Morning Report

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Blitzscaling vs. Bootstrapping and Vanderbloemen Search Expands Its Vision

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Good Tuesday Morning,

DAYLIGHT

A new book titled Blitzscaling argues that in today’s venture-backed world, it’s essential to “achieve massive scale at incredible speed” in order to seize the ground before competitors do—but Tim O’Reilly disagrees: “Uber and Lyft have developed powerful services that delight their users and are transforming urban transportation.

“But if they hadn’t been given virtually unlimited capital to offer rides at subsidized prices taxicabs couldn’t match in order to grow their user base at blitzscaling speed, would they be offering their service for less than it actually costs to deliver? Would each company be spending 55 percent of net revenue on driver incentives, passenger discounts, sales, and marketing to acquire passengers and drivers faster than the other? Would these companies now be profitable instead of hemorrhaging billions of dollars a year?…Would a market that grew more organically—like the web, e-commerce, smartphones, or mobile mapping services—have created more value over the long term?”

Christina Stembel bootstrapped Farmgirl Flowerseven though it’s based in San Francisco—to $23 million in revenue: “After a year and a half in, I had only $411 left in the bank. It was really lean. I’d even switched from coffee to Lipton tea because it was like $.06 per tea bag rather than dollars per cup. Then my landlord, who was a corporate attorney, found out I was running a business out of my apartment…

“I had to move the business outand I did, but now I had two rents to pay. So it was hard. But I rented the smallest space I could at the San Francisco flower market, and somehow right at that time orders increased by just enough that we made the sales I needed to pay the bills. I never took any outside funding, so every move I made had to be profitable, immediately.”

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STARTUPS

Here’s how to prepare for an investment apocalypse: “Everyone in the startup world is expecting a crash to come at any moment. But few are taking concrete steps to prepare for it. If you’re running a venture-backed startup, you should probably get on that. First, go read ‘RIP Good Times’ from Sequoia to get a sense for how bad it can get, quickly.

“The first step in preparing for a coming downturn is making a plan for how you’d get to a point of sustainability. Many startups have been lulled into a false sense of confidence that profit is something they can figure out ‘later.’ Keep in mind, it has to be done eventually and it’s easier to do when the broader economy isn’t crashing around you.”

PRIVATE EQUITY

In 1989, with $20,000 she’d saved from working as a receptionist, Marygrace Sexton started Natalie’s Orchid Island Juice Co., making fresh juice, as she says, “before it was chic”: And then in 2001, with annual revenue at $20 million she sold Natalie’s to a private equity firm: “‘They said I was doing a great job but wasn’t going to be able to take it to the next level and they could,’ Sexton explains, shaking her head. ‘They got me all twisted.’” Over the next few years, sales fell by 20 percentso she bought the company back, and “Sexton arranged a label redesign, sank $5 million into machinery and bought an 11-acre site with a warehouse for $3 million.” Annual revenue has now surpassed $60 million.

REGULATION

Philadelphia is getting close to banning cashless stores: “Proponents of the bill argue that cashless stores effectively discriminate against poor consumers who do not have access to credit or bank accounts, especially in a city with one of the highest poverty levels in the country…

“Sylvie Gallier Howard, first deputy director of the city Commerce Department, said there are about five businesses in Philadelphia that are currently cashless, less than many other major cities. But she said the department is confident that the cashless business model will proliferate. ‘At some point, probably in the near future, a ban on cashless businesses could impact our competitiveness as a city, which would negatively impact those that are already the most disadvantaged,’  she said. ‘We must prepare our city for the rapid pace of modernization.’”

FRANCHISING

In 2009, Sports Illustrated reported that the bankruptcy rate for NFL players was as high as 78 percent within five years of retirement; hoping to chart a different path, former wide receiver Jason Avant is opening franchised trampoline parks: “With 5,000 to 7,000 visitors per week, Avant’s Deptford park finished No. 1 in revenue among all 21 Launch franchise parks in the country, according to the Warwick, RI-based company. Launch Park was co-founded by Ty Law, a three-time Super Bowl champion with the New England Patriots, and will soon have 28 locations in 15 states, according to its web site. …

“Avant said transitioning into business was never smooth for him. He considered starting his own brand when retiring but did not want his inexperience to affect the business. He appreciated having a playbook with guidelines and successful market-validated examples to follow when starting out.”

TECHNOLOGY

Apple is paying a bug bounty to a 14-year-old who found a major FaceTime bug that allowed people to eavesdrop on others: “Apple’s history with bug bounty rewards is mixed. The company originally started paying iOS bounties three years ago, but researchers have been reluctant to help Apple with its security. Apple offers up to $200,000 to security researchers who discover vulnerabilities and report them, but the bugs are often more valuable to sell elsewhere than to report. Earlier this week, a security researcher detailed a macOS flaw, but refused to submit it to Apple until the company pays researchers for Mac security flaws. Apple currently only offers compensation for iOS bugs, not macOS ones.”

MANUFACTURING

Tesla might be facing competition from Rivian, an electric vehicle startup out of Detroit with a line of SUVs and pickups. The company was founded in 2009 but has been avoiding the spotlight: “The company spent years setting up its organization, supply chain, and manufacturing and hired top talent. Rivian’s director of engineering came from supercar manufacturer McLaren Automotive and the vice president of design worked at Jeep and oversaw the development of Grand Cherokee and Wrangler.

“Rivian has said that its R1T electric truck pickup will have a 400-mile range, go from zero to 60 mph in three seconds, offer all-wheel-drive, and tow up to 11,000 pounds. The R1S is an electric seven-passenger SUV, also with a 400-mile range.”

RETAIL

Another holiday retail spike is expected this week on the most insufferable holiday of the year (if you’re single). Record sales are expected for this Valentine’s Day even though fewer people have been celebrating it over the years, according to a recent survey. Only 51 percent of those surveyed expect to celebrate while those who are “said they would spend an average of $161.97 on the holiday, which is up 13 percent from last year’s total of $143.56.”

THE ECONOMY

With its recession fears fading, Goldman Sachs is moving away from investing in companies with strong balance sheets: “Strong balance sheet stocks typically perform well when rates are rising and the economy is growing because those with more debt have trouble with financing costs. Corporate debt has been growing at a steady clip during the recovery and now exceeds $9 trillion. At the same time, Goldman’s market team sees the economy as being stronger than the Fed anticipates. The firm’s economists see just a 10 percent chance of a recession and think there’s a chance the Fed goes through with at least one rate hike.”

SPOTLIGHT

A former pastor, William Vanderbloemen built his staffing firm, Vanderbloemen Search Group, into a Forbes Small Giant with more than 20 employees and more than $6 million in revenue. We spoke to him recently about his decision to expand beyond staffing churches to helping other faith-based organizations, businesses, and schools.

What pushed you to broaden your scope?

The short answer is, I started to realize a few years ago that the Church, with the big C, is bigger than just the local congregation. Maybe they’re a relief organization, maybe they’re a school, maybe they’re businesses like Chick-fil-A that’s very driven by Christian values.

Do you worry about altering the formula that made you successful?

We have not changed our services. We’ve expanded our understanding of who our client is. As an entrepreneur, I know that I’m susceptible to what I call SOS, shiny object syndrome. Like, “There’s a new thing, I’ll go try that.” And I don’t want to do that. We are not following a shiny object, we are not leaving our lane. We’ve just got a broader vision of what that lane is, and we’re going to swim in the whole part of that lane.

Have you had to adjust your search practices?

I think the entrepreneur’s chronic weakness is that we always tend to outsell what we can deliver. I know that’s my chronic weakness. So for 18 months, we said, how do we build delivery systems that show legitimacy, that show influence, that show ability to execute. The last thing you want to do is not be able to deliver what you sell.

How do you think about values when you’re matching candidates with companies?

I think I’ve made the mistake in the past of hiring really competent people without paying attention to whether or not they were a good cultural fit. I’ve now flipped that. For the most part, I think competency can be taught, culture cannot.

How do you assess whether a candidate will fit a particular culture?

When someone comes to us saying, we need a new CEO, a new headmaster, a new pastor, it’s basically like saying we need a heart transplant, right? So part of what we do is go look for what hearts are available out there. What’s the donor? But if you talk to a transplant surgeon, almost any one of them would say, the real money is not in developing the donor. The real money is in being able to do the tissue match. Because you can put a healthy heart in a healthy body, and if the tissue doesn’t match, everybody dies.

And that’s what’s ahead.

Please send comments and suggestions to mattg@oxfordcenter.com and lfeldman@oxfordcenter.com.

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