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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.

Key Partners Support Success

Entrepreneurs cannot achieve success alone.

They need the help and support of a whole host of people who are directly involved in the business, including employees, partners, family members and investors.

Entrepreneurs also need to develop key “partnerships” with people and organizations that are not a direct part of the daily operation.  These partners work closely with an entrepreneur in some way that is important or possibly even critical for the operation of the business.  Even though they are not as directly involved day-to-day as employees and customers, the support of these key partners can be at least as important for a business’s success.

Let’s look at an example of key partnerships for a simple business model.  My students all know that I have one more business start-up in me.  I plan to open a bait shop when I retire from teaching.  Why a bait shop?  My first significant small business experience was running the bait shop for the marina that our family owned in Wisconsin when I was fifteen years old.  So it seems appropriate to me that my last business venture should also be a bait shop!

An entrepreneur can use key partners to help reduce risk by sharing that risk with partners.  In Dr. C’s Bait Shop, I will seek out suppliers who will help reduce the risk associated with my inventory.  Minnows and worms are perishable, so I will work with suppliers that are willing to deliver inventory often and only deliver it when I need it.  That reduces the risk that my inventory will go bad if I have a stormy week that would lead to a significant drop in sales.

Dr. C’s Bait Shop will need a space to operate in a good location.  I will try to find a landlord who will rent me the right building and offer good service at a fair price even though my business is new.  I may even be able to get the landlord to pay to fix up the space I need and add that cost into my rent.  So, key partners can help entrepreneurs secure needed resources without actually spending their precious start-up cash to acquire them.

I will seek out counsel from people with more experience in the industry to help serve as advisors.  I will talk with bait shop owners in other markets and connect with old timers in the Tennessee fishing community.

Finally, I will build legitimacy for my bait shop among angling enthusiasts by volunteering in local hunting and fishing organizations.

Good networking with key partners is much more than just introducing myself and giving them a business card.  I need to earn their support by making the relationships between us mutually beneficial.

So as simple as my bait shop business is to operate, its success depends on building a network of key partnerships.  While being an entrepreneur means you do not work for anyone, it does not mean you don’t work with anyone.

 

Smallness Offers Advantages: Don’t Rush being a Big Business

Something that always gives me pause is when I hear entrepreneurs and their managers refer to their small business as “the company”, or even worse, “the corporation.”

I was talking with an entrepreneur who has two partners and no employees.  Their business seemed to be kind of “stuck.”  They were not getting some important, and yet basic things done to market their business and take better care of their customers.  He kept saying things like “the corporation needs to do this” and “the corporation should do that.”  They were spending most of their time trying to determine who should have what title and how to create a well-defined structure.

I finally said, “Wait a minute!  There are just three of you!  Sit down, make a list of what needs to get done, and divide up the work.  You are ‘the corporation’ so get busy!”

In fairness, the entrepreneur and his partners have big dreams and have a business model that could become a big business someday.  But they will never reach their dreams if they don’t start running their small business the way it needs to be run.

A key advantage that small businesses have is that they are not big businesses.

Small businesses can be nimble and can react quickly to customer needs and changes in the market.  Small businesses can continue to be entrepreneurial and seek opportunity.

As the business grows you will need to add some structure, increase the clarity of people’s roles, and put in some processes and procedures.  But all of this should be done judiciously and slowly.

Small businesses that try to act “big” too quickly run the risk of losing their entrepreneurial culture.  I can tell you from my own experience that once you lose the entrepreneurial spirit in a business, it is very difficult, if not impossible to get it back.

So how do you start to build an organization while still keeping an entrepreneurial culture?

When you delegate, make sure that you don’t just delegate tasks.  You need to delegate the responsibility and the authority to manage the tasks.  Give your employees the ability to make improvements and to react quickly to the market.  Everyone needs to have a sense of “ownership” of what they do.

When you start to create organizational structure for your business, don’t just create positions and reporting relationships to deal with immediate problems and challenges.  Be intentional about the kind of structure you are building and how it will impact your ability to remain entrepreneurial as a business.  Too much bureaucracy can kill innovation very quickly.

When you start to create processes and procedures ask yourself one question:  Is it critical?  While standardized processes and procedures are important to support a growing business, if overdone they can actually inhibit your ability to grow.

When you own a small business don’t be in such a rush act like a “big” business.  Your smallness is part of your competitive advantage.  Find the balance between building an organization and maintaining your entrepreneurial culture.

 

Putting a Crowd Around the Board Table

Crowdfunding, which uses the Internet to generate small contributions of funding from a large number of people, has been getting a lot of attention lately among entrepreneurs.

Crowdfunding primarily has been used to help raise money to support social causes and to help fund struggling artists.  The money received from crowdfunding has to be considered a contribution or a donation.  In most cases, something nominal is usually offered in return for financial support, such as a free download from a musician.

Historically, because of securities laws, small businesses have been unable to use crowdfunding. Until recently, entrepreneurs had only been able to seek funding from a limited number of people who meet specific income and wealth criteria.

A few creative entrepreneurs have used a loophole in the rules to raise money through crowdfunding.  Rather than treat money raised through a crowdfunding campaign as investments, they offer people something of value in return.  For example, a person opening a new brewpub may get people to “donate” to support the start-up by offering free admission to a special opening night event.  The contributions would be motivated by the desire of local beer enthusiasts to support a new local brewery.  The most commonly used websites that promote traditional crowdfunding are Kickstarter and IndieGoGo.

One instantly legendary crowdfunding campaign was implemented by Eric Migicovsky.  He was raising money for his new wrist watch, called Pebble, which pairs with smartphones via Bluetooth.  Contributors were promised they would get preference to buy a Pebble when the watches were introduced to the market.  Although his initial goal was to raise $100,000, Migicovsky was able to raise over $10 million to help launch Pebble.

The recently enacted Jumpstart Our Business Startups (JOBS) Act of 2012 significantly expands the use of crowdfunding for entrepreneurs.  Under the provisions of this bill, those who provide funding through crowdfunding can now become equity investors with ownership in the business.  The JOBS Act opens up the funding of start-ups to allow almost anyone to invest in entrepreneurial ventures.  Several efforts to create crowdfunding platforms under the JOBS Act are being developed, including one in Nashville called InCrowd Capital, being led by Phil Shmerling.

Attracting investors through crowdfunding requires a different approach than when pursuing funding from angels and venture capitalists, who tend to invest more in the entrepreneurs leading the team than in their ideas.

Crowdfunding investors, on the other hand, are attracted to compelling stories and business ideas they can see themselves using.  What led to the success of the Pebble crowdfunding campaign was that people were excited about a completely new technology that they wanted to be the first to own.  Not every product can create that kind of passion and excitement.

The JOBS Act certainly broadens the pool of people who can invest in small businesses and offers an exciting new avenue for raising money for start-ups.

However, using crowdfunding also may make the entrepreneur’s work more challenging.  If adding just one new partner increases the complexity of running a business, imagine what a crowd of partners can do to complicate an entrepreneur’s life!

A Long Journey

In May of 2005 Jason Duncan walked across the stage at Belmont’s graduation.  At that moment he became the first alumnus of our new entrepreneurship program.

Like many who have followed him, Jason had worked on a business he wanted to launch while studying in our program.  His plan was to move to Montana and open a coffee shop.  He even had a name for his coffee shop – EVOKE.

However, as is often the case, nothing went according to plan.

Try as they might, he and his wife Jenni were never able to open their coffee shop in Montana.  But they did find a way to get into the coffee business.  Since every attempt to open a store seemed to meet a roadblock, they adjusted their business model and opened EVOKE as a mobile coffee catering business.

“EVOKE did not set out to be a mobile coffee catering company,” said Jason.  “But what we found out is that we grew up doing this, made money, and knew that we now had a foundation to stand up on.”

Although they had success with their mobile coffee catering business in Montana, in 2008 they decided that their best chance for long term success was to move EVOKE to Jason’s home town of Oklahoma City.

“When we moved EVOKE to Oklahoma City, we knew we had two options:  to work our tails off and learn from our mistakes in Montana or shut EVOKE down and move on,” said Jason.  “We knew we could be better.  We took the first option and worked tirelessly to run a solid company based on what we had planned years ago.”

Jason and Jenni realized they would have to adapt their business model once again in this new market.

“Oklahoma was very different than Montana,” explained Jason.  “We had competition, which we did not have in Montana.  So, we focused on a key part of coffee:  The relationship.”

The customer relationship part of the business model is the one that most often gets misunderstood.  There is not one best way for all businesses to interact with customers.  But there is one best way for your business model to build a relationship with your customers.

The large national coffee chains are built on a relationship with their customers that supports the core of their business model, which is efficiency.  They are good at getting a large volume of people through their stores each day.

EVOKE’s business model was based on a different relationship with their customers.  They chronicled their ups and downs openly and honestly in a blog to allow their customers to get to know them on a more personal level.  They worked hard to become part of the fabric of their community. By following this model, EVOKE has become one of the top coffee catering businesses in the country.

But they never lost sight of their original plan.

“We did not change our vision as we grew and kept our eyes on the ‘final’ goal — if there is one in business,” said Jason.

So on the first of May this year, their plan to open a coffee shop finally became a reality.  They opened the first brick and mortar EVOKE coffee shop in Oklahoma City.

All it Takes is Five Slides

Making a pitch for investment is one of the most important steps that many new business owners can make.  It can also be one of the most intimidating.  First impressions matter with investors, so the pressure is on to make your pitch to them a winner.

For many years the rule of thumb was to limit your initial pitch to investors to no more than ten slides in your PowerPoint deck.

But now there is a push to get entrepreneurs to consolidate their pitches even more.  The latest recommendation for pitches to initial investors is to limit the presentation to five slides.

“I am an advocate for communication in a clear, crisp way,” explains Mark Montgomery, founder of the Nashville consulting firm FLO Thinkery.  “Great ideas at the core should be simple.  If you require pages and pages to explain the concept, then perhaps the concept is not fully baked.”

Here is what I would recommend you put on five slides for an initial pitch to potential investors.

Slide One — Who are you?  When it comes down to it, investments are primarily made in people, not in business plans, concepts, or ideas.  The best idea in the world has no value to an investor if they don’t think the entrepreneur can successfully implement it.

Slide Two — What is your concept?  What problem does it solve or need does it take care of for your target customers?  This slide conveys your target market and the value proposition you offer them.

Slide Three — What is your “proof of concept”?   The more real and tangible this evidence is, the better.  Conduct market experiments and, if appropriate, develop prototypes that you can test on real customers.  A great way to get real data from customers is to give the first versions away for free.  The information you get from these first customers will be worth much more that what they might pay for the product.  And, you will have real live customers to talk about with investors.

Slide Four — What is the growth potential for this business?  Tell them what the business can become and what you will need to reach that potential.  Investors want to see growth – significant growth.  They want to opportunity to make their investment back several times over, which means you need to show how the business can grow into new markets or expand into new products.

Slide Five — What is the exit plan?   Investors want a path to get a return on their investment.  Demonstrate that there will be someone willing to buy the business to get them that return.  Find examples from your industry of other startups that have sold to larger companies as evidence.

Your presentation during these five slides should be genuine and passionate.  Show them you are committed, knowledgeable, and prepared.

If you can keep your initial pitch clear and concise, you have a much better chance of moving into more serious discussions with investors.

May Updates on Small Business Economy

While April showers have brought wonderful May flowers in our backyard, entrepreneurial economy is not blossoming going into the summer.

Here are some highlights from various indicators:

  • 71 percent of small business owners still believe the United States economy is in a recession according to results of the 2012 U.S. Bank Small Business Annual Survey
  • The SurePayroll Scorecard data shows that month-over-month, hiring and paycheck size show little change, both down 0.1%, while year-over-year, hiring is down 1.5% and paychecks are down 1.1%. Optimism among small business owners is also down from last month.
  • Intuit’s Small Business Revenue Index shows that revenues have been growing slowly, while their Small Business Employment Index shows that employment is growing slowly, by 0.2 percent in May.
  • Data from nominees to Ernst & Young’s Entrepreneur of the Year program, shows that over the last two years employment growth in this select group of high-growth companies was 31% job growth. While this sounds promising, these businesses are hard-wired for growth, so in many ways these figures are not as robust as I would hope to see.
  • William C. Dunkelberg at NFIB said this today about their latest small business survey, “May was a stagnant month for employment in the small-business sector, with the net change in employment per firm, seasonally adjusted coming in at ‘0’.”

The Right Value Proposition is Heart of Entrepreneurial Success

The value proposition — the collection of things a business offers to the target market to solve a problem or satisfy a specific need — is how an entrepreneur attracts customers away from the other choices they have among all of their competitors.

Most value propositions for new businesses come from some fundamental trend in the economy, in demographics, in technology or in society and culture.  These trends lead to changes within industries.

For example, the widespread use of the Internet forever changed industries such as music and newspapers.  Inflation in the economy both led to soaring healthcare costs and more recently begun to affect the food industry.  Inflation has clearly shaken up both of these industries

A fundamental role of being an entrepreneur is to find solutions for the problems and needs customers have that result from the change that follows disruptive trends like these.

Once the entrepreneur identifies the new business opportunity, the next step is to identify the specific offerings that provide enough value to customers to get their attention and motivate them to purchase from the new business.

It could be something about the product itself, such as its price and value, features, performance, durability or design.  It could also be something about how the product or service is delivered to the customer, such as its method of delivery (in their homes, on-line, in an exciting new retail location, etc.) or the specific services offered to go along with the product.  Or, it might be something about the personnel of the company, including their expertise, responsiveness, or reliability.

It is almost always best to identify and focus on one or two things that will make your business stand out to customers.  Focus on the most important need or problem the customers are facing.  Offer that feature to the customers with excellence in mind, making sure all employees understand its importance.  And make that key feature the heart of all of your promotion and other communication with the customer.

The best way to develop the key features that are at the heart of your value proposition is to listen to your customers, as while you may think you know what the customer wants, most of the time you will not have it quite right.  You will probably have to adjust your product or service to fit with what the customer actually wants or needs.

You may have started with something that is too complex and confusing to the customer.  What you thought would be one of many features of your product may need to become the only thing you focus on.

Sometimes the entrepreneur starts too narrow, and what was thought of as the product or service is only one of its key features – you may need to broaden what it is you offer.

Or you may discover that what you offer is a great value, but you have not been selling it to the right target market.

Once your customers affirm that you are offering the right value proposition, it needs to become the focus of everything you and your employees do every day.