When to Implement Budgeting

In the early stages of a new business, entrepreneurs do not pay much attention to budgets.

Financial forecasts that estimate revenues and expenses are part of the business planning process.  But these are really just estimates, since so much is unknown about what will actually happen as the business begins to grow.  Because of this, it is impossible to develop accurate budgets.  Managing cash flow is a week-to-week or even day-to-day challenge that is a reaction to what bills need to get paid first based on what revenues have come in the door. Continue reading When to Implement Budgeting

Look for Veins of Gold in the Market

When first starting a new business, entrepreneurs are not well served when they view themselves as builders or architects.  That is the wrong frame of mind.

When entrepreneurs enter the market with a predetermined view of what they are going to build or design they run the risk of creating a business that does not really fit with what the market wants.

Steve Blank, successful entrepreneur and author, cautions entrepreneurs to learn the difference between the searching stage of launching a new business and the executing stage. Continue reading Look for Veins of Gold in the Market

Small Business Owners Still in Recession Frame of Mind

September was another month of low expectations and pessimism for the small-business community, with the NFIB Small Business Optimism Index losing 0.1 points and falling to 92.8. The recession-level reading was pulled down by a deterioration in labor market indicators, with job creation plans plunging 6 points, job openings falling one point and more firms reporting decreases in employment than those reporting increases in employment.

The survey shows that key elements that will be needed for small businesses to, once again, help pull us out of a recession are just not improving: Continue reading Small Business Owners Still in Recession Frame of Mind

When it is Time to Work in Your Business

Here is a sampling of quotes from first-time entrepreneurs that I hear in my office.

“I am trying to get my business card just right – does it look better with a horizontal layout or a vertical one? And do you think this font is OK?”

“We think that after working on it for the past six months that our business plan is just about finished.”

“I’ve been tweaking my logo for the past couple of weeks and I think it is getting close to what I want.”

“This is my latest mission statement – I moved a couple of words around so I hope it sounds better now.” Continue reading When it is Time to Work in Your Business

The Wild West of Crowdfunding

Looks like I have a new example to use in class for legal changes that create new business opportunities.  There are several new entities popping up due to the the growing interest in crowdfunding and the passage of the JOBS Act that will allow crowdfunding to be used for equity investments rather than just donations (the Kickstarter model).  We are also seeing growth in microfinancing, which is another segment of this industry.

One entry into the wild west of crowdfunding is a Nashville-based company InCrowd Capital, founded by Phil Shmerling.  Phil has started writing a blog on crowdfunding that should become a valuable resource for those interested in this budding new industry and those hoping to learn how to become an effective crowdfunder.  Phil is a sharp guy who will surely offer all of us useful information through his blog.

Another site was recently launched is called Seeds.  Seeds is not taking an equity approach to crowdfunding.  Instead, they have established a “game” site that links participants to real entrepreneurs seeking micro loans.  They describe Seeds as “Farmville meets Kiva.”

Here is how they describe how Seeds works:

The Seeds revenue model is three-pronged:

1) We monetize impatience. As you rebuild a citadel in the game, you can either wait hours in real time to complete a level, or use virtual currency to expedite the process. Virtual currency can be purchased with real dollars. Proceeds will be microlent to borrowers.

2) The sale of virtual goods: Within the Seeds virtual world, you can purchase limited edition virtual goods using in-game currency to decorate your world. Proceeds will be reinvested in for-profit microloans.

3) Actively asking players to make microloans to the businesses of their choice.

Thus, we’re merging two multi-billion dollar industries – social gaming and microfinance. We’re taking the profits social games make, and reinvesting it in entrepreneurs for a profit, empowering women and buoying economies (including our own!).

While some are beginning to worry that crowdfunding is just one big train wreck, I think that the evolution of the crowdfunding industry is going to be a fascinating combination of a series of little train wrecks and some amazing successful innovations.

Who is going to win?  Nobody knows, but the market will begin to give us some insights very soon.

Intestinal Entrepreneurial Fortitude

Not everyone is prepared to be a successful entrepreneur.

In the new book Heart, Smarts, Guts and Luck, two successful venture capitalists and a management consultant surveyed a large number of successful entrepreneurs to uncover what traits they have in common.  One of the traits — guts — particularly hit home with my experience as an entrepreneur and as a teacher of entrepreneurs.

The authors argue, and I agree, that guts is not a trait that you are either born with or not.  Having the guts to be an entrepreneur is something that can be nurtured and developed.  They identify three key elements to developing and nurturing guts in entrepreneurs.

Eighty percent of the successful entrepreneurs in this study said that their entrepreneurial guts were developed through experiences early in their lives.

I can cite several experiences from working in our family businesses that helped to toughen my skin.  One in particular stands out.  When I was in grade school my father partnered in a cleaning products distributorship.

Although I was only eleven, I was eager to become a part of this new venture.  So I decided to sell the product door to door.  My first sales call was to our next door neighbor, who was a good friend of our family.

Rather than pat me on the head and buy some product to be nice, she looked me in the eyes and said, “Tell me why I should spend our hard earned money on this stuff?”

I did not make the sale.  I was left speechless and devastated.  It was a hard lesson that I have carried with me the rest of my life.  Nobody owes you anything in business – it is up to you to earn it.

The second key element for developing guts is training and education that prepares entrepreneurs how to make decisions in complex situations.  We urge every student who comes into our program to start a business while they are in school because this kind of training is so important.  It helps them to gain experience, confidence and learn from their mistakes in a safe environment.  However, I am not one who thinks we should require every student to start a business as many schools are moving toward.  I think that making starting a business an assignment misses a key aspect of developing true entrepreneurial guts – the courage to make the choice and cross the threshold to start a venture.

The final element of developing and nurturing guts is becoming part of a community of entrepreneurs.  By joining an ecosystem of fellow entrepreneurs you gain peer support, wise counsel, and a group who can hold you accountable.  We need to have our entrepreneurial guts reinforced, nurtured, and checked throughout our career.

Having guts to be an entrepreneur does not imply that you take careless risks – quite the contrary.  Having guts to be an entrepreneur means that you are ready through experience to carefully and prudently manage and mitigate the risks that lie ahead.

Forecasting Revenues Key to Successful Launch

The late, legendary Silicon Valley attorney Craig Johnson used to say, “The leading cause of failure of start-ups is death, and death happens when you run out of money.”

And the leading cause of running out of money in a start-up is poor financial forecasting.

At the core of unrealistic forecasts is the undying optimism of most entrepreneurs.  Their “what could possibly go wrong?” attitude leads to many forecasting disasters.  My father used to say that when he looked at investing in an entrepreneurial venture he would always double the start-up costs and triple the time it takes to get to breakeven.

My rule of thumb is a bit different.  I believe that being overly optimistic leads to entrepreneurs making fatal mistakes in estimating revenues, which is at the heart of most forecasting errors.  So, my approach when reviewing a business is plan is to cut revenue forecasts in half.

Here are the four most common revenue foresting mistakes I see:

  • Assuming an “instant on” button for a new business.  Most business plans I read show significant revenues from the beginning of the business, sometimes even for the very first month that they open their doors.  The reality is that it takes time to build a customer base for any business.  That is why an entrepreneur should have at least six months personal living expenses available to make it through the startup in addition to the money the new business needs.
  • The magic of the hockey stick.  A common pattern in business plans is to show a relatively slow initial start to revenues, and then assume some that unexplained breakthrough will occur that leads to a sudden and dramatic increase in sales.  When you graph this type of revenue forecast it looks just like a hockey stick.  The reality is that such sudden growth is just not that common and usually results from specific actions.
  • Assuming enough sales to make the business model look successful.  In this mistake entrepreneurs forecast their expenses and then they plug in enough revenues to make the business become profitable.  When I press these entrepreneurs, their explanation of revenues is “well, these are the revenues I need to make the business work.”  The truth is that the market will not give you the sales you need, it will only give you the sales you earn through a well-executed business model.
  • The marketing plan tells a different story than revenue forecasts.  The marketing plan should specifically explain what you are going to do to achieve the revenues you forecast.  Why will customers want what you are selling?  Who are these customers?  How are you going to communicate to them about your business?  The marketing plan should explain in words the numbers shown in the revenue forecast.  Most plans just do not make this connection.

To avoid running out of cash before your business model has time to work requires an accurate assessment of how much money you will really need to get the business off the ground. While knowing your costs is important, accurately forecasting your revenues is critical.

It is so sad to see a business model that has real potential fail simply because the entrepreneur was unrealistic about how much money it would take to get to the point of success.