Posts from MBA Mondays

Exit Interviews

I am a big fan of exit interviews. I have learned more doing exit interviews than most other management techniques. When people are on their way out and have no fear of saying exactly what they think, you can learn a lot.

It is rare for an investor/VC to do exit interviews. I only do them in situations where there seems to be a significant problem in a portfolio company and I want to get to the bottom of it.

But if you are the CEO of a company, you should be doing exit interviews with everyone who leaves your company until your company gets to the point that it is impossible to do that. Once you pass that point, your senior team should be doing them along with you.

Here's what I like to do.

First, get a sense from the exiting employee's manager what the cause of departure was. Get the manager's take on the situation. Context is very helpful in situations like this.

Second, don't make an exit interview a witch hunt. Make it a conversation about the good and bad things about the company, the job, the people, etc. The less confrontational the exit intereview is, the more you can learn.

Finally, don't take everything that is said as gospel. There are always two sides to every situation. I like to understand both sides as well as I can. Everyone has an opinion and an agenda and its best to understand everything in that context.

Doing exit interviews is a lot like doing references. The patterns that emerge over multiple interviews are the most telling and that is what you want to be listening for. Exit interviews are a great way to get those patterns out on the table where you can see them.

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MBA Mondays: When Its Not Your Team

Phil Sugar left a great comment on last week's MBA Mondays about Turning Your Team:

Do not think that the reason you aren't scaling is because you need to bring in outside management. That will kill a team. 

This is the biggest worry I have because some will read this and think, I'm not growing what I need to do is turn the team, and that is just wrong.

If you aren't growing, its likely to be a product problem, a strategy problem, or a competition problem. I have rarely seen a management team problem be the reason for lack of growth. 

Company building is not this simple, but I do like to think about it terms of two stages. Getting the product right and customers/users scaling. Then scaling the company and the team. If you aren't doing the first, you mostly don't need to worry about the second. There are occasional team issues in the first stage you need to deal with but they aren't the big thing you need to focus on. The big thing you need ot to focus on is the product and its fit with the market. 

These issues can play themselves out again when the company is larger. Companies can lose their way. Or their product lineup can get stale. Or competition can enter the market and change the dynamics for users or buyers. Once again, you need to focus in on getting the product right and making sure that it is providing value to customers/users. 

In all of these situations, it is tempting to think the issue is the team and that turning the team will fix the problems. That is exactly why Phil left the comment he did. Team issues are largely scaling issues not growth issues. And it's critical to be able to recognize which is which because fixing the wrong problem can be devastating to a company.

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The Similarities Between Building and Scaling a Product and a Company

This has been a theme of mine since Roelof Botha put it in my head a few years ago. He said that entrepreneurs should approach building a company with the same passion that they have for building a product.

I've been thinking about scaling the team a lot this week. There are parts of building the team that are like designing and shipping a product. And there are parts of building the team that are like growing the service over time.

Putting together the initial team, creating the culture, instilling the mission and values into the team are all like designing and building the initial product. It is largely about injecting your ideas, values, and passion into the team. You do that by selecting the people carefully and then working hard to get them aligned around your vision and mission. Putting a product into the market and building your initial team are largely about realizing your idea as something tangible. That tangible thing is your product and your team. They go hand in hand. The team builds the product and the product is a reflection of them and you.

Once you have a successful product in the market, you need to turn your attention to scaling it. The system you and your team built will break if you don't keep tweaking it as demand grows. Greg Pass, who was VP Engineering at Twitter during the period where Twitter really scaled, talks about instrumenting your service so you can see when its reaching a breaking point, and then fixing the bottleneck before the system breaks. He taught me that you can't build something that will never break. You have to constantly be rebuilding parts of the system and you need to have the data and processes to know which parts to focus on at what time.

The team is the same way. Your awesome COO who helped you get from 30 people to 150 people without missing a beat might become a bottleneck at 200 people. It's not his or her fault. It could be the role has become too big for one person. Or it could be that he or she can't scale to that level of management. Think of this problem like a part of your software system that worked well when you had 1mm users per month but is breaking down at 10mm users per month. Both need to be reworked.

How you fix your system and how you fix your team depends on the facts and circumstances of the problem. There is no one right answer. The key is removing the bottleneck so the rest of the system can work again. When it is software, the problem is a bit easier to solve because it doesn't involve moving people around and the emotions that creates. But that's what a manager does and good managers do this often and they do it well.

It is harder to instrument your team the way you can instrument a software system. 360 reviews and other feedback systems are a good way to get some data. And walking around the company, doing lunches with managers who are one level down from your senior team, and generally being open to and available for feedback is the way you get the data. When you see that someone on your team has maxed out and the entire system is crashing as a result, you need to act. That could be breaking the role into parts, that could be reorganizing the entire team, or that could be removing the person and replacing them, or it could be some other solution. Whatever it is, it needs to be done or the company won't function as well as it can and should.

In summary, many entrepreneurs are engineers and/or product people. They intuitively get how to build and scale software systems. They may not intuitively get how to build companies. Fortunately, as Roelof pointed out to me, there are some similarities. And by understanding them and internalizing them, you can become a better leader and manager.

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MBA Mondays: Turning Your Team

A serial entrepreneur I know tells me "you will turn your team three times on the way from startup to a business of scale." What he means is that the initial team will depart, replaced by another team, which in turn will be replaced by yet another team.

I have been closely involved with over 150 startups in my career and since roughly 1/3 of the startups we back get to real scale, that means I've seen the "startup to scale movie" over fifty times in my career and I can tell you this – my friend is right.

The people you need at your side when you are just getting started are generally not the people you will need at your side when you have five hundred or a thousand employees. Your technical co-founder who built much of your first product is not likely to be your VP Engineering when you have a couple hundred engineers. Your first salesperson who brings in your first customer is not likely to be your VP Sales. And your first community person is not likely to be your VP Marketing. 

Likewise, the first VP Engineering who figured out how to manage the unwieldy team left by your technical co-founder is not likely your VP Engineering when you have five hundred engineers. Your first VP Sales who built your first sales team is not likely the person who can manage a couple hundred million dollar quota. Companies scale and the team needs to scale with it. That often means turning the team.

The "turning your team" thing probably makes sense to most people. But executing it is where things get tricky and hard. How are you going to push out the person who built the first product almost all by themselves? How are you going to push out the person who brought in the first customer? How are you going to tell the person who managed your first user community so deftly that their services are no longer needed by your company?

And when do you need to do this and in what order? It's not like you tell your entire senior team to leave on the same day. So the execution of all of this is hard and getting the timing right is harder.

This is where serial entrepreneurs have a real leg up on first time entrepreneurs. They have seen the movie too and they played the starring role. So they know what the next scene is before it even starts. They know the tell tale signs of the company scaling faster than their team. And so they move more quickly to move the early leaders out and new leaders in. One of the signature faults of a first time founder is they are too loyal to their founding team and stick too long with them. 

If it is any consolation, the founding team makes most of the money when a company becomes successful. That technical co-founder who built the first product will likely end up with tens of millions of dollars, if not a lot more, if a business they helped start gets to five hundred or a thousand people. The VP Engineering of a five hundred person company will not likely have an equity package that is worth anywhere near that much.

So I generally advise entrepreneurs to be open and honest about all of this. Tell your early team that they may not make it all the way to the finish line but they will be handsomely compensated with equity and if you are successful, they will be too. And when it is time for them to go, think about how much they brought to the company and consider vesting some or all of their unvested stock on the way out. Also think about compensating them to stick around during the transition. And always make sure they leave the company with their head high feeling like the hero that they are. 

Here's the thing. Turning a team is not the same as firing someone for weak performance. You are firing someone for doing their job too well. They killed it and in the process got your company off to a great start and growing to a scale that they themselves aren't a great fit for. They may not be right for the job at hand, but they are a big part of the reason that the company is successful. That's the narrative that you need to have in your mind when you turn your team.

All of this is very hard, particularly if you are doing it for the first time. So get some mentors, advisors, and board members who have lived through this before. And listen to them about this. You may not want to listen to them too much about product and market stuff. Maybe you understand that better than they do. But when it comes to scaling a management team, those who have had to do it before will generally be right about the issues you are facing with your team. So their advice and counsel is worth a lot and you should pay close attention to it.

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I finally picked up the Isaacson book on Steve Jobs. Figured enough time has passed to give the proper amount of perspective. It must be a big book because I've spent the past two weekends on it and I am only 50% through according to the Kindle app. As an aside, I am reading it on three devices at the same time, my Kindle Fire, my Nexus 7, and my HTC One. I love how the Kindle app syncs so you can do that easily.

My favorite part so far is how Jobs turned around Apple and did it pretty quickly. He did two primary things as far as I can tell. First, he got his people into the top jobs and got rid of the executives who had been calling the shots before he showed up. And second, he brought focus to the product line, and thus everything else.

There's this great scene in the book where Jobs draws a classic four quadrant chart, consumer and pro on one axis, desktop and laptop on the other. And he says "we are going to make one computer for each quadrant and we are going to kill all of the other product lines".

I am only half way through the book and I am certain that this book should be required reading for any and all entrepreneurs. Jobs is the quintessential entrepreneur and there is so much to be learned from him.

The power of focusing should be at the top of that list. When you focus, you can rid yourslef of extraneous expenses (Jobs laid off over 3,000 people in his turnaround of Apple), you can get your best people focused on the important projects, and you can bring clarity to your marketing and what you want the consumer/customer to think of you for.

Many entrepreneurs and CEOs misjudge how many things they and their team can do well. It is always less than you think. I once was involved in a 75 employee company that was in three different businesses. It took a difficult financing to convince the CEO to exit two of those businesses, but it was the best move that company made. The next three years were a time of explosive growth for that company.

Focus is critical when you are three people, when you are twenty-five people, five hundred people, and ten thousand people. You can always get farther faster by saying no to too many projects and too many priorities. Pick your shots carefully and hit them. That's what Jobs did to turn around Apple and that's what you can do with your company too.

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A Table Of Contents for MBA Mondays

For the past few years, I've been using a third party service called Pandamian to power a table of contents for MBA Mondays. They've been awesome to work with but the honest truth is I would prefer to have this thing run natively on AVC and point to MBA Mondays posts on AVC.

What I want is something that I expect others might want as well. I want a cloud based solution that crawls my blog regularly and looks for posts that are tagged MBA Mondays (and tagged other things) and then generates the front end code  to render a real-time table of contents on my blog that links to the actual posts on my blog.

The main reason I want this is to power the table of contents for MBA Mondays, but it would also be awesome to power a table of contents for a bunch of other categories on AVC. These table of contents pages would be great to put behind the "topics" links on the AVC Archives page.

I suspect the answer is that there are a number of WordPress plugins that do this but nothing for folks like me who are on Typepad. Which is yet another reason to consider switching to WordPress. But I really don't have time in my life for yet another project right now.

So if anyone has any good ideas how I can get a tool to power this table of contents for MBA Mondays, I am all ears.

#MBA Mondays#Weblogs

Startup Management

AVC regular William Mougayar is building an education oriented community for entrepreneurs called Startup Management. He soft launched it in the past week.

The idea, as I understand it, is to aggregate and tag blog posts about startup management from all around the web and curate them into a community site focused on educating entrepreneurs on how to be better leaders and managers of their companies. William will also create original content on the site. He describes it as a "Huffington Post" model.

There is certainly a need for this kind of thing. If you want to learn about term sheets, you can go to Brad Feld's blog and click on the "term sheet" category, but you would have had to know to go to Brad Feld's blog. If you want to read my stuff on employee equity, you would have to go to AVC, click on MBA Mondays, and then into the table of contents and scroll down to find it.

Obiously Google crawls all of this content and can find it for you if you poke around hard enough, but the idea of curating all the content that entrepreneurs, VCs, and others who work in the startup sector have written on the topic of startup management is a really good one.

I hope William succeeds with this effort and I am rooting for him.

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From The MBA Mondays Archive

In the comments to Valuation vs Ownership, Mike Nolan said:

Just today I talked with an entrepreneur developing a SAAS in an educational space. His questioned focused on how to set up his first LLC and be prepared for funding rounds.  As usual, I recommend reading past articles on for a look at how investors think. Fred's post today could not have come at a better time.  Fred – perhaps you could directly address early formation of LLCs by companies to make it easier to interact with investors. Tips for corporate structure, units vs. member interests, etc.

Well it turns out there was an old MBA Mondays post that addressed those issues. So I will re-run it today.


I'm taking a turn on MBA Mondays today. We are moving past the concepts of interest and time value of money and moving into the world of corporations. Today, I'd like to talk about what kinds of entities you might encounter in the world of business.

First off, you don't have to incorporate to be in business. There are many people who run a business and don't incorporate. A good example of this are many of the sellers on Etsy. They make things, sell them, receive the income, and pay the taxes as part of their personal returns.

But there are three big reasons you'll want to consider incorporating; liability, taxes, and investment. And the kind of corporate entity you create depends on where you want to come out on all three of those factors.

I'd like to say at this point that I am not a lawyer or a tax advisor and that if you are planning on incorporating, I would recommend consulting both before making any decisions. I hope that we'll get both lawyers and tax advisors commenting on this post and adding to the discussion of these issues. I'll also say that this post is entirely based on US law and that it does not attempt to discuss international law.

With that said, here goes.

When you start a business, it is important to recognize that it will eventually be something entirely different than you. You won't own all of it. You won't want to be liable for everything that the company does. And you won't want to pay taxes on its profits.

Creating a company is implicitly recognizing those things. It is putting a buffer between you and the business in some important ways.

Let's talk first about liability. When you create a company, you can limit your liability for actions of the corporation. Those actions can be for things like bills (called accounts payable in accounting parlance), promises made (like services to be rendered), and lawsuits. This is an incredibly important concept and the reason that most lawyers advise their clients to incorporate as soon as possible. You don't want to put yourself and your family at personal risk for the activities you undertake in your business. It's not prudent or expected in our society.

Taxes are the next thing most people think about when incorporating. There are two basic kinds of corporate entities for taxes; "flow through entities" and "tax paying entities." Here is the difference. Flow through corporate entities don't pay taxes, they pass the income (and tax paying obligation) through to the owners of the business. Tax paying entities pay the taxes at the corporate level and the owners have no obligation for the taxes owed. Your neighborhood restaurant is probably a "flow through entity." Google is a tax paying entity. When you buy 100 shares of Google, you are not going to get a tax bill for your share of their earnings at the end of the year.

And then there is investment/ownership. Even before we talk about investment, there is the issue of business partners. Let's say you want to split the ownership of your business 50/50 with someone else. You have to incorporate to create the entity that you can co-own. And when you want to take investment, you'll need to have a corporate entity that can issue shares or membership interests in return for the capital that others invest in your business.

So now that we've talked about the three major considerations, let's talk about the different kinds of entities you will come across.

For many new startups, the form of corporate entity they choose is called the LLC. It stands for Limited Liability Company. This form of business has been around for a long time in some countries but became recognized and popular in the US sometime in the past 25 years. The key distinguishing characteristics of a LLC is that you get the limitation of liability of a corporation, you can take investment capital (with restrictions that we'll talk about next), but the taxes are "flow through". Most companies, including tech startups, start out as LLCs these days. Owners in LLC are most commonly called "members" and investments or ownership splits are structured in "membership interests."

As the business grows and takes on more sophisticated investors (like venture funds), it will most often convert into something called a C Corporation. Most of the companies you would buy stock in on the public markets (Google, Apple, GE, etc) are C Corporations. Most venture backed companies are C Corporations. C Corporations provide the limitation of liability, provide even more sophisticated ways to split ownership and raise capital, and most importantly are "tax paying entities." Once you convert from a LLC to a C corporation, you as the founder or owner no longer are responsible for paying the taxes on your share of the income. The company pays those taxes at the corporate level.

There are many reasons why a venture fund or other "sophisticated investors" prefer to invest in a C corporation over a LLC. Most venture funds require conversion when they invest. The flow through of taxes in the LLC can cause venture funds and their investors all sorts of tax issues. This is particularly true of venture funds with foreign investors. And the governance and ownership structures of an LLC are not nearly as developed as a C corporation. This stuff can get really complicated quickly, but the important thing to know is that when your business is small and "closely held" a LLC works well. When it gets bigger and the ownership gets more complicated, you'll want to move to a C corporation.

A nice hybrid between the C corporation and the LLC is the S corporation. It requires a simpler ownership structure, basically one class of stock and less than 100 shareholders. It is a "flow through entity" and is simple to set up. You cannot do as much with the ownership structure with an S corporation as you can with a LLC so if you plan to stay a flow through entity for a long period of time and raise significant capital, an LLC is probably better.

Another entity you might come across is the Limited Partnership. The funds our firm manages are Limited Partnerships. And some big companies, like Bloomberg LP, are limited partnerships. The key differences between a Limited Partnership and LLCs and C corporations are around liabilities. In the limited partnership, the investors have limited liability (like a LLC or C corporation) but the managers (called General Partners) do not. Limited Partnerships are set up to take in outside investment and split ownership. And they are flow through entities.

There are many other forms of corporate ownership but these three are among the most common and show how the three big issues of liability, ownership, and taxes are handled differently in each.

The important thing to remember about all of this is that if you are starting a business, you should create a corporate entity to manage the risk and protect you and your family from it. You should start with something simple and evolve it as the business needs grow and develop.

As an investor, you should make sure you know what kind of corporation you are investing in, you should know what kind of liability you are exposing yourself to, and what the tax obligations will be as a result.

And most of all, get a good lawyer and tax advisor. Though they are expensive, over time the best ones are worth their weight in gold.

#MBA Mondays

What Is Strategy?

My post on Product>Strategy>Business Model got a lot of comments and other reactions out there on the social web and from that I realized that many confuse strategy and tactics. And so I thought I would attempt to define strategy in business.

I like this definition that I got at wikipedia:

Strategic management is a level of managerial activity below setting goals and above tactics.

Strategy takes what you want to achieve and develops a plan to get there. From strategy you can develop tactics and implement them.

For me, strategy is as much about what you are not going to do as what you are going to do. Also from wikipedia:

Strategy is important because the resources available to achieve these goals are usually limited.

Strategy also involves how you are going to differentiate from competitors. Competitors are a given in business. How you compete with them will define the business. I like this framework a lot:

The basis of competition

Companies derive competitive advantage from how an organization produces its products, how it acts within a market relative to its competitors, or other aspects of the business. Specific approaches may include:

  • Differentiation, in which products compete by offering a unique combination of features.
  • Cost, in which products compete to offer an acceptable list of features at the lowest possible cost.
  • Segmentation, in which products are tailored for the unique needs of a specific market, instead of trying to serve all consumers.

Strategic thinking can be seen in other disciplines outside of business. Two areas I have studied carefully are sports and the military. Winning teams and winning armies have often won because they have out strategized the losing team. You can see that in the Revolutionary War when Washington was outmanned and outgunned. And yet his strategic moves put the British on the defensive and eventually won the war.

Don't think you are going to win in business with a better product, more capital, or a bigger team. You can't just throw resources at a market and expect to win. The winner in a market most often has the best strategy and exectutes it well.

So read up on strategic thinking. Chandler and Drucker would be my two choices. Sun Tzu would also be on the list. Henry V by Shakespeare might also be worth reading.

And make sure that your company has both mission and vision (goals) and a strategy. It's too easy to skip from goals to tactics and you will not be well served by doing that.

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MBA Mondays: Sales Leads On A Small Budget

So today on MBA Mondays we are going to talk about something useful – Generating sales leads on a small budget. Every startup that wants to sell something runs into this challenge.

I asked Russell Sachs, who runs sales for our portfolio company WorkMarket to tell us how they do it. And this is what he put together. I think its terrific. I hope you do to.


Uncovering Qualified Leads Without a Big Marketing Budget

It is hard to debate the fact that leads are the lifeblood for virtually every sales
organization. Without qualified leads, scaling a business can be a tricky thing to maneuver. For
large organizations with big marketing budgets, there are many options at your disposal – trade
shows, conferences, SEO, social media, lead lists, outsourced sales and webinars to name a

But for startups, early stage companies and small/medium businesses, uncovering
qualified leads on a tight budget is a very different situation, and one that many organizations
struggle to figure out. While I am not suggesting we have discovered the holy grail here at Work
Market, I am going to share some of the more effective methods that we have used, and look
forward to additional comments on what this readership finds successful.

“Calling All Customers”

One of the easiest and most accessible sources for new prospects resides in an all too
often untapped source; ­ existing customers. What we have found in our organization is that
there are networks and friendships that extend well beyond the walls of competition. If you are
doing a sound job of servicing your customers, they will happily (in some instances eagerly)
share the success with their peers; even those that work for a competitive organization. Asking
your customer who else they can recommend can uncover a bounty of qualified targets for your
sales team to go hunt. The obvious caveat here is knowing when you have earned the right to
ask for referrals and recommendations.

A great example was a recent trip we took to visit a customer in a major metropolitan
location. The customer was so impressed with our software and team that when we asked her if she knew anyone else she could refer us to, she picked up the phone and called her colleague
at another company right on the spot.

Leverage the Marketplace

For those who are not familiar with Work Market, we are a contractor management
platform tied to an online marketplace that lets enterprise organizations efficiently find talent and
manage the on­boarding and off­boarding process of that contractor and freelance workforce.
Literally thousands of jobs are run through our platform every single day, and we are proud to be
able to support such a vibrant community. Because our freelancers have a great experience on
our site, get paid every week by hundreds of companies and can essentially keep themselves
busy all year, they are all too happy to refer us to other companies that they do work for or have a
relationship with. In fact, some of our best customers are the direct result of our talented
community referrals.

Recognizing that not everybody has access to an entire marketplace that they can tap
into, there are countless similar ways to leverage the same “crowd” dynamics. Whether you
sponsor a specific user group in your community, get active in a local “meet­up” or become a visible member of a relevant organization, you can successfully create trust and credibility.
Having others sing your praises will drive interest in you and your company ­ after all, word of
mouth is some of the most effective marketing available! Volunteer to host or chaperone a
session, moderate an interesting discussion, or present on a topic of interest at a trade show or
event. People will not only approach you to get your perspective on what you presented, but they
will be more inclined to invite you into their office to learn more about your organization (and you)
since you have removed the threat that you are simply contacting them to “get the sale”. And,
they will willingly share your information with their peers if you are providing them with content
and direction.

Get Social with “Social Media”

I am not proclaiming that you should create a Facebook page to drive inbound interest
(since this is an obvious solution). But there are a variety of professional tools like LinkedIn and
Twitter that will enable you to find out who your customers are connected to and what their
interests are. Too often, people are looking to link with others simply for the thrill of accumulating
contacts or to help them get a job. But, by reaching out to your customers and partners and
explaining why it makes sense to truly network via LinkedIn, you will have visibility into who they
socialize with and open doors to a vibrant community of constituents.

Similarly, by using Twitter to communicate relevant articles, blogs and data to your
community, potential customers will start following you and be more receptive to your overtures
if they perceive you as a contributor and expert in their field. Creating a corporate and individual
brand are vital to differentiating yourself. In our organization, we try to share content about
contingent workforce topics, associated companies and pertinent data to our followers every
week and have built a strong brand in the process.

Generate a Newsletter

At Work Market, we strive to educate our customers and prospects on a variety of issues, including product updates and new feature releases, ways to improve and scale
contractor business, customer success stories and case studies, as well as industry topics.

For example, tax and compliance are of top of mind for organizations that leverage contractors.
To address this, we recently ran a series of short newsletters educating our database about the
pitfalls of improperly managing and utilizing those resources, and found the interest on this topic
to be overwhelming. We used the power of sharing knowledge to establish credibility and enable
prospects to feel comfortable reaching out to us to learn more.

In addition, there are plenty of wonderful, low cost tools that let you email your prospects
and understand their open and click­through rates, survey them to gather feedback and opinions
and have visibility and transparency into exactly what messages are resonating. You can then
share this information with your sales force and arm them with a more precise, targeted
message to serve as catalysts for powerful conversations.

Outbound Calling Team

To be clear, I am not saying that outbound cold calling is a “new” strategy, but I am
shocked at how many people have proclaimed that using the telephone to source opportunities
is dead. We have proven this model to be extremely successful, and have tied incentives to
ensure that we are promoting the right behavior. For instance, we reward our inside sales team
for setting up qualified appointments and provide an additional bonus if their appointments turn
into closed deals. Lists on the internet are in abundance, and should be leveraged to their fullest
capacity. In my experience, if you are calling a prospect with genuine intent to uncover whether
a problem or pain exists, and are respectful and intelligent in your dialog, you will uncover great
opportunities at every turn.

I am sure that there are dozens of other ways that people get effective leads without
spending big dollars for them and I am looking forward to hearing more! Please share your

Russell Sachs
Vice President of Sales and Business Development
Work Market

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