Latest Updates

Wednesday, March 7, 2018

Lesson #289: Our First Acquisition--Red Rocket Acquires Restaurant Furniture Plus

Posted By: George Deeb - 3/07/2018

As many of you know, Red Rocket has been looking for a business to acquire for the good part of the last two years.  I previously wrot...

As many of you know, Red Rocket has been looking for a business to acquire for the good part of the last two years.  I previously wrote about all the challenges and hard work you can expect when doing M&A related projects, so I won't repeat those. But, I am excited to announce, Red Rocket closed our acquisition of Restaurant Furniture Plus last month, in partnership with Kessler Warshauer Ventures.  And, what a wild ride it was, getting our first acquisition to the finish line.  Let me elaborate with a few learnings from this process for your educational benefit.


In the last two years, we looked at over 260 businesses for sale.  We made offers on around 20 of them.  That is a lot of hours invested to simply find 8% of them that were interesting enough to make an offer.  From that list of offers, we agreed to financial terms, and started a formal due diligence process with around 6 of them.  And, we got one to the finish line, successfully unscathed through the due diligence process and negotiations of the formal purchase agreements.


At one point or another, over the last two years, I would have thought, with 80% certainty, that I was approaching the finish line towards acquiring a pet supplies, beauty products, candy maker, auto leasing, educational toys, and fitness video business.  But, there are many reasons why these deals did not close.  We learned something bad during due diligence.  The seller gets scared away by the agreement terms.  The seller tries to increase the price, after agreeing to a lower price in the letter of intent.  And, in one case, the seller liked our plan so much, they decided not to sell and try to grow the business themselves with our plan!  So, the deal is never done until the agreement is signed by both parties, as the process is laden with many potential pitfalls along the way.


Normally, serious conversations are pretty well spaced out.  So, with 20 offers made in two years, a normal spacing is around one big deal a month.  But, in November 2017, it was insanity.  We had six different deals that were all in competitive bid situations that we needed to pick one to focus on, and risk losing the other five deals in the process.

We originally passed on Restaurant Furniture Plus, picking a pet supplies business doing creative Facebook marketing, with a very large customer list, that was being sold at a very attractive purchase price.  But, we learned in due diligence that their Facebook marketing economics were deteriorating, the customer email list was really very low quality and with a declining profit base, the purchase price multiple of earnings was increasing by the day.  So, we passed on that deal in the 11th hour of negotiating the agreement.

We went back to Restaurant Furniture Plus and one other business to see if they were still available.  But, they were already under letter of intent, and off the market.  So, we focused on a candy seller on Amazon, that we liked their proprietary branded product line and their attractive purchase price.  But, when we learned their private label product was really branded candies by other manufacturers, that the purchase price did not include inventory (taking the purchase price way up) and there were scores of negative product reviews online speaking to the quality of the product, we got nervous.

At that same time, Restaurant Furniture Plus called back saying they were unhappy with their buyer, trying to change the purchase price last minute, and asked if we were still interested.  We always liked this business, and decided to shift direction and strike the deal with them.  So, I guess the third time of talking with them, really was the charm!


As a lesson for what to look for in a good acquisition, Restaurant Furniture Plus really had it all.  They were serving a big market with a clearly differentiated service offering.  They had terrific unit level economics, with a high return on marketing investment.  They were growing over 67% per year, with a 50% conversion rate on leads, and a loyal repeat customer base making up over 50% of their orders.  It was a lightweight fulfillment model, with very little working capital needed, as their suppliers dealt with inventory and warehousing needs.  The founders were really smart and impressive, with terrific procedures in place, making it simple to transition.  And, it was a way to satisfy my marketing itch, with a service-driven B2B business model that was not going to go head-to-head with Amazon in the B2C space.


With Amazon controlling 65% of all shopping searches, it is really hard to compete with their marketing muscle and pricing power.  Especially with Chinese manufacturers starting to sell direct on their website at wholesale prices (re-read this post about this threat to U.S. ecommerce companies).  So, to be successful in e-commerce, in the era of Amazon and Alibaba (re-read this post about Ali Express's threat to U.S. ecommerce companies), we think you need a couple things.  First, a proprietary branded product or service that you can call your own (preferably not manufactured by overseas suppliers selling the same product to others or themselves on Amazon).  Second, you need to find a category that Amazon isn't going to want to dominate themselves.  Restaurant Furniture Plus offered us both of those things.


As for a few learning to share about the small cap mergers & acquisition market, it is materially different than the middle or larger cap markets.  First of all, the entrepreneurs have typically never sold a business before, so they are new to the process, and unknowingly create a lot of friction to getting a deal done (e.g., having never seen a purchase agreement before, which can be scary to them).  And, secondly, they are typically not getting great advice from often less-experienced business brokers (which was not the case with Restaurant Furniture Plus, who was instrumental to helping us getting the deal done).  So, do your homework before engaging a business broker, to make sure they are really good at getting their clients to the finish line.

Compare this to bigger companies.  When a business is put up for sale, it is really for sale with low odds the owners change their minds (so low odds  you are wasting time, spinning your wheels).  And, the investment bankers are much more sophisticated at bridging the gaps and getting both parties to agree on deal terms.  Not to mention the stability and professionalism that comes when buying later stage, higher cash flow producing businesses that have their documents in place, which makes due diligence much easier.  It was frustrating for me being a former big-bracket investment banker at Credit Suisse, running through a process like this.


Make sure you have all your ducks in a row in how you are going to handle your post-closing training and transition period.  There is a LOT to learn in your first 30 days, if you are lucky enough to get that amount of time from the seller.  Make sure you have the right list of topics to get trained on.  And, the right list of technologies and other assets that need to be quickly transferred.  And, make sure the founders are on board to assist as consultants for some period of time after closing.  Preferably, a seller who is flexible to work with you when things ultimately go wrong when trying to transition systems, bank accounts, credit cards, supplier accounts, payroll processing, etc. on a flip of the switch.  Don't plan on running the business for the first month, as you will be knee deep in transition items.  And, the smoother the transition, the less opportunity something falls through the cracks to create problems for you down the road.  And, the first thing to do--hug all your new employees that you plan on retaining, with material incentives, as they will ultimately dictate your success or failure.  You don't want them looking for the door, the minute you arrive, or else you are toast as all their institutional knowledge walks out the door.


So, we are obviously excited to have our newest company in our portfolio.  And, I am personally excited to get back into a CEO role again, alongside my partner on this deal, Art Kessler.  But, Red Rocket will continue to be business as usual.  As you have business needs, continue to bring them our way, and our team will be happy to help.  I will do my best to keep the new blog posts coming on a regular basis.  We very much look forward to this new adventure.  And, if you know any restaurant chains looking to source new furniture, you know where to send them!!

For future posts, please follow me on Twitter at: @georgedeeb.

Friday, March 2, 2018

How to Calculate What's Working When Marketing on Multiple Channels

Posted By: George Deeb - 3/02/2018

Long gone are the days of blindly spending marketing dollars without a data first mindset to clearly calculate and prove you are driving ...

Long gone are the days of blindly spending marketing dollars without a data first mindset to clearly calculate and prove you are driving a return on your marketing investment (your “ROMI”). This previously linked post demonstrates how to track your ROMI at the 30,000 foot view, based on your overall business revenues vs. costs, or at the unit level of an average transaction. But, if you want to really fine tune your efforts to maximize your ROMI, the best marketers turn to marketing attribution tools to help optimize marketing within every sub-channel of their business. Let me explain.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Monday, February 12, 2018

Lesson #288: How to Build a Startup Ecosystem

Posted By: George Deeb - 2/12/2018

I have previously written about Chicago’s exploding startup ecosystem .  But, startup ecosystems are popping up all across the country a...

I have previously written about Chicago’s exploding startup ecosystem.  But, startup ecosystems are popping up all across the country and the world, with varying levels of success.  I wanted to talk about the mix of ingredients that are needed to make a startup ecosystem thrive over time.  So, leaders in your local communities can have a blueprint with which to follow to propel your startup ecosystem, and hopefully, your own success in the process.


Access to Great Ideas.  Great ideas turn into great businesses.  Think building “platforms” over “features”, or “wisdom” over “widgets”, or “painkillers” over “vitamins”.  Startups are hard in all cases, might as well be working on really big ideas.

Access to Talent.  Great entrepreneurs, preferably serial entrepreneurs that have learned from prior mistakes, are ultimately going to dictate the success of their businesses, and in turn, the success of the ecosystem.

Access to Capital.  The best ideas and the best talent are useless without the capital to fund their vision.  If that capital is local, great, as investors like to invest close to home.  If that capital is located in another city, that is also great, provided investors in those towns are willing to deal with travel (which they often don’t).  It is critical that the capital is available to embrace each stage of development, from seed to early to growth stages of your business.  Having seed stage, but not Series A or Series B stage, is a recipe for a likely “flame-out” of that startup, when they hit the wall in that level of their growth.

Access to Customers.  To me, this is the most important piece.  Customers drive revenues.  Revenues impress investors.  Investors fund growth.  Growth leads to big exits.  Big exits leads to a robust ecosystem.  This often means tight partnerships between early stage ideas with later stage companies to buy those services (ones who are supportive to helping the local startup community).


Entrepreneurs.  Duh, you need experienced teams running the startup businesses.  With an equal balance of needed skillsets from strategy, to marketing, to technology, etc.

Mentors.  First time entrepreneurs need to be able to ask questions of experienced leaders, to help get them up the learning curve, without making the same mistakes of their predecessors.

Investors.  Whether these are individual angels, organized angel networks, venture capital firms, private equity firms, family offices, corporations or other funding sources doesn’t matter.  What matters is the money is flowing from whoever can cut the checks for that stage of a business’s growth.

Incubators.  This category picks up everything from shared office spaces for startups, all the way up to formal startup accelerator programs with formal educational curriculum.  The point is, entrepreneurs can learn from each other, when they are in close proximity to each other.

Universities.  A lot of the biggest business ideas are born from the research inside of universities.  Having a healthy technology transfer process for these ideas to be monetized by business leaders is key.  And, university professors need to know, it is perfectly acceptable to try and monetize their ideas, at the same time they are trying to win a Nobel prize (which many don’t agree with).

Corporations.  The big companies in town help in many ways.  They invest through corporate venture capital funds.  They become potential customers of new local startups.  They have pain points of their own, that a local startup can build and solve for them.  They are often the exit for startups that have gotten large in size. You need a really healthy interaction between the startups and corporations working towards a common goal.

Associations/Events.  There are many groups in town that help organize and propel the ecosystem.  This could be industry trade associations, venture capital associations, entrepreneur networking groups, chambers of commerce, economic development groups, etc.  Leverage these groups of like-minded people at their big annual events or leverage their tools (e.g., job boards on their websites).

Government.  Whether it is at the city, county or state level, your local government can play a very important role.  That could include providing tax incentives for startups to launch in their city, tax free profits on any capital gains in a startup (to help stimulate investment), passing ecosystem friendly laws (like free access to the internet), or establishing venture capital funds with a portion of their treasury.

Service Providers.  The lawyers, accountants, bankers, recruiters, agencies, advisors, and consultants in your community all play a role.  The more experienced they are with startups, the better advice they will bring to the ecosystem.


Spread Equity Deep.  Most entrepreneurs concentrate equity into only a couple people at the top of the organization.  It is better to spread equity deep into other employees, as well.  Why?  Because if employees have a vested interest in the business, they will work harder towards hitting the goal.  And, when the company sells for $1BN, it creates hundreds of multi-millions that have new-found funds to start their next startup, powering the ecosystem to the next level.

Serial Exits.  Selling companies for big returns impress investors.  But, often times a first time entrepreneur, will see a $50MM sale as “big money”, and sell too early to put some cash in the bank for a rainy day.  But, a second or third time entrepreneur has already banked cash from their first exit, and now they are in a position to “roll the dice”, walking from a $50MM sale, in hopes of a $500MM sale down the road.

Reinvest Returns.  Money that simply goes into the bank account, or into safe real estate investments, does not help the ecosystem.  The money needs to round trip back into the community.  So, if you sell for $100MM, hopefully a good chunk of that is funding other startups in the ecosystem.

Shoot for the Moon.  Many investors are simply too conservative for a startup ecosystem to be successful.  Silicon Valley prides itself on “failure as a badge of honor”, as the lessons learned in one bad startup, will apply to the next good startup.  If you are too conservative, trying to cross potential “strikeouts” off your list, you are most likely crossing off potential “home runs” at the same time.


It Takes Leadership.  It takes a couple cheerleaders at the top that are going to “plant the flag” and have everyone rally around those goals for the community.  Preferably, somebody that can put their money where their mouth is, and can lean on their deep rolodex of key relationships in your region (e.g., the governor, the mayor, the local billionaires).

Leverage Local Strengths.  Figure out what your region does better than others, and focus your efforts around those industries or skills.  For example, New York would be a great place for financial startups and Los Angeles would be a great place for entertainment related startups, given the high concentration of experts in those areas.

It Requires Startup Density.  It will be really hard to build a robust community in very small towns.  There simply isn’t enough activity, breadth of industries or depth of expertise in any one industry to be effective.  So, either live in a town big enough to support an ecosystem, or prepare for a lot of travel between a bunch of smaller regions that have been aggregated into one community.

Collaborate Across Regions.  Don’t think a startup ecosystem is isolated to your city.  The best startup ecosystems feed off each other.  Think about the collaboration happening between New York and Boston startups, given their close proximity to each.  Or, between Detroit and Germany, because they both serve the auto industry, as examples.

Publicity Helps.  The rest of the country needs to know what you are up to.  Less about your desire to build an ecosystem.  But, more about the venture capital flowing into your region, or big exits being realized at big valuations.  So, celebrate your successes, and put those success stories locally “on display”, or nationally “on the road”.  That will get investors and talent to want to check it out.

Progress Must Be Measured.  Like with any business endeavor, you must have good measurement with which to manage it.  Quantify key metrics like the amount capital raised, investor value created, companies formed, jobs created and material exits in your market, and shoot to have those metrics improve year over year.

It Can’t Be Forced.  The community needs to share a common goal.  The goal of building a robust community can’t simply be embraced by a few, to be forced on others; it has to be embraced by everybody participating in the community, for it to be successful.

It Takes Time.  Don’t expect miracles overnight.  Ecosystems are not built in years, they are built over decades.  That is why Silicon Valley’s startup ecosystem is as big as it is; they have literally been working on it since the 1970’s, a fine tuned machine after 40 years of optimization.

Hopefully, you now have a better understanding of what it takes to build a robust startup ecosystem.  You can’t do it by yourself; you must collaborate as a symbiotic community with a shared set of common goals between people that are equally happy helping others, as they are at helping themselves.  Layout the blue print for your city, let it percolate for a couple decades and hopefully good things will come.

For future posts, please follow me on Twitter at: @georgedeeb.

Friday, February 9, 2018

The Case for Your Startup to Hire Former CEOs

Posted By: George Deeb - 2/09/2018

A common mistake most entrepreneurs make when setting up their management team is filling it with people they feel are easier to contr...

A common mistake most entrepreneurs make when setting up their management team is filling it with people they feel are easier to control or won’t make them look stupid. That typically means an older, former CEO would never get a reasonable look as a direct report to the CEO of most early stage companies. But, is that fear justified?

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Monday, January 29, 2018

Lesson #287: Stop Using Overly Aggressive Marketing Tactics

Posted By: George Deeb - 1/29/2018

Red Rocket has studied over 200 businesses to potentially acquire in the last couple years, and I have seen a lot of questionable market...

Red Rocket has studied over 200 businesses to potentially acquire in the last couple years, and I have seen a lot of questionable marketing tactics being used by a few of these companies, sometimes bordering on outright fraud.  Or, at a minimum, abusing their relationship with their customers, with overly aggressive marketing efforts.  I am going to share a few of these examples with you, so you don't repeat these mistakes with your businesses.  It is hard enough to acquire customers in the first place, yet alone to scare them away long term with tactics like the below.


We were looking at a dropshipping ecommerce business that was marketing a "get a free product if you pay for shipping" offer.  That by itself was fine.  But, when I learned that once the customer was in their shopping cart funnel, buried in the fine print . . . very fine print . . . was a small footnote that said by accepting this offer, they were also signing up for their $39.99 per month subscription model.

We didn't pick up on the problem until we saw that their churn rate of lost customers, was off the charts.  Their average life of a customer subscription was only two months (not 6-10 months, like most good subscription offerings).  This was because customers were getting pissed by seeing $39.99 charges showing up on their credit card, for something they had no idea they had signed up for.  And, to make matters worse, the company made it very difficult to contact customer service to call and cancel the subscription.  Which lead customers to the customer review websites to publicly incinerate this business.  And, once the bad reviews are out there in mass, it is almost always too late to recover.

When we asked the business broker if he was aware of this situation, I found his answer humorous: "yes, the founder is aware that he is using 'aggressive marketing' tactics".  That was an understatement.  He would have been a lot closer by saying "suicidal marketing" tactics!!


Here are a few more examples of overly aggressive marketing tactics we have seen:

  • Adding Better Business Bureau and eTrust certificates to their website, when in fact, they were not approved or highly rated by those services.  Flat out lying.

  • Keeping the hundreds of positive customer reviews published on their website, and curating out the thousands of negative customer reviews.  Dude, time to stop the presses and figure out why you are getting so many bad reviews in the first place.

  • Having their friends manipulate customer reviews on third party websites.  On a Monday, they had 50 only negative reviews published, and when we brought it to their attention, by Tuesday, there were 300 positive "fake" reviews added on the same site.

  • Not disclosing to their customers, pre-order, that products were being shipped from overseas, and that could result in 30-40 day delivery times.  Resulting in thousands of disgruntled customers trying to track down what they thought were lost shipments (many of which being missing gifts during Xmas season).

  • Selling a completely "snake oil" type of product, claiming certain benefits of the product that were not scientifically supported, and using fictitious before and after photos to enable the sale.

  • Firing away emails to their 500,000 person list, when the tactics used to build the list resulted in a very poor quality list only converting 0.01% of such customers into sales (1/100 of what it should be), and pissing off 500,000 people each week with unwanted emails in the process.

  • Selling prescriptions of certain hormone drugs to be used in off-label types of ways (e.g., weight loss in men), when the hormone was originally designed for other purposes (e.g., fertility in women).

  • Saying they were featured in major publications in their industry, when in fact, they simply bought advertising space in those magazines and did not have a featured editorial article.

  • Having a shopping cart funnel flow that tried to upsell customers additional products at seven different times during the purchase process.  Not illegal, but certainly ill-advised and abusive to the user experience.

Any of these tactics sound familiar in your own businesses??  If so, time to stop using strategies like these.  And, time to start building your business in more credible and customer-first ways.


I know how hard it is to drive initial customers for your business.  But, if you need to resort to tactics like the above, yes you are helping your short term sales, but you are slicing your long term throat in the process.  Once bad customer reviews are out there, it will be near impossible to attract new customers.  Once investors learn these questionable tactics are being used by you, you will lose credibility in their minds, and they won't want to invest in your business.  And, once your customer funnel and access to capital dry up, there goes your business, right down the drain.


As I have said in the past, with startups, perception often outshines reality, with many entrepreneurs doing the "smoke and mirrors" dance trying to get the attention of potential customers.  But, there is a very fine line between "stretching the truth", and flat out lying, or being overly aggressive with your marketing efforts.  So, if you are thinking about doing it, don't!!  As it will eventually come back to bite you in the ass.  A snake oil you certainly don't want coursing through your veins.

For future posts, please follow me on Twitter at: @georgedeeb.

Monday, January 22, 2018

Lesson #286: Want to Sell More? Keep Your Mouth Shut!

Posted By: George Deeb - 1/22/2018

I have written dozens of useful how-to lessons for driving sales , but perhaps none is more important than this one.  This is the day th...

I have written dozens of useful how-to lessons for driving sales, but perhaps none is more important than this one.  This is the day that you learn that driving sales has very little to do with what YOU have to say.  And, it is everything to do with what YOUR CLIENT has to say.  The magic sauce to closing the transaction is knowing how to ask probing questions, sit back and LISTEN.  Keeping your mouth shut is typically a really hard concept for a salesperson to grasp.  But, if they do, jewels of insights and real pain points of your customers will quickly surface to the top the more THEY talk.


A salesperson’s first instinct is to pull out a demo of their product and start talking about all the bells and whistles built into the features and functionalities of that product.  [Insert Yawn!]  First of all, you never lead with the “what”, you always lead with the “why” your product can help them to drive more revenues, cost savings, customer experience improvements or whatever.  But, more importantly, you should never blindly open the pitch until you know exactly what your client’s pain points are.


In order to learn your client’s pain points, you have to start by asking them what they think their pain points are.  In some cases, the client’s will know exactly what they are trying to improve in their business, as it relates to your product.  But, in many other cases, your client will not even know they have a problem, and you will need to educate them on the problem they have.  But, be sensitive to the fact many customers will not want to admit they have a problem, keeping their cards close to their chest for negotiating advantages.  So, it is up to you, to tease it out of them.


A good salesperson knows how to ask the right questions, that will help them get to the meat of learning their client’s real pain points.  Sometimes you can tackle the question head on, like “tell me more about what you don’t like about your current product?”  Then, when ready, focus your pitch specifically around those elements they most care about.

But, sometimes you need to get to the answer through the back door, instead of the front door.  Maybe questions like “can you tell me more about your conversion rate you are seeing with your current tool, as I can help you benchmark that to what I am seeing with our other clients”.  That one question may go in many directions: (1)  they may not know their conversion rate (pain point #1); (2) they will certainly be curious what their peers are achieving, in comparison to themselves (pain point #2); and (3) any smart manager will want to learn how to improve their business if they are lagging behind (pain point #3).

Either way, the more probing questions you ask, the more intelligence you gain to craft a perfect pitch that exactly meets your client's needs, and the more learnings you can pass back to the product development team, for them to build additional features into your product, that can help next year's upsell with that client.


I was working with a social media listening company.  This was a relatively new industry, compared to old school market research based on human focus groups. The sales team needed to help educate and entice their clients with questions like: (1) did you even know you could glean market research intelligence from social media; (2) would you be interested in listening to billions of social media conversations, to bubble up the three most important insights your customers are saying about your brand, versus asking the 100 people in face-to-face focus groups with expensive travel costs to ten different cities; and (3) did you know you are spending $1MM a year on traditional market research, and we can get you 10x better insights for only 10% of the price?   Not once did I say: look at this cool feature or functionality of our product, or pull out my demo.  You get to that later, after they are already drinking the Kool Aid at the strategic, higher level, and then you set the hook with the product.


If you jump right into pitching your product, your odds of closing the sale are going to materially decrease.  Why?  Because you have no idea yet, what your client actually needs.  I argue you should not even pitch your product at all in the first meeting.  Build a relationship with them first, asking the key questions, learn their pain points, and THEN set up a second meeting that specifically addresses their most pressing needs.  This way, your odds of closing the sale will materially increase.  The biggest mistake most entrepreneurs have is having “diarrhea of the mouth”, when it comes to peddling their product.  All that does is put your customers to sleep in that first meeting.  And, that first meeting is the most important, to making sure you get the next meetings and the sale!  So, the next time you want to open your mouth in a first sales meeting—it better be asking questions and not pitching products.

For future posts, please follow me on Twitter at: @georgedeeb.


General Business



Fund Raising

Red Rocket is a featured contributor on entrepreneurship for many trusted business sites:

Copyright 2011- Red Rocket Partners, LLC