Cashing in on a hot idea

JENNY FORDE READILY admits to being on a steep and not always enjoyable learning curve since setting up her business almost five years ago. A self-confessed IT anorak who ended up in business by accident rather than design, Forde says she would be much happier in the back room writing software than out front promoting her social media market research company.

After finishing top of her class at college, Forde was not short of offers when she graduated. For 10 years she job-hopped her way around the international IT industry gaining considerable technical experience along the way. However, a serious car crash stopped her career in its tracks and she came back to Ireland to recover.

To avoid boredom during her long recuperation, she began to help a college friend, Don Hanley, with IT support for his internet marketing company.

Initially her input was mainly in the area of software development but having seen the beginnings of the social media revolution in the US when she was working there, Forde encouraged Hanley to start introducing his clients to the power and possibilities of social networking.

His clients were cautious and wanted evidence that time spent blogging, tweeting, posting comments and interacting with customer forums actually worked. But as social networking was still an emerging phenomenon, there was little in the way of market analysis out there. Hanley quickly realised he would have to do his own. He subsequently asked Forde to take on and develop this capability within his company.

When it became clear that social media was here to stay, he suggested to Forde that there was a niche in the market for a dedicated social media market research company.

Forde argued that she lacked business experience but Hanley said he would become her mentor and business partner. He also offered her office space and seed capital of €50,000 to get the venture off the ground. His company would be Forde’s first client.

Forde had an immediate affinity with the social network model of communications and was an early convert to Twitter and Facebook. She enjoyed watching how consumers expressed themselves online and found it easy to spend hours analysing blogs for insights into how people were thinking about brands, products and services.

What interested her most was the fact that consumers commented spontaneously – and for the most part honestly – on social media. This honesty gave far more valuable feedback about consumer attitudes and intentions than conventional market research. Her insights went down well with Hanley’s clients, who provided the fledgling company with a steady stream of work.

After nearly 18 months in business, however, Forde was so preoccupied with analysis that she had yet to land a second client. She hired staff on a casual basis and paid them well but didn’t pay much attention to the fact that the company’s seed capital was dwindling away. She topped up the fund from her own resources and also relied heavily on the income from Hanley’s company to stay afloat.

When the company’s second anniversary came, Forde was expecting a big pat on the back from Hanley. She had developed a robust research model and had become adept at expressing outcomes in a user-friendly way. Instead she was told frankly that, while she was brilliant at her job, she was rotten at running a business.

Hanley pointed out that she was wasting her early mover advantage in the field and that she needed to settle down, employ some full-time staff and start setting growth and sales targets for the company.

To help her on her way, Hanley chipped in an additional €100,000, which he said was a no-interest loan he wanted back after 12 months. He also said he would like to look at taking a formal shareholding in the company to protect his investment. A further €50,000 was invested in the venture by Forde and her parents.

Forde took the pep talk to heart. She employed two bright young graduates, put a lot of time into training them and, with difficulty, learned to step back and let them get on with their job. She made a big effort to drum up new business and, while she managed to win some new clients, she never felt comfortable pitching for business.

In the early days, Hanley insisted that the owner-manager is usually the best ambassador for a small company, but when Forde said she wanted to hire a sales and marketing professional he agreed to the idea.

The person she chose for the job turned out to be a real find. He was a good team player, highly motivated and generated a lot of new business.

Forde signed up for a business development courses and Hanley was gratified to see that while it was a struggle, she had really begun to get to grips with running a small business. By the end of year three, the company was employing six people and Forde was setting increasingly ambitious sales targets for the business.

The first stop to her gallop came when her very productive sales executive said he was leaving. Having hired well once, Forde assumed she could do so again.

Seven months after taking on a new sales executive, however, she realised she had made a big mistake.

The new recruit has not gelled with the company’s other employees and the once happy-go-lucky atmosphere has been replaced by friction. Forde is now very concerned that the first two employees the company took on, whom she has spent time and money developing, will leave and may even set up in competition.

She also fears she may face legal action if she tries to dismiss the newcomer as the sales and performance targets set in the terms of her employment contract have been met.

In addition, while Forde’s company is not short of work, it is short of money. Clients are dragging their heels when it comes to paying their bills and managing cashflow is a constant struggle.

As a consequence there is little left over to invest in developing or expanding the business and Forde is getting increasingly frustrated over missed opportunities. She sees great potential but is struggling to get buy in from Hanley and her bank manager.

Hanley, who is still not an official shareholder in the business, is nervous of committing any more money to the venture. Her bank manager is even more nervous and flatly refused Forde’s application for additional borrowing facilities to support business growth. His view is that the value of social media has yet to be proved.

Forde is now in a state of constant anxiety about the future. The software she developed was state-of-the-art when it was completed but this type of technology needs to be updated regularly and Forde needs to be working on the next generation to stay ahead.

However, the existing software is still very effective and Hanley’s argument is that her efforts should be focused on using what she has to drive revenues for the next year at least.

In an ideal world, Forde would pursue both avenues: grow the business and invest in the future. Her big problem is that she cannot figure out how to get the right balance between the two.

How can Forde get her business on track?

THE EXPERTS’ ADVICE

Forde should consider whether she is the right person to lead the company. She readily admits she is more comfortable in a pure IT role

THE COMPANY’S finances are an immediate issue. Forde needs to put in place proper controls to ensure outstanding debts are managed effectively. Simple techniques such as prompt customer invoicing, asking for a percentage of the payment up front before work commences, offering discounts for early payment and maintaining regular contact with debtors, can help keep money flowing.

Cash is the life blood of any business. So she should consider taking on a part-time credit controller. Good working capital management should ensure the firm is adequately financed to allow for further research and development thus ensuring that the company has growth potential. Having regular, accurate and timely financial performance information is key to running any business.

Forde also needs to address the share capital structure and debt commitment to Hanley. She could ask him to re-schedule the loan repayments or to convert the €100,000 loan, or part of it, into equity, perhaps in the form of convertible preference shares. The firm won’t have to pay back the loan in 12 months and Hanley will be protected. Forde also needs to formalise his initial €50,000 seed capital investment as it is not clear how it has been committed.

As Hanley appears to be a taxpayer, he will probably be able to avail of the attractive Business Expansion Scheme (Employment and Investment Incentive) tax reliefs.

Since there are three sets of investors in the company (Forde, her parents and Hanley), Forde should consider having a shareholders’ agreement in place to regulate the relationships between the investors.

Another issue is staff management. Having the right management team in place is crucial to the survival of any start-up. A great management team is often the difference between an average company and a great company. Forde should think about how she can incentivise good staff to ensure they are committed to staying in the company through an employee share scheme for example.

She also needs to ensure staff employment contracts include a clause preventing staff from setting up in competition with the business or poaching customers should they leave the company at a future date.

Forde should also consider whether she is the right person to lead the company. She readily admits she is more comfortable in a pure IT research role and this is where her key talent lies.

As the company grows, it may be appropriate for her to step aside and allow a more dynamic, multi-skilled person to take the helm while she takes on a different role, perhaps as chief technical officer. Forde also needs to ensure the company stays ahead of the competition, prioritising sales leads and growing market share. The company’s product offering needs to evolve continually.

She may also want to consider entering the InterTradeIreland All-island Seedcorn Business Competition, which offers young innovative companies the opportunity to win up to €280,000 and access to some of the island’s leading entrepreneurs and investors.

– Grainne Lennon

IN RELATION to the firing and hiring of a new sales executive, it is essential careful consideration is given to the role on offer with a view to creating a checklist of necessary qualifications, experience and competencies for the role.

While this will go a long way to making the best choice for the organisation, an offer of employment should be made subject to satisfactory references, and references should always be checked.

An employer must also be mindful that the provisions of the Employment Equality acts, which prohibit discrimination on the grounds of gender, civil status, family status, sexual orientation, religion, age, disability, race and membership of the Traveller community, apply to all stages of recruitment.

Any contract of employment for a new employee should include a probationary period to allow the employer time to assess the employee’s performance. The length of the probationary period should be dictated by the nature of the job and how long it will take the employer to assess performance, but should not exceed one year. The employee’s contract should provide for termination by the employer during the probationary period on a specified period of notice and it should state that the employer’s disciplinary procedure will not apply to termination during the probationary period.

Turning to Forde’s problem, with the exception of a dismissal relating to pregnancy, trade union membership and other specified grounds, an employee must have one year of continuous service with the employer to bring an unfair dismissal claim.

Assuming this employee’s contractual notice is less than five months, the employee will not be able to bring an unfair dismissal claim. There is no service requirement for a discriminatory dismissal claim under the Employment Equality Acts and Forde needs to exercise caution in terms of the reason given to the employee for the dismissal to seek to ensure that no inference of discrimination is raised.

An employee may bring a claim under the Industrial Relations Acts but the recommendation of a Rights Commissioner in this regard is not legally binding. While an employee may consider making an application to the High Court to restrain a dismissal, this is very unlikely, outside of senior employees with significant remuneration.

All of this means that if Forde terminates the employee’s employment on the appropriate notice, the employee will be very limited in terms of legal redress.

– Michael Kennedy

FORDE HAS managed to build up her business in a difficult environment and survive. However, it is a real struggle and seems to be extracting a high price for her on both a personal and professional level.

The company appears to have pretty healthy sales volumes. It is worth understanding the customers and sales a little further.

Is the business charging enough? The company should look to understand the value customers get from their service offerings. A survey could be useful here. Also, what are competitors charging for similar services? An examination of companies in the same space should be undertaken. How do they match up?

Finally, an assessment of payment methodologies would be of value. Could it get fees upfront to assist cashflow?

An exercise should also be conducted in relation to costs. Is the business optimising its return from cash spent? For instance, there were a number of hires along the way of casual employees and graduates. Is the company engaging the right people in the right jobs? Employees are one of the most expensive elements of any business.

In relation to Forde’s business partner, Don Hanley, the informal nature of the relationship is unhealthy for both sides. This should be formalised by a shareholders’ agreement as soon as possible.

As a next step, the business should be setting down clear goals along with a plan on how they are going to be achieved. Forde is frustrated at the moment by missed opportunities. The nature of such opportunities and the resource required to capture them should be included in the plan. The plan should also include projected revenues and costs associated with getting there. Only then will the real investment requirement become apparent.

For Hanley, other potential investors or the bank, this would be of real value. It should also be very useful to the business as it sets about its work.

– Ronan Byrne