A Long Road

One option for product based start-ups is to try to license the product to a large company for them to manufacture and distribute. This is a long, tough road. StartupJournal has a good summary of the issues you will face with this market entry strategy.

Only about 3% to 6% of patented products by independent inventors ever reach the market, either through licensing or direct selling by the innovators themselves, estimates Don Kelly, a patent agent in Alexandria, Va., and a former senior director in the U.S. Patent and Trademark Office.

You can improve your chances of success by making sure you have a strong marketing plan for your product. The more compelling this part of your story, the more likely you’ll get interest. Make sure to have adequate legal protection for your product. You need to invest in the time of an experienced IP attorney.

Screening Employees for Cultural Fit

When it is time to grow your management team it can be a frightening experience. How do we know if this person will fit in? How do we know if this person will help build the kind of culture we want to create?
There are a few tricks of the trade that have proven to be effective. You just need to create situations where people show their true character.
A common technique that I have found to be effective is the “waiter test.” You can learn a lot about how a person really treats other people by taking them out to eat and observing how he treats the waiter or waitress. USA Today credits the first official documentation of this technique to Raytheon CEO Bill Swanson in his book Swanson’s Unwritten Rules of Management.

Among those 33 rules is only one that Swanson says never fails: “A person who is nice to you but rude to the waiter, or to others, is not a nice person.”

I had an entrepreneur in a growth management seminar I teach offer his “bowling test” as an example of how to judge character. He and his partners in their engineering firm wanted to create a culture that was not too stuffy. They did not want a firm that was populated by engineers who were “full of themselves.” So part of the interviewing process was to take prospective engineers bowling. If they had a good time and enjoyed themselves, they passed the first screen. If they seemed uncomfortable or even embarrassed, they probably would not fit in.
A local coffee shop owner has applicants fill out an application that includes two questions:
If you could have a 1-hour conversation with anyone living or dead, who would it be and what would you talk about?
If you were to write an autobiography, what would the title be? Explain.
He understands that his coffee shop is as much about the atmosphere as it is the coffee. So he wants to fill his stores with interesting people. I doubt Starbucks pays that close attention to its hourly employees.
We had our “receptionist test.” I gave our receptionist veto power over all major hires who came in for an interview. If they were rude or condescending toward her, they never came back for another visit. If she gave the thumbs up, we would invite them back for the “real interview.” We wanted staff who could work in a flat structure where all employees play a key role. (The receptionist was considered part of our marketing team due to her close interaction with customers day-to-day).
Know what is key to your culture and find ways to assess all hires that come into your business to assure that they will fit in. (And by the way…yes, it is legal to screen for fit with culture as long as you do not use it to discriminate against a protected class of people).

Knowledge is Key Resource

Dr. George Solomon, Director of the Center for Entrepreneurial Excellence at George Washington University, spoke on our campus here at Belmont last week. In both of his lectures he stressed knowledge as the most important resource any entrepreneur needs to be successful.
In his first talk, Dr. Solomon stressed the need for need for knowledge about your local market and your target customers. Dr. Solomon also illustrated how data about a market can either validate ideas as business opportunities, or in some cases, uncover needs in the market that have not yet been met. All of the data he used in his example of Nashville was from reputable sources easily available at no cost. Although Google has made searching easier in some ways, it can lead to hours of wasted time. A skilled reference librarian (most university and larger public libraries have them on staff) can help focus your data search.
His second lecture stressed the importance of knowledge about yourself in preparing you for taking the entrepreneurial plunge. The most successful entrepreneurs are best at “red sky” thinking. Psychologists tell us that “red sky” thinking involves the “Big Picture” and is concerned with the what and then the how. It is someone who enjoys starting new entrepreneurial ventures, networking with other people to accomplish big goals, and toying with global concepts and possibilities. Such thinking can be learned and developed. Creativity is a teachable skill, according to Dr. Solomon.
Thanks to the Moench family for their generous gift that has made this speaker series possible.

Why Entrepreneurship’s Impact on Education is Less Than Hoped For

Two of my books have looked at how entrepreneurship can help improve K-12 education. In a new paper titled “Why is Educational Entrepreneurship so Difficult? 2006,” Henry M. Levin looks at barriers to badly needed innovation in how we approach education.

Much of the recent literature on improving education in the United States seeks to promote entrepreneurship as the solution to raising educational quality and equity. But, the historical record documenting substantial and sustained departure from conventional educational practices is scant despite numerous attempts at entrepreneurial innovation. This paper contends that the challenge of entrepreneurially induced change is not due to a deficit of ideas or lack of volition on the part of those who seek change. Rather it is due to intrinsic features of the educational system which defy modification. These include not only such matters as a stubborn school culture, but also the very role of schools as organizations that must serve other organizations and depend upon them for resources. The paper evaluates the record of new forms of organization such as charter schools and educational management organizations as well as other well-intentioned strategies for transforming American education. It concludes that successful educational entrepreneurship must overcome a deeply-rooted institutional conservatism that is largely explained by modern institutional theory.

We see this here in Tennessee. When we moved here, I had hoped that I could continue to support charter schools as a means to raise the bar for all schools in terms of increased financial and outcomes accountability. Alas, the public school lobby in this state has made sure that the charter school law makes any attempt at setting up a charter school doomed to fail from the very beginning. When I gave a talk to leaders of our public schools, it fell on deaf ears.
Thanks to Paras Dagli for passing this along.

Colorado Extends Regulatory Flexibility for Small Business

Colorado Governor Bill Owens has extended help for Colorado’s over 493,000 small businesses by signing into law a bill that continues the requirement that state agencies prepare a cost-benefit analysis of proposed rules that may affect small businesses when requested by the Colorado Department of Regulatory Agencies (DORA).
In Colorado, each state agency, its functions, and its boards are reviewed according to a statutory review schedule and statutory criteria. A sunset review discusses whether the agency, its functions, or board should be
continued without changes, continued with changes, or terminated. Provisions in the Colorado Administrative Procedure Act governing the preparation of a cost-benefit analysis were set to terminate on July 1, 2006, unless extended by legislative action. This bill extended the cost-benefit analysis requirement until July 1, 2013.
The small business community, led by the National Federation of Independent Business/Colorado (NFIB) and the Colorado Association of Commerce and Industry, supported the passage and signing of the bill.
“Duplicative, unnecessary and overly complicated regulations hit small business the hardest. By continuing these cost-benefit provisions state agencies can better see when they need to provide flexibility in their rules,” said Tony Gagliard, NFIB/Colorado State Director. “For small business, having the ability to participate and help shape the rules they have to comply with is important. The bill’s passage helps to maintain Colorado’s small business friendly environment.”

Angel Investors Slowly Changing Their Focus

Angel investors have been slowly changing the types of deals that they like to invest in. As Business Week pointed out a few months ago, they seem to be “moving up the food chain.”
One aspect of this change is that more angels are banding together into informal and even more formal networks for their deal making. In a talk this week at Belmont, Sid Chambless, Executive Director of the Nashville Capital Network, described how these angel networks work.
Traditionally, entrepreneurs have to find an interested angel through their own network of contacts. An intermediary, often an attorney or CPA, will usually make the introduction. Once introduced the angel will usually assess the entrepreneur and eventually evaluate the plan.
With an Angel network, the business plan first goes to the network staff. This makes the angel network more like a VC firm in how it evaluates deals. The staff will reject about 50% of business plans as soon as they arrive. They can usually tell quickly if a deal is just not suited for angel money or if the concept is just not viable.
For the remaining 50%, the network staff provide consultation and advice on how to prepare the plan and the pitch for the deal process. They help the entrepreneur get the presentation and the written plan up to standards that an experienced investor will expect to see.
About 50% of these deals get to the point that they are ready to go before an investment screening committee. This is a group of experts and angels who evaluate the deal for funding. The angels make their own individual decisions on whether or not they want in on the deal.
Only about 20% of these actually receive funding. The money normally comes from several sources, including one or more of the angels in the network. One investor usually serves as the lead or “champion” investor for the deal.
If you are keeping track, that mean for every 100 plans, 50 make it past first review, 25 get to the committee and about 5 might get funding.
On average, about 10% of the funded deals make it big, while about 45% muddle along and 45% fail. That means that an angel network may need to see 200 deals to find one that hits it big. The success rate of funded deals is about the same as we see with VCs, but venture capital funds only provide money for about 1% of the plans they see.
The changes in angel investing has also corresponded to more deal flow. Last year there was more money invested by angels that venture capitalists. Given that angle investments are often much smaller than those made by VCs, this means an significant increase in the number of entrepreneurs receiving angel financing over the past few years.
Part of the reason that angels have moved up in their criteria is that venture capitalists have also moved up. VCs continue to favor later stage financing. This has created a gap in smaller deals that need seed funding. As a result of this, more people are having to rely on their own money and investments from friends and family to get their businesses off the ground.

Multi-Level Marketing

One of my regular visitors asked me to write a post on multi-level marketing (MLM). His question: Is it a legitimate business?
Multi-level marketing is a system where people make money by getting other people to become “distributors” for a product. While some money may be made by actually selling the product, most money is made by creating layers and layers of people who are distributors working under your distributorship. You make the most money by the inventory and fees these folks pay as they sign up. The deeper the layers go beneath you, the more you can make. Some have called this a pyramid. Laws have been passed to limit the pyramid-ness of these businesses, but as always, businesses adapt to the new restrictions.
In a strict sense I guess you could say your distributorship is a business. It takes in money and spends money, and often the distributor incorporates to capture this activity.
In my definition of what makes up an entrepreneurial business, I think this is not a legitimate business.
First, it does not create real economic value. In this sense, it is not unlike the dot.com’s. Their only purpose was to raise money and cash in before that system fell apart. If you get in early you may be OK, but the late comers rarely do very well.
Second, for most of the participants it does not create wealth or even income in any significant way. I know there are exceptions, and even a few MLM companies that have found models that seem to last. But so many have come and gone, leaving people with garages full of product that will never sell.
Third, although each distributor is called “an entrepreneur” in many MLM models, they never have the chance to grow a real business that satisfies real customers by selling them a product over time that has value as their primary source of revenues. They also add no economic good through building employment. The distributorships never grow, evolve, and take form like a traditional business can and usually does.
OK, I know I have just opened a Pandora’s Box with post, but you asked…..

Good Advice, Bad Statistics

Impact Lab has a post that offers sound advice for any small business.
However, before I get to his advice, I need to offer a critique. The premise of the advice is that 80% of small businesses fail. Guess what? That is an urban myth. There has never been a study that shows this high a failure rate — ever. Some studies using flawed data showed as high as 60%, but they count a business that is sold as a “failure”. If the company no longer existed, it was counted in the failure column. Now with better data the studies indicate 40-50%. And remember, with training and education these failure rates drop to 15-25% in other surveys.
Now back to his advice…..
The title of the post, “Your Baby’s Ugly..and You’ve Got Bad Breath,” really tells the whole story. Entrepreneurs and small business owners tend to surround themselves with too many cheerleaders, too many “Yes-men” and Yes-women.” That is a recipe for bad decisions that could have been avoided.
You need to have someone, (preferably more than one person) who will tell you when you are wrong. Someone who is not afraid to take your most prized idea and tear it apart. Someone who will tell you that your decision is dead wrong, when it is dead wrong.
If this person is an insider, all the better. For some entrepreneurs their spouse or some outside adviser plays this role.
Just find someone who is wise enough to know when you when you are wrong, and brave enough to say it.