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Business Model Demands Patience

Author and entrepreneur Steve Blank describes the business start-up process as having two phases.

In the first, entrepreneurs learn about their customers and what they want. This can be thought of as a series of experiments with real customers. It eventually leads to a business model that can be used to build a sustainable venture.

Once we learn what our business model needs to be, we can begin the second phase, which includes attracting more and more customers and building a company.

It is essential that we take our time before moving to the second phase to make certain we’re building our company around a business model that can lead to successful growth.

Nashville-based Aloompa is a great example of a business that’s taking its time to get things right.

In a visit to my business school class at Belmont University, two of the founders, Kurt Nelson and Tyler Seymour, told how they developed the business model for this relatively young company.

The original vision was to develop apps that would allow streaming of live videos directly to the iPhones of concertgoers. But this proved to be more difficult than they thought. However, their experimentation with the business model led to recognizing a more promising opportunity that still involves apps for music events.

They approached the Bonnaroo music festival about developing an app for attendees. To prove to Bonnaroo that the app would be something of value, they gave away the first year’s version.

They used that first year to prove that the app had value and to test what features fans at the festival truly wanted.

Their success with Bonnaroo led to the sale of more music festival apps. With each new app they continued to engage the market, all of which helped them learn more about their business model and their customers.

A big, early breakthrough for Aloompa occurred when they were asked to develop a new app for country artist Kenny Chesney. This showed them that their business model could be much broader than just developing apps for music festivals.

They still weren’t finished experimenting with what their emerging app business could become. Recently, they moved into developing apps for the Rally to Restore Sanity staged by comedians Jon Stewart and Stephen Colbert, as well as for the popular conversation game Table Topics.

Nelson said Aloompa isn’t ready to hire a full-time staff and build an organization. The partners are keeping operations lean and flexible because they expect the business model to continue to evolve.

The Aloompa story illustrates that even when the market seems to be accepting a new venture, and sales start to grow, owners still shouldn’t move too quickly to formalize the business. Be patient. Continue to experiment with customers. Tinker with the business model until you’re ready to scale up the venture.

Rethinking Goal Setting

If business plans are marvelous works of fiction — and they most often are — then the specific financial goals that they are tied to are fairy tales.

Don’t take this wrong.  I am a strong advocate of building a business that meets your aspirations.  You need to consciously engineer your financial and non-financial priorities into your business model.  But when I start reading plans with specific multiples of EBITDA tied to an exit event a few years out I cringe. 

Even VCs know that only 10% of plans they fund (which can be as few at 1% of plans they receive) will probably meet the goals stated in the business plans for their portfolio companies.  And yet, almost every entrepreneur seems to think their plan will hit its numbers and reach their specific goal.

I think more of us should take the approach of goal setting that Ami Kassar has set for his business MultiFunding.  From his blog:

I often get asked the question “Ami, what is your goal for MultiFunding ?”  People want to know “how big” I want the company to be, who do I think will “buy it” one day, is this a “lifestyle business”, or do I “want to take it public one day.”  My answer is that our goal for the first year was to survive, which we did.  My goal for the second year is to be able to keep the company growing at a pace where we can maintain excellent customer service, and to be able to make a good living while I do it.

Business models evolve as we learn from the market where our business really needs to be and what it can really achieve.  You’ll be a lot happier as an entrepreneur if you set realistic goals, especially for the early stages of the business.

Once you get traction, then you can start to set more specific goals that reflect a growing knowledge about the market and your customers.  And you can more realistically temper these potential goals with your non-financial goals including those shaped by the time you want for your family, friends and community.

A Mixed Outlook

The Kauffman Foundation has connected what they consider the nation’s top economics
bloggers.  Although not all of us are economists, we all write our blogs with commentary on economic policy and/or trends.

Each quarter they survey us to see where we think things are in the economy.  We are an eclectic bunch, with a variety of journalists, academics, consultants, and just good old fashioned pundits.

This quarter the group was slightly more positive than the past quarter. 

Although 77 percent continue
to describe the economy’s overall condition as “mixed,” “facing
recession,” or “in recession,” 23 percent now believe the
economy is “strong and growing” or “strong with uncertain
growth”.

Here is the word cloud from our open ended response to the state of the economy:

word-cloud.gif

This survey was from a few weeks ago.  Wonder what renewed inflationary pressures, record federal deficits, and unrest around the globe will do to change our collective perspective next quarter…

New Economic Reality Leads to New Business Models

After developing their business model and forecasting expenses, many aspiring entrepreneurs are suffering from sticker shock. The thought of investing a large amount of money or going into debt is scaring many away from their startup dreams.

Aubree Phillips, who is graduating from the entrepreneurship program at Belmont University this spring, has dreamed of starting a clothing boutique since the day she arrived on campus. She gained experience by working in the campus-based clothing store called Feedback and worked on the plans for her store in every entrepreneurship course she took.

But with graduation looming this spring, the thought of spending more than $100,000 to open her store in a weak economy gave her cold feet. But she did not abandon her dream. Instead, she partnered with her friend Natalie Sawyer, a Lipscomb University alumna, to brainstorm about ways to meet shared goals by bootstrapping.

The biggest single financial commitment was the physical space to house their boutique. So Phillips and Sawyer decided to change their business model from a store to a “traveling boutique” called Fringe and Lace. Rather than setting up in a traditional storefront, they take the clothing directly to their customers’ homes.

“We specialize in clothing, jewelry and accessories,” Phillips said. “All items are trendy and under $100. Our customers find that shopping at home, surrounded by friends, is a fun and relaxing buy topamax online canada alternative way to shop.”

They are able to keep staffing costs down since they do not need employees for a brick-and-mortar store. Phillips and Sawyer staff all of the parties. When the business grows beyond what they can handle, they plan to hire interns and part-time employees to help.

Fringe and Lace has relied on bootstrapping for its marketing. Word-of-mouth has been a big source for securing early customers, which they have encouraged through the use of social media. They have also been using a blog approach to their website, www.fringeandlace.com, to keep their customers current on their new inventory and to help build a community of loyal repeat customers.

Inventory is the final major cost for their business. “After each party, we make an order to update our merchandise,” Phillips said. “This way we do not have too much inventory on hand. It also helps us to continue to offer new and different pieces. We try to be smart about our buying so we don’t end up having too much or excess inventory that we can’t sell.”

They store their inventory in an office at Sawyer’s home.

Rather than letting the economy discourage their dreams, Phillips and Sawyer showed how changing the business model and bootstrapping can make the cost of a startup more affordab

Joint Venture on the Boulevard

Belmont and Lipscomb universities are just a few miles apart along Belmont Boulevard and are both part of the Atlantic-Sun athletic conference.  Over the years and intense rivalry has developed between the schools, which reaches a crescendo each year during basketball season.

While the Battle of the Boulevard — as this rivalry is known — continues between their basketball teams, one group of student athletes has called a truce for the sake of launching a new business.

Two Belmont tennis players have joined forces with a member of the Lipscomb tennis team to start Mydormfood.com, an online grocery store geared toward college students with empty cupboards in their dorm rooms or apartments.

Jonathan Murrell, a sophomore finance major at Belmont University, came up with the idea.

“I kept finding my friends paying three times as much for food on campus compared to what it would cost at bulk stores.”

Jonathan developed his business model the right way. Rather than jump directly into writing a formal plan, first he talked with potential customers, some friends and other students to gauge the validity of the concept.

He also assessed what he needed to get the startup launched. What he needed most was help.

He also realized that he needed people with other skills. Jonathan approached his older brother James, a marketing major at Lipscomb University, and Bruno Silva, a teammate on the Belmont tennis team.

After a few planning meetings, the trio decided that this new idea was worth going for. James would take on the shipping and marketing. Bruno would manage the inventory and accounting. Jonathan would oversee the site and customers.

So, the company was born with three tennis players from rival schools coming together.

They soon realized that their original business model was not quite right. Instead of students being the primary target market, they soon learned, most orders were coming from parents.

So, they adjusted their product. They created two options: gift cards so students could shop for themselves, and pre-made care packages delivered directly to customers’ doors.

Bootstrapping is a big part of their startup. Jonathan’s and James’ oldest brother recently moved out of their house to pursue graduate work in history at Oxford. So, their mother agreed to let them use his office as a makeshift warehouse.

“We removed all the old manuscripts from his bookshelves and replaced them with Pop-Tarts and potato chips,” Jonathan said.

They also developed their own website, which saved them thousands of dollars in development costs. They used an online legal site to set up their LLC.

While they have high hopes for their new venture, they took care to protect their downside risk.

“We ended up making our inventory purchasing decisions based on what we would be willing to eat if the business failed. If it doesn’t work out, let’s just say I’ll be eating mac and cheese, cup noodles and Skittles for a very long time.”

But if they succeed, their effort will be known as the Joint Venture of the Boulevard.

Five Voices at Once

Lee Rainie, Director of Pew Research Center’s Internet and
American Life Project, gave an intriguing talk on their research into the current use of the Internet in the US at our USASBE conference this past week. 

The trends they are finding on the use of wireless, social networking, the types of technology we are using to access information, and the types of information we are seeking is really eye-opening.  Anyone who is working on ventures related to the Internet or that rely on it for marketing (I guess that pretty much includes almost every business today) should read their reports. 

One of the interesting conversations that came out of their data was about the changing norms and social expectations that are developing due to technology and the Internet.

Most of us have experienced a situation where we are talking to a young adult who in the middle of the conversation begins to answer a text message.  Those of us who are Baby Boomers find this behavior to be socially rude.  But to younger people, this is absolutely socially acceptable.

An extension of this is the need to compete with our marketing to an increasing amount of “noise” out there.  People receive multiple messages, often simultaneously. 

Such multiple, simultaneous flows of information are becoming the norm in our culture.

If you try to fight it, you will likely lose.  When culture shifts this way it is impossible to reverse or even slow down the changes.

The conversation reminded me of an interview I heard with Brad Faxon, who is a professional golfer.  Faxon had tried his hand at television broadcasting with NBC sports this past year.  He is getting to the age where he is not very competitive on the PGA tour, but not quite old enough for the senior tour.

He said that his contract was not renewed with NBC.  He shared that one of the most difficult things about the job was being able to listen to five different voices at once coming through his head phones offering information about what was happening in the golf tournament.  He had to discern which of the voices were relevant for his commentary, while at the same time carrying on a conversation with other announcers or making comments about what was going on in the tournament.

I think all of us may soon experience something similar in our daily lives.  More and more information is coming to us through more and more media and sources.  And it is coming to us faster and faster.  It is not slowing down and it is not going to let up. 

We will all need to learn to adapt to this new social/cultural reality of “five voices at once” both as consumers of information and producers of information to the marketplace.

More Women Pursuing Entrepreneurial Career

During the on-going recession, entrepreneurship is becoming an even more popular path for women in America.  Elizabeth Fuller has an article in CSM that explores some of the common practices of women entrepreneurs:

“If opening a business demands courage, opening one in the aftermath of the
worst economic downturn since the Depression demands a special steeliness,
especially for female entrepreneurs. Because women-owned businesses are
concentrated in retail and service industries – think Estée Lauder, Coco Chanel,
Mrs. Fields Cookies, even Zipcar – they were among the first to feel the
downturn. Now, in a fragile recovery, the business climate requires other
qualities, like resourcefulness and patience.”

Their strategies?  Keep debt low and bootstrap at every opportunity. 

MBA Partners with Seven Year Old

Shawn Sweeney will soon be graduating from the MBA program at Belmont University. Like a growing number of graduate students and alumni, he made the decision to leave his corporate job to become a full-time entrepreneur.

But what makes Sweeney unique is his choice of a business partner for his venture. It is his 7-year-old son, Gunner.

As with many opportunities, this business was born out of an interest that Shawn and Gunner had in common.

When Gunner was 5, he became interested in recycling. It was around the same time that Gunner was also learning about money and how to count. Since Nashville’s recycling program does not pick up glass, Shawn Sweeney mentioned the idea of taking neighbors’ glass to the recycling center for a fee. That piqued Gunner’s interest right away.

In August 2009, Gunner and his dad walked through their immediate neighborhood to find customers. Six neighbors signed up.

The neighbors loved the service and began telling their friends and neighbors. Gunner Recycling soon reached the maximum capacity for the family truck, so father and son decided that it was time to invest in a trailer.

As Gunner Recycling continued to grow, it quickly became a family business. Tiffany Sweeney, Gunner’s mother, became part of the team. Shawn Sweeney recently left the corporate world to focus more time on entrepreneurship, including Gunner Recycling.

“It’s inspiring to see the amount of glass recycled through our small business,” Shawn Sweeney said. “Gunner’s vision is to get every person in the world to recycle as his customer. I’m still trying to talk him into focusing on getting every person in Nashville to recycle as his customer.

“We have a great opportunity to reach more residential neighborhoods, apartments, office buildings and small businesses.”

Gunner is already learning important entrepreneurial lessons.

“When you are forced to explain every detail in a situation, it helps to slow down the process and make a more informed decision,” Shawn said of teaching business to a 7-year-old. “We’ve learned not to over-complicate things. There is no need to make our simple business difficult. Keeping it simple for us means keeping it simple for customers, and they seem to appreciate it.”

Gunner loves to deliver bins to new customers because “his customers” are his favorite aspect of being in business. Customer service is an important lesson for entrepreneurs of any age.

I am a strong advocate for teaching children about managing money and business at a young age. Many undergraduate students who come to study entrepreneurship at college arrive with operating businesses in hand. I hope I have the privilege of having Gunner become one of those students in my class in a few years.

If you are interested in learning more about Gunner’s business, visit www.gunnersrecycling.com.

Giving Thanks for Small Business

As my quote of the week, I offer the words of our daughter, Maggie Kuyper, who teaches English and coaches volleyball at St. Cecilia Academy in Nashville.  She reflected at her blog on all of the many wonderful small businesses that make up our downtown in Franklin, Tennessee.

So thanks to all the people and families who spend their time building and running these awesome small businesses!

You can read the entire post at her blog Life, Literature, and the Pursuit of Happiness.

Happy Thanksgiving!