Know Before You Owe Episode 1: Building Business Revenues
Join us every month for a new episode of Know Before You Owe, a podcast series hosted by Fundera CEO, Jared Hecht, where he sits down with today’s top entrepreneurs to discuss how business owners can grow their business and improve the various aspects that make up a successful business loan application.
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Know Before You Owe Episode 1:
Building Business Revenues
Jared: Welcome everyone to the first episode of Know Before You Owe, a monthly series produced by Fundera where we sit down with today’s top entrepreneurs to discuss how to improve the various aspects of your business that make up a successful business loan application.
Having strong revenues is one of the many ways to secure a competitive loan, so this month we’re going to discuss how to successfully build business revenues. I’m Jared Hecht, CEO of Fundera, and today I’m joined by Howard Lerman, founder and CEO of Yext, a technology company that enables businesses to update location-related information on multiple websites all in one place.
Howard happens to be one of my favorite entrepreneurs ever, so it is an honor to have him on our show today. Howard, thanks for joining us.
Howard: Thanks for having me, Jared.
Jared: Howard, to kick things off, would you mind telling us a little bit about yourself, your history as an entrepreneur? I know you’ve started many businesses in your life. Can you speak on how that led you down the path to creating Yext?
Howard: Yext is my fifth or sixth company depending on exactly how you count, and I’ve been starting companies ever since I was about 19. I started a company in my dorm room in college as a sophomore. A lot of folks my age had pictures of athletes or people in the Keys up on their college dorm room walls, and I had a whiteboard. That’s one of the things I was known for is I had a whiteboard in my college dorm room, and I used to plan for the future and think about the opportunities there.
I started my first company at the age of 20. It was called justatip.com. It let people send anonymous tips to their friends telling about their annoying problems, and it took off. I started a technology consulting company after I sold that business when I was a junior in college, and then have been at it ever since.
Jared: You are a serial entrepreneur for all intents and purposes.
Howard: For all intents and purposes. I’m the kind of person that would have been an entrepreneur before it was cool to be an entrepreneur, and I think probably many small business owners are like that, too.
There’s a glamorization, of course, in today’s press about being an entrepreneur, and movies like “The Social Network” make it seem like it’s fun and cool and success is guaranteed, but the reality is it’s the school of hard knocks, and I think many small business owners know that, and I certainly know it. I would have been an entrepreneur back in the 1850s or the 1750s or in the Middle Ages, and I bet many of you would have, too, for your craft.
Jared: That’s most likely true. It’s interesting you say that. A lot of people have the perception that with being an entrepreneur, success is guaranteed when, in fact, it’s most often the opposite case. Failure is more often guaranteed than success, but it’s generally persevering through failure that yields success.
Howard: It’s only Internet entrepreneurs that are guaranteed success.
Jared: For those in the audience, he is joking. Howard, to get right into it, a lot of our listeners deal with revenue growth as one of the biggest challenges to their business. After growing and building five or six different businesses, Howard, one of the questions that always comes up is, “Does it take money to make money?” Do you believe that in order for a business to grow revenues, it needs to invest capital to begin to grow?
Howard: It takes a little bit of money to make money. It doesn’t take a whole lot, and every business I’ve started … I guess there’s two kinds of capital. There’s the capital in the traditional sense, but then the more expansive capital and the more expensive capital is your own time.
When we started my first company when I was in college, it probably took a few thousand dollars, and so that was capital in the traditional sense, but the capital in the non-traditional sense was the time it took us to program the site and evangelize, and that took a couple of people working full time, so I think it does take capital.
It takes actual capital, in the Fundera sense, and it takes your own time, which is money, too, because we all know that time is money. It takes a little bit, but it doesn’t take a whole lot. You don’t need millions of dollars. You don’t need hundreds of thousands of dollars.
My first website, we probably invested less than $5,000 to get it started, which is still money, but it’s not hundreds of thousands of dollars, and many entrepreneurs will be able to scrape together $5,000.
Jared: That’s interesting because you separate starting a company and the need for capital when you start a company and growing a company. Over the course of your career, when you’ve grown multiple different companies, did you ever look at raising capital even in the form of a loan or debt or equity in order to grow your revenue, and why would you take that approach?
Howard: You have to have a little bit of start-up capital. In order to take things to the next level, you sometimes do need some capital to get there.
By the way, every business, large or small, is different, so it’s actually pretty cheap these days to start an Internet company. The most expensive thing is your time if you’re a programmer or if you’re not a programmer, finding someone to do it. If you’re, say, a dentist, you have to rent equipment, buy equipment.
If you’re a restaurant owner, you have to invest in your lease and your interior space, and so there is some start-up capital, and that capital helps you get going, but if you grow revenue pretty fast and pretty quickly, even if you’re profitable, you eat up cash. Cash and profitability are different things, depending on how you collect your money.
Jared: Right. That makes sense. When you first started Yext, how did you start growing revenues, and when did you really realize that you were onto something, because Yext in its current incarnation, was not always Yext. Yext had evolved from a series of ideas.
Howard: Right. The first thing we started was Felix, which is a pay-per-call network. You can think of it like that. The way that we started growing revenues was … We had a salesperson signing up customers that would buy phone calls from us, and then we’d use Google AdWords to drive leads to those customers.
Google AdWords is really a good way to start growing revenue right away because it’s where customers can find you. Google AdWords or search advertising from Yahoo/Bing is really a great place that, in that way, you can catch a customer at the exact moment of their interaction.
It’s really hard to show up in the search results organically, meaning that the natural results that Google decides, its algorithm decides to put up at the top. What you can do is you can buy their pay-per-click product and show up at the top as a sponsored link, and that’s the fastest way to be found and therefore, start getting customers right away for many businesses, not for all businesses.
Jared: Yep, makes sense. Over the course of the growth of Yext, and Yext has a rather unusual trajectory relative to other businesses out there. Yext has gone on and raised tens of millions of dollars over its history, and some people even speak of an IPO at some point in the future.
For businesses out there, let’s just say, customers of Yext even, small business customers of Yext, what advice outside of continuing to use Yext or investing in search marketing on Google or Bing, would you provide them as guidance? What other channels could they actually think about growing their revenues in, tactics they could use or strategies that they can apply as well?
Howard: Once you attract those first few customers, you want to mine them for additional customers. Word of mouth and referrals are the best way to build your business and to build your small business. Obviously, what that means is to get those first few people in might be expensive, but then you offer them a superior, awesome experience that they remember and then encourage them, incentive them even, to invite their friends to come to your business.
A great way to do that is through email marketing. What you can do is when your customers come in, make sure you get their email address so you can stay in contact with them. Staying in contact with people with relevant sorts of experiences and contact is a really powerful way to attract more customers, because if every customer that walks in your door brings 1.2 customers in, you’re going to grow pretty fast.
Jared: Are there any services out there that you love or that you’ve used in the past in regards to email marketing?
Howard: Constant Contact, they come to mind. People have used them, and you can set up powerful things with them like you can run events through Constant Contact, and you can do what’s called “Retention Marketing,” where you can have a curriculum of messages go out at certain periods of time. For example, if you’re a dentist, you could say, “Every six months, I want to email this person an email reminding that it’s time to go back to the dentist.” That’s a great way, those really powerful tools that are simple to use that you can set up to do that. Constant Contact is a good company.
There’s another company, a competitor to Constant Contact, called iContact that does the same thing, a similar service, similar price points. They’re great as well.
Jared: It’s interesting. When we generally speak to small business owners, they always talk about having two problems consistently across the board. Number One is, “How can I acquire more customers?” and Number Two is, “How can I grow my revenues or how can I have more capital to make investments in my small business so I can actually grow it?”
On the customer acquisition front, there’s a lot of tools, and we’ve already talked about services small business owners can use to help them acquire customers, whether it’s search marketing, whether it’s email marketing, whether it’s referral programs …
Howard: … And social media marketing, too. You can get up on Facebook and Twitter and again, it depends on the kind of business. If you’re a restaurant, you ought to be involved in that stuff. Maybe not so much, it’s important if you’re a doctor, but those are the kinds of things that can really help you get out there, and social media marketing is cool because you can post, and you can make sure your business is alive, but at the same time, you can still connect with certain customers and see who likes you digitally, not just physically.
Jared: Right. These things are all great for driving top of the funnel and general interest in a business.
Howard: I should add, too. I forgot that. A core tenet is you have to have a website and, of course, it goes without saying that if you’re going to run search advertising in Google AdWords, you have to have a website. You have to have a website. You have to have digital prices. You have to have a Facebook page. You ought to do all that stuff.
Jared: What percentage of Yext customers actually have an online presence or a website?
Howard: We’re skewed because most of our customers are thinking about how to manage their online digital presence, and so virtually all of them do because they’re thinking about this stuff. Yext, with business listings, is a really fast way for a certain kind of small business to be found and a secondary way for them to be found so that their listings in Yelp and Yahoo and Bing and various other places will show up properly and correctly.
Business listings for local businesses are really important. For home-based businesses, not so important, but for anyone that might be looking for a barbershop or a pizzeria or a dentist or a retail store, listings are pretty important because that’s what shows up online.
Jared: Right, and everybody’s going to their phones or they’re going online.
Howard: That’s correct. There’s all kinds of data there, and E-commerce is a really big deal. Four hundred billion last year, but offline commerce is 15 times bigger or six trillion last year, and it’s growing really fast, too, because people now can use their phones, their smartphones, Android and iPhone, to go around and look for small businesses and local businesses right on their phone without doing so from their home and buying something directly in the store as opposed to from their basement online.
Jared: Yep. Absolutely. We’ve talked a lot about how to drive demand at the top of the funnel.
Jared: Another really key ingredient to revenue growth is what you were alluding to before, retention marketing and ensuring that your current customers stay loyal, so you can retain your customers and become bigger and better customers over time. In any of the businesses that you’ve built in the past and including Yext, can you walk through how retention marketing or continuous engagement helps growing revenues?
Howard: Continuing to have customers stay with you really boils down to offering them an amazing service and amazing experience. It’s not enough to just deliver a great product. You have to deliver a great experience, and it’s not enough to deliver a great experience.
You have to deliver a great product, so you need to make sure that your product’s something of value, that you’re solving a real problem for the customer, that they know and that they value and that they appreciate, and then when you do that, you need to make sure you communicate that value to them and that you’ve shown them how you’re doing that and that they stay happy.
Jared: Let’s just say you’re not building an Internet company, and let’s say you are Howard, and Howard, you own a pizza shop, and you had a limited marketing budget. Let’s say you had $100,000 every single year that you could spend on marketing. How would you allocate that? Would you focus it on acquiring new customers, or would you focus it on retaining your current customers and making sure they turn into die-hard fans?
Howard: I think it’s all a mix. It’s not binary like that, but you would definitely want to make sure you have a really good presence because people look for pizza shops on Yelp, and people are looking at that stuff. I’d make sure I’d have a very active Facebook page. I would definitely, depending on where I am, enroll in Seamless so that I could get orders from Seamless Web and online orders, but I would really focus on providing a great service, and then when customers come in, I’d try to get their email address.
I’d try to get them to like me on Facebook and Foursquare and share and Tweet to me, and tell their friends about us. Then I might look for some sort of grassroots types of stuff like … If I was grand opening the store, potentially offering some dollar pizza pie for up to noon or something like that during off hours in order to maximize the people coming through the store and then making sure that they love the pizza, and of course, getting, like I said, their email addresses so that I could add them into retargeting, so that I could target them during lunchtime, during dinnertime, during off hours.
Then I might even do a little bit of mobile advertising to try to engage people around lunchtime so that ads for my pizza show up on people’s phones right at the moment that they want a piece.
Jared: It’s a mix across the spectrum, and every small business owner should be thinking about revenue growth across many different channels, leveraging the tools that are available to them.
Howard: Definitely, and making sure everyone that walks through your front door has a wonderful experience and that they tell their friends about you.
Jared: Yep. In growing your business or businesses, I should say, if you could pinpoint the one lesson that you wish you had learned about revenue growth before you started Yext or before you learned that lesson, what would it be?
Howard: Revenue growth takes cash, and so I hit on that point a little bit before, but let’s say theoretically that you’re growing fast. I’m going to make up some numbers on the fly here. Let’s say you’re doing $100,000 of sales in a month, and let’s say you’re going to grow 50% the next month. In Month One, you do $100,000, and in Month Two, you do $150,000.
Let’s further say that your supply costs are 80% of your revenues, so you have roughly 20% profit, so in Month One, you have to spend $80,000 to acquire your supplies. Then, in Month Two, you have to spend $120,000. The problem is that, in order to buy your supplies for Month Two, you can’t do that off the revenue in Month One because your supplies in Month Two are $120,000.
Howard: You’re going to have to find a financing partner to help you grow. I never really thought about that and realized that until we started to grow, and we were a unique company because we’re an Internet company, but the reality is that in order to fund your business when you’re growing, growth consumes cash. Your cash balance … The faster you’re growing, the lower your cash is going to be. That can be really scary.
Jared: What do you do to combat that as an Internet entrepreneur or a small business owner?
Howard: I think there’s two different answers. As an Internet entrepreneur, when you’re growing your revenue, there’s a lot of VCs that are willing to show up to your doorstep and fund your company. The problem is that for small business owners to start growing, it’s a little bit harder to find a financing partner.
Jared: What do you recommend they normally do? Do they try and identify a long-term financing partner? Do you think it’s more about identifying friends and family that can help them out? Is it absolutely necessary to find a long-term financing partner?
Howard: I don’t think it’s necessary for everybody, but if you could grow your business, you should do it. You should make that investment. You already took the bet to start your own company and to leave your career and embark upon your own endeavor, and so my advice to any entrepreneur is if you have the opportunity to grow, it’s your destiny to do it.
If it takes a little bit of financing, find someone to help you do it, whether that’s a relative or a friend or it’s a bank or a lender. It’s not like you’re betting on some Wall Street fat cat stock. You’d be betting on yourself, and there’s no better bet you can make as an entrepreneur than on you.
Jared: Agreed wholeheartedly. After building your first five businesses and then starting Yext, what’s the one piece of information that you’ve learned from those first five that you are grateful that you had that you think made you more successful in your journey building Yext?
Howard: I’m not sure I learned this, but I always intuitively knew it, which is that the most important thing you do is pick your partners. You’re going to be with them for a long time. Many of you will be sole proprietors, and that’s fine, but for those that are not, make sure you go into business with the right people because there’ll be twists and turns and uncertainty and ups and downs, thick and thin, and you want someone that you’re teamed up with that is going to be there with you and help you through that.
Just make sure that you’ve got amazing folks you’re building this company with and your business with, and that you treat them like family because if you treat your partners or employees like family, they’ll treat your business like they own it, and that’s how it’ll be successful in the long run when you’re not there all the time.
Jared: We talked about success a lot, but one thing that you normally don’t hear entrepreneurs talk about very frequently is failure. When I first came to you with the idea of Fundera around a year-and-a-half or maybe two years ago, we walked through that iteration of our company, and you looked me square in the eyes and said, “This won’t work.”
We had a long conversation, and you went through and outlined a lot of the reasons why it wouldn’t work, and needless to say, we took a lot of your feedback and incorporated it into a business model that hopefully will work and does work and will set us up for building hopefully a meaningful company one day, but the reason why you said it wouldn’t work … I remember this distinctly … Was because you said that at one point in time, you had built a business that had a lot of similarities to our initial version of Fundera, and it did not work.
Can you tell me about some of your failures in business because I’m a firm believer that, for every entrepreneur who has had an incredible success like Yext, they’ve also had many more failures that helped them get to that point.
Howard: I think what you find is that successful entrepreneurs if they keep at it … Ben Horowitz’s book, which again, is geared toward tech entrepreneurs, but I think the lessons can be applied to anyone, basically stated, the number one job of a CEO or an owner is to not quit, and I told you that your concept wouldn’t work, Jared, but that was my initial reaction, but I knew that you would make something successful because of you, and the thing that you know how to do and that successful entrepreneurs and small business owners and large business owners do is they continue to evolve and tweak their ideas when they run into barriers to iterate and overcome so that they find a concept that does work.
I knew that while the concepts you were thinking about might not have been the right concepts, the only way that you’re going to learn that they’re not the right concepts is you try them. They fail, but then you came up with a better way, and that’s a testament to the entrepreneur. It’s always about the people, not the ideas.
Jared: Right. Tell me about that, because the instance that you told me about in your personal career was, I believe you had built software for gyms to better acquire customers, and that didn’t work, correct?
Howard: We tried a million different models there. We were working to find a way to provide a consumer with a tremendous experience in health clubs and, at the same time, provide gyms with a new source of leads because people weren’t using the Yellow Pages as much, and we tried letting people buy free passes on line. We tried emailing people and then sending these updates in gyms. We finally cracked the model in sending leads to gyms of people that had requested a free trial pass.
Then we thought that we could apply that same model to veterinarians. We ran a pilot concept where we got a bunch of vets to agree to take leads from us and see how well they worked. It turned out that vets are not really people people, whereas gyms have tons of salespeople sitting around and waiting for leads that they’re going to hop on the phone. Veterinarians preferred to interact with potential customers over the phone …
Jared: … Or animals.
Howard: … Or animals over the phone as they called and customers, and so it turned out that we needed to build up a way for them to receive phone calls, not just leads.
Those are examples of having the right area of idea but not having the exact formula down and continuing to tweak the formula until it was perfect.
Jared: Those tweaks gradually led to new ideas as well, right, so my understanding is that partially inspired Felix …
Howard: … That’s right, and so Felix came from that, and then learning from … All ideas build upon each other. The best recipes have evolved over a long time, and we saw the larger opportunity to synchronize the world’s location information, once we started dealing with off-the-track phone numbers and recognizing that local data and the entire local data system was a total mess for businesses that didn’t have a way to control their data, for publishers that couldn’t get accurate data, and for consumers that were often finding the wrong information online.
That’s when we saw the opportunity to synchronize the world’s local data.
Jared: Which is incredible. I remember visiting you in your old office in Chelsea in Manhattan, and I’d say over half the people there were working on Felix, and you pulled me by the earlobe into your office and said, “Look at this,” and it was the relative early days of Yext, and it looked like the future of small business discovery on the Internet.
Howard: You’ll have to come by again, because maybe I have a new secret.
Jared: I can’t wait to see it, but it’s astounding to me how these five or six businesses that you’ve built over the course of your career so far have not necessarily been five or six individual businesses. It really all started as a 20-year-old with a whiteboard in your dorm room in college, and it’s been a natural evolution of ideas and revenue growth ever since.
Howard: Absolutely. Buffett wrote that book about snowballs. You find an area of leverage. You’re around amazing people, and you build up ties to your community and to your team and your customers love you and you build great stuff, and you meet great people. I have no doubt that you and Fundera will have the same experiences. You help small business owners in the U.S. today and someday, abroad build their business and help them achieve their dreams. I think it’s a phenomenal, noble mission.
Jared: Thank you, Howard. I appreciate that. I’m sure you will continue to snowball and build up even more and more momentum over the next several years, if not several decades as you have done in the past several decades.
Thank you, Howard. I appreciate you taking the time.
Howard: My pleasure. Have a great day.
Jared: For those listening, if you have any more questions on the topic you’d like Howard or Fundera to address, you can Tweet us at @Fundera, find us at Facebook at Facebook.com/Fundera or email sales@Fundera.com. We’ll see you all next month for our next installment of Know Before You Owe. Thanks for listening and hope to see you again soon.
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