The highlight (for me) of last year’s SXSW-interactive conference was the Lean Startup SXSW – a whole day of planned content, mainly in one room (in the AT&T executive center) focused on the idea of “the lean startup”.  Eric Ries and team did a phenomenal job bringing together a set of topics and speakers that you just normally wouldn’t get exposure to in a single day.

Leveraging the success of that forum, SXSW has created the Startup Village this year.  The 4th floor of the Hilton will be converted to startup mecca.  I thought the “Lean Startup SXSW” track might have gone away in favor of this modified (and bigger billing) approach.  Apparently not so.  Today SXSW.com announces that they’re bringing Lean Startup SXSW back – and some of the chief instigators are involved again – Eric Ries, Dave McClure, Steve Blank, 500 Startups, et al:

The Lean Startup SXSW will take place on Saturday, March 10th from 9:30am – 6:00pm at the Downtown Hilton (across from the Convention Center), and the most up-to-date agenda can be found here.

So, more central location, same Saturday location in the schedule (good call).  The agenda already has enough speakers identified for me to plan my Saturday schedule.

Once again, good evidence of how SXSW adapts and co-opts good ideas from the outside.  Congrats to the organizers, I’m looking forward to it.

I guess if we can have Technical Debt, and Process Debt, why not Management Debt?

Ben Horowitz’ post on Management Debt is a good read, but one thing that separates it from technical debt or process debt is that it seems to my own naivete that it almost never pays to pick up the management debt if you can avoid it, as described by Ben:

Like technical debt, management debt is incurred when you make an expedient, short-term management decision with an expensive, long-term consequence. Also like technical debt, the trade-off sometimes makes sense, but often does not. More importantly, if you incur the management debt without accounting for it, then you will eventually go management bankrupt.

He gives three tough examples – two in a box, overcompensation, and no feedback loop.

In the end, it comes down to leadership even more than management.  In each of his scenarios, good leadership cuts through the problems or is willing to pay the debt now rather than later.

I never considered myself a Mark Cuban fan.  But when I read his blogs and excerpts from his book I find him very convincing.  It just doesn’t translate into most of the TV appearances I’ve seen.

One Entrepreneur.com, they’ve run an expert from his book “Mark Cuban’s 12 Rules for Startups” that really hits the spot for us at BP3.  A couple of highlights for us:

1. “Don’t start a company unless it’s an obsession and something you love” – well, I’d have softened this a bit- either starting a company, or what the company is focused on, needs to be an obsession and something you love.  You need one or the other. Preferably both, but one or the other are mandatory.  When Lance and I started BP3, we were passionate about BPM and convinced we needed to start a company to achieve our vision around BPM services delivery.  But it started with passion on the subject matter for us. That said, it wasn’t the first time for either of us to venture off on our own and attempt to start something, and we’d both worked for other people’s startups.
2. “If you have an exit strategy, it’s not an obsession.” Very true.  Another bad sign: you have hobbies.  When you’re starting up, if you’re passionate about the startup and the subject matter, where is the time for hobbies? Many founders are like Lance and I – married with kids.  There’s no time for hobbies for the time being.
3. “Hire people who you think will love working there.”  Right.  If they think BPM is boring, we don’t hire them!
4. “Sales Cure All.”  Absolutely.  Almost any problem your company has can be fixed if you sell more (or more profitably) so that you have the funds to invest in fixing the problem.
5. “Know your core competencies and  focus on being great at them.”  - If you’re doing a services startup, this is a must.  Time is really precious, focus is really precious.
6. “An espresso machine?”  I think coffee is critical – for me even if it isn’t for everyone else!  But we also dig the free sodas.  And there’s a deli on the first floor.  And a small gym. It matters.

There’s more in the article, worth reading.

Steve Blank consistently writes one of the best blogs.  His installment (at least 2 parts) on the National Science Foundation Innovation Corps is no exception.

Of course the knee-jerk reaction from most people is that government cannot help in such situations without screwing things up… but then you see things like this:

63 scientists and engineers in 21 teams made 2,000 customer calls in 8 weeks, turning laboratory ideas into formidable startups. 19 of the 21 teams are moving forward in commercializing their technology.

That’s a great result from what they set out to tackle.  And of course there are no guarantees that these ideas will work – odds are most of the 19 proceeding will fail. But if the NSF can get scientists thinking about commercializing the tech they produce, the economy (and the US) will benefit as a result.

And keep in mind Steve Blank’s “Secret history of Silicon Valley”:

The Scientists, the NSF and the teaching team were all going to go where no one had before.

Given that Silicon Valley had started with scientists and engineers not MBA’s, I thought this was a bet worth making.

Pretty cool.  But the crazy thing is that they’re going to keep going – doing cohorts of 25 going forward.  Have to applaud this program for trying to get the most out of government R&D dollars – and hopefully spawning some startups in the process.  Just another interesting test case for the “process” of teaching entrepreneurship (and as he put it, applying the scientific method to developing a business).

A series of articles to kick off the new year show that Austin is a bright spot still…

• Just today, OtherInbox announced it is selling to ReturnPath for an undisclosed amount.  Based on the smiles from the OtherInbox team, this was a good sale, at a good time, for the team.  Looks like a great fit with the parent company. It marks another success for Joshua Baer, who (along with a few others) has really re-energized the startup scene in Austin.  Interestingly, part of the value ReturnPath perceived in the deal was getting a good footprint in Austin, TX:

“The decision to acquire OtherInbox was based on its technology and its broad customer base, but separately we’ve been talking about where we might expand operations, and Austin was on that list,” Forman said. “The cost of living, the tech scene and the talent pool were very attractive to us. The opportunity to get that as part of the bargain with OtherInbox is awesome.”

• Socialware just landed an investment from the CrunchFund.  I’ve known Chad Bockius since ’99 and I’m impressed at how he’s been able to get visibility for the company with investors outside of Austin (note that Austin Ventures is also an investor in the company, however).
• The Austin office rental market is tightening up.  This trend has been going on for some time.  Locally, in our office building, this is noticed as I have to drive one extra floor up in the parking garage to get parking these days.  There just isn’t any vacancy.  Prices are moving more gradually but they are starting to move.  I saw a lot of growing firms in Austin reach for bigger space in 2011, with designs on growing headcount, and a belief in the stability of their businesses.
• There are IPOs on tap for Austin as well.  Bazaarvoice is the most likely candidate with a strong growth track record and a strong product offering.  Chuy’s, a Tex-Mex restaurant chain based in Austin is also planning to go public to fuel expansion (if a location comes your way, two recommendations:  DO order the “macho burrito”, and DO order the tres leches for dessert – but find a friend to share it with).  3 other companies are up to bat this year, having already filed for an IPO.
• All of this really has me looking forward to the Angelou Economic Forecast.  I took a look back at my notes from last year, and it looks like he pretty well nailed the economic forecast for Austin and Texas.  Not only does AngelouEconomics provide some of the best economic development consulting, it is also a local Austin startup-made-good story itself.  Quite a local success story.

Here’s to 2012!

According to Naval, we’ve got the problem all wrong:

“There isn’t a shortage of developers and designers. There’s a surplus of founders.”

He makes a compelling argument as to the “why” :

The cost of starting a company has collapsed. It’s now just (minimal) salaries. For entrepreneurs, desks are free, hosting is free, marketing is online, and company setup is cheap.

Raising the first $25K for product development is easy – join an incubator. Raising the next $100K is easy – investors are following the incubators with automatic notes. Building a product and launching a product are easy – develop on Open Source Stacks, host on Amazon, launch on Facebook, Android or iOS, get your early traction.*

Getting real traction is hard. Raising millions of dollars is hard. Building a sustainable, long-term company is hard.

Basically, he makes the point that if you’re pre-traction, you have to expect to give up a lot more equity to grow your company than if you’ve already got traction.  In the microcosm of the overall market that I see, in professional services, you could easily argue the surplus of founders argument. If you consider all the individual contractors as “founders” that haven’t gotten traction yet.

We’ve always felt that it was important to hire people who valued being part of a team, and building something bigger than themselves.  Being part of a team enables us all to execute at a higher level for ourselves and our customers. It makes it easier to take a vacation and still sleep well at night.  It makes it easier to get health insurance.  It is a long list of benefits to being part of a firm.  Including, building value that is sustainable even after the point when you’re ready to move on to another phase in your life. For builders, this is an attractive proposition.

Lots of good economic news in the city of Austin lately.

• Formula 1 is back on track.  There’s some debate, locally, about the value this has for Austin’s economy, but it is clearly a net-positive for the next 10 years.  Perhaps not coincidentally, a couple of new hotels are scheduled to be built downtown over the next couple of years.
• The Samsung plant in Austin is producing the A5 chip for Apple.  This was a massive investment from Samsung in local infrastructure ($3.6B).  Those of us following the news in Austin a few years ago probably recall what a close decision this was for Samsung.  It was the biggest investment in chip manufacturing capacity since the heydey of silicon in Austin.  These days, Austin is more of a hotbed of design than manufacturing.    As I understand it, Austin is Samsung’s second largest infrastructure investment – and the largest outside of South Korea.  People often forget how much is manufactured in the US in general – but this kind of high-tech component is particularly unusual to be manufactured onshore.
• Austin is attracting more early stage investments than other parts of Texas. $280M in Austin alone last quarter.  Fifty Austin companies received funding.  This reminds me of the 90′s in Austin.  There have always been complaints about it being much harder to raise money in Austin than in the Valley, and perhaps it is.  But it clearly is easier in Austin than it is in many other parts of the country.
• It looks like the “best performing cities” are moving to Texas…
• The unemployment rate nationally recently dropped to 8.6%.  But in Texas?  8.1% (down .3%).  A half-point better than the country as a whole. Austin, however, is a full point lower still, at 7.1% – 1.5 points lower than the national average.

So it appears to be a good time to be bullish on Austin.  But if you’re just now noticing, you’re late to the party.  All through the downturn, it seemed clear to those of us who live here that Austin was building up, slow and steady, a diverse and growing economy.  I’m looking forward to going to the Angelou Economic Summit in January – there are typically some key insights into how the local economy has been performing, and this year should be particularly interesting.

Really interesting progress on the state of the art for startup process.  It recently got some coverage at Austin Startup, with a great infographic included. But it has previously been discussed on Steve Blank’s blog.

The Genome Report is 68 pages of great reading.  Lots of details go into the general conclusions that you see in the info graphic.  It is included at the bottom of this post as well.  Interestingly, they go even farther than just producing a report. There’s an a survey you can fill out, the startup compass, which will help determine how your startup compares to other startups they did their research on for the Genome project.  I went partway through this survey myself, but at some point it becomes apparent that it is not really a good match for services businesses, it is really about product businesses.  And that’s fine – it is still far and away the most interesting pattern-matching tool I’ve seen for startups.

And the key finding seems to be exactly what Austin Startup focused on:

One of the big findings amongst the data was that almost 7 out of 10 companies failed due to premature scaling or inconsistency. Peeling back the data, the lessons seem really simple: don’t act like a big company.

Fascinating stuff… or scary stuff, if you’re running against the statistics they’ve collected… The statistics definitely back the idea of the lean startup.

(Side note for BPM practitioners… how can we apply this kind of data and thinking to our own BPM efforts as we grow them from projects to programs and beyond?)

Startup Genome Report 01

Nice to see more companies bringing talent and jobs to Austin. BlackLocus joins the list this week with news coverage from AustinStartup and the Austin-American Statesman:

BlackLocus, a technology company founded in 2009 by three Carnegie Mellon University students, is making Austin its headquarters to take advantage of the area’s cloud computing talent pool.

The company, which sells Web software that helps e-commerce companies price their products, raised $2.5 million from Silverton Partners of Austin and DFJ Mercury of Houston in July.

Since then, BlackLocus has built out its senior management team and is working to double its 15-person workforce over the next two quarters.

AustinStartup has a more personal touch to their coverage:

“We are excited to join the high tech community in Austin,” said Rodrigo Carvalho, co-founder and CEO of Black Locus.  “We have been graciously welcomed. The technology companies here and the people behind them want to see others succeed. Everyone has been so helpful. It comes down to the networking, the resources and the top tier talent. Austin was our top pick. “

They also covered a couple of the recent team additions, which happen to include my friend Rob Taylor, previously of TrueCar, and Trebor Carpentor, previously of Lombardi, of all places.  It is a small world.

One anecdote from Isaacston’s Steve Jobs that really resonated for me was this amusing exchange between he and Ellison:

At this point Jobs got real close to Ellison and said, “Larry, this is why it’s really important that I’m your friend. You don’t need any more money.”

Ellison agreed with that general sentiment, but thought it was stupid that some “fund manager at Fidelity” would make more money on Apple’s success than he or Jobs.

Jobs responded by saying, “I think if I went back to Apple and didn’t own any of Apple, and you didn’t own any of Apple, I’d have the moral high ground.”

Ellison’s response: “Steve, that’s really expensive real estate, this moral high ground.”

Ellison is so right. That moral high ground is really expensive real estate.  And it is much more expensive real estate for people like Larry and Steve than it has ever been for someone like me.

So the question: is that expensive real estate really worth it?

We know the answer is supposed to be yes, but so often we see people make decisions that yield that moral high ground.  We might face that temptation ourselves. Just remember that holding the moral high ground isn’t something you start doing after you’ve made your millions (because, for most people who do this, there are always more millions to chase… and then billions).  The moral high ground is something you start doing today, if you weren’t doing it yesterday.  It is something you build up piece by piece, day by day, until it has real value. That value is in reputation, trust, personal relationships, business relationships.

In my experience, in the long run, the moral high ground is worth it.  If you stick to it, you’ll find that while some of your friends and colleagues end up with more money in the short term, or even in the long term, you’ll end up with the friends.  The lifelong friends.  And if you’re in Steve’s rarefied air you end up with not only friends and loyal executives, but admirers far and wide.

That moral high ground gives you the moral authority to lead more effectively.  In an information economy, that’s important.  Your talent can walk out the door any time.  And while the economy may not be good, the job market for high tech workers is quite good.

I’ve never regretted holding that expensive real estate.  No question, the really expensive real estate is still worth it. I hope Larry went ahead and bought a few Apple shares while he was at it, though.

Fred Wilson has one of the best blogs on the subject of startups and investing.  Which is really no surprise given his cat-bird seat on the whole industry.  As a services startup, I occasionally find passages in his writing that really resonate, like this one:

Roelof Botha, a leading VC with Sequoia, once gave me a great piece of advice in helping founders start to focus on company building. He said founders should think of their company as a product and build it and shape it with the same passion and care. I’ve taken that to heart and passed it on a few times.

No matter how or when you do it, building a company is a required step to sustainability. Positive cash flow is not enough to keep the company independent and solvent. You need a culture, systems, and processes to keep everyone happy and functioning well.

This is so true.  We’re still a work-in-progress at BP3.  We’ve been building our culture, and our team of amazing individuals. But we’re still learning the right processes for the new situations we’re finding ourselves in as we get bigger and are tackling more projects simultaneously.

How you handle these situations has a big effect on how the company performs for its customers.  When we have a “process failure”, if all we do is firefight in a one-off fashion, that will help the customer and solve the short-term problem.  But we are trying to build a lasting company.  We need to not only put out the fire but adjust our operating guidelines so that we identify these issues and situations early – and have an organization and response in place to resolve the issue without firefighting.

Every time we put out a fire we’re also taking a step back and trying to think about whether this is something we need to address systemically or organizationally, or whether this is a one-off event.  And even for the one-off events- what’s the best escalation path for dealing with those without derailing core business functions?

Great comment down below the main article by Charlie Crystal:

That’s one of the most enjoyable parts of building a company–defining what kind of people you want to be, the impact you want to have on the world, your employees, your community; and then cheerfully getting it done and evangelizing what you do, why you do it, and how you do it.

This is company building, and it is good stuff.

There’s a theme about management that has cropped up over the years regarding owning the outcomes, rather than the excuses (Steve Jobs’ definition of the Vice President versus the janitor comes to mind).

Ben Horowitz (of Andreesen Horowitz) captures this perfectly in his “Nobody Cares” post.  It is both great advice, a great reminder of something you should already know if you run a startup, and an admonishment that you need to be tough if you’re going to go down that road:

That might be the best CEO advice ever. Because, you see, nobody cares. When things go wrong in your company, nobody cares. The press doesn’t care, your investors don’t care, your board doesn’t care, your employees don’t care, even your mama doesn’t care. Nobody cares.

And they are right not to care. A great reason for failing won’t preserve one dollar for your investors, won’t save one employee’s job, or get you one new customer. It especially won’t make you feel one bit better when you shut down your company and declare bankruptcy.

This is so true. As consultants we see this all the time – customers don’t care about our excuses, they just want their projects and processes delivered as promised.  Sometimes there are really important mitigating circumstances but we’ve got to help them climb over those obstacles.

And at the end of the day – nobody cares about the excuses.  You have to make payroll, pay bonuses, grow your firm, and make it happen.  And if you don’t, no one will care about the excuses.

We’re pleased to announce that BP3 placed #11 in the “Under $10M” category of the Austin Business Journal’s 2011 Austin Fast 50 listing:

The Austin Business Journal honored the 50 fastest growing companies on Thursday at its annual Fast 50 awards ceremony at the AT&T Executive Education and Conference Center. The awards rank Austin-area companies based on compounded annual average sales growth over three years.

Numbers reflected calendar 2008, 2009, and 2010 performance – so the data is already a bit out of date!  Perhaps surprisingly, we’re growing faster in 2011 than we have in previous years, due to the great environment for BPM consulting services, and hope to be back on the list next year as a result.  Quite an array of companies and industries are represented in the Fast 50 list – congrats to all the other small firms who made it – it is these fast-growing companies that are driving employment in Austin (all the little #’s add up).  Every year the ABJ honors the “Fast 50″ – 25 fastest growing companies over $10M in revenue, and the 25 fastest growing companies under $10M in revenue.  There are restaurants,  consultancies, medical firms, financial firms, and real estate.  You name it.  For those of us in Tech, it is a good reminder that the main-street economy is alive and kicking.

The other interesting thing from our perspective: growing quickly just isn’t part of our goal-set.  We’re just trying to build the best team and capabilities in the BPM space, and provide great value for our customers.  If we can do that, then growth will likely follow as a side-effect.  I don’t think there’s a better way to do it a consulting business without taking outside capital.

Additional text in the print version of the article:

WHAT IT DOES: BP3 is a boutique business process management software consulting business.

HOW IT’S DIFFERENT:  Primarily, we differentiate ourselves with the quality of our expertise in the BPM space.  We’re the most experienced IBM BPM consulting vendor, as a result of our deep ties to its predecessor, the Lombardi BPM product line, dating back to 2003.

KEYS TO GROWTH: The key to our growth is finding more great people to join our team.  Our business is a people business.  Beyond that, the foundation of our growth is that the BPM software market in general is growing.  And, specifically, IBM BPM is growing nicely.

BIGGEST CHALLENGES: Already in 2011, we’ve added six employees to our firm.  Our big challenge will be to support our great people.  When you’re smaller, you can simply be a collection of amazing individual talent.  As we get bigger, to get the most out of this band of talent, we need to optimize our teamwork and organization.

Imagine my surprise to read an article referencing Gen X without falling back on the tired cliches of calling GenX lazy and stupid, in not so many words:

Gen-X has just 46 million members, but they continue to lead the way and set the standards in the startup world.  [...]

Gen-X is rife with entrepreneurs. In fact, they will likely make or break our country’s ability to transition to the new social Internet society. They have drive and independence. And they have a lot they can teach both the boomers and Gen-Y.

I’m not big on the generational stereotype – and this article references some of the old ones, but phrased more politely – individualistic, technologically adept, flexible, valuing work/life balance.  I don’t see that as differentiated from the previous generation, but maybe differentiated from the stereotypes of the previous generation.  At any rate, “GenX” is apparently in the sweet spot (from an age point of view) for starting companies and running companies.  Let’s hope they/we do a good job of it.

Great read from the founders of Yipit, on the long hard road to become and overnight success:

So, it’s now February of 2010, over two and half years since we started, and we have yet another idea: build an aggregator for the early but quickly growing daily deal industry. The idea was sound, timely and right up our alley since we had been doing local deal aggregation for the last 9 months.

And, in just three days, everything changed.

We launched the new idea in a three-day scramble, got some initial press, users loved it, and four months later raised $1 million from amazing investors. A year after that, we’ve raised $6 million, made real revenue, attracted hundreds of thousands of users, and recruited amazing people to join our team (we’re hiring! join us!). And, best of all, we’re just getting started.

I really liked the raw honesty of this post.  I just quoted the happy part – 2.5 years in.  But there’s also this part:

“So, what do you do?”

Ugh. I hated that question.

The truth was that we were trying to start a new venture but we hadn’t really made any progress.

Anyone with a struggling startup can relate to this.  I’ve felt this same awkwardness explaining what we do – not so much because we’re struggling but because BPM isn’t exactly a buzzword for the masses or a great conversation starter at social events.  But I’d much rather be telling people about what we do at BP3 as a BPM services firm than, say, a dating site (not that there’s anything wrong with that!).

I’ve noticed when I explain how we started BP3, people have assumed that we only left Lombardi at the moment IBM acquired the company.  Not so.  We started BP3 about 2.5, almost 3 years, before IBM acquired Lombardi.  An investor would probably call that being “early”.  It wasn’t about the acquisition or potential acquisition.  It was about starting a company that could be the best BPM services firm we could be.

That 2-3 years was great formative time for us to build our reputation, our culture, our team.  It takes a long time to build the foundations for success – especially when you’re bootstrapping – but people don’t always remember how long it takes.  All of a sudden, it looks like success and they wonder how it materialized out of the blue.  But we’re in it for the long run, and we always were.

In closing, congratuations to Yipit on their “overnight” success!

I’ve been getting tired of reading about “The Melt” – the new company / concept from the folks behind the Flip camera company.  Press like this quote from the interviewer: “You’re not just trying to build a restaurant, you’re trying to build… an empire…”  Wow.  Well that makes it a tech company right?  Well, actually, all of the big restaurant chains have become technology companies to varying degrees.  They’re also process-centric businesses (though they use specialized software and hardware, not general purpose BPM software).

Tons of name dropping in the video below (which only makes me more skeptical):

This should be my dream come true – I love grilled cheese sandwiches, and I make a pretty good one myself.  Their focus on process would be really interesting if we already knew they were a success (we don’t yet know this).  It is nice to see process and process tech getting top billing, in a sense.

And despite my visceral negative reaction to the coverage of The Melt, it *is* a tech company.  Comparisons are made to McDonald’s, Starbucks, Chipotle.  These are all process and technology companies that happen to be pretty good at producing food and coffee.  But extra emphasis is given to the processes and technology that go into the restaurant chain:

The same thing goes with The Melt. Kaplan went with grilled cheeses because he found machines that press and grill a grilled-cheese sandwich in record time, which ensures fast turnover, which improves profitability. The grilled cheese comes with soup because it’s cheap, and easy to store and manufacture. You can order from your iPhone, again, because this improves turnaround time.

Let’s hope they don’t forget to make a grilled-cheese sandwich that is absolutely better than what I make at home – and the soups better be good too.  If the food isn’t great, they won’t need fast turnover because they won’t have enough customers to eat the food.  Fast turnover only matters once you have volume.  Descriptors like “cheap”, “easy to store and manufacture”, “record time”, “fast turnover” – these aren’t encouraging adjectives at this stage of the enterprise.

The article closes with:

It’s a manufacturing and technology process. It’s really not that different from making portable cameras.

At the end of the day, you can’t taste a Flip camera.  You’re customers are going to eat these sandwiches – they better taste good.  I hope the folks at The Melt understand that better than the Business Insider.

I’m sure several BPM firms could comment on this article by Jacob Ukelson, as so many of them have been acquired over the last few years!  Jacob gives “10″ rules for doing this successfully, and they’re all good.  In particular:

Rule 5 – Pretend you are a doctor and have taken the Hippocratic oath – first do no harm. Don’t change anything until you have learned the landscape of the new company. I know successful US executives have a penchant for action – but this is a case where early action can be disastrous. Understand that it will probably take a year until the company is more or less integrated. Maybe I should have put this rule first.

Companies that are acquisitive tend to have a very well-oiled acquisition process.  But companies that don’t do a lot of acquisitions likely put together a team on the spot to go make it happen.  I observed the Lombardi acquisition from the outside, but even so it was obvious that IBM has done a few acquisitions before – the terminology, the process, the time taken, were all indicative of years of practice.  When a company has jargon like “Bluewashing” you know they’ve integrated a few companies.  In the particular case of Lombardi, you have to give IBM credit for giving expression and voice to the “Lombardi” DNA they  acquired, and not just stamping it out with IBM-ness.

Momentum for Austin startups continues – with news that Austin startup Spredfast has raised a $12Million round of funding.  Rod Favaron, our Lombardi CEO, is running the company:

The company, which launched its service last year, received the funding from InterWest Partners of Menlo Park, Calif., and Austin Ventures. It has raised a total of $16 million.

Spredfast’s software lets clients manage campaigns and conversations on social media sites, including Facebook, Twitter, LinkedIn, YouTube and blogging platforms. Rather than going to each social site, Spredfast lets users publish and monitor social activity from one central platform.

[...]

“This is a big step for us, and we’re ready for the next stage of growth,” said CEO Rod Favaron, who joined the company in February. Favaron was previously CEO of Lombardi Software Inc., which was acquired in 2010 by IBM Corp. for an undisclosed price.

It is both a vote of confidence in Spredfast, and in Austin.  In 2010 it was common to read about the dearth of funding in Austin, but almost ever since then, we’ve been seeing more news about funding in Austin than I can remember since the ’90s.

In a followup to the previous post about recruiting talent to Austin, I think news like the above fundraising does more to recruit industry veterans to Austin than the recruiting trip they recently embarked on.  The coverage on MarketWatch wasn’t flattering:

In fact, I have to report that the Austin group’s recruiting night in San Francisco was something between a bust and a learning experience for the group.

It sounds like the two main events were, basically, a tough learning experience.  But hopefully the CEOs took advantage of the trip to prearrange a bunch of meetings with likely recruits rather than just depending on the group events.  Still, the target and the optics are all wrong.  Instead of getting a story about what a great place Austin is to work, and that people are coming here to work at our high tech companies, we got an article essentially about indifference in the Bay Area and how hard it is to find talent in Austin (which isn’t quite as dire as the article makes it out).

Imagine if these same CEOs had gone on a tour of Universities in California (or other states) to recruit talent?  To put the idea out there for college students to think about Austin as a destination.  University is the right place to strike.  The experienced industry veterans don’t need to go to a job fair to find companies in Austin – they’ll leverage their connections to find a job.  Its the college kids who need some help discovering Austin and Austin companies as a place to land.

The rest of the article focuses on “solutions”… and here’s one perhaps the 30 tech CEOs could get behind – an Austin-funded scholarship at several universities – giving us some press out there on the coasts.

Update:  This article on Austin startups finding funding via Angel List is probably relevant as well.  It just speaks to how the world of fundraising is changing, and there are fewer barriers than ever for Austin entrepreneurs:

Even for Austin startups that aren’t actively raising money, AngelList is becoming a way to get on the radar of potential investors, partners and customers.

Bill Boebel, an Austin entrepreneur and angel who has invested in 15 companies, calls it the “LinkedIn for startups.”

“It’s a startup’s resume,” he said. “Just like when you’re recruiting an employee and want to learn a little more about that person, it’s a great way to find out more about a company.”

And further, Ravikant says:

“Entrepreneurs inside Silicon Valley already have access to investors here, but it can be harder for a promising startup in Austin to break in,” he said.

“We have helped Austin startups get exposure to Silicon Valley and New York investors, and we also give those investors the lay of the land in Austin.”

Has there been a better time to invest in people and talent?

Jason Cohen, a local Austin startup hero, paints a bleak picture for consulting in “The unfortunate math behind consulting companies.”  The basic thesis is that it is really hard to ramp up from a single-person consultancy to a bigger company that makes money.  He’s right. It *is* hard.  But it is also harder to be an individual consultant than he lets on:

• Most independent consultants have a hard time relaxing when they’re “off”.  They get enough time on the bench or on vacation to live a good life, but when they’re on the bench they’re worried about when the next project starts. It makes it hard to truly enjoy time off.
• Lack of camaraderie.  There’s no team as an independent.  At first that is liberating, but later on it is frustrating for those of us that are more social.
• Lack of vision.  Being an independent consultant does lack a certain vision.  What are the goals? What are we building toward?  What gets me excited about getting up in the morning to do this work?  You know, besides paying the bills?
• Not to mention, your income is clearly a function of hours worked * billable rate.  Not everyone likes that.
• You have to do it all: sales, contracts, insurance, delivery of the project, project management, QA, etc.

Most happy independents that I know offload at least a couple of these things:

• Having a spouse with insurance.
• Having another company produce most of their leads/business, while they just focus on delivery.
• Paying other independent consultancies to do things like accounting, benefits, and other bits that aren’t in the sweet spot.

So this leads to the question:  should you hire?  Should you try to grow your consulting firm to a bigger practice?  Jason writes:

Consulting can be a great way to fund a startup or make a bunch of cash. It’s easy to start; Just pick an hourly rate and jump in.

But someday soon you’ll notice there’s only so many billable hours in the day, and you’ll be tempted to expand. Maybe hire an employee for $30 per hour and re-bill them at $60. Easy money, right?

Unfortunately the math doesn’t work that way.

Jason is right. It isn’t that easy.  But it isn’t quite as bad as he makes it out to be either.  First, let me lay out some of the ground rules you can use as assumptions if you’re building a consulting company.

1. Base your budgeting on 2000 hours in a year.  It is a nice swag (2 weeks off), and it also makes the math easy!
2. Expect 80% billable as your realistic maximum, though some of your people will do better than this.
3. A good rule of thumb is that your minimum billable rate is 2x the hourly cost.  At 80% billable this is better than break even.  But at 50% billable you’re losing money. This isn’t a good billable rate, but it is the minimum billable rate. Because you do have costs: Medical benefits, 401k contributions, office space, vacation, downtime, sales & marketing, etc.  But there’s no reason to settle for the minimum rate.
4. If you are using a contractor (1099) in the US, you shouldn’t expect to markup their rate by more than 50% (ie, 33% margin for you at most).

So, even with all that, Jason paints a pretty bleak picture for your prospects of making money as a consultancy.  The primary issue is scaling the size of your business so that you can (a) reduce risk, and (b) make more profit.  If you talk to friends at startup software companies, they’ll spend lots of time discouraging you about the scalability of consulting companies (something investors and software folks are pretty convinced of).  Here are my thoughts about how to address scale, risk, profit:

Start with a co-founder.  If you don’t have one, find one who is also a specialist in the same area, or who has a tightly complementary specialty.  Make sure that you have enough skills overlap that you can cover for each other in a bind, but that you also have some different skills to augment each other in unique ways.  Starting as a company of two partners is easier than being the sole founder with one employee.  (Who wants to be your first employee, anyway?).  It allows you to reduce your risk – and if you charge correctly you can be break-even if one of you is billing.  And you’ll have more flexibility to chase leads, take vacations, etc. – without company revenue declining to Zero while that is happening.

If you’re going to grow, you’re going to forgo profits.  The independent consultants I talk to don’t want to admit that, but it is true.  At BP3, Lance Gibbs and I certainly could have had a more profitable first 3 years of operation if we just ran a two-man shop.  But we saw an opportunity to grow a bigger business.  We hired great people – and held on to the team through lean times in 2008 and 2009 – taking lower salaries ourselves and paying people when they were on the bench for long periods of time.  That scrappiness and determination got us into a great position to grow our team in 2010 and 2011 – from a bigger base.  But remember – every time you hire, you’re investing profits – reducing your cash flow for 60-90 days (or longer if training is required).  A good way to think about it is that people you hire in 2011 will add materially to your business in 2012 – it makes you plan conservatively around what you can afford.   Now that we’re a little bigger, it is easier for us to hire when we come across the right person – we don’t have to work as hard to time each hire just right.

This also means that it is better to not grow, than to hire the wrong people.  If you take this approach, when you can’t find enough talent to grow, you’ll be more profitable.  When you can find those people, you’ll grow the business at a little lower margin, and with a little tighter cash flow – but with your future baseline performance at a higher level.

Those early hires are really important.  See the previous point.  Early hires in a consulting firm set the tone: culture, discipline, follow-through, work-ethic, reputation, skill.  Don’t hire someone on reputation alone – better to hire someone whose reputation hasn’t caught up to their real performance than to hire someone whose reputation exceeds their real capability. If you hire the right people at the beginning, it actually gets easier to attract the right talent later on.

Forecast next year’s revenue based on your current staffing.  Don’t fall into the trap of building a consulting-based business plan that depends on hiring people in the same year that they contribute to your bottom line.  I’ve seen a lot of these “plans” before: “we’ll hire 3 people in Q1, 4 people in Q2, 6 people in Q3…”  To which my response is typically “which 3 people? which 4? which 6?”  If you don’t know who they are, take that out of your plan.  A better way to write it would be:

Based on our forecast we can afford to hire 3 people in Q1, 4 people in Q2, 6 people in Q3.

Point being: there’s a difference between what you can afford, and what you can actually execute.  Given how important each person is to the growth of your company, are you going to hire the best 3 people you can find in Q1, or will you only hire 2 if you can only find 2 you’re excited about?  Intellectually we all know what the right answer is but it is important to actually act on that knowledge.

Get Financing.  You may not think you’ll need it – but as soon as you can, get it.  When you’re a small consulting company, usually one customer has an outsized influence on your cash flow.  Having a line of credit or a loan can give you some cushion against the vagaries of their accounts payable.  Word of warning: it is very difficult to get a traditional bank to do this until you have 3 years of history as a business.  Second, you’ll be referred to operations that do receivables factoring, but I would recommend steering clear of those companies because their contracts are horribly one-sided and may make it difficult to get traditional financing later on. If you and your partner have the capital for it, it may make sense to put some money into a corporate savings account – to be tapped only in certain situations that all the partners agree upon.

Have a sharp focus.  You have to know how to say no to work that isn’t in your sweet spot.  Saying yes to all the opportunities that come your way will cause the following problems:

• You won’t build the necessary depth in your chosen area of expertise, or any particular area at all.
• Your win rate will be a lot lower – because you’ll be competing with people who specialize in each area, whereas you are essentially presenting yourself as a generalist.
• You can’t effectively partner with other people or companies because you always feel like you could be competing with them for business.  Ask yourself what kind of work you would refer to the partner firm, and what kind of work the partner would reasonably refer or sub to you.  If you can’t answer that question, one or both of you is lacking focus.
• You won’t build a reputation in your niche.  Reputation in the age of twitter and blogs is really powerful.  Lack of one is similarly powerful in its absence.  Start blogging, get on twitter, and learn your niche and who the experts are.  Those experts are rarely wanting for work.

Back to Jason’s Post:

Jason terms it “unfortunate” math for consulting… but the real problem is that consulting is an EQ business, rather than an IQ business.  It requires more emotional maturity and awareness, and the smartest guy in the room is not necessarily the best consultant.  Ideally you’re both high IQ and high EQ.  But don’t forget which one will get you further in consulting – EQ.  If you don’t have a high EQ, partner with someone who does!  There’s no one “right answer” to how to succeed as a consultant.  But there are definitely higher or lower risk plays on the business.

Jason points out in his post a series of problems a small consulting firm will face.  There are remedies to the problems Jason points out, and he offers a few himself.  But as you ramp up your team, in my experience when the firm is ~5 people is the hardest phase in growth.  At that stage you need everyone billing as much as possible, you can’t afford to pay for overhead (a non-billable person working for your company), and somebody (hello, founder) has to work a lot of extra hours to get things like invoicing, sales, and recruiting done – because customers don’t pay you to do that work with billable time, you don’t want to pay someone else to do it for you, and it has to be done right.

As you head north of 10 people, the math starts to work more in your favor.  You can hire non-billable help with administrative or sales work, or one of the knowledgeable billable people on your team can explicitly spend less time billing.  Another thing I’ve often heard from bigger companies is that getting past 15 people is a tough barrier – that you run out of “people you know” to hire, and have to get your operations in much better order than you required as a smaller company. I agree that somewhere between 10 and 20 people, the nature of your firm changes and you need to change with it.  I’m sure that is true at many inflection points further on as well.  If you just look at this as another interesting business problem to solve, you’re in good shape.  If someone tells you there’s a glass ceiling to how big your services business can get, just ask them if they know how big IBM’s professional services business is.

Jason’s thought on running the business at smaller sizes:

• None of these new tasks are fun or creative. It’s drudgery, and it’s on you. Congrats, you’re a business owner.

Well, don’t go down the path of building a business unless you enjoy being a business owner and running or building your business.  If you enjoy doing this sort of thing, it won’t feel like drudgery – it will feel empowering and gratifying*.  If you don’t enjoy this sort of thing… partner with someone who does, or get a job!

His other recommendations are in bold, my comments in regular typeface:

Recommendation: Charge more.  Well, this one is a bit obvious.  If you have too much demand for your services, you generally need to raise your rates or hire more people (increase supply).  Figure out which one you can do.  The basic issue is, pricing is incredibly important in consulting businesses.  Mimiran is a great resource for better pricing techniques.  But regardless, you have to understand that your consulting value is worth more than the hourly wage you put in.  You have uniquely differentiating value.  You’re likely committing to provide your customer with an outcome or else lose your “job” (contract) – which is something their own team may not be putting at risk.  An hour is not what you are truly charging for, you’re charging for the output you produce, and dividing it by the # of hours. There is a difference.

Recommendation: Bill more hours.  Generally consultants bill more than what Jason was describing in his post. While this is true, so long as you bill by the hour, I’d phrase this differently:  provide more value.  That might mean billing more hours.  Or it might mean that you will either raise your rate or the demand for your services by providing “better outcomes”.  Focus on the value.

Recommendation: Build a product.  I’d be very careful with this one.  Most consulting companies don’t make the transition.  The product you’re going to build has to be something that will get a lot of your attention and TLC – and likely something that earns money for you right away.  What you don’t want to do is take a profitable consulting company, plow the profits into a product that isn’t profitable (most products aren’t), and then find yourself with a less valuable enterprise overall.  Make sure the product is truly something you want to invest in, and make sure you understand how it will yield revenue.

Recommendation: Use subcontractors instead of employees.  This is lower risk, but lower reward – and I don’t just mean financially.  This choice comes down to what you want to be when you grow up. Is this a business or a body shop? There’s a difference.  If you’re building a business, you use contractors as a minority of your business or to augment specific skill sets or deal with variability of demand.  But if you’re building a business, it is your team, your employees, that will really build it with you.  You need to hire those people – contracting them won’t cut it.

Concluding Thoughts…

Jason’s conclusion:

It’s always hard. Most consulting companies don’t make much profit, and it’s one in a thousand that has the discipline to launch a successful product during off-hours. If you’re going to make it happen, you yourself need to be serious, disciplined, and relentless.

The idea that small consulting companies don’t make much profit doesn’t ring true.  A well-run consulting business is a good business.    Of course, for many consulting companies their margins may look lower because they do certain things:

• Provide generous benefits, from vacation to medical insurance, to 401k or profit sharing.
• Pay generous salaries & bonuses.
• Buy the latest and greatest hardware gadgets and software tools.
• Keep overhead (non-billable head count) low.

These tend to reduce margins in the short run, but retain top contributors in the long run.  Usually a tradeoff worth making.  But the biggest question for the independent consultant moving toward a small consulting firm:  What’s next?

Is the goal to build a big consulting firm?  To make some money?  To solve a particular problem in your industry or specialty?  To have a boutique firm of good friends and rock star specialists?

It really is up to you.  But the answers will help dictate what makes sense as you build your business…  For BP3 it is to be the best business process firm we can be – which is compatible, for now, with being a growth business.

*  Author’s note:  One of the things I enjoy about building the business, as a consultant, is the opportunity to practice our craft (BPM) internally.  As we get bigger, there are real payoffs to improving processes. And we have time to actually think about our business and improve it.

** Another note: Perhaps the title should just be “Consulting Math” since we didn’t discuss Software Math… but I think the prevailing public opinions about consulting businesses largely come from people with a software background – primarily that they don’t make much money and can’t scale, and are inherently riskier.  But, most people don’t mention the fact that these days, most software companies are probably less profitable than consulting companies.  There are really significant exceptions (e.g. Google, Microsoft) which is what people focus on.  But in enterprise software most of the money is in consulting these days.

Martin Zwilling’s post on 7 startup co-founders that can lead to conflict reads like a greatest hits of imminent failure.  Not that there aren’t notable exceptions to every problem cited, but at this level we’re talking in generalities.

His advice?

If you think about it, you should realize that not everyone is ‘ideal partner material.’ Most of us learn that in other partner relationships, like dating and marriage. First you have to be clear on who you are, and who you can co-exist with, what complementary skills and resources you need, and what decisions in the business you are willing to relegate.

Lance and I are often asked how we make our partnership work at BP3.  We’re different.  Different personality types and different kinds of career experience and skills.  Martin addresses this neatly:

4.  “We are so alike, we finish each other’s sentences.” You really need a partner who is complementary, and can tackle the operational roles, like marketing, finance, and sales. A partner who is a carbon copy of you will likely mean two people working on every problem, rather than a natural separation of duties. Most startups can’t afford that.

I couldn’t agree more.  Lance and I are good complements.  And we each respect the other person’s strengths.  And we know how to step in for each others’ weaknesses.  I really think respect is the foundation for people who are truly different to have a good working partnership.  Without the mutual respect, conflict is inevitable.

Lance and I were fortunate (in a sense) – we had the opportunity to test our partnership while we were still working at Lombardi.  We had a 13 week assignment – with 8-hours of travel required each way, and traveled 5 days a week for 13 weeks.  We spent 2 hours in the car each trip, we ate three meals a day together, and we worked together with our customer for 8-12 hours a day.  And that was just the MINIMUM amount of interaction we had for 13 weeks.  In this environment, you either earn mutual respect or you never want to work together again.

At BP3, it hasn’t all been roses.  2008 and 2009 were tough years for the US economy.  We grew in those years – but we had to scratch and claw are way through it.  Our previous experiences of trial-by-fire prepared us to get through those tough years as well – we didn’t give up or play the blame game, we just got to work.  And it prepared us to be able to tell each other tough truths.  I recall taking a call, the day our son was born, about taking a new assignment for BP3 – one which I needed to personally handle and travel to – at what we might say is a sensitive family time.  But we talked about it and we knew what the right decision would be for the business.  Lance has similarly taken tough assignments in Europe and other places hard to travel to – when it was what the business needed.  Sacrifice is required to build the business up.  Make sure you’re in the hole digging with someone you respect.

Our point of view – that co-founders who really do have different backgrounds are a better fit – is actually backed up by research done by the Startup Genome project, which shows that co-founders with a mix of business and tech background are more likely to succeed than co-founders with the same background (I’m paraphrasing badly – but that’s the implication of the research so far).