How I Got My Business Model Right With My Second Company

How I Got My Business Model Right With My Second Company:

The CEO of Stage 2 Networks, an Inc. 5000 company, recaps his $100 million education.

In 1999, Joe Gillette was managing his telecommunications firm, Gillette Global Network, out of New York City, generating revenues of $10 million. As many entrepreneurs do, he began fantasizing about the story that he might be telling in his old age one day.

"I thought I'd call the story 'How I Turned $40,000 into $40 million'," said Joe. "But it ended up being called 'How I Turned $40,000 into $40 million and back into $40,000."

Joe was sharing his story with a collection of business owners at Inc. Magazine's New York City headquarters, high above Wall Street on January 24, 2012.

Joe's business grew incredibly quickly during the go-go 90s. By 2000, after a telecom bust and the bursting of the tech bubble in New York, Joe's company was taking on capital on onerous terms to sustain the company's growth. All the while his ownership stake got squeezed down. By the time he left the company in 2007, he held a 1 percent stake in a $100 million company. Not a great return after 10 years of hard work.

Joe is like a lot of Inc. entrepreneurs. He learned his trade and built his network at a larger telecom company before realizing there was opportunity to be found if he started his own business. As one of the top salespeople for his old company, he knew he was capable of generating revenue, the life blood of a new business--or so he thought.

"I didn't understand operations. I believed that sales revenue could solve all problems," Joe told the business owners who gathered at Inc. on a glorious sunny winter's day. "While I had good instincts on running the business, I didn't understand how cash flowed through the company. It was only after professional investors came in and helped me rebuild my financial operations that I really understood what made the company value. Two words: gross margins."

Joe, like a lot of sales-oriented entrepreneurs, believed that revenue could solve all problems but he would learn that bad business models remain bad no matter how much cash flows through the company.

After licking his wounds, Joe re-assembled the best managers he'd worked with and set out to build a new telecom company. Fittingly, he called it "Stage 2 Networks." At Stage 2, Joe tried to right all of his old wrongs. On Jan. 24, he imparted his recipe for success with the audience.

They are:

#1: Gross Margins and Infrastructure His old company ("OldCo") had low gross margins. Plus he re-sold someone else's network solution because he didn't have the capital to build his own telecom network.

At his new company ("NewCo"), Joe built out his own infrastructure, the cost of which had come down dramatically over the previous several years. He also focused on the high gross margin segment of the business.

#2: Staff vs. Outsourcing For OldCo, Joe turned everyone he worked with into employees of the firm which led to high overhead costs.

In NewCo, Joe outsources all functions that aren't directly related to the strategic value of the business.

(It's interesting to note that Joe went from spending too little on infrastructure and too much on employee overhead to a complete reverse--spending more on infrastructure and less on employees).

#3: Capital In OldCo, Joe went to venture capitalists for capital. While Joe still sees value in attracting the operating talents and connections of VC, he thinks most entrepreneurs don't fully realize the skills with which "professional capital" play the capital game. For many of them, their goal is to control the most important decisions your company will make.

In NewCo, Joe tapped into the thriving angel world where he laid down terms for capital that worked best for him. Joe may move on to professional capital in the future but, again, on his terms, not theirs.

#4: Control In OldCo, as previously mentioned, Joe ceded control of his company to the venture capitalists, who had an agenda that was too different than his.

In NewCo, Joe retained total control of the voting stock even after raising $10 million.

#5: Leadership In OldCo, Joe trusted his gut for most decisions but went in with the salesmen's mentality that revenue was the most important data point. By the time he'd been put through the ringer with his OldCo, Joe received the proverbial MBA from the School of Hard Knocks.

In NewCo, Joe understands how all the operational details need to be tracked in order to make smart decisions for the company.

#6: Employee Development In OldCo, Joe admits that he kept several employees longer than he should have.

In NewCo, Joe knows that his most important job is to develop a world-class team to run the business. Today, Joe is much more familiar with the indications that someone is not performing and much quicker to remove them once non-performance becomes apparent.

#7: Advisors In OldCo, Joe kept his own counsel, confident that he could figure out the answers to any challenges the business threw his way.

For NewCo, Joe has collected a team of outside advisors, both formal and informal, and makes it a point to share the progress of the company and solicit their feedback along the way.

All in all, Joe Gillette has turned his first go-around, what he called "How I turned $40,000 into $40 million and back into $40,000" into a launching pad for his new business. It may only be a matter of time before he can add "…and back into $40 million" to that story.

Many thanks to Joe Gillette of Stage 2 Networks for sharing his story.