Lessons I Learned Today 5/14/09 – Increasing your company “gravity”

This is a recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.

 

*What’s Really Going On At Your Company? by Gene Marks

Savvy entrepreneurs mind their stores using a flurry of metrics. Having a handle on these numbers can make a huge difference–both in day-to-day management and in long-term planning.

Every industry (and company within it) has its own set of meaningful metrics. Choose ones that capture performance from all three perspectives–in terms of income, leverage and cash flow–and track them week-in and week-out. Remember that each number tells a different story, and only taken together do they deliver what all smart owners ultimately crave: honesty. Examples of these metrics are:

  • Cash Flow From Operations
  • Inventory Turns
  • Receivables Growth Vs. Sales Growth
  • On-time Deliveries
  • Backlog
  • Interest Rate Coverage.

 

*How To Set Up An Advisory Board by Mary Crane

Whether you have 10 employees or 1,000, having a reliable group of advisers who can offer objective analysis and a few timely introductions can make all the difference.

Young, growing companies stand to benefit most from advisory boards, says Richard Magid, president of SoundBoard, a consultancy specializing in creating and running advisory boards: “An advisory board is good for that independent eye. It helps ask questions beyond just what is on the first line of the profit and loss statement.”

With business regulations growing more complex and transactions more international, the number of companies with advisory boards has crept up.

Here are some tips for building your own indispensable advisory board:

  • Start with people you know and trust. Lawyers and bankers are no-brainer additions to any advisory board.
  • Beyond the inner circle, troll your local SBDC (small business development center), SCORE (Service Corps of Retired Executives) office or industry association.
  • Smaller companies with no more than 20 employees typically have up to three advisers, according to the National Federation of Independent Business. (An odd number is nice in case you’re looking for a swing vote on a key decision.)
  • The greatest asset an adviser lends is credibility–with clients, employees and investors. “You want someone who validates your solution, with a name you can bank on,” says Amy Millman, president of Springboard Enterprises, which counsels women-run start-ups. “Advisers are people who open doors.”
  • Balance Is Best –smart people in specific areas where you need help are important but you also want a spread of perspectives and skills that complement your own.
  • Many mentors will sit on a start-up’s advisory board for no pay because they want to network with other industry players and to build their own credibility. About 20% of small businesses offer some kind of compensation, if just enough to cover traveling costs to and from meetings.
  • Recruit your advisers on a short-term basis: The advice your business needs at $500,000 in sales is different from what it needs at $5 million. Set adviser term limits from 12 to 24 months so that you don’t have to deal with sudden, awkward dismissals. You may only hold meetings a handful of times a year, but check in more often than that. You don’t want to fall off your mentors’ radars.

 

*At Start-Ups, Boards Spar Over Cash Plans by Pui-Wing Tam

“Many start-ups are finding themselves locked in boardroom dramas as they navigate the tricky tightrope between how much to cut and how much to grow. These debates have taken on new urgency because fresh financing is hard to come by and, for some, cash is running low.”

“The November meeting…was literally a two-hour rejustification of why we’d defy the odds.”

“Boards are asking hard questions, and everyone is being put to the test,”

“Companies can’t just save their way to success.”

“…company’s sales picture became cloudy as the markets started to gyrate…”

 

*The Economics of Giving It Away by Chris Anderson

In a battered economy, free goods and services online are more attractive than ever. So how can the suppliers make a business model out of nothing?

Over the past decade, we have built a country-sized economy online where the default price is zero.

“Gratis can be a good business.” The minority of customers who pay subsidize the majority who do not. Sometimes that’s two different sets of customers, as in the traditional media model: A few advertisers pay for content so lots of consumers can get it cheap or free.

Today it is the revenue engine for all of the biggest Web companies, from Facebook and MySpace to Google itself.

This model uses free as a form of marketing to put the product in the hands of the maximum number of people, converting just a small fraction to paying customers. It’s an inversion of the old free sample promotion: Rather than giving away one brownie to sell 99 others, you give away 99 virtual penguins to sell one virtual igloo.

What about those companies trying to build a business on the Web? In the old days (that would be until September of last year) the model was pretty simple:

  1. Have a great idea.
  2. Raise money to bring it to market, ideally free to reach the largest possible market.
  3. If it proves popular, raise more money to scale it up.
  4. Repeat until you’re bought by a bigger company.

Now steps 2 through 4 are no longer available. So Web startups are having to do the unthinkable: come up with a business model that brings in real money while they’re still young.

What about the oldest trick in the book: actually charging people for your goods and services? This is where the real innovation will flourish in a down economy. It’s now time for entrepreneurs to innovate, not just with new products, but new business models.

Microsoft created Web versions of its business software and offered them free to small and young companies. If your firm is less than three years old and under $1 million in revenues, you can use Microsoft’s software without charge under its BizSpark program. When those companies get bigger, Microsoft is betting that they’ll keep using its software as paying customers. In the meantime, the program costs it almost nothing.

Digg, for all its millions of users, still doesn’t make a dime. A year ago, that hardly mattered: The business model was “build to a lucrative exit, preferably in cash.” But now the exit doors are closed and cash flow is king.

“Free” has as much power over the consumer psyche as ever. But it does mean that Free is not enough. It also has to be matched with Paid.  Free is still great marketing and bits are still too cheap to meter — but enough to pay the bills. Free may be the best price, but it can’t be the only one.

 

*Why do we need an advisory board?

Many entrepreneurs tend to surround themselves with too supportive “Yes” people. They also tend to get too close to their strengths and weaknesses. In the end, it is difficult to for them to become objective. As General Patton once said, “No one is thinking if everyone is thinking alike.” The founders can often start a fatal flaw of “breathing their own exhaust, and they” and the business runs the risks of suffocating from the lack of new insight and ideas.

 

*How do we create and manage our advisory board?

Experienced boards can also help lead entrepreneurs through uncertain times. Michael Dell discovered this: “If a company is having problems, the role of its board becomes greater. Many board members may have seen recessions and downturns more closely than the people who are operating companies today. Because most managers have probably not been through something like this, the board can provide perspective.”

 

*How do we build our external team?

It pays to start with an excellent legal firm that knows its way around the specific legal needs for new business venturing, such as incorporating, legal structuring, private equity, venture capital, taxes, legal issues in hiring employees, stock options for employees, contract law, securities, M&A, transactions, and real estate.

 

*Are you ready to be the lead entrepreneur?

It is not easy to be the boss if you have never been one, and the mistakes you make early on can come back to haunt you. In fact, the first-time entrepreneur faces perhaps no challenge greater than learning how to be the boss.

 

*The Wise Use of Resources by Wayne Amundson

As demands grow and resources become increasingly scarce, associations and non-profits must be more innovative in how resources are allocated and costs managed.

I would argue that the vast majority of organizations do not know the real cost of their various products and services. This lack of knowledge may lead them to mistakenly increase their focus on one product or service in the belief that it delivers a high financial contribution. The reality may be the opposite.

And for those organizations that set prices based on cost (a massive mistake in my view, and the basis for a future article), an inaccurate cost determination and the overly low price that results could be disastrous in the long run.

Some organizations have attempted to deal with this situation by allocating overhead costs.

 

*What is your unique solution?

You had identified a solid problem in your industry space. Now it is time to turn your focus on creating the perfect solution. In his book, A Good Hard Kick in the Ass: Basic Training for Entrepreneurs, Rob Adams argues that you never really know your customers as well as you think you do because, “All you have is a one-time snapshot.” And besides having just a snapshot of the customers, the industry is constantly changing.

Helpful questions in this customer profiling are:

  • Who are the existing/potential customers?
  • How does the problem change from company to company?
  • What are their characteristics?
  • How do they decide to buy?
  • What factors, other than customer characteristics and marketing efforts, will influence their buying?
  • In what ways can they profit from the new product?

Conducting a SWOT Analysis – A SWOT analysis is an essential exercise for formulating new business strategies. Threats to any new business venturing will most likely come from the industry risks we discussed earlier.

Strategic Mapping and Gap Analysis –  Ralph Waldo Emerson has a famous line that is often quoted in business, “If a man can make a better mousetrap than his neighbor, though he builds his house in the woods the world will make a beaten path to his door.” Making a play on Emerson is Garage Technology Ventures co-founder Bill Joos, who says, “It’s not enough to come up with the idea on how to build a better mousetrap. You must really want to kill mice.” As we have stated earlier, you cannot just build it and expect that they will come. You need to look for a viable opening in your industry, learn what differentiates each offering, and create and market a better solution.

Do users really care? How does our solution help the experts who specialize in our space? Does it really solve a deep problem? And does our venture team surrounding the problem really understand? Dan Bassett, of InnoCal Ventures, said that entrepreneurs have to ask themselves, “Is the product based on a need-to-have or a want-to-have?”

Here are a few questions that can help you “score” against the diffusion process.

  • What is the relative advantage of the new solution?
  • How superior is the innovation to the other solutions it was designed to compete against?
  • What about the compatibility? Does it fit with current end-user activity?

 

 *Brands as Gravity by Stephen E. Arnold for Beyond Search

In the online world, there are Jupiters, suns, and asteroids. Traffic sorts itself out in ways that are gravitational. A big brand gets lots of traffic. The asteroids generate less customer pull. Why’s this important? Online sites without pull are not likely to pull the traffic. Sad but true. Quality may be defined as lots of clicks. IT Pro here reported data that underscores the gravitational pull of 10 brands in the UK. The headline told the tale: “Top 10 Web Brands Get Half of UK Traffic.” The top three online brands were Facebook, Microsoft, and Google. The most interesting comment in the report was this remark:

Second-ranked MSN/Windows Live slid nearly a percentage point to 9.2 per cent, but added over a billion minutes in the past year. Third-ranked Google gained 0.4 per cent market share to 5.3 per cent, adding 950 million minutes.

Facebook appears to be the winner, which may have implications for the host of social challengers now available. In the UK, social seems to be the pull.

 

What I Think

I think there are several main lessons to be learned, or reinforced, from the articles posted on this date. There is a series of short articles from the Global Entrepreneurship Institute, including one designed to test whether you should even be an entrepreneur. There is another article in the post on the next day giving sound advice on how to become an “Olympic Entrepreneur.” There were several on the issue of creating and using an advisory board once you go forward. This is an often overlooked strategic tool many start-up entrepreneurs don’t take advantage of. A carefully picked “outside” board can spell the difference between success and failure, for exactly the reasons set out in these articles. I strongly commend them to any start-up entrepreneurs or others who have not used this.

The article by Pui-Wing Tam points out how boards and advisory boards are currently struggling even more than they have in the past with strategies, based upon the threat from a poor economy. The right move now can leverage a company to a point much higher in the pack, or drop it off the charts. In a similar vein, the articles by Wayne Amundson, The Wise Use of Resources, and by Gene Marks, What’s Really Going On At Your Company, speak to the issue of making sure you understand the total impact of everything you do. I see way too many start-up entrepreneurs who have a nice spreadsheet, but have left off a few expense items from a process they didn’t fully understand. The cost of your goods or services is based upon more than what you paid for raw materials or labor. Taxes, debt service, insurance, returns, postage, your time, your profit, etc., are items amazingly left off many Excel sheets I’ve seen attached to otherwise seemingly “pretty” business plans.

Following on that thought, the article by Chris Anderson, The Economics of Giving It Away, tells the story of several well known companies which thought they could make huge profits, starting by appearing to give something away, and thinking that if they did it for a large enough “customer” base, they could eventually make it big. A very few have done this, but many have obviously also missed that part of the Excel sheet which tells you what your “burn rate” is on expenses and just how long you need to have that much cash to burn, before you reach a refueling point.

You have to make it to the refueling point to be in a position to reap rewards on a massive basis, using the “give-away” business model. If you make it into those circles, then Stephen Arnold’s insight on the “gravity” of brands is an excellent read.

You also saw recurring theme, questioning the unique value solution when contemplating just what it is you’re planning to do as a new business. If you can’t answer these basic questions, it is time to look for an advisory board or a really good mentor.

 

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If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.

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Posted in Applied Entrepreneurship, business, Business interruption, crisis, etc., Business life cycle, Buying a business, Family business issues, Financial security, Financing a business, Growing a business, Innovation, Intellectual property, Perseverance, Personal happiness, Planning for a business, Recession strategies, Running a business, Selling a business, Social networking & media, Starting a business, Succession Planning, technology, Thinking about a new business

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