Roger Vozar

As the economy moves away from recession, many privately held companies are finding themselves with available cash and are deciding how it can be best utilized.

“They’re calling and asking, ‘Do I acquire a business, or start a new product line? Or do we further incentivize our top performers?’” says Tyler A. Ridgeway, director of Human Capital Resources at Kreischer Miller.

Many companies are aggressively looking for top talent, and you need to act quickly to attract ‘A’ players and ensure your best performers don’t leave. Top executives are landing jobs more quickly than ever, Ridgeway says.

Smart Business spoke with Ridgeway about retention methods that will motivate key employees.

How can an owner identify which employees are indispensable?

If you went to the office on Monday and someone gave notice, whose departure would make you feel irreparably harmed? Think about the key people you need to take your company to the next level of growth. Also, consider who you consult with when making a critical or strategic decision. These are the employees who need to be the focus of your retention efforts.

What financial rewards are being used to retain employees?

Total compensation is important, but it’s not always about base pay. Companies are using phantom stock plans, stock appreciation rights or a pool of money tied into company growth. For instance, if a $10 million company grows to $15 million, a portion of that $5 million difference can be divided among key performers and put into a pool that can act as a retirement benefit or, if the business is sold, would vest immediately. These types of programs can be used to attract top talent to your company or reinforce the desire of your existing team to stay and contribute at a high level.

You can also set bonuses on a team or individual basis. For individuals, percentages can be tied to specific goals you expect your executives to accomplish, such as qualitative metrics or projects to be completed.

It’s also advisable to add subjective items so the team is rewarded if the company has a really profitable year. Executives are willing to share risks, and they want additional cash if they put forth the effort and the company grows. A situation in which someone can contribute strategically, and reports to the ownership, is very attractive when you offer some type of upside if the company grows.

What are some other retention strategies?

Health care and flex time are still important. Health care negotiations are all over the map, and how a company addresses this key employee benefit can act as a strong motivator for top performers to stay.

Vacation time and flex time are also important because businesses are operating in a 24/7 environment; an executive may not be in the office all the time, but he or she is almost always plugged in. Organizations that take into account their employees’ personal lives and offer flexible work arrangements will be viewed as the best companies to work for.

Employee engagement also is important. If you can create an environment where employees at all levels understand their importance and role within the organization, and how they contribute to the growth of the business, it will be easier to retain them. When that breaks down and someone doesn’t feel they’re contributing or engaged, you risk losing that person.

Employee retention is not like a best practice environment; you have to know your organization and what motivates your employees. Most organizations now have four generations in their workforce and they’re all motivated differently. Figure out what motivates your employees and be flexible in creating policies that encourage them to stay and operate as cohesive, engaged teams.

Tyler A. Ridgeway is director of Human Capital Resources at Kreischer Miller. Reach him at (215) 734-1609 or tridgeway@kmco.com.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Finding a bank for your business is different than applying for a car loan. Instead of just needing a source of capital, you also need a partner that can help your business grow.

“You’re looking for a relationship that will allow your business to prosper,” says Andrew M. Phillips, vice president, relationship manager at Bridge Bank.

Smart Business spoke with Phillips about how to find the right bank for your business.

How does an owner find a bank that fits his or her business?

First, look for a bank that is truly dedicated to serving businesses. Long lines for tellers and heavy branch traffic may indicate that bank caters to personal accounts. A true business bank will likely have a lobby that’s much more open, with employees sitting at desks rather than behind teller windows. There’s less activity there because most business is conducted out in the field, at client offices or job sites.

Another consideration is size. If you need to borrow $500 million, your choices are going to be limited to big banks. But if you’re a small to midsize business you should look for a smaller bank that shares the same vision and spirit as you.

If a bank has the capacity to lend $500 million, it can certainly take care of your $2 million loan request, for example. But you’re going to be a small fish in a big pond, and you probably won’t get the service that you need for your company. That same $2 million loan is very important to a small to midsize bank, as will be your relationship.

What are the advantages smaller banks can provide?

Do you want to shape your company to fit lending requirements and other parameters of a big bank, or do you want a bank that shapes its requirements to fit your company? By virtue of their size, certain smaller banks can be more adaptable to the unique needs of the businesses they serve. They can be more flexible and offer solutions customized to fit individual businesses instead of broad-brush, pre-packaged solutions to fit a particular business sector, for example.

Every bank will say they have expertise in your industry. But don’t let this be a substitute for a banker taking the time to learn your particular business, which isn’t exactly the same as your competitor’s. The right bank can do a lot to help you maintain the edge that helps you thrive.

A smaller bank doesn’t have a prepackaged program that says, ‘You’re a distribution company that has $10 million in annual revenue, so you need a $2 million receivables line of credit and up to $1 million of term debt.’

They look at each client, how they do business, and determine what advantages can be provided that fit into their way of doing business. For example, can they take discounts from vendors that they aren’t taking? Do they need to finance a piece of equipment at a shorter or longer term?

Once you’ve decided the right size of bank, how do you choose one?

Talk to business colleagues about their experience and find a few banks that make sense and are a good fit for your business. Some banks do have expertise in certain industries and if you have one that’s particularly good with yours, start there.

Then, meet with a few bankers and get to know them. It’s not enough to send a package and see how your needs fit with the bank on paper. You need to discuss your company’s history — where it has been, where it is now and where it will be in the future. It’s important to provide your financial history, but it’s just as important to outline what and where your company is, its goals, and the ambitions and desires of the people running it.

That will help to ensure a good fit. People have different priorities, and a bank needs to know those priorities to put together a customized solution.
It takes a lot of time to do this process properly, but a good banking relationship is worth the effort.

Andrew M. Phillips is vice president, relationship manager, at Bridge Bank. Reach him at (408) 556-6575 or andrew.phillips@bridgebank.com.

Insights Banking & Finance is brought to you by Bridge Bank

Every day, small business owners make mistakes by failing to disclose issues when selling their businesses, risking potential legal entanglements.

“Selling a business is not unlike selling a house. In California, there is a duty to disclose. Although a broker representing the buyer or seller has fiduciary obligations, by law, the onus of disclosure falls on the seller,” says Gregory M. Gentile, a partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Gentile about pitfalls owners should avoid when selling businesses.

What can a seller do to mitigate the risks of selling a business?

Finding the right broker and/or consultant to help sell or market your business is a crucial step to success. Many times, owners seeking to list their business select the first person they meet. This can cost time and money.

Within a few months, you may see no results and have to go on a search all over again. Take time to interview the broker and focus on a realistic outcome. A reputable broker can prepare a sound market analysis and aggressively list the property to attract willing buyers.

The seller can also expect a reputable broker to have a well-drafted representation agreement. It is important that the seller review the agreement carefully and understand his or her obligations.

What are the contractual responsibilities of the seller?

Using a broker to market the business does not relieve the seller from due diligence. The seller is required to disclose all material conditions that may affect the prospective buyer’s decision to purchase the business. The seller can expect the broker to set forth these obligations in the listing agreement. It is very important for the seller to carefully review the listing agreement to ensure his or her awareness of these obligations that the broker places, by contract, on the seller, and the potential downsides if the seller fails to abide by them. If any part of the agreement is questionable, it is important to ask questions; and if necessary, consult with an attorney.

What provisions in the listing agreement should a seller be most concerned about?

Many listing agreements have one or more provisions requiring that the seller affirmatively disclose. There may also be provisions that seek to relieve the broker of any liability if the seller fails to disclose. For the seller, this means to be complete and accurate with any information provided to both the broker and the prospective buyer. Any material fact that may reasonably influence a buyer’s decision to purchase the business must be disclosed.

The listing agreement may have indemnity provisions favoring the broker. For instance, if the agent or broker gets sued or is required to defend a claim brought by a buyer, the broker can seek indemnity (recovery of damages) against one or more of the parties to the transaction, and such damages include, by contract, any attorney’s fees and costs incurred by the broker’s attorney in defending any claim. This can be substantial and financially devastating.

Many agreements have arbitration provisions. Such a provision in a listing or purchase agreement will pre-empt a lawsuit in superior court, which means that the parties must go to judicial binding arbitration if there is a dispute. Arbitration has the potential of being expensive since arbitrators charge hourly for their time.

The agreement can also contain an attorney’s fee provision. If the seller fails to disclose, and the broker has been forced to hire an attorney and prevails against the seller, the seller will be required to pay the monetary damages, the broker’s attorney’s fees and costs, including expert fees (if any are incurred, and they usually are) and the arbitrator’s fees, which can be substantial.

Selling one’s business can be financially rewarding, but it is also a complex transaction with many pitfalls for the seller. It is important to do your homework and select a reputable business broker. Further, be sure to read and understand the contracts presented by the broker, ask questions and, if necessary, consult an attorney.

Gregory M. Gentile is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (408) 918-4554 or GGentile@rmkb.com.

Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC

“The most innovative ideas come from conditions that are constrained or set.”

I’ve always thought of myself as more of a task manager than an innovative, creative person, and those words from ShareThis CEO Tim Schigel, subject of this month’s cover story, resonated with me because not knowing where to start is a familiar experience.

At first glance, it seems counterintuitive to place limits on innovation.

Wouldn’t keeping all options available lead to more possibilities? That, in turn, would be expected to produce better results, since you’re able to select the best solution from among a larger pool of ideas.

Setting constraints

As Schigel says, without rules you wind up floating around in this ambiguous space. Only with constraints does innovation occur.

That comment made sense to me. When there are no rules, there also are no boundaries or ways to keep projects on track. It sounds like a way to rack up some huge expenses with no assurance you’re on a trajectory toward success.

At ShareThis, the starting point for development was to restrict ideas to working within the Amazon Cloud. Designers also had to ensure that their solutions didn’t use up too much computer power and slow down websites.

For many companies, I’m sure budgetary constraints are a large consideration that employees must work within. That’s certainly one of the reasons ShareThis stayed within the cloud rather than invest in a data center. But they were able to find a way to make the seemingly impossible work.

Ignoring the crowd

Clearly part of Schigel’s success stems from being a contrarian: “I like to go where the puck is going.”

As a hockey player, I appreciate any analogy connected with the sport. But it does make good business sense. All that he’s really saying is that better results come from anticipating changes.

Talent can make up for a lot of shortcomings when it comes to reading and reacting to a situation. But companies, like hockey players, can certainly maximum their potential by analyzing where things are going and taking steps to arrive there ahead of the competition.

In the case of ShareThis, that meant getting away from being dependent on a Facebook platform and developing an open model approach to sharing.

Hitting home runs

Many engineers at Google and other West Coast companies are from Midwest colleges like The Ohio State University and the University of Michigan, says Schigel, who grew up in Cleveland. Schigel says they often don’t have the same belief that it’s OK to change the world that you find on the West Coast. As a result, many business plans focus too much on incrementalism, he says.

“They just want to make something 20 percent better, instead of changing the rules,” Schigel says.

He says the key is to build up confidence within your organization and encourage people to ask questions. Remember, however, to stay focused as well.

“If they are just asking, ‘What if?’ and are not accomplishing anything, that gets a little old,” he says. “You want to not only ask the interesting and penetrating questions, but then go try and do it.”

Sounds like the perfect balance of task manager and innovator to me.

Roger Vozar is associate editor at Smart Business Northern California. If you have an interesting story to share about a person or business making a difference in Northern California, please sent an email to rvozar@sbnonline.com.

After witnessing the Dust Bowl’s impact on the Midwest, the founders of Lundberg Family Farms decided they needed to take care of the soil and treat it as a living organism when establishing the Sacramento Valley business in 1937.

“When they arrived here, they started to farm using cover crops that would produce nitrogen from the air, like a legume or vetch. They also would idle the ground. At that time, it was counter to the methodology of burning,” says Grant Lundberg, CEO of Lundberg Family Farms and grandson of one of the company’s four founders.

The organic rice pioneer continues to innovate, earning top honors for Ag Innovation last December at the 29th annual Regional Innovation Awards presented by Innovate North State.

Leading the organic movement

One major innovation at Lundberg Family Farms involved a decision in the 1960s to raise organic brown rice. While that might seem like an obvious choice given today’s marketplace, it was a pretty risky move at the time, Lundberg says.

“First of all, doing your own rice milling and linking directly to the consumer was counter to what growers were doing. So that was a different paradigm,” he says. “The other was brown rice. At that time all rice was milled white, or about 99.9 percent of it. The idea that you would leave the bran on, where a lot of the nutrients and vitamins are, was counter.”

The organic gardening publications produced by Robert Rodale and Rodale Press had a major influence on the Lundbergs. Management approached Rodale to talk about organic farming because they knew he would understand how to do it on a certain scale.

“They had a choice to make. At a time when everybody was growing large amounts of commodities and selling it to cooperatives, they decided they were doing something that was valuable and there were consumers who would appreciate it,” Lundberg says.

“It seems obvious now, but it was a 180-degree shift back then. People basically thought they lost their minds.”

Organic farming fit right into the company’s culture, following along the path set at the beginning in trying to take better care of the soil. While many decisions at Lundberg Family Farms seem to go in the opposite direction of competitors, they are based on core values.

“Those values serve as our compass, and as we’ve grown our consumers expect that of us,” Lundberg says.

The decision to move to organic farming was based both on philosophy and business improvement.

“It came out of this philosophical bent on how we wanted to take care of the land, which cascaded out of the Dust Bowl,” Lundberg says. “But we also wanted to find value in what we did and take care of our family. So both drivers were at play. And it made good business sense because we could differentiate ourselves.”

Managing processes

Lundberg Family Farms follows a model based on the Stage-Gate development process to manage projects and make decisions on what to pursue.

“It’s pretty widely used in the food industry, and a discipline we’ve internalized and worked with to move along our product,” Lundberg says.

The process has been helpful in answering questions such as:

  • Why are we going to do this?
  • Should this product move forward in the process?
  • Have we done the research and understand the risks?

“We have a team process, including a couple of folks who work full time in different parts of product development,” Lundberg says. “We also have a food scientist and research scientists.”

It’s not just about product, but processes as well, because it’s an organic certified organization and needs to follow certain standards.

“We don’t use any chemicals. So to take care of weevils and grain bugs, we have to use a nonchemical process,” Lundberg says. “One of the challenges with businesses is how to solve given restraints. For us, the constraint is that we can’t use man-made chemicals in the storage process.”

Sanitation, temperature controls and product cleaning techniques are the main methods employed in place of chemicals.

“Really, the chemical process has only been developed since World War II. So it’s just understanding how to do it and innovating different techniques and methods,” Lundberg says.

Branding the business

It’s important for any company to establish its brand identity. For Lundberg Family Farms, its brand is associated with organic farming and family, the source of the values that led to the decision to go organic.
Lundberg says company executives didn’t predict back then that consumer demand for organic foods would grow to the extent it did.

“I don’t think there was this grand vision of the future. That is where our values helped guide us,” Lundberg says. “For us, it’s been a 30-year process at a minimum. Except for the really committed supporters, when we’re trying to push into new markets people weren’t aware of us.”

Management has always made decisions with succession and the next generation in mind, which Lundberg says is a powerful idea.

“We have to take care of the capital and ownership and bring them along with ideas, or we’ll never keep it together,” he says. “The family is very committed to that governance principle and respecting the needs of ownership, management, labor and land.”

Keeping the future in mind includes staying relevant to consumers, which is why Lundberg Family Farms is looking at new grains like quinoa and different beans that are growing in popularity.

“We want to make sure we understand where our retailers and consumers are going, and where it is OK for our brand to go out and deliver on,” Lundberg says. “We’ve taken on this quick cooking, entrée area that’s important to us. So we’ve invested in that and continue to innovate in those categories.”

Innovation has been part of the company’s culture from the very beginning and will always be important, Lundberg says.

“Our website has a page that gives our mission and values. Innovation is in our mission. There’s a rich history about us being innovators. But you can’t rest on that, you have to use it as a source of energy and drive for the future,” Lundberg says.

Learn more about Lundberg Family Farms:

Facebook: www.facebook.com/lundbergfamilyfarms
Twitter: @lundbergfarms

How to reach: (530) 538-3500 or www.lundberg.com

The movie “Moneyball” depicted how baseball executives were using statistics to predict outcomes, and allocating resources accordingly. Rodolpho Cardenuto, appointed president of SAP Americas in January 2013, foresees a similar approach in the business world as companies gain insights from big data.

“The only difference is that they used past statistics. The real insight is how to predict outcomes,” Cardenuto says. “I think it’s going to be a bigger revolution in business than in any sport.”

The challenge is transforming big data into actionable items. Making use of data involves taking it from infrastructure to information and then to insight. The information is already being collected, it’s a matter of how to derive useful insights from what has been gathered, Cardenuto says.

“It’s about how to get insights from the big data. We can accumulate as much information as we want. You can feed information from all over the place — social media, archives or systems — but how do you get insights from that?” he says. “Big data is about how to transform that information into something useable for the business.”

The volume, variety and velocity of data continues to grow exponentially — a compound annual growth rate of 45 is anticipated through 2015, Cardenuto says. Combined with rapid decreases in storage costs, companies are now able to store vast amounts of data.

Here’s how SAP, with its HANA database management system, is leading the charge to take that data and present relevant results to enable real-time business decisions.

Defining the parameters

Before devising a plan based on the data, you have to determine what data to focus on.

SAP employs data analysts and engages with customers to understand how they want to market to consumers so they can make the jump from big data to insights.

As an example of how that is accomplished, Cardenuto cites oil and gas companies that are SAP customers. They have wells that provide 50 terabytes of information. Using the SAP HANA application, the companies can analyze that information to determine the most cost-effective and productive way to operate the well.

“They have sensors. They can get the information they want. But the important thing here is transforming this information into insights to better utilize this well’s potential,” Cardenuto says.

Another client, a retailer in Mexico, analyzes data once or twice a week to see which products are selling, he says. That data is used to manage logistics and deliver products to stores.

“If I have a TV set that is selling in one store, I can reroute my logistics, my supply chain, to deliver more TV sets to that specific store and from other stores where they are not as much of a bestseller,” Cardenuto says.

While the same process had been followed previously, the cycle took up to three days to complete. That lag meant that there was no guarantee that there would still be the same product demand, particularly if the item were part of a current promotion, Cardenuto says.

“Now they can do that in real time,” he says. “Only with real-time HANA can they do that.”

Another SAP product, Precision Marketing, which used to be called Precision Retailing, is an application that pools historical consumer data. For example, Wal-Mart could use it to find what products customers purchased and at what time.

It can also provide detailed information about customers such as a female between the ages of 25 and 30, with or without children, employed or not, even whether a person prefers organic foods.

Of course that sort of information appeals to retailers, but it has also been used by a transit agency in Montreal, Canada, Cardenuto says.

Cardenuto envisions data analysis being taken a step further to determine why there was more demand in one region in order to predict future demand spikes. He says such predictive modeling is definitely on the way.

Along with big data and real-time insights, Cardenuto sees cloud computing and simplification as two trends that will be the focus of CEOs in 2014.

“The cloud is enabling customers to have access to new innovation as well as a return on their investment in technology faster than ever before, in weeks instead of years,” Cardenuto says.

That means businesses that adopt cloud technology can redirect those returns to investments in other technologies and business models that fuel innovation and growth.

“The cloud can be an important catalyst in any enterprise. It offers a simpler delivery model to accelerate the adoption of innovation,” Cardenuto says.

Simplification is important because complexity is a significant challenge that businesses face today, according to Cardenuto. Whether it’s in business processes or user experience, complexity slows everything down and results in longer business cycles, frustrated users and unhappy customers.

There are more mobile connected devices than there are people, making it critical to develop a simple user interface that provides a personal experience, he says.

“We have made simplification our focus. We are simplifying everything, so our customers can do anything,” Cardenuto says. “With technologies like cloud and HANA as a platform to tackle big data and integrate across applications, businesses can achieve faster innovation.”

Finding inspiration for innovation

Innovation is key for any company, but where do you look for inspiration?

At SAP, executives pay attention to research coming out of universities, venture capitalist investment areas and startup companies. They also work with customers to better understand how technology changes can help them improve business processes.

“We also leverage design thinking to ensure our solutions are user-centric, so users get maximum value from them,” Cardenuto says.

Before being named president of SAP Americas, Cardenuto had served as president of SAP Latin America for five years and established SAP as an innovation provider of choice for companies of all sizes in a variety of industries.

Cardenuto says SAP works directly with customers on new products, finding companies that are willing to adopt technology that is in the prototype phase.

“If we find ourselves with something that grows and appeals to more and more customers, we commercialize it,” he says. “We could say it’s a learn, build, measure, learn methodology.”

That timetable for the process continues to shrink as technology evolves.

“Through process simplification, we are doing this faster and faster. In fact, we can take innovations from concept to market in as little as five months — that’s as fast as leading startups,” Cardenuto says.

Adapting to millennials

Perhaps an even bigger challenge than tackling big data or continuing to innovate is adapting to the impact millennials, typically defined as those born between the early 1980s to the early 2000s, are having in the workplace.

Cardenuto says that’s the biggest challenge he’s faced in his career as a leader and one every business has to tackle, regardless of industry.

“Leaders in every industry and sector are also confronting it,” he says. “It’s about a fundamental change that is taking place in the workplace and the marketplace, as millennials emerge as the largest generation since the baby boomers.”

Within 15 years, millennials will represent 75 percent of the global workforce and will have amassed the greatest purchasing power in history at $2.45 trillion worldwide.

“As our current and future employees and bosses, and present and future customers, their impact transcends numbers: It’s about how they embrace technology and the digital world,” Cardenuto says.

Millennials are highly mobile and social, which is driving employers at many businesses to rethink traditional models.

“They are probably the most educated generation ever and are already shaping corporate culture. How you hire, retain and engage them is both a challenge and an opportunity,” Cardenuto says. “That is why I am intensely focused on putting the best strategies in place to fit our early talents.”

Company leadership needs to ensure that it attracts and motivates millennials, he says.

“We have put programs in place that expose young, high potential employees to diverse business situations and allow them to be bold, innovative and engaged. We mentor and are reverse-mentored by them. We strive to keep our workforce flexible, and enable them with our best training programs,” Cardenuto says.

Millennials, with their understanding of and comfort with technology, will be an important part of teams leading innovation and shaping the future of companies.

“Above all, we try to listen and learn from their ideas, beliefs and contributions — how they use technology, push to crowdsource ideas, and expect it all to run faster, smarter and more sustainably,” Cardenuto says. 

Takeaways:

  • Transform information to insights.
  • Understand customers so you can provide solutions.
  • Adapt your business model to address millennials.

The Cardenuto File:

Name: Rodolpho Cardenuto
Title: President
Company: SAP Americas

Born: Sao Paulo, Brazil

Education: He received a bachelor’s degree in electronic engineering from Centro Universitário da FEI (Faculdade de Engenharia Industrial) in Sao Paulo, Brazil, an executive MBA from the Business School Sao Paulo (BSP) and a master’s in international business from the University of Toronto.

What was your first job and what did you learn from it? About 25 years ago I was a systems analyst at a bank in Sao Paulo, working the night shift —11 p.m. to 7 a.m. I worked at night and went to school during the day; my first class started at 7:30 a.m. Getting to class on time was a challenge, so I saved up to buy my first motorcycle. Aside from developing a longstanding passion for riding motorcycles and learning to get by on very little sleep, my first job taught me the importance of hard work, perseverance and disciplined time management.   

Learn more about SAP Americas at:

Facebook: www.facebook.com/SAP
Twitter: @SAP

How to reach: SAP Americas, (800) 872-1727 or www.sap.com

Tim Schigel sensed where the Internet was headed and developed a platform that changed the way people connect.

“I had this notion that people were going to become the center of the Web, not domains or websites,” says Schigel, chairman and founder of ShareThis Inc., a widget featured on more than 130,000 websites that allows Web surfers to share items through social media networks and email.

While sharing is now accepted as an integral part of Web use, that wasn’t the case in 2005 when Schigel reached out to a professor at the University of Illinois, David Goldberg, one of the inventors of genetic algorithms.

“I was looking at the overall digital marketing space, and Google owned just about all of it,” Schigel says. “There aren’t many companies that have really changed the dynamic of that landscape, but it has to change because there is so much growth in front of it.”

ShareThis was launched in November 2007, with installation on 1,000 sites within the first week. A second round of funding was raised in February 2008.

Here’s how Schigel created ShareThis to take advantage of a growth opportunity.

Blazing a trail

A common theme among entrepreneurs is that they tend to find their own path. Schigel says he’s never liked going to where the crowd was, so it wasn’t hard to ignore venture capitalists who said they wouldn’t invest in ShareThis unless it had a Facebook plan. Schigel favored an open model approach to sharing rather than the closed model used by Facebook.

“If you are so enamored by Facebook, go ask Accel (Partners) to let you invest. But I’m trying to do something new. Something different,” Schigel says.

It helped that Schigel had experience in the media technology space. While director at Blue Chip Venture Co., he led investment in advertising.com, which was sold to AOL in 2004 for $485 million.

“If I were younger and hadn’t been a venture capitalist myself for a little while, I might had been more intimidated by it,” Schigel says. “I just couldn’t believe how many of them — it was that follower mentality — just wanted to do what was being written up in Tech Crunch.”

Illinois Ventures joined Blue Chip in investing in ShareThis, which eventually attracted other investors.

“If you think about how networks recreate, we create these networks through sharing. So before long investors started realizing that we were onto something,” Schigel says.

He did have to educate people about the value of sharing, however.

“The way I think of it from a marketing standpoint is that instead of three channels, you have millions of channels. Every single person is a channel,” Schigel says. “You need to activate those channels and you need to understand those channels.”

Many companies and app developers have made it easy to invite friends to visit a site, for example. But while they have become adept at the mechanics of social networking they don’t fully grasp its implications.

“I still think there is a big opportunity and not as much understanding of the true science of influence,” Schigel says.

Marketers get caught up in viral and want viral videos, for example.

“Viral can work, but it is very unpredictable. You can’t predict that by investing $1 million in a video it will go viral. So if I can tell you with 99.9 percent accuracy that if you invest in this you will saturate the market, that’s what marketing is all about,” Schigel says.

The problem has been that there hasn’t been a system in place to track and measure networks.

“What I like about ShareThis is that sharing creates those network connections beyond just who knows each other, but how information and influence flows between people. Then we can measure it and hope to influence it,” he says.

Focusing efforts

All companies need to continue to innovate, whether a startup or an established business. But it can be difficult to determine your next step when the possibilities are endless.

That’s why Schigel is a firm believer in constraint-based engineering.

“It means that the most innovative ideas come from conditions that are very constrained or set. If I said, ‘Go and invent something cool,’ and don’t give you any rules, you will just float around in this ambiguous space,” he says.

“If I say, ‘Go figure out how to lift something that weighs 10,000 pounds using a device made out of toothpicks,’ now innovation starts to come in.”

One limitation ShareThis had to address concerned the functionality of websites that were using the widget.

“We were embedded in some pretty big sites, like ESPN and Disney. And we knew that Web developers were going to be very critical of any third-party code that slowed down the performance of their site. So we had very high constraints on trying to do as much as we could while taking up as little compute power as possible,” Schigel says.

ShareThis also decided to focus on using the Amazon Cloud rather than hiring a systems engineer.

“As we grew, there was an argument that we were going to have to invest in a data center. We still haven’t done that. We are still 100 percent in the cloud,” Schigel says.

Instead, team members were told the entire system had to work in the cloud, which meant they had to find a data warehouse solution in the cloud. Although there were questions as to whether such a solution existed, they discovered a company to work with.

“If we changed that first rule, they would have been defocused. They would have said, ‘What about this?’ or ‘What about that?’ But they were told not to bring up anything that’s not in the cloud,” Schigel says.

Google has set engineering constraints that a new product cannot be launched unless its performance for things like Web page loading speed meets certain criteria, he says. That was done because Google learned that search results were perceived as being better based on how fast the page loaded.

“They know it has a perception on behalf of the user. It is more powerful that the function itself,” Schigel said. “That’s another example of learning an important lesson to set a constraint and not violate it.”

Creating insights

Collecting data is important, but the real value is in the insights based on that information.

Schiegel and ShareThis made a contrarian move not to sell data, but keep it and produce relevant strategies from the information.

“The reason why is we believe data was just going to get commoditized, and most of the people who consume the data don’t know how to apply it. The value is in the insights from the data. I can give you all of the data about the stock market, but it doesn’t mean you’ll make any money,” Schigel says.

ShareThis recently launched application programming interfaces to allow others to access the data. Schigel expects that app developers and service providers will develop some interesting new ideas based on the APIs.

Entrepreneurs can learn a lesson from this approach, Schigel says. The big ideas come from creating a platform that other organizations become dependent upon.

“There are plenty of opportunities for people to build apps or solutions on top of that, that are still good money makers, that could transform a certain industry or domain by taking some of these concepts and applying it to health care, let’s say,” Schigel says.

That’s one key difference he sees between the Midwest and the West Coast.

“Midwest companies think in terms of platforms, how to create an ecosystem in the market that builds on top of what we’ve made instead of a point solution,” Schigel says.

Big ideas also evolve from understanding the customer’s viewpoint, he says.

“That’s where the idea for sharing and ShareThis came from,” Schigel says. “We were asking a group of people, a cross-section of ages and experience — not necessarily techies — to describe their Internet experience.”

What they discovered was that people were not satisfied with searches and knew results were being manipulated.

When people were asked about their sources for new information, they said it was from links shared by others.

“That’s how information is shared, No. 1. I do it all the time and nobody tracks it,” Schigel says. “In my mind I was envisioning this fiber optic network of hot points that represented when people shared information, with information crossing these bridges. Nobody knows it’s happening and nobody tracked it. So it was literally that moment a light bulb went off.”

Takeaways:

  • Constraints help spur innovation.
  • Avoid the follower mentality and find your own direction.
  • Create a platform others depend on.

The Schigel File:

Name: Tim Schigel
Title: Chairman and founder
Company: ShareThis Inc.

Born: Tacoma, Wash. Fort Lewis Army hospital. Grew up in Cleveland.

Education: Bachelor’s degree in electrical engineering from Case Western Reserve University.

What was your first job and what did you learn from it? Aside from cutting grass, etc., my first real job in high school was at a fence factory. We made decorative fences and snow fences. I would work a shift from 2 to 10 p.m. I had to manage a number of older Polish immigrants and close down the factory. I learned the value, honesty and integrity of real work and had a great deal of responsibility at a young age.

Who do you admire in business? Charlie Mechem, former CEO of Taft Broadcasting, commissioner of the LPGA, Arnold Palmer’s adviser for more than 30 years and many other roles. Charlie is the classiest person you could meet. He is sharp as they come, disciplined, pioneering and all the while the warmest person you could imagine.
What is the best business advice you ever received? Listen. Listening is the key to understanding. It’s critical in any role you might be in. We could avoid a lot of wasted time if people would take the time to listen to each other.

What led you to entrepreneurism rather than a career as an electrical engineer? Many of my relatives were entrepreneurs and also very creative. I don’t see it as a choice between “entrepreneurism” and engineering. They are one in the same. I believe the best entrepreneurs have a strong foundation, or expertise, in some industry, field or skill. It helps to have a platform from which to understand and interpret the world. I choose electrical engineering because my father was an electrician and we always had electronics around the house, including my guitars and amplifiers! I didn’t know exactly what I wanted to be, per se, but I knew that I enjoyed new ideas and cutting-edge innovation. I’ve tried to blend those interests and my passion for music in all that I do. In my freshman year I helped launch a program between CWRU and the Cleveland Institute of Music for the study of digital music and recording. For the late ’80s, it was pioneering stuff!

Learn more about ShareThis at:

Facebook: www.facebook.com/sharethis
Twitter: @ShareThis

How to reach: ShareThis Inc., (650) 641-0191 or www.sharethis.com

The JOBS Act, passed in 2012, changed rules to make it easier for small businesses to secure funding from investors.

“The Securities and Exchange Commission actually has three initiatives related to the JOBS Act. Crowdfunding has received most of the attention, but the SEC also amended Regulation D to allow small businesses to use general advertising and offers the Regulation A option, which is sort of a mini registration,” says James S. Hogg, a partner at Brouse McDowell.

Smart Business spoke with Hogg about how these JOBS Act options work and what they offer small businesses looking to raise funds.

What has changed with the amendment to Regulation D?

In the past, a private placement had to be done without general advertising, so you would either use a broker to find wealthy investors or you would find them; it was more or less word of mouth. Once you found investors, you would do a conventional private placement.

According to the SEC, $900 billion was raised that way in 2012. Of that, about $8 billion was raised in offerings of less than $5 million each. The amended regulations are intended to allow more small businesses to participate by expanding the pool of investors they can reach. But when you use general solicitation — Internet, newspapers, radio — you can only sell to accredited investors and there are more rigorous procedures to follow to ensure buyers are accredited.

To be accredited, an investor must have a net worth of $1 million or annual income of $200,000. You can still raise funds the old way under Regulation D, which allows for up to 35 non-accredited investors and an unlimited number of accredited investors. But if you use general solicitation, all investors must be accredited.

How can small businesses use crowdfunding?

Nothing is set until the SEC adopts final rules, but based on the proposal, companies are limited to raising $1 million in a 12-month period.

Crowdfunding has hit a couple of snags. One involves regulation; the proposal doesn’t allow for state regulation and some regulators would like to see more safeguards, while other people want to get money to small businesses as quickly as possible.

The SEC proposal requires use of a funding portal such as Kickstarter or Indiegogo and limits purchasers — a person with net worth of less than $100,000 can’t spend more than $2,000 or 5 percent of their net worth a year, and someone with a net worth of more than $100,000 is restricted to 10 percent of their net worth.

Crowdfunding would also require annual reports, although they would be basic — including financial statements that may have to be reviewed by a CPA firm, and if the amount raised was more than $500,000, you would also need an audit. As proposed, the rules might make crowdfunding unattractive. I’m sure that’s part of the comments the SEC is wrestling with.

What is happening with Regulation A offerings?

Historically, if you did a Regulation A offering, which is like a mini registration, it would not be given an exemption from state registration. As a result, only 0.2 percent of offerings under $5 million used Regulation A.

The SEC has made it a two-tier system by adding a new rule that allows an exemption from state securities law registration. You can still raise money the old way, but if you elect to do so under the new rule, there are reporting requirements in return for the state law exemption. The maximum amount that can be raised would also increase from $5 million to $50 million.

This is still in the proposal stage, and comments are being accepted through March 24.

How do businesses decide what route to take?

If you’re really small and raising funds entirely in Ohio, you can sell to up to 10 investors without any filings, but make sure you meet the requirements for this exemption. Most companies with larger offerings will probably continue to opt for Regulation D, but when the regulations are finalized they may consider crowdfunding or Regulation A if those are exempt from state securities registration.

James S. Hogg is a partner at Brouse McDowell. Reach him at (330) 434-4106 or jsh@brouse.com.

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It’s difficult to protect your data when you don’t know where it is and who has access.

“Most companies don’t go through a data classification process. The No. 1 thing businesses can do to protect their data is to know where it is and the value it has,” says Joe Compton, CISSP, CISA, a principal with the Skoda Minotti Risk Advisory Services Group.

Smart Business spoke with Compton about actions companies can take to improve information security.

How do you go about finding and classifying data?

There are many different models you can use, including a simple checklist of three things:

Does the data contain private information?

Should this information be restricted to a limited number of people within the organization and from outside vendors?

Is it critical to the business? Would losing it negatively impact you or stop you from running your company?

If the data doesn’t fit under any of those areas, it would be considered an unprotected asset or unimportant data.

But the model can get complex; there could be 13 or 14 categories used to organize your information. The point is to develop a data classification scheme so you can protect it. You don’t want to provide the same protection for all data if it isn’t necessary.

After data has been classified, what’s the next step?

Once you know the data you have and its location, you need to establish controls. Most companies don’t have a disciplined approach to implementing security controls.

A good source for best practices is the PCI Security Standards Council, which offers downloads that provide a detailed list of controls that should be placed around sensitive data. In the case of PCI, it deals with credit card data. Most businesses handle some sort of credit card data, but even if you don’t, you could still adopt the same standards the PCI sets for credit cards and apply it to your sensitive information.

By doing so, you’ll have a very disciplined and defined approach to protecting critical data sets in terms of organized controls. There’s also a defined testing procedure you could follow on a regular basis to ensure those controls are working.

Controls can be as simple as firewalls or segregation of duties in terms of who has access to the data. It could involve logging access to databases and keeping a record of who works with data and where it is going. PCI has a list of 12 defined areas that it has built controls around that are appropriate for any business or any data set.

When you know what and where your data is and have a defined control set, then you need to address a data loss prevention (DLP) solution.

What are some examples of solutions, and how expensive are they?

DLP solutions range from the very expensive to relatively inexpensive.

For instance, if you run applications like SAP, Oracle financial, Microsoft Great Plains or various accounting systems, they have controls built into the software to prevent information from flowing out along with automatic tracking. But what happens when that data is moved off the system to a spreadsheet or mobile device? You can set policies prohibiting that, but that’s impractical.

You want to enable people to access the data, while keeping it secure. What DLP does is make sure data is appropriately encrypted. DLP software will look inside files and, if it sees data patterns that are sensitive, will force encryption before releasing that information to a device. It will also take inventory of what was on a device. If a device that was properly encrypted is lost or compromised, you can remotely wipe it through mobile management.

There are solutions that cost a fortune, and others that cost as little as $14 per month, per user. Some are preventative — they will notify you if a mobile media device is connected to a computer and catalogue the data moved over so you know what was on the device if it gets lost.

But the first step toward a solution is identifying your data. You’ll never reach the point of implementing a solution until you know what data you have and where it resides.

 

Joe Compton, CISSP, CISA is a Principal with Skoda Minotti Risk Advisory Services Group. Reach him at (440) 449-6800 ojcompton@skodaminotti.com

 

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Investing some time and money when setting up a business can help you avoid more expensive problems down the line.

“Clients will want to form a corporation in Nevada because someone told them there’s no tax there. But if they’re doing business in California or elsewhere, generally they have to qualify as a foreign corporation and pay taxes and regulatory fees when they could have just incorporated in California,” says Tim M. Agajanian, a partner at Ropers, Majeski, Kohn & Bentley PC“It’s important to know what your personal and business goals are and where the best location is for your business.”

Smart Business spoke with Agajanian about steps owners can take when forming businesses that will reduce the potential for future problems.

How should an owner select the entity type for the business?

Sit down with your attorney and talk about the core of the business, your goals and the best locations for your business operations. An accounting firm should also be involved, preferably one with experience in your industry.

Together, you should determine 
what entity type to be, based on the kind of business performed; and the accounting, tax and legal issues that would serve as the basis of selecting a state for incorporation or other selected business entity (i.e., general partnership, limited liability company, limited partnership).

If you’ve thought 
about an exit strategy, that would affect your selected entity and where you would form that selected entity. Some companies are set up to go public eventually while others might be designed for sale to private equity firms or to remain in the family. If you’re not sure, your professional advisers can walk you through this process. It’s really about getting back to the fundamentals of your business and the related corporate and tax laws, regulations and estate issues.
 
What can happen if you chose the wrong entity type?

For example, if you are set up as a C corporation and should have been an S corporation, there are tax issues involved when it comes to sale and personal taxes. I have seen companies that were converted to S-corps to take advantage of more favorable tax structure, and owners had to delay a potential sale of their business while that conversion was effective. It can take years to fully convert from a C-Corp to an S-Corp. 

Right now, a limited liability company (LLC) is a popular setup because the administration is easy. But it’s not always the right vehicle. It works well for smaller operations such as family-owned businesses or ownership of certain types of real estate. But I’ve seen it become problematic with larger businesses that have issues regarding corporate governance.
 
If you’re a restaurant group with five locations, I’d look at a more formal corporate structure because there is more protection of shareholders. Another trend is to incorporate in a state like Nevada, which doesn’t have state income tax. But a business must have a legitimate reason to be there. I can’t tell you how often I’ve taken over representation and asked a client why they’re a Nevada corporation when they’re located in California. If you’re going to pay tax in California anyway, why aren’t you a California corporation or a LLC?

What do business owners need to consider before leasing space?

Look at where you need to be and get a good real estate broker who knows the area to represent you, particularly for professional service companies. The broker can determine what the market is and what landlords are willing to give, and also connect you with the best attorneys who have done multiple deals with that landlord. Some landlords require a personal guarantee from partners of a law firm, while others will treat it like a corporation, so there’s no recourse if they default on the note beyond the initial guarantee.

That’s nuanced protection you would not know about without local knowledge. Avoiding future problems with your business is really about attention to fundamentals, meeting with your attorney and making sure that person knows what is important to you so he or she can identify what issues need to be addressed from a legal and practical standpoint.
 
Tim M. Agajanian is a Partner with Ropers, Majeski, Kohn & Bentley PC. Reach him at (213) 312-2010 or tagajanian@rmkb.com
 
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