Lesson 5. Create a Funding Runway High-growth agencies take more risks than their peers. Risk is necessary to expand, but it comes at a price. In an ideal world, your agency has the profits and cash flow to fuel growth, but, more likely than not, you are going to need access to capital in order to excel and continuously innovate. Cash-flow crunches are debilitating to agencies. If you do not have the proper capital reserves in place, making payroll and covering accounts payable can cause the best of agencies to stall.
The Realities of Costs, Funding, and Cash Flow
Although top-line revenue goals are important benchmarks for many agencies, rapid increases in sales and staffing can quickly lead to costs rising out of control. If these are not carefully planned and managed, then revenue growth becomes a zero-sum game. This is a difficult, and sometimes painful, reality for agencies. Despite tremendous demand for services, and seemingly endless project pipelines, systems become strained, processes falter, staff performance suffers, and cash reserves run dry.
Agencies must have strategic approaches to their accounting and finance systems. We will cover some basics here, but model agencies will take the initiative to continuously expand their knowledge and competencies in these core areas. It helps to have trusted outside accountants and financial advisors, but it is also important that agency leaders maintain a keen interest in the agency"s finances.
Investing in Growth There was a time when I was considering a significant expansion strategy that would have required approximately $250,000 in new financing. I spent a year or more meeting with advisors, talking to banks, and discussing options with potential investors. At the end of the day, I opted for a more conservative approach, but in the process learned some valuable lessons about funding growth.
Here are six of the most important takeaways from my experiences.
1. Build a Stable, Profitable Business You are a service business. Although the goal is to build a hybrid agency with multiple revenue streams, no marketing agency is cashing in on the preprofit valuations enjoyed by upstart tech companies we read about in TechCrunch. In order to secure debt and/or equity funding, you must prove you can run a profitable business that is capable of servicing its debt and providing a return on investment to its shareholders.
2. Understand Your Value Determining your agency"s valuation can be very difficult, since everyone seems to have a different formula. According to HubSpot CEO, Brian Halligan, "When marketing services firms get acquired or merge with another firm, they are typically valued at a low multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or a low multiple of revenue because services revenue streams are relatively low margin and inherently lumpy."1 For this reason, it is challenging to go after investments from angel investors and venture capitalists, and somewhat of a c.r.a.pshoot if you decide to start selling shares of your agency. The reality is that most agency leaders think their firms are worth more than they really are. However, disruptive agencies, with innovative models and diversified recurring revenue streams, are likely to stand the greatest chance of receiving strong valuations should they choose to pursue equity funding.
3. Explore Your Options Having been through years of investigating and pursuing a variety of funding options, and reading endless books and blogs on the topic, I would advise that you focus your energy on the friends-and-family network. This will likely be the primary source of debt and equity funding for most small-to-midsize agencies that require additional capital to grow their businesses. Whether the financing is structured as a loan, line of credit, or convertible note, friends and family usually are the most captive audiences for entrepreneurs, and most flexible on terms.
During early growth phases, and once your agency matures, bank lending can be a viable option as well. However, if the agency has weak financial statements, banks will require that you or your business partners put up significant collateral in order to secure loans and lines of credit. This makes it difficult for start-ups to turn to traditional lenders for help.
4. Ensure You Can Service the Debt It is easy to drown in debt if you are not careful. Be realistic about your recurring revenue and your ability to service additional debt. For example, say your agency is forecasted to generate $600,000 in revenue, with a respectable 10 percent net profit margin. So on average, your agency earns a $5,000 net profit per month. Let"s a.s.sume you make $3,500 per month in loan payments to service your existing debt, which leaves $1,500 in cash each month.
Now, expansion plans call for more staff and technology infrastructure upgrades. You do not have the cash reserves to fund the growth, so you consider another loan. The terms would require an additional $2,500 per month loan payment, which would put you at a monthly deficit since you only have $1,500 in cash at your current size. Banks will not touch this, and you should not put friends and family in the position to make a tough call. It is time to scale back your plans.
This is a very simplistic example, but it is meant to demonstrate the importance of seeing the big financial picture when planning growth and scaling your agency.
5. Never Lose Sight of Cash Flow Cash is absolutely king when scaling your agency. As we discussed in the previous section, revenue and profits can be deceiving signs of financial health. At the end of the day, agencies must be cash flow positive in order to maintain stability.
For example, consider the following scenario: Your total average monthly operating costs are $70,000, but you forecast an additional $7,000 in expenses this month due to travel and conference costs. Plus, you make $5,000 per month in payments on a term loan. So your total money out for the month will be $82,000.
Invoices for the month total $84,000 and are distributed on the first of the month with standard net-30 terms.
As long as all your clients pay on time, you will be cash flow positive for the month-in other words there will be more money coming in than going out. However, what happens if one or two of your clients are late on their payments? On top of that, you have to call for IT support midmonth to fix critical issues with the server and internal network. The IT costs run another $3,000, and their standard terms are due on receipt.
All of a sudden, a month that looks solid from a revenue perspective turns into a financial mess. You have to draw on cash reserves to pay your bills on time and make the end of month payroll.
So, do not a.s.sume a strong month of invoices and receivables translates into positive cash flow. Keep a pulse on money coming in and going out at all times.
6. Know Your Exit Strategy What are you building for? Succession? Acquisition? If so, what is your price? Agency leaders should know their end game. How is it possible to define your agency"s purpose, and build a culture of pa.s.sionately loyal employees, if no one knows where you are going? Plus, the answer to this question dictates the decisions you make regarding funding and growth.
Agility, Mobility, and the Cloud
According to Forrester, the global cloud computing market is estimated to increase from $41 billion in 2011 to $241 billion in 2020.2 Cloud computing, which consists of Software as a Service (SaaS), Infrastructure as a Service (IaaS), and Platform as a Service (PaaS), is revolutionizing business-technology infrastructures.
I will focus on cloud application services, or SaaS, in this chapter, but for rapidly growing agencies, I would advise consulting an IT professional about implications and opportunities in all three areas of cloud computing.
Moving to the Cloud Cloud applications offer rapid deployment, often without professional IT support. They enable agencies to build more agile systems that are capable of adapting quickly to changing business environments. SaaS solutions tend to be more cost effective upfront and long term, and can play an important role in improving productivity and efficiency. They are designed to scale as the agency grows, while facilitating a more mobile workforce, which is imperative as the utilization of smartphones and tablet computers explodes.
Here are four key points to keep in mind as your agency evaluates opportunities to integrate cloud applications.
1. Solve Real Business Problems Look for software that brings real value to the agency and its clients. It is easy to get seduced by trendy new technologies, but do not force solutions into the agency that are not needed. You should be able to make a clear business use case for cloud applications, just as you would any investment. Consider the following questions when evaluating solutions: What problem will it solve?
Will it enable us to improve efficiency, productivity, or profitability?
Will it increase the value and results we deliver to clients?
Will it reduce information technology costs?
Will it create a more secure, stable, and reliable technology infrastructure? This may include server uptime, Internet speed, and data security and backup.
2. Reduce Redundancies and Avoid Feature Overload There are solutions, such as NetSuite, which offer all-in-one software. NetSuite OpenAir, for example, is a cloud-based professional services automation software that includes project management, invoicing, project accounting, expense management, timesheets, resource management, and professional services dashboards.
These types of robust solutions may be ideal for some agencies. However, be careful to limit the redundancies across your agency"s platforms, and avoid adding unnecessary expenses for features that you will never use. For example, if your agency already uses 37Signals" Basecamp for project management, TimeFox for time tracking, and Quickbooks Online for accounting and invoicing, then you are probably not in the market for a feature-rich platform that does it all.
I tend to look for solutions that excel in specialized areas. This means that our infrastructure consists of a collection of disconnected cloud platforms, which certainly presents management challenges, but the benefits we gain outweigh the inconveniences.
3. Have an Integration Plan New cloud applications require sound integration plans to bring the desired benefits to your agency. Consider how the software will integrate with existing solutions, how you will encourage adoption by targeted users, and how you will monitor usage. You also want to know from the start how you will determine if the solution was a successful investment.
4. Know the Risks and Challenges Cloud applications are not perfect. There are a number of inherent risks and challenges, whether you build your infrastructure through a few more robust solutions, or rely on a diverse collection of specialized providers. Let"s consider some of the more common issues: No central dashboard: Although there may be ways to customize program integrations, most solutions do not talk to each other. In other words, the data and activities in each platform are isolated, which creates inefficiencies in tracking and reporting information. In some cases, this may even create the need for the manual entry of duplicate content. For example, TimeFox does not integrate with Quickbooks Online, which means we have to manually enter timesheet data into a separate program in order to create invoices.
Inefficient user management: Without a single management portal, managers must develop their own systems for controlling user permissions and access across all platforms. For example, if a new employee joins the agency, a manager may have to update access across more than a half-dozen applications.
Outgrowing solutions: As your agency continues to expand, there may come a time when you outgrow the cloud solutions on which you have built your business. This is why it is so important to evaluate your growth trends and timeline when building your infrastructure. If there is a chance you will require a larger solution down the road, consider issues, such as data portability, now.
Changes out of your control: There is risk a.s.sociated with every cloud company, no matter how stable they are. Factors such as service outages, mergers and acquisitions, and product updates can all directly affect your agency. The key is to mitigate your risk as much as possible by doing your homework and selecting trusted providers. Read the service level agreements closely, and ensure you have the ability to access and extract your data should you choose to change providers.
Monitoring and security: With the proliferation of mobile devices in the workplace, unauthorized access, and lost and stolen devices, can be a cause for concern. Again, the key here is to take precautions and educate your employees. Chapter Highlights Model agencies make calculated investments in hardware, software, staffing, partnerships, advisors, and office s.p.a.ce designed to support their foreseeable future needs, while maintaining the highest levels of service quality, efficiency, and productivity today.
Infrastructure planning should account for current and short-term needs, with contingencies for midterm possibilities.
Always test innovative solutions from emerging technology companies, but turn to proven organizations when it comes time to make major infrastructure decisions.
Look for technology partners with track records of performance, transparency, stability, continuous innovation, and exceptional customer/community support.
Marketing agencies are bound by the limitations of human resources.
Make it a priority to connect with and engage an advisory board for your agency.
In order to secure debt and/or equity funding, you must prove you can run a profitable business that is capable of servicing its debt and providing a return on investment to its shareholders.
Whether the financing is structured as a loan, a line of credit, or a convertible note, friends and family are usually the most captive audience for entrepreneurs, and they are often most flexible on terms.
Cloud applications enable agencies to build more agile systems that are capable of adapting quickly to changing business environments.
Make a clear business use case for cloud applications, just as you would any investment.
New cloud applications require sound integration plans to bring the desired benefits to your agency.
Chapter 5.
Devise an Inbound Marketing GamePlan Doing is the key to differentiation.
The Shift to Inbound Marketing
Inbound marketing focuses on getting found by customers. People are tuning out traditional, interruption-based marketing methods, and choosing when and where to interact with brands. This basic evolution of consumer behavior, which we have come to call selective consumption, impacts agencies in the same ways it affects your clients.
Model agencies are expanding their capabilities to meet growing demand for inbound marketing services, as well as using inbound marketing strategies to build their own brands.
Inbound marketing has given agencies the power to differentiate by doing. Agencies are using blogs, social networks, online video, e-mail marketing, webinars, podcasts, and ebooks to connect with prospects and clients in more meaningful and effective ways. They are creating value, while demonstrating their expertise and growing their businesses.
The marketing world is full of thinkers, talkers, and self-proclaimed gurus, but after awhile they all start to sound the same. What we need are more doers-agencies and professionals that drive change by practicing what they preach. The market is moving fast, and growth opportunities are everywhere.
This chapter is about using inbound marketing to define and differentiate your agency and brand. We walk through practical steps to generate more leads and build greater loyalty. Then, in Chapter 6, we focus on how to control your sales funnel, and turn leads and loyalty into revenue.
The Universal Goals: Leads and Loyalty Inbound marketing gives agencies the ability to boost search engine rankings, generate inbound links, and drive website traffic, which are proven lead generators. In addition, inbound marketing strengthens your brand and enhances your thought-leadership positioning, which can have a much greater impact on your long-term growth, stability, and success.
The most powerful and profitable inbound marketing campaigns will use content and community to build loyalty, resulting in: Higher retention rates Less churn in your client portfolio means a more stable and reliable recurring revenue base.
Greater profit margins Long-term client relationships lead to improved efficiency, which translates into higher profits.
Goodwill benefits Strong relationships lead to more opportunities and greater creative freedom.
Origins of the Inbound Marketing GamePlan
I originally developed the Inbound Marketing GamePlan in early 2008 as a service chart used in PR 20/20 business-development proposals. The goal was to offer prospects an easy-to-understand visual that outlined proposed services for a 12-month campaign, broken out by quarters. However, over time, we realized the concept was too tactical in nature, and our approach was much too focused on lead generation. It was a step in the right direction, but we needed to evolve our thinking.
In late 2009, we set out to better align our core services with current and future market demand. Based on lessons learned and data gathered supporting dozens of client inbound marketing campaigns, we were able to see trends emerging, both in terms of needs and goals, and the strategies and activities that were most effective in generating leads and building loyalty.
We saw an opportunity to redefine the Inbound Marketing GamePlan as a strategic process. Today, the GamePlan follows a standard eight-step approach that concentrates on shifting budgets and resources to more effective and measurable inbound marketing strategies.
Step 1: Clearly define and differentiate your brand.
Step 2: Design and deploy a content-driven website.
Step 3: Go beyond prospects, and consider the impact of your agency"s marketing efforts on all audiences.
Step 4: Establish measurable and meaningful campaign objectives designed to achieve the primary goals of leads and loyalty.
Step 5: Build an integrated campaign fueled by the four core inbound marketing strategies: search marketing, social media, content marketing, and PR. The success of each strategy creates momentum that drives your agency forward.
Step 6: Establish dynamic budgets that can be easily shifted based on campaign performance and a.n.a.lytics.
Step 7: Define campaign timelines with milestones, tasks, and responsibilities.
Step 8: Measure everything, and be willing to adapt and evolve.
Why a Football Field?
More than anything, we needed a simple visual (see Figure 5.1) that represented all facets of an inbound marketing program. There were too many elements for a Venn diagram, and football is the perfect metaphor for an inbound marketing campaign: The stadium and the field: The stadium is your website and online communities-the places that you will draw audiences to-and the field is your brand, upon which your agency and marketing campaigns are built.
Quarters: The game-technologies, strategies, and innovations-is changing so rapidly that your campaigns should be planned and updated in real time, with in-depth quarterly reviews. Agencies with static strategies struggle to compete with more agile firms.
Personnel: Consider the impact of the draft and free agency on a professional football team. Because so much of inbound marketing is driven by content and relationships, the selection and retention of top personnel-A players-has never been more essential.
Teamwork: Inbound marketing requires a highly coordinated effort and calls on a diverse skill set, including: strategy, copywriting, design, data a.n.a.lysis, programming, messaging, promotion, and relationship building.
Commitment: Inbound marketing success does not happen overnight. It requires practice and patience. You need to build reach and strong relationships through social networking and by consistently publishing valuable content.
Pa.s.sion: You have to want it more than the other team. It is that simple. If you do not, it will show in your services and communications.
Goals: The end zone was the most obvious reason for the field. Every organization must generate leads and build loyalty to thrive. So, we started in the left end zone with the GamePlan, and then built the objectives and strategies from left to right, driving toward these goals.