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Venture Capital Dictionary: Every Term Entrepreneurs Need To Know

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I’ve put together a venture capital dictionary of the most important venture capital terms you need to know on your journey as an entrepreneur.

A

Accelerator: A group, institution or program which offers guidance, networking, and infrastructure to companies in order to accelerate their growth. In return, the accelerator is given equity.

Accredited Investor: In certain markets and situations an investor must satisfy strict guidelines in order to be considered “accredited”. In the US, for example, an individual or group of investors must meet thresholds for net worth or income, as outlined in the 1940 Investment Company Act.

Acquisition: When a buying company purchases a controlling stake in a target business. When the board, shareholders, and managers of the target company approve of this deal, it is called a friendly acquisition. When one or more of these groups does not, it is called a hostile takeover.

Allotment: The process of providing new shares to shareholders. A shareholder’s allotment is the number of shares they are to be given.

Analyst: Part of a venture capital firm. Usually asked to carry out a preliminary analysis of businesses before a firm offers investment. This can involve projection analysis, early stress testing, market research, and other administrative duties.

Angel Investor: An individual investor who provides financing during a company’s earliest moments. This investment is usually offered in return for equity or convertible debt and is provided in order to get a company into shape for the next financing round (usually a seed round).

Anti-Dilution Provisions: An agreement protecting an existing investor’s share in a business. If new investors are brought in and given equity, the original investor’s equity is not diluted. They continue to own the same share of the business as originally agreed.

Articles of Association: A critical document that outlines the rights and restrictions attached to a company, as well as the said company’s share classes and share structure. This includes information about shareholder voting and selling rights.

Assets Under Management: This includes all financial assets managed by a venture capital fund.

Associate: A member of a venture capital firm. A step up from analysts, associates carry out more in-depth research and carry out due diligence.

B

B2B: Short for Business to Business. Simply refers to any company which does business with other businesses as their primary focus.

Bad Leaver: This happens when an employee or staff member leaves a company and violates agreed procedures. When this occurs, the “bad leaver” disqualifies themselves from share or equity payouts. In extreme circumstances, they are not allowed to hold onto their existing shares or receive money for them. An example of a bad leaver would be an employee fired for gross misconduct or someone who resigns before an agreed date of departure.

Board of Advisors: A group of individuals who offer advice to the management of a company. This is an informal relationship and not legally binding, but can provide valuable strategic policies.

Board of Directors: Custodians of a company. The board of directors (“board” for short) looks after a company’s affairs and makes major decisions about its future. To have a seat on board usually requires investment. For that reason, most boards are made up of investors or investor representatives.

Bootstrapped: A business, usually a startup, which is funded purely by the main entrepreneur behind the business and/or any generated revenue.

Bonds: A form of debt investment. In this case an investor offers a loan to a business in return for bonds equalling that value. These can then be cashed in after an agreed amount of time, and at a specified rate of interest. Bond owners are therefore creditors rather than shareholders and have no say over a company’s strategies.

Bridge Loan: A loan that bridges a financial gap. Usually used to finance a business when it is in negotiations with a large investor, to keep the business running until new investment or revenue is generated.

Business Plan: A business plan is a systematic breakdown of how a business will develop. This clearly states any expenses needed to achieve specific goals within a given timeframe.

Burn Rate: This is one of the least underlooked items in this venture capital dictionary but also super important. This is, in essence, the amount of money a company is using over a specified time. For example, a monthly burn rate. Used by venture capitalists to gauge how sustainable a target company’s expenditure is.

Buyout: A way for an investor or founder to exit a business. It occurs when another investor offers to” buyout” another investor or founder’s shares to gain more control of a business.

C

Cap: A limit placed on any transaction, usually financial. This could be a cap on fundraising or expenditure. It could also be a cap on the price of shares or a cap on the number of products being manufactured.

Capital: This refers to monetary assets that a company, group, or individual has access to for business use. You might also hear the term “working capital” to describe this, though that is most usually applied to available cash.

Capitalization Table: A summary list for a startup. Includes investor and shareholder details such as their names, percentage of ownership, and any shares or stock class they own.

Capital Gains: Any profit made from the sale of property or an investment. Usually taxed by governments.

Carried Interest (Carry): A fee often charged by venture capital firm managers. Usually 20% of any generated profits. This incentivizes managers of venture capital funds to ensure that they are investing their clients’ money in profitable businesses. This 20% fee usually only happens if an investment performs beyond an agreed threshold.

Cash-on-Cash Return: How much an investment generates in relation to the original amount. For example, if an investor invests $10,000 in a business which is then later bought and they receive $100,000 in return – that is a cash-on-cash return of 1000%. Also known as Multiple on Invested Capital (MOIC).

CEO: A chief executive officer. Responsible for all managerial decisions, and ultimately in charge of the business unless removed by a board of directors.

Compliance: A company is in compliance when they follow all regulations and laws which are salient and binding.

Common Stock: when you are thinking about venture capital terms this, in essence, represents company ownership. Shares allow their owners to vote on corporate policy and to have a say on serving directors. If liquidation should occur, or a sale, common stock owners are only paid an amount after bond and preferred stockholders.

Completion Schedule: An agreed timeframe for completing all administrative and procedural tasks in order to sign off on investment.

Convertible Note: as shared in my book The Art of Startup Fundraising, this is a legally binding agreement that if an investor loans an agreed amount of money to a business, that it can be converted into equity at a later date. For example, an investor lends $50,000 to a business with an annual interest rate of 10%. After one year, the business performs a share issue, giving that investor shares equal to $55,000. That’s the original amount, plus the 10% accrued interest as equity.

Convertible Preferred Shares: An agreement where shareholders can convert their preferred shares into common shares. This usually has a specific time frame associated with it, such as two years after investment.

Corporate structure: A description of how each department (Marketing, Human Resource, Accounting etc.) within a business contributes to the overall vision and goals of the organization.

Covenant: A legally binding agreement. This agreement stops an individual from carrying out a specific act. For example, an investor could agree to invest in a company if the startup founder signs a restrictive covenant. This type of covenant means that if the founder sells its ownership in the future, they cannot set up a new company that competes with the original business.

Credit: Finances given or “loaned” to a business or individual, usually with a date of repayment set in stone. The credit becomes a debt and often has a percentage of interest placed on top of the original credit agreement or loan.

Creditor: Individual, group or organization that lends money to a business. The creditor is who the loan repayments should be made to.

Crowdsourcing: Innovative, hassle-free way to seek investment by using third-party companies such as Onevest to match your start-up with ideal investors.

Crowdfunding: When investors or interested parties pool their money together to support a financial venture. Rather than having one large investor buy a large stake in a company for $1million, 10,000 people could each invest $100 each. This stops any single group from controlling everything and is in some cases easy to secure than one large investment sum.

Cumulative Dividends: A payment made to shareholders for an agreed amount. This is either fixed or an agreed percentage of a share’s price. Cumulative dividends must be paid out to shareholders with preferred shares if the original share purchase came with that agreement.

D

Debt: Any finances or assets owed to a creditor.

Debtor: A business that owes a debt.

Default: Failing to make debt payments.

Demand Registration: Also known as Demand Registration Rights. Where an investor can force a private company to initiate an IPO or share issue so that the investor can sell their shares on an exchange. Usually only applies to common stock.

Dilution: When an existing investor or founder’s share of a business is diluted. This happens when new investors buy up equity or shares and there is no anti-dilution agreement in place. This reduces the fraction owned by current investors/founders. This is a critical term in this venture capital dictionary.

Disruptor: Any innovation in a marketplace that disrupts the existing way of doing things. This can be through new technologies that leave existing ones obsolete, finding a new demographic for a niche, or altering the price point usually associated with an existing marketplace.

Dividends: Profits paid to shareholders. A dividend in kind is the payment of assets instead of cash.

Down Round: If new investors buy shares at a value lower than a previous fundraising round or share-issue, then this is called a Down Round.

Drag-Along Rights: Force’s minority shareholders to back the sale of a company. Usually forced through by shareholders holding anywhere from 50% to 75% of the stock.

Due Diligence: A complete financial and legal assessment of a business or deal before purchase. Only through due diligence can a buyer know exactly what they are buying and its robustness.

Dynamic Equity Split: Co-founders or investors are rewarded new shares in their business dependent on their performance. The more someone contributes, the more they earn.

E

Enterprise: A company or business.

Entrepreneur: Someone who starts a business.

Entrepreneur in Residence: A successful entrepreneur who is hired by a venture capital firm to identify future investment opportunities. They may offer mentorship to the firm’s portfolio of companies.

Equity: A portion of a company. Someone who owns equity owns a percentage of a business through shares or an agreement to be given shares at a later date.

Exit: The end-goal for most investors. How an investor sells their share of a business, hopefully for as high a profit as possible.

F

Fair Market Value (FMV): After analyzing a business, this is the amount an independent third party assessor believes a company’s shares are worth. When you are thinking about the venture capital dictionary or terms this one really comes into play when doing a 409A Valuation.

Financial Forecast: Also known as a financial projection, a forecast estimates growth and income for a business over a given time, based on comparison with existing businesses and market research.

Founder: The person or people responsible for the creation of a company.

Funds of Funds (FoF): A fund that invests in other funds. Imagine a venture capital group that invests in other venture capital groups.

Future Proof: Projecting into the future and protecting a business or product so that its fundamental design will keep it competitive in the future.

G

Ground Floor: When an investor has the opportunity to be part of a company from its first, initial moments.

H

Harvest Period: This is the period where a venture capital firm starts to generate returns on its investments. Usually results from an IPO, merger, acquisition, or new product launch.

I

Incubator: Similar to an accelerator. An organization that offers assistance to startups so that they may reach their initial investment rounds.

Initial Public Offering (IPO): The first sale of shares traded openly on a public exchange.

Internal Rate of Return (IRR): As part of this venture capital dictionary this is a calculation of how much money is returned on investment annually. Venture capital firms expect to see larger returns over longer periods, and so if an investment’s IRR diminishes over time, VCs may sell their shares in order to free up investment for more lucrative ventures.

Investment Period: The time taken for a venture capital firm to invest its funds across its portfolio companies. Most venture capital funds have invested all their capital after 3 – 5 years.

J

J-Curve: When the IRR (See Internal Rate of Return) of a venture capital fund is plotted on a graph, it should resemble a J as profits grow.

K

Kamikaze Defense: A last-ditch defense against a hostile takeover where a company carries out strategies to reduce its operational or financial worth. The end result is that this may make a business less attractive to investors.

L

Limited Partner (LP): An individual or entity such as a pension fund or insurance company which contributes capital to a venture fund.

Liquidation: When a company is dissolved and its assets are disposed of or sold.

Liquidation Preference: A clause in a contract which stipulates which investors receive payment first if a company is liquidated or sold, even before a company’s founders in many cases. This is a common clause often used by venture capitalists to off-set the risk of investment.

Liquidity Event: Any event which results in liquidation, such as defaulting on debts.

M

Market Research: A way to define consumer wants and needs. By carrying out market research studies, a start-up can then streamline its approach to be more appealing to a target demographic.

Market Value: The amount an investor or consumer is willing to pay for something based on current consensus about how much a company, product or service is actually worth.

Mezzanine Level: Companies which are beyond the startup phase, but not fully mature. Even though this is included in this venture capital dictionary this tends to be for more later-stage companies.

N

Non-Disclosure Agreement (NDA): An agreement that anything mentioned between two parties cannot be disclosed with others. This includes product information and other sensitive data. For example, if a VC firm carries out due diligence into a target company, they may have to sign an NDA so that, even if they do not make a purchase, they cannot use the information they discovered during this process. Keep in mind that even though this is included in this venture capital dictionary, VC firms hate to be presented with NDAs right away for just intro meetings.

O

Outsourcing: Hiring a freelancer to complete a task for your business rather than you or your employees doing it. A Common practice to reduce overheads and secure quality work without requiring full-time staff.

Option: Similar to right of first refusal.

P

Pari Passu: Term used during negotiations. It means side by side or at the same rate.

Pivot: A quick change in business strategy. Often occurs when a startup shifts its attention to a new niche or product type.

Portfolio Company: A company in which a venture capital firm has invested, adding it to their portfolio.

Preferred Stock or Share: This type of stock is rewarded with dividends before common stock.

Proof of Concept: Demonstrates that a product or service will work and be financially rewarding for investors. Most venture capitalists will expect this before investing.

Prospect: Sales speak for any customer or investor who fits a demographic. A person who is most likely to make an investment when approached. Also known as a potential investor.

Pro-Rata Rights: Provides an existing VC investor with the option to increase his or her stake in a company during future fundraising stages.

Q

Qualified IPO (Qualified Public Offering): A description of a future IPO of a company. When used, convertible equity securities convert into common equity. Also used to terminate stock transfer rights for specific investors if necessary.

R

Recapitalization: When a company restructures its capital, changing its equity and debt ratio.

Right of First Refusal: A contractual agreement that an investor will have the first option to buy shares or take part in another business transaction before being opened up to others. As part of this venture capital dictionary, this is an important term when you have a large corporation that wants to invest in your company as that could limit your potential outcome eliminating the possibility of a bidding war.

Return on Investment (ROI): The amount of profit an investor makes in relation to their original investment.

S

Seed Round: The first financing round for a startup. Often attracts angel investors. Precedes series or “round” A.

Secondary Public Offering: Takes place after an IPO. A share offering to the public, often when founders are looking to sell their stake.

Sector: A market niche where a business is looking to sell its products or services.

Series: A round of investment. Usually named A, B, C, and so forth.

Stage: The level of development of a startup.

Startup: A business at the beginning of its journey, usually the first couple of years.

Syndicate: A network of investors looking to invest during a specific fundraising round.

T

Tag-Along Right: A legally binding agreement that ensures minority shareholders have the right to sell their shares for the same value or terms as majority shareholders.

Term Sheet: Outlines the main points of investment, how it will be paid, what will be given in return, and what the investment will be used to achieve. Not legally binding, but provides a good foundation during negotiations.

U

Underwriter: An individual or firm who “underwrites” or assumes the financial risk for another party.

V

Valuation: When assessors, usually a third-party, calculate the value of a business through its assets, finances, revenue, burn-rate, and future projections.

Venture Capital: Pooled finances of a venture capital group currently available for investment.

Venture Capitalist: Individual, usually in tandem with a venture capital firm, who invests in companies, often within a specific niche.

Venture Partner: An individual brought in temporarily to assist a venture capital firm. Not a full partner, but may identify and facilitate new investment opportunities for a VC firm.

Vesting: Stock options provided to employees, usually as a reward for performance and duration of employment.

W

Warrants: A contract issued by a company allowing an investor to subscribe for shares at an agreed price during an agreed time frame.

Window: Time frame associated with a share option or investment opportunity. This term is super important in this venture capital dictionary as founders need to continue to create urgency or the fear of missing out.

X

XRT: An extension that appears after a ticker symbol on a listed stock. It means that the buyer of the stock cannot legally buy shares at a lower price because the rights to do so have now expired.

Y

Yellow Knight: A company, investor, or VC firm that was going to carry out a hostile takeover but pulls out, offering a friendly merger instead.

Yield: Financial or asset measurement. Usually, the amount or percentage returned to an investor for their investment. Includes share sales and dividends. The earnings an investment generates over a specific period of time. For example, one quarter or annual yield. Even though this term is included in this venture capital dictionary this is not a typical term that early-stage companies would encounter.

Z

Zone of Resistance: The upper limit for a share’s potential value. The lower limit is the Zone of Support. Understanding the zone between helps venture capitalists and other investors gauge a good time to buy or sell the stock.

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I’ve failed 3+ dropshipping stores. Revealing everything. Any advice is appreciated.

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Hi everyone. So for the past 6 months, I have been trying to build a dropshipping store and scale it. Unfortunately, all attempts have failed, but I have learned a lot along the way. I hope this post helps others as I will be revealing all my stores and everything that I have learnt. I'll try and make it an interesting read/case study.

What bothers me though, is I don't understand how I have failed. I have followed the exact advice of so many professionals and now i'm all burned out. Any advice would be MUCH appreciated.

Professionals strategies that i have followed: Gabriel St-Germain, KING COMM, Verum, Kevin Zhang, Kevin David, lots of Facebook groups and Reddit recommendations. I've also completed the entire Facebook blueprint.

HOW I FIND PRODUCTS: – Ecomhunt/Aliexpress Dropshipping Center (40+ vol per day)/Facebook Video Search ("shop now", "free shipping" etc./ Facebook Turbo Ad Finder/ Instagram feeds etc.


FIRST STORE: BONIRIS

Link: https://www.facebook.com/bonirisglasses/ (website is dead)

Launch Date: December 2019

Sales: 2

Ad Spend: ~$500

Reasoning and what I learned: I tried to solve a problem. Simple as that. People get sore eyes when they look at screens all day. Blue light blocking sunglasses help solve that problem.

I was new to Facebook ads and didn't manage the process correctly. I ran too many PPE campaigns to try and generate social proof. I spent too much money on professional photo designs. This left me with a low conversions budget and ultimately I gave up due to a lack of sales.

One point to mention is that my creatives were good. I also experimented at the end by taking a winning competitor video, slapping my own logo over it, and judging the results. No sales.


Fast forward 4 months later I was back in the game and was determined to learn everything possible before trying again.

I also had to try and make this work during COVID-19.


SECOND STORE: WAGGY PRINTS

Link: https://waggyprints.com/

Facebook: https://www.facebook.com/waggyprints/

Launch Date: March

Sales: 18

Ad Spend: $1,600

Reasoning and what I learned: I launched a personalized print on demand / dropshipping store after about 2-3 weeks of planning it. This store took the most effort out of all of them so i'll talk about it a bit more. I also drafted a full business plan for it.

I figured print on demand would be less of an issue during corona as POD merchants weren't positioned in China, therefore shipping times wouldn't be an issue. POD is also becoming increasingly popular, so I tried to capitalize on it. I could also make a decent margin per print with Gooten fulfillment ($20-50) and I figured i could take on the big players. I was wrong.

My website looks amazing and the mock-up designs look good. For anyone interested in personalized print on demand, I recommend Chris Conrady and Wholesale Ted (Youtube) to learn from.

Okay, let's get straight to it. Facebook Ads!

I blew $100 on growing the page to 900 likes. Don't do this! It is completely useless. Next, I ran multiple $5 adsets with 8 creatives per ad set. Don't do this either! Experts suggest a minimum of $2.50 per ad creative. I then tried 2 creatives per $5 ad set.

Next, i tried to copy Verums strategy and run $50/day CBO campaigns with 2 creatives in each adset. I got 1 sale after 2 days and turned them off. I then changed the interests, changed the creatives, and tried again. This time with a $100/day CBO budget for 2 days. Same result.

This is when i introduced a custom dog harness to the website. I ran this over multiple campaigns with lots of testing and only got ~12 sales.

Facebook Screenshots: https://imgur.com/a/2ERCPU4

The only reason why "Pets At Home" has 3 sales is because the same person purchased the same product 3 times over the following weeks. All the other sales are basically from the pet harness.

Facebook testing:

  • Narrowing with engaged shoppers

  • Top 4 countries only (UK/US/AU/CA), or US only

  • So many different interests (found through audience insights, google search, suggestions etc.)

  • I tried to scale interests that showed some value after 2 days

  • I tried targeting different volume amounts (1m – 80m) and excluding dropshipping/aliexpress/printondemand interests.

  • I tried running identical ad sets with slight changes such as mobile-only, facebook feed only, etc.

  • Went to the breakdown tool and tried to target exactly what was working from old adsets, into new ones. E.g. Women only, 40+, Mobile only, US only.

  • Tried Conversions set to purchase, conversions set to add to cart, and set to view content

  • Different thumbnails

  • Tried to retarget website visitors over 180D

  • Always single interest testing. Sometimes tried with multiple interests but it made no difference.

After the Verum method failed, i tried normal ABO's and same result. I then tried a paid instagram promotion and got no results ($50). I also tried growing the instagram page by posting memes but it didn't provide results and was too hard to grow. I know how to grow a page as i have a different meme page with 20k followers, and also used that to try and promote this one.

I also made an Etsy shop and tried to sell on there. Got 0 sales ffs.

Anyway. enough of this business, onto the next.


THIRD STORE: NAPANNA

Link: https://napanna.com/

Facebook: https://www.facebook.com/napannajewelry/

Launch Date: April

Sales: ~15

Ad Spend: $1,100

Reasoning and what I learned: Thought i'd give personalized print on demand jewelry from aliexpress a go for the same reasons. I could claim that there would a 1 month delay due to the personalized nature of the product.

Facebook screenshots: https://imgur.com/a/iuDF7vY

2 ads per creative. I work out which one performs best after 2 days and kill the bad performing one, while doubling the budget. Nothing scaled properly though. I also tried all the different creative options such as slideshow, carousel, image, video, etc.


FOURTH STORE: Home Life Deals

Link: https://homelifedeals.com/

Launch Date: May

Sales: ~2

Ad Spend: $400

Reasoning and what I learned: I got sick of creating a new store everytime i wanted to test a niche or a product so i created a general store, only for testing, and to target products that people need for their house.. If a product was successful in the testing phase, then i'd create a new website around it.

Unfortunately, every product failed… My products aren't bad though, the couch covers look great. They are also proven to sell as the aliexpress dropshipping center reports constant 50+ sales and competitors have hundreds of thousands of views per video.

For these, i mainly just tried video ads. I found ads that were already working and stole them for testing and slapped my logo over it. I also found 5 or so videos from competitors, aliexpress product listings and more. Then i cut them up and created my own. Nothing worked though. The videos were good as they were proven to work by competitors. I also tested with different thumbnails.

I also tried finding products with a US warehouse. So everything would take ~2 weeks to arrive.

As i was much more experienced with Facebook ads, i tried to sell blue light glasses again on here. Still didn't work smh.

Facebook screenshots: https://imgur.com/a/L8jtz0k

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How To Perform A Competitor Analysis (And Why It’s Important) by @BlairKaplanPR

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by Blair Kaplan Venables

There’s nothing like a little healthy competition to light a preverbal fire under you. With the increase of businesses moving online during this COVID era, you need to make sure that your business stands out online. If you’re one of the 1% of entrepreneurs who managed to create a business with no direct competitors, congratulations! If you’re like 99% of the rest of us, it’s time to do some homework. Stat. It’s important to know who your competition is, what they are selling, how they are selling it, where they are marketing and what they are doing right. If you know this information, you are able to work on a strategy to potentially capture their clients and grow your business.

A good place to start your investigation is by performing a social media competitor analysis. By scoping out your competition, you will be able to see where their weaknesses may lie, which is information that you can use to you advantage. For example, if you see that your competition isn’t on a specific social media network and you know that your target demographic is spending time on that social media network, you may want to build up a presence there.

 

Identify Your Competitions

What other companies are competing for the business that you seek to obtain? You should be able to identify at least five companies that are your competition. You can do this by Googling key words, asking friends and doing your own research.

The best place to start finding out information about their social media presence is via their website, where these links should be posted. It’s also helpful to go into each social media platform and search their name because sometimes websites aren’t up to date with social links.

 

Document Your Findings

Creating a competition chart is the best way to record your findings. Open up your favorite spreadsheet program (I’m an Excel or Google Sheets gal, myself), open a new document and make rows listing your competitor’s names. Then create columns for the following four key pieces of information about your competitor’s online presence:

  1. Where are they on social media? Don’t forget about LinkedIn, TikTok and other surprising places they may be.
  2. What type of content are they creating? Is it instructional or do they share personal stories?
  3. How many followers they have on each social media network?
  4. Any notes you may want to reference later.

Determine Key Opportunities

We aren’t just cruising social media to be a lookie-loo. We now need to analyze the stats that we have found. Once your chart is filled in, you will be able to see what your competition’s social media strengths are (which may be places you don’t want to compete with them) and where their weaknesses lay (which may create opportunities for you to lead the pack).

Keep in mind you’re not trying to replicate someone else’s strategy. Your social media approach should be unique. But you are looking for opportunities. You may also find content ideas that your top competition isn’t executing yet, which is fantastic news. Learn what they are doing and you can figure out how to do it better or differently. There are always opportunities on social media to create great content and grow your brand’s presence.

 

 

Blair Kaplan Venables is an expert in social media marketing and the president of Blair Kaplan Communications, a British Columbia-based PR agency. As a pioneer in the industry, she brings more than a decade of experience to her clients, which include global wellness, entertainment and lifestyle brands. Blair has helped her customers grow their followers into the tens of thousands in just one month, win integrative marketing awards and more. She has spoken on national stages and her expertise has been featured in media outlets including CBC Radio and Thrive Global. Blair is also the author of Pulsing Through My Veins: Raw and Real Stories from an Entrepreneur. When she’s not working on the board for her local chamber of commerce, you can find Blair growing the “I Am Resilient Project,” an online community where users share their stories of overcoming life’s most difficult moments.

The post How To Perform A Competitor Analysis (And Why It’s Important) by @BlairKaplanPR appeared first on She Owns It.



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A Bigger Truth About Restaurant Food Delivery

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Photo by Viktor Forgacs on Unsplash

I was listening to Dan Primack’s podcast on Pro Rata and he was interviewing Senator Klobucher who is now publicly and vocally speaking out against Uber purchasing Grubhub and has tried to mobilize against this.

Her argument is that if Uber buys Grubhub (which itself once merged with Seamless) it would mean that Uber Eats / Grubhub would control half the market and that with DoorDash the two together would control 90% of the market. I think that’s a largely flawed fight to be picking and of all the uses of Senator Klobuchar’s I could think of some much more productive fights to be having.

For starters Uber itself has had to lay off 27% of its workforce due to the pandemic and has been severely impacted financially from the crisis with no immediate respite in sight. Its core business was already struggling to become profitable, so having tertiary businesses like food delivery that can deliver needed profits would be welcome to their financial stability. And the market would still have DoorDash and PostMates duking it out as well as the potential that players like Instacart broaden their business one day or Amazon gets into food delivery.

Even more likely is eventual technology disruption where drones deliver foods and make it hard for existing car delivery services to compete. It won’t happen right away but I’ve seen some innovative companies doing exactly this in places like Australia where they are taking a more liberal approach to allowing drone deliveries. Therein lies the advantages of free markets and competition and if we really believed it were that easy to buy off your largest competitor and be a monopolist we’d all be surfing on AOL TimeWarner portals.

But the broader issue that hasn’t garnered much press attention is how the restaurant industry itself is being transformed and what tools a modern restaurant will need to compete. What is the Shopify of the restaurant industry? I have some compelling data that suggests it may just become ChowNow.

We know that the restaurant business already operates on thin margins and many struggle to survive. So when delivery services came along many were willing to pay the fee to try and increase business. It was only about 10–15% of their actual total revenue per month so for many it wasn’t a battle worth fighting — they just put up with the food delivery company fees. Customers were happy and restaurants focused on their in-store business.

The problem for the restaurants is that the more successful the “aggregators” of customer demand become over time, the less power the restaurants themselves have individually. This will largely be true whether you have 2 strong competitors or 5 because unless a delivery company can make a profit it won’t continue to stay in business.

The delivery companies own the customer relationship and can drive traffic to the most profitable restaurants for them. Obviously if you have a great restaurant brand with differentiated food people search for you by name but for many people looking for pizza, sushi, Mexican food, Thai food, whatever, you might go with the choice put in front of you if it’s being recommended or delivered more quickly. The delivery companies also own many of the assets like the photography so they can make certain options look much more attractive.

So just like when Groupon came out many small merchants welcomed the uptick in traffic, without owning the customer you lose the most valuable asset — the ability to re-market to your customer base and encourage them to become more loyal and more frequent customers. You lose the ability to up-sell and cross-sell products. And just like with Groupon the small businesses ended up having many unprofitable customers.

At Upfront we always took the approach that we wanted to back startups that enabled merchants to own the customer relationship and to increase profits by becoming excellent at marketing and serving ones most loyal customers.

So several years ago we backed a company called ChowNow that enables restaurants to offer self-service ordering for pick-up or delivery and the restaurant owns all of the customer information and relationship — ChowNow is simply a SaaS enablement product.

The company has done well over the past several year but never really captured the same press mindshare as the food delivery companies because when a company shows up at your house you get to know that brand rather than the tech that enables restaurants.

Covid-19 has changed all of that. Whereas pickup & delivery may have been 10–15% of a restaurant’s business before it’s currently 100% and when it’s your entire business the thought of paying huge commissions to a third-party delivery service becomes much less attractive. So while many restaurants knew they eventually needed to invest in better order management software, many had been putting it off.

But just as many product or apparel companies were happy selling at Amazon, Walmart or Nordstrom in the past and have lately realized the importance of Shopify and serving customers directly — so, too, are restaurants. Enter ChowNow.

What data do I have to make the case?

  • ChowNow now has 17,000 restaurants using its SaaS platform for take-out and delivery and is adding more than 2,000 / month right now (and trending up)
  • 10 million diners now use the ChowNow ordering platform vs. 24 million for GrubHub, so like Shopify while they built the customer base slowly and with capital efficiency they are now rivaling the bigger players in footprint
  • Last year they were serving 50,000 customers / day through their platform and did approximately $500 million in GMV (the value of the orders placed), this year they are on track to do $3 billion (with a B) and expect to end the year at a revenue run rate that may top $100 million (yes, I asked for permission to publish these numbers).

If you want to see a short spot that outlines the importance of the restaurant industry arming itself with better software tools to serve and market to their customers you may enjoy this 60-second video that makes it clear why it matters. It speaks volumes to why we all love our local restauranteurs and want to see them survive …

https://medium.com/media/dab8c9b98b12a45a4b06435888cc7fc0/href

Or if you want to see the argument laid out clearly by a customer, look no further than Motorino Pizza in NYC who posted this note that appears before you enter their website:


A Bigger Truth About Restaurant Food Delivery was originally published in Both Sides of the Table on Medium, where people are continuing the conversation by highlighting and responding to this story.



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