A lot of small business owners give up on their dreams before they even start to grow due to a lack of commitment or sometimes, they simply don’t know what the next step is. In scaling a small business, the growing pains are as real as they can get. Entrepreneur, speaker, and investor Alec Stern joins Solomon Ali to share his personal struggles and lessons learned, and to give a reality check to those in the industry as a reminder to what needs to be done. He also talks about the different things you need to prepare when deciding to engage in small business and, more importantly, what to expect. Learn and pick up his strategies on what you need to do to make your story a successful one.
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Scaling Your Business With Constant Contact Co-Founder Alec Stern
Welcome to the show, Alec. I’m glad to have you here on the show. I’m so excited to be here with you and find out a little bit about you and your company. I won’t do it justice in introducing you, so would you please introduce yourself to my audience?
Thanks for having me. I like to say I’m a serial entrepreneur who likes cereal. I’ve been on the founding team of eight companies and the most notable one that people recognize is Constant Contact, which is a small business tool for digital marketing.
Can you tell us a little bit about that in the beginning stages?
When we started Constant Contact, there were three of us in an attic. There were two technical people and me. The original team and the cofounders. At the time when we started the company, this is going back a couple of years, there were the larger big box competitors to small business. They had either agency, marketing tools or they had staff and they were able to get out and stand in front of and in touch with their customers and prospects with email marketing and other tools. We wanted to level the playing field for small businesses. Walking down Main Street, in any city around the world, how could we level the playing field for them and give them an easy to use set of tools where they just have to worry about, “What do I want to say and when do I want to say it?” and not have to worry about the technical aspects of the stuff that was required with the enterprise tools.
When growing a small business from an attic, what was that like? How did you come up with the vision? Tell us a little bit about the growing pains of scaling it?
Initially, we set that premise for leveling the playing field and providing a self-service easy tool for small businesses because they didn’t have staff and they may not be technical, but they knew the messaging that they want to send. We had to live into that promise to make it easy and simple. In order for us to figure out what that needed to be, and I’ll tell anyone, “You’ve got to get out to your target market and ask a lot of questions.” The first question is, “What in your businesses are you challenged with? What are you looking for? What are some of the objectives and goals? What’s the vision of that small business?” They would say, “I’d love to stay top of mind with my customers or I’d love to drive them back in. I want more revenue. I want them to tell others and have them come in,” and so forth.
I call this the Bicycle Wheel Syndrome. When you’re starting a business, every spoke is another idea on how you’re going to help your target market. We had to figure out what’s the one spoke we’re going to start with and that was email marketing. When we started, there were more things we didn’t have than we did. We didn’t have a finished product, a business plan, customers, success stories and revenue. There are a lot of things we didn’t have and as I understand, we need those. We didn’t have those initially, but once we learned that we could satisfy their goals and objectives with what we were trying to do. When we told them that, they got wide-eyed and now we had to live into creating that.
To figure out what your message is, go out to your target market and ask a lot of questions.
Capital-wise, what type of capital did you have to infuse in the business in the startup stage or stage one and as you move through the stages?
When we started, SaaS did not exist. It used to be called ASP, Application Software Provider, then SaaS and now Cloud. We were one of the first to come out with a SaaS offering. We’re on the IBM platform. Initially, we had to put our software on a CD and then plug it into someone’s computer. Probably most of the people reading this won’t relate to that. There were a few things that had to happen for us to get the flywheel going. One was to create a product that someone would want to pay money for. We were renting it for $15 a month. Inexpensive, but for a small business, if they’re paying for something, they want to see the value. Once we satisfied that and got the flywheel going, we didn’t take salaries. We were leaning into this and committed to doing it, without getting paid.
How long did you go without pay?
At least a couple of years.
Did you work somewhere else?
No. I was fortunate to personally have a couple of exits prior. An acquisition and another company that I was in the early team. The first twenty people and we went public. I did have some disposable income. At the time, I had several mortgages. I had a lot of money going out and nothing coming in. That’s a problem that most of us face at times in life. A lot of pressure on but it also motivated me to move quickly here as best we can.
I know on one of my early days, we had to go without pay for years and going without pay, everyone will say, “How can you go without pay?” I said, “I had to.” I would work little odd jobs to try to make ends meet, so it was difficult. Any money I got, I put it in the business. Did you do that as well?
Initially we were all committed to this. We were scrappy. We had several interns and we had anyone that was willing to and wanted to learn. We had an incredible initial team, then as it evolved and started to grow, it was an exciting thing for folks. There wasn’t any pay involved, so we had to figure out some of those things. To answer your question, it was roughly in the two-year mark when we took our first round of venture funding. That was a $2.4 million round. We took additional funding over time leading up to going public.
Can I ask you a little question about that your first round of funding for my audience so that they can get an understanding? What was that process like?
It’s a process, whether you’re going to get funding, you’re going to get a bank loan or you’re looking for someone to get involved strategically like an advisor. There are some things you have to have in place. You may not have a full-blown business plan, but you might have an executive summary. A shorter version of that with all of the projections of financials and what you’d see the business and how it would evolve. You’d be losing money without any revenue, but you can infuse in money that you might take from a variety of ways. It could be debt and a loan. It could be giving up equity for someone to finance the business. You have to have that business plan and know your 3 to 5-year vision of where this is going to go. You take that and you put it into a PowerPoint where you’re going to have 10, 12 slides and some other additional ones. When they ask questions, the answer needs to be, “I have a slide for that.”
It’s important to pay attention to what Alec is sharing with you because he’s someone that has done it, been there already. He’s giving you some great tips on what you need to do.
This is not the first time this has been done. There is somewhat of a repeatable process, so we tend to want to shortcut it or we want to skip things or we’re not ready to maybe put something together. Whoever is on the other side of this is going to have an expectation of having certain things in place. They’re going to want to see that you have a handle of what the businesses are. Where you see it going, and how are you going to get there. There’s that vision of what you’re going to do now, and so what are you going to do in six months or in a year?
If you’re going to go out and get money, they’re going to say, “What are you going to do with it?” You have to tell them like, “Use the proceeds for hiring some additional folks for developing the application or sales team to maybe go out or marketing to go and promote it.” You’re going to have to be really clear on how you’re going to spend that money. Because they’re going to say, “If I give you the money, what are you going to do with it? What are you going to achieve with that money?” Everyone’s going to want to know that so those basic things are the key and the foundation for opening up the conversation to get money, whether it’s a bank loan and the SBA and others offer great big bank loans and so forth. If not, giving up equity for funding.
I know a lot of entrepreneurs out there think they have the greatest business since sliced bread. When they get money, they don’t want to give up anything. I’m like, “That’s a pipe dream because you’re going to have to give up something or you’re going to have to collateralize it. You’ve got to give the investor something to look for.” Were you willing to give up something? Was it a process that you had to mull over? Tell us about that.
When you’re starting a business, every spoke in a bicycle wheel is another idea on how you’re going to help your target market.
No matter what it is, you’re giving something up. It’s a give and get. If you’re going to take money from someone, if it’s a straight bank loan, some are small business-friendly and centric and others, maybe not, but they may collateralize it against your home like, “You don’t have enough here. We don’t see the asset yet,” or you might not have intellectual property. You might not have things that they would say, “There’s value in that.” You have to really think through that to understand that you’re going to give something up. In every case, it will lead to giving up some ownership in the company.
The burning question is the valuation and what’s the company worth? When you don’t have customers and a lot of things that are not being checked as needed, then others could argue it’s not worth a lot. You give up more when you’re getting money if your valuation is lower, so it’s in your hands to create value, get out of stealth mode, get your product out there and get customers early customers. Don’t get family and friends or people you did business with before and go get strangers because they’ll give you brutal, honest feedback. If they have success with it, then they can become a reference which you will want as part of the value like, “We’re showing you that our target market wants what we have.”
After that, it’s a question about scale, “How do you get more of them?” Also, you have to be able to answer the question, “How are you going to show the growth path?” In the case of working with small businesses, it’s very difficult to go door-to-door and we were told you’re not going to succeed unless you have a huge army of salespeople. We had to figure out how we’re going to go to the market. In working with small businesses, there’s a whole channel out there of trusted resources, services and others that small businesses rely on for other aspects of getting help, like their point of sale system or other things.
If you could work with those folks who will endorse recommend, suggest and refer, then you can get to your target market through that channel, which has a lower cost of acquisition, bringing you customers and value to get your valuation to go up. When you tradeoff for taking in funds of one way or another, you give up less of the ownership. It’s an equation. For example, if your company is worth $1 million in valuation and you’re taking in $100,000, you’re going to roughly give 10% of the business up. You have to expect that’s what you’re going to do and that’s realistic.
I know you do a lot of other things like help companies to grow strategically and sit on their board and advisory. What are some of the most important things that you feel that an entrepreneur looking to scale a business as you have done in the past and then take it public? That process.
Unpacking that, there are a lot of places we can go because it’s a journey. It’s a marathon. It’s not a sprint. It can be two marathons.
I found it to be taxing.
Imagine if you weren’t a runner, you didn’t have sneakers and you had to run a marathon. That’s what’s taxing. We’re all doing this for a reason, whether it’s a nonprofit, creating a new small business to provide for your family, or creating a business that would potentially scale and have an exit to get acquired or go public. We’re all doing it because we’re passionate about something. We were passionate about small businesses, and helping main street, small businesses of all types. You’re on the journey. The things we talked about is to get you ready for the marathon. It is a marathon.
It’s a long journey. I’ve been on the journey for 32 years. We did not as well as some and not as bad as some, but we did extremely well. Now, I find myself doing similar to what you’re doing on a smaller scale, working with minority companies saying, “If I could do this, you can do this as well.” It’s not that difficult. However, it’s more than a notion. What I mean by that is the journey is like running that marathon. When you start, you’re loosening up. By the time you get to mile 3 to 5, you’re feeling pretty good but when you get to mile 16, 17, your body’s like, “What the heck am I doing?”
Your support system around you is saying, “What the heck are you doing? You don’t run. What are you doing in a marathon?”
I have found that a lot of entrepreneurs, especially minority entrepreneurs, have an unrealistic viewpoint of their businesses, and where they want to go with it. They overvalue the business, and they underestimate the importance of the capital that’s needed and what people need for return. When I invest, I’d like to be able to make sure that it’s enough collateral there or we have enough growth to share in the growth of the business and things of that nature. Can you speak to that from your point of view?
People always ask me, “Who are the folks that you look up to and have influenced you?” My answer is, “All the small businesses, startups and the entrepreneurs that I had a chance to work with, either through providing products and services to or advising and mentoring.” The one group that I’m most passionate about is when you talk about urban innovation and inner-city innovation. There are a lot of accelerators and programs that support small businesses. You’re not alone in a lot of places around the country. There are great organizations that can provide mentorship and support.
I’d say in the journey in this marathon, the difference between a real marathon and this is that this you can get a lot of support around you. People can carry you for a little while or run with you and cheer you on and motivate you or slap you around and tell you going too slow or whatever it is. It’s important to find the smart factor. Smart advisors, mentors and people that can help you figure out your projections, your strategy for raising funds and alternatives and what’s the difference between those.
It’s important to bring in others into the mix. There are a lot of folks that have been there and done that, who can guide you and mentor you. It’s not always giving you the answer, “Don’t do that, do this.” It’s showing you the alternatives and then you have to make a decision around what to do. A lot of times, I’ll see startups or an entrepreneur who has horse blinders on. They know their idea, where they’re going with it, the solution that they’re going to provide and they don’t necessarily want to get feedback like, “I know what my customer needs.” They won’t get customer feedback, prospective customer feedback, strategic advisor feedback or experts in their area, like those who are strong on finance and accounting or whatever. You have to wrap those folks around you and get them to assist you to allow you to propel ahead and have success.
Getting a small business public is as taxing as running a marathon without any sneakers.
It’s interesting that you said that because I know when I was scaling my business, one of the things that I learned if you grow too fast is that banks say no. They don’t want to deal with you because they think, “Let’s see what you do for a couple more years.” I found that to be interesting because I went very naively thinking, “We grew from zero to a few million. They should be excited. I should be able to get all this money,” and it didn’t happen.
The perception there is like you’re on your way. If you did zero to $2 million, you could probably go to $4 million. A lot of the people and there is a support network around bank financing and potentially taking loans from individuals, investors if you will or giving up equity in exchange for money. All of them are trying to buy time. They never say, “No,” per se. A lot of them won’t say no. They’re going to wait to see, “What happens next?” If you have that kind of success, you’re starting to see something or maybe you’re so early, you don’t have revenue yet. They’re going to say, “This is a great idea and you’re onto something. Keep us posted, let’s see how we do.” All they’re trying to do is check some additional milestones, if you will, to feel more comfortable about involvement and investment.
It’s not until, for example, we’re going to get potentially a bank loan, where one bank says, “We love the idea. We want to give you the money.” That other bank who is sitting on sitting on the sidelines, cheering you on for your marathon, will be like, “We’re interested.” Sometimes it takes two for someone to potentially step up. They’re going to maybe wait on the sidelines and so what you have to do, as best you can, is create a sense of urgency and show that you know your path to success for offering you are bringing your customers, a product, service or whatever it may be. You can present and articulate how you’re going to scale and it becomes a money issue. You’re not going to have enough revenue to scale so you’re taking external funds to accelerate. If you can paint that picture and let them see, we should be in on this because our money will help in that scale trajectory, then they’re going to step forward and give you the money.
I recall, when I went to a VC in a private equity company, they wanted a lot. They wanted over 40% of the company for a small dollar amount. I was like, “I’m not sure if I want to do that.” They kept talking to me and talking to me and then they brought up all the different minefields that I would have to navigate. Things that I had not even thought about and know to think about, they start sharing with me, then reality hit for me. I’m like, “Maybe I don’t know enough.” I knew my business. I knew the core business but maybe I didn’t know enough of the other critical pieces that were necessary.
The ‘or’ in that is the debate and conversation around valuation. That $1 million example I gave you and if you took in $100,000, that’s roughly a 10% trade-off and giving them potential equity. If they’re saying to you, “We want 40%,” that math doesn’t work, so what has to give? It’s the valuation. Your valuation comes down to $300,000. You think it’s worth$1 million and they think $300,000. They’re going to take 40% or whatever the percentage is that’s higher than 10%. The only way you can get the valuation back up is to show milestones and things that you’ve achieved. It’s not always revenue-driven, but we have a finished product, we have the right team, we have a large problem that we’re solving, we have the right solution and this is what makes us unique. The competitors while they’re out there, are not focused on sort of these things that we that we are that sets us apart for success. By the way, we have 2, 3, 4 customers and some success stories. Each of those things is increasing the valuation because you’re checking boxes to give someone that wants to invest comfort in investing and also in that valuation.
That’s what we ended up doing. We started looking at the industry. We start showing and identifying exactly how we would gain market share, not necessarily take market share away from others, but that’s what we were doing. We were going to gain more market share by taking market share away because we knew we had solved a problem. We had identified it and then that’s when things start turning around. I’m going to say it was hard freaking work.
It’s stressful, it’s very hard and there are a lot of the peaks and valleys, up and down, and that happens in the course of a day, not overtime.
I remember my parents and wife at the time, everyone’s telling me to get a job, get two jobs, we have bills to pay, things of that nature and I’m working a part-time job and doing all that and doing the business. Still, every dollar that came in I’m pumping it into the business. They’re like, “Are you crazy?” I’m like, “No, this is going to work.” No one believed in it but I found out in the very beginning, I had some believers but along the way they all fell away, fell to the side. In the end, it was just me. As I start getting money all of a sudden, I had some more believers again.
It’s funny who comes back around when you start having that success. If you were to take that all the way through to having an acquisition or an IPO, it’s always funny when they come back and like, “That’s the one that got away from us.” “No, you kicked us out of your office and told us there’s no way we’re going to succeed.” You don’t remember that part of the story.
Could you tell us about the IPO?
I’m jumping ten years from we went public, the process leading up to that, there were a lot of things that need to be in place. We were fortunate. Constant Contact, when we sold it, there were 1,500 employees and we had an amazing management team that came in.
Before you jump to the IPO, tell us about the growing pains, because I know there are some critical things in growing pains that most entrepreneurs don’t know. When you take your business from where you’re wearing all the hats, and you know marketing, finance, you know it all, to have to bring those experts in and place them around you to grow that business.
We were fortunate, even in the earlier days, to have the initial core management team that we’re rounding out and needed. We had great people, obviously there. We had great advisors. At that point, we had a great board that was very supportive. A lot of things that were in place, but I think one of the hard things is when you’re starting is setting the culture. What do you want that culture to be? We spent a lot of time figuring out the things we’re going to focus on. Number one was to delight the customer, wow the customer. If you create a wow mode for your customers, they’re going to stay with you, tell others and all those things. Culture is key.
When you scale, one of the most challenging things was when we would hire somebody in and within six weeks, they were the manager of another group. At scaling growth, you’re bringing in so many people, and we had to make sure that culture carries down because some people weren’t there very long. Even though in the interview process, you’re making sure that there’s a culture fit and that they’d be a great addition to the team and they’re passionate about our target market and so on.
It’s a great challenge. The growth itself is very challenging because you’re assimilating in new people. Sometimes you’d blink and they now have people that are reporting to them. It’s very challenging. There are many other things that a great management team will make sure to try and not have a lot of bumps in that road as you’re doing it. If you’re not growing a team fast enough, then the challenge is that everyone’s doing a lot more. As you’re wearing a million hats and then the hope is, “We’ll bring a few more people to focus on that.” You take some stuff off your plate, give it to new people and that plate gets filled with some other stuff that hadn’t been done. It propels that way. Eventually, you’ll need to round that out.
When you bring in those new people on, and before you’re making all the decisions, you and your core management team and making all these decisions, then you have to delegate and allow other people to make decisions and even possibly go through a learning curve. What was that like?
It feeds into the challenges, but there are a lot of trade-off conversations with, “We have so much money and it’s going to be allocated to growth.” “We took in money. We should use the proceeds. We’re going to hire a team.” You have to establish the areas you’re going to hire them in and make sure you nail that. It doesn’t make sense to hire ten more salespeople if you don’t have a finished product. For example, maybe you’d want to hire more engineers to finish the product, but you need to get some folks on the sales and business development side to start telling the story because partnerships take a long time. There are a lot of things that come into play.
They always say hire your replacement and there are a lot of people out there that won’t. I’m not talking specific to my experience with Constant Contact or the other companies I was involved with. Advising, mentoring, talking and speaking of tons of startups, there are a lot of people that would almost be afraid of, “If I hire someone who is as good as me or better, I’ll lose my job.” It’s like, “No, you’ll move up.” If you’re doing a great job, you’re moving up and they’re taking your job. There’s a little bit of hesitance with some folks. As they always say, “When you’re starting a business, everyone is equal.”
In the early days, whoever joined the company, no matter what your title was, you first put your desk together. It was in a box. When you finish your desk, then you unpack your computer and put on your desk. You lay everything out and then someone from IT or operations will come over and set it up and get you on the network and what have you. It’s almost like everyone empties their own trash can. You have to have all those things as part of your culture as well as the expectation and understanding as you start to scale, “If you do a good job, you’re going to move up. You’re going to have more direct reports.” You hire that person that can step into that role. Everyone has to leave their egos behind and your past experience issues. Everyone’s like, “I had a boss and he would never promote me.” All of that baggage needs to be left behind come at it with a fresh start.
In the earlier days, don’t be a single founder. You should find a complement to have at least two folks that are responsible for the success in the business. No one can wear all hats. Everyone’s like, “I’m technical and I’m also good on the business side.” Pick your lane, stay in your lane and get someone else to get in the other lane. That’s going to also give confidence to investors and others. You realize that titles don’t matter. You’re willing to step aside and maybe bring someone in which we agreed early on. We brought a rock star CEO in to run the business. For us to step aside in those titles to do whatever it takes for the business to succeed.
How did you know when it was time to bring that rock star in?
Sometimes you would and other times, others would. For example, going out and getting funding. If people are first time entrepreneurs and someone’s ready to fund, they may make suggestions that we should maybe bring someone in. They may want somebody that they know to come and step in. Have somebody else step in and run the business because then they’ll feel confident that that person has been there and done that and can foresee what’s to come and hopefully be able to accelerate the growth in the business. You have to establish hiring your replacement. You have to be open to what’s best for the business. Oftentimes in the earlier days, it’s either by your decision or someone else’s suggestion, recommendation or possibly requirement like, “We’ll give you the funding but you’ve got to bring someone in who is seasoned and can potentially run the business.”
How would they get in touch with you if they were looking to get some strategic business help or in need of services or things that you might offer, that may be able to help them navigate that minefield?
I’m spending half my time going around speaking, so I’m often in cities, speaking at conferences as they come. I have a website, www.AlecSpeaks.com, as one way and then on all the social channels, it’s @AlecStern. I happened to beta test most of them, so I got my name without underscores and all this other stuff.
Alec, I want to thank you so much for coming to the show. I appreciate and love having you here.
Thank you. I appreciate it.
About Alec Stern
Alec has more than 25 years of experience as a founder investor and hyper-growth agent for companies across various industries. He is an innovator with extensive expertise in growing and scaling companies, startup and operational growth, go-to-market strategy, strategic partnerships and more.
As a primary member of Constant Contact’s founding team, Alec was one of the original 3who started the company in an attic. Alec was with the company for 18 years from start-up to IPO, to a $1.1 Billion-dollar acquisition. Alec has also been a co-founder or on the founding team of several other successful startups including VMark (IPO & acquisition), Reaching Grasper Cane and MOST Cardio amongst others.
Performing hundreds of keynote addresses Worldwide, Alec has become known as America’s Startup Success Expert for his popular sessions at conferences like Secret Knock, CEO Space International, City Summit, Powerteam International and Habitude Warrior. In 2019Alec is the Keynote speaker at three out of the top five “Inc. Magazine Must-Attend Conferences for Startups and Entrepreneurs in 2019.”While on tour, Alec has shared the stage with the likes of Tom Bilyeu, Jack Canfield, Les Brown, Kevin Harrington and Mark Victor Hanson. Alec appears on the Influence 100 Authority List by Influence Magazine which recognizes his contribution to helping and advancing startups and entrepreneurs worldwide. He has also recently been featured on the covers of several other magazines including “Small Business Trendsetters,” “Success Profiles” and “Business Innovators.”
Alec advises a variety of early-stage companies and serves as a judge, mentor and advisor for nationally known startup accelerators and programs including TechStars, Mass Challenge and the Stevie Awards and speaks at Universities including Harvard and MIT.
One of the Northeast’s most accomplished entrepreneurs, he is a limited partner in Boston-based G20 Ventures, which provides early traction capital for East Coast enterprise tech startups. Alec is also an angel investor in a number of rising startups in various industries.
Only a sideman when it comes to music, Alec is an accomplished drummer and has had the honor of sitting in with a number of musicians including Toby Keith’s house band in Vegas.