Tài liệu Business Startup survival kft ppt

Far more people work in small companies than large ones.. Small company people point to five reasons why they like to work in this kind of environment: Social.. You need to select one ma

Copyright 2001 Simply Media, Inc.

Lincoln, MA 01773-0481 www.simplymedia.com

Deaver Brown, Author

Brown co-founded the Umbroller stroller company, American Power

(APCC), and Simply Media He published The Entrepreneurs Guide

with Macmillan in hardcover and Ballantine in mass market paperback

He published a business series of CD-ROM’s with Macmillan andanother series with Simply Media Brown graduated from HarvardCollege and Harvard Business School He has published numerousarticles in trade journals and business magazines

Business Startup

Checklist

Keep copies of your paperwork in a

home safe and a backup set offsite.

Copy of Your Incorporation

Papers

Copy of Your SS-4 (Fed ID#)

Copy of your Annual Payroll

Summary

Copies of Your Bank Statements

Backup diskette of your financial

program

About the Survival Kit Series

Our Survival Kits are designed to be quick, concise, and much

easier to read than most reference books As in true wilderness

survival kits, the key to success is limiting your materials to the

least amount necessary This provides users with fast, light, yet

complete packs, and ensures easy travel without excess baggage.

At Simply Media our hardest task is eliminating materials that

are not absolutely necessary for traversing the subject’s territory.

We take the time to make each of our Survival Kits as short and

concise as possible so you can learn the most important facts

with a fast cover-to-cover read.

The Business Startup Survival Kit pares down the huge amount of

business startup information available, and provides you with the

essentials to start and run your business.

In the Survival Kit spirit of “less is more,” the contents are

con-cise and divided into small individual categories for faster

read-ing and better comprehension.

Entrepreneurship as a career

choice is it for You?

Business startups appeal to their founders for

three reasons:

Freedom –Freedom is the right to choose In

your own business you get the right to choose

who you deal with and reap the rewards of your

work

Job Security – You get to keep your job

unless you go out of business You have no fear

of downsizing, irrational bosses, or the

elimina-tion of your entire job funcelimina-tion

Wealth – You have the possibility of creating

substantial wealth for yourself and your family

If the business works, you can usually receive a

long term stream of earnings and cashflow

Most business startups begin because thefounder wants to make something happen andearn a living for his or her family Even the greatcompanies such as McDonald’s, Microsoft, andWalmart usually started as very small firms andremained that way for a number of years Most

of the founders of these companies had littleidea about how big their firms could becomesome day They succeeded by sticking to theirknitting, getting stuff done, and making suretheir little companies were built on a solid foun-dation

The exceptions to these rules were heavily

fund-ed venture capital startups such as Compaq andStaples that were, in fact, big company organiza-tions from their first day in business This bookdoes not focus on these kinds of companies thatare big companies from their birth

Why Avoid Business Startups.

Most people avoid business startups for threereasons:

Getting Started

Chapter one

Video 1: Getting Started

in Your Own Business

Economic Risk – 3 out of 5 startups go out

of business in less than five years Often the

owner winds up with personal liabilities

associ-ated with these failures

Career Risk People with good career

prospects can have their reputations tarnished by

a small company failure Even if the firm is

moderately successful, their opportunities to

rejoin the large company world later are limited

Temperament Many people do not have

the temperament to withstand the uncertainties,

ambiguities, and problems associated with

busi-ness startups and small companies in general

When deciding about starting and running a

new enterprise, remember that it is far easier

begun than ended Once you start most people

wind up involved in small businesses for the rest

of their work careers This is due both to their

choice and large companies distrust of former

entrepreneurs as potential employees

Therefore, keeping your current day job is the

best career choice for most people Think long

and hard before making a jump to

entrepre-neurial life

The Entrepreneurial Profile

Successful entrepreneurs tend to have nine sonal characteristics As Peter Drucker has said,

per-a good executive cper-an become per-an effective preneur But, would that individual live the verydifferent life of an entrepreneur happily and suc-cessfully? Usually not

entre-Executives must manage a large sprawling lished organization This requires a cool, mea-sured, analytical style and approach The entre-preneur must build an organization where noneexisted before They have to drag their less thanperfect company along until it beings to function

estab-as a self-sufficient enterprise The ments required to do these different tasks varywidely

tempera-The following are the nine characteristics ited by successful entrepreneurs If you havethem, fine; if not, consider keeping the day job!

exhib-Enthusiasm & Endurance Enthusiasmand endurance are suspect in the corporateworld The effective executive is supposed to bemeasured in approach and focus a substantialamount of their energies outside of the business

in community and leisure activities The preneur must plunge forward with often self-deluded optimism to urge his or her team for-ward again and again, often against formidableodds

entre-An individual must have a thick skin to endurethe constant barrage of problems and criticisms.Few things are as good as they should be in abusiness startup, from facilities, to products orservices, to people, and cashflow Through all ofthis the entrepreneur needs enthusiasm andendurance to prevail personally and corporately

Conclusiveness Entrepreneurs must beable to conclude and move on without lookingbackwards This is not the same as decisiveness

Business Startups

1996-2001

1996 ‘97 ‘98 ‘99 ‘00 ‘01

Chart in millions Business startups

are expected to keep growing rapidly

One does not need to come out strongly one way

or the other for the simple reason that in the

fluid business startup environment the very same

decisions must often be revisited several times

based on new information and circumstances

One needs to be able to conclude and move on

without recriminations about this, that, and the

other thing

To wait or linger in decision making is to court

disaster in a business startup whereas in large

corporations it is viewed as cool, measured, and

appropriate to wait and gather more and more

data before concluding In business startups,

deals have to be struck quickly

People need to be hired; facilities secured;

prod-ucts sold and shipped; and the cycle repeats itself

until the company emerges as a going concern or

disappears If the leader is not conclusive, the

company loses its fluidity, stuff gets backed up,

and the company chokes to death

Leadership & Independence

Entrepre-neurs must lead from in front This involves

get-ting in front of tough problems as well as

cheer-leading the troops on to better results

Eccentricity is often present It usually works

out as long as leadership skills are present Most

successful entrepreneurs have a low need for

support and are loners by nature They tend to

work well independently without the comforts

of large organizations or family support systems

Product Pride Entrepreneurs have to care

passionately about making their products or

ser-vices good They can not always start from this

position It usually takes time, especially when

doing anything new for the first time But the

goal must be the perfect hamburger for Dave

Thomas of Wendy’s, the right PC for Michael

Dell, or a great retail store for Sam Walton

Marketing Skills Effective entrepreneurs

are always trying to figure out what works, what

sells, and changing stuff frequently to make thishappen Thomas, Dell, and Walton spent yearstinkering with their products and services toperfect them It is a never ending process forsuccessful entrepreneurs

Nerve & Shrewdness You need nerve tonavigate through the pitfalls of business startups.This is not about being brassy or pushy It isabout sticking it out, having guts, and workingyour way through sticky problems

Shrewdness is an important skill since businessstartups need to make things happen with less:less money, lesser people, and less cash

How Do You Measure Up?

Without a strong dose of these nine qualitiesyour venture will flounder like a wounded duck

as you try to manage your business startup Testyourself against this nine point grid Check outyour findings with a few friends Your friendscan often give you a quick read about where youstand on this stuff

If you identify one or two shortcomings, get apartner or strong senior manager who possesses

Did You Know?

Of all the companies inthe Dow Jones Industrialaverage in 1900, only one

is still in business:

General Electric

the missing characteristics The original CEO

at American Power recognized his marketing

shortcomings and hired me to fill this gap Do

the same yourself However, if you have several

shortcomings, save yourself the trouble and keep

the day job

Small Companies as a Career

Choice

Why Work in a Small Company?

Far more people work in small companies than

large ones Similarly, far more people work in

small companies than have an ownership

posi-tion in one Small companies have been the

engine for growth in the US economy for over

20 years Fortune 500 companies are steadily

cutting back on their absolute employment

numbers even as their sales grow Large

compa-nies are focusing on leveraging their assets,

reducing their employment, and cutting back on

their dependence on employees as they

out-source more and more of their own work

As a result, working in small companies is

usual-ly a safer career route than the old fashioned

approach of working for a corporate giant,

rely-ing on their benefits and stability, countrely-ing on

retirement with a nice dinner, gold watch, and

substantial pension These days smaller

compa-nies provide much steadier and more reliable

employment opportunities as long as they stay in

business!

Small company people point to five reasons why

they like to work in this kind of environment:

Social. A smaller group that tends to band

together and help each other as well as being

more responsive to individual needs Less

impersonal More personally involved A major

source of socialization on and off the job

Stability No one gets laid off unless the

com-pany suffers severe problems Tendency to pulltogether and protect employees in tough times

Personal Freedom Not as much personal

free-dom as a founder gets But a lot more thanavailable in a large corporation

Less Politics As long as you do your job, there

is less political pressure or need to ally with theright power structures within the firm

Personal Recognition People know what you

do and don’t do well You are missed if absent

Why Not Work in a Small Company?

The following are considered the three majorrisks of working in a small company:

More Work You simply must work harder since

simple things need to get done and there arefewer places to hide than in a big company

More Performance Pressure More real work

must be done per employee Fewer supervisorsand more doers Fewer meetings and confer-ences to “get through” the day

Less Pay Pay levels are usually lower than in

large companies This is especially true for theactual hours worked Fewer pay increases aregiven just for time and grade

Y o u Do n ’ t S a y

We stayed up with our competition during the week We beat ‘em working weekends.

”

Curt Carlson, Radisson Hotels

“

Small Company Employee Profile

Effective small company people must be good at

what they do There is simply no place to hide

Many people prefer to work in the quieter less

political environment of the small company

However, they must pass a more demanding

skills test since simply possessing the political

skills that can get you by in a large company

won’t work here

Get Stuff Done. Tip: This is the

over-arching requirement for a successful small

company career Small companies are for

you if you can get stuff done If not, find a

big organization to work in.

Independent & Low Maintenance Don’t need

a lot of direction or supervision Most people

think this is true of themselves It is not Low

maintenance means not needing a lot of social

chit chat, support, and help to get work done

Quiet & Not Quarrelsome Small offices and

facilities do not have enough space for disruptive

or argumentative people who always have

“something going on.” Large companies often

thrive on these characters Small ones don’t

Nerve & Shrewdness Small company people

need to get lots of things done which often takes

shortcuts and ingenuity A certain amount of

nerve helps people blast through walls and

shrewdness assists in getting what the company

needs done by outsiders

How Do You Measure Up?

If you fit this profile, small companies will

wel-come you with open arms Sell them on the fact

you have these exact characteristics Very few

people have ever told me in an interview, “I can

get stuff done, am independent, not some, and have the shrewdness not to get bam-boozled.” This is what your new small companyboss is looking for

quarrel-Perhaps more importantly, if this profile fits you,you will enjoy working in small companies Thiswill further enhance and support your self-esteem and your work product

Without a strong dose of these qualities, smallcompany work will be unsatisfying for you Testyourself for these qualities Get a second opin-ion from your friends and associates

If your skills do not match up, don’t force a fit

As the founder of the Fairmont Hotels said, “Mybest decisions are the ones I passed on.”Knowing what you can not do is often moreimportant than knowing what you can do

Market Selection

The first step in a business startup is choosing asuitable market Avoiding the wrong market isfar more important than selecting the right one.One unforeseen rock can sink your fragile start-

up This need for caution is one reason why somany successful entrepreneurs are bedrock con-servatives and not real risk takers They mayhave missed innumerable chances to be evenmore successful, but they pride themselves onhaving avoided high risk projects that could havekilled their firms

This cautious tendency is especially helpful inselecting a suitable market for your firm to enter

As Howard Stevenson has said, the market musthave a cashflow positive curve almost immedi-ately unless your firm is underwritten by a ven-ture capitalist The market also must be largeenough to be worthwhile entering but not too

exceed $1 million to $2 million.

large or it will attract predatory competition.

Appropriate Markets For You

Appropriate markets have five general

charac-teristics:

Small (but not to small) markets Big markets

are for big companies and small ones for small

companies Walmart and many other retailers

got around this problem in their early days by

starting in small retail market trading areas

Microsoft, Compaq, and Dell got around it by

starting when all PC based software and

hard-ware companies were small other than IBM

These companies grew up with their markets

Not Capital Intensive Capital intensive

mar-kets are the domain of large companies Only

they have the financial resources to compete

effectively here Your market selection should

permit at least a 10 to 1 ratio for sales to equity

($1 million sales can be supported by $100,000

of equity) Many services and consulting

com-panies fit this requirement Some consumer

product companies do if they can outsource

most of their production and fulfillment

A Market You Understand Above all you must

hit the ground running in your business startup

Successful entrepreneurs usually had a long

standing knowledge of their general markets

before launching their first company Bill Gates

had been working with computers for 10 years

before launching Microsoft; Michael Dell had

been selling stuff directly to consumers for 3

years prior to starting Dell Sam Walton hadbeen a successful independent retailer for 20years prior to launching his Walmart concept

Substantial Customers dominate the market.

Although you may be small, you need customersthat are large so you can finance your businessoff of their financial strength Cash paying cus-tomers can be considered “substantial” for thesepurposes

Long Product Lifecycles. Fashion forwardbusinesses get a lot of attention because themedia loves huge successes followed by bigcrashes! Most of these companies are on the ashheap after a few years because short lifecycleproducts are so treacherous to build a businessupon

Long product lifecycle products and servicesgenerally appeal to a large segment of the con-sumer or business community They tend to below to moderate priced Examples are valuepriced retailers and restaurants, moderatelypriced consulting and services firms, and moder-ately priced outsource firms

Check Your Concept Out Against this Market Profile Be sure your market selection meets this

criteria If not, you should recognize that youare betting against long odds by deciding to goforward any way The number one reason forbusiness startup failure is a lack of sufficient sales

to support the enterprise This sales problemoften arises through the choice of an inappropri-ate market

Market Opportunities & AvoidingDanger

Tip: Most opportunities are found in small stable markets with substantial upside If the upside is too great too soon,

you can find yourself with a ton of toughcompetition such as Netscape got from

Video 2: Market

Selection

Microsoft and Amazon.com received from

Barnes & Noble Some of these upstarts make

it Most lose a ton of red ink along the way and

wind up being bought, as Netscape was, or

liqui-dated as many PC companies were that entered

after the market was growing quickly

It is a risky matter to challenge for leadership in

a large market unless you have a ton of venture

capital behind you Compaq did this and

sur-vived Netscape had a ton of VC money behind

it and still wound up selling out

Most markets have opportunities within them

for those experienced enough to mine them

You need to select one market and one suitable

product or service to launch a business upon

Most business startups get into a market and

then change their initial products or services

quickly to conform to changing industry trends

The trick most successful entrepreneurs think is

in the execution not the initial idea

After screening your concept to be sure it fits in

an appropriate market, take your selection

process to the next level and be sure it is in one

of the following three attractive market niches

Market Leaders are Complacent Without the

Big 3 being complacent, the Japanese car

com-panies would never have established a beachhead

in the US and Canada Similarly Walmart

found that big retailers in the 1960’s and 1970’s

were complacent and showed little interest

in small towns for their stores Tip:

Complacent market leaders provide

opportunities for entrepreneurs.

Twenty three industry competitors turned down

the patent for the Umbroller before my partner

and I launched the product that quickly became

the number one seller in the category Warning:

This criterion clearly puts up warning signs

about entering hot market businesses such as

Internet enterprises where no one is complacent

Primary Market less than $500 million Most

of the companies discussed earlier were in theserelatively small sized markets when they werebusiness startups Microsoft and Dell startedwhen the PC business was in its infancy.McDonald’s virtually started the fast food indus-try Walmart competed in small trading areasuntil very recently

This approach is supported by Peter Lynch ofFidelity who is so positive about regional restau-rant and retailer opportunities because they cangrow in smaller trading areas If they prosper,they can roll out nationally and internationally

to attain large size

Therefore, you can compete with a large petitor as long as it is in a small primary market.The large competitor only becomes truly threat-ening when you take them on in a large marketwhere they can bring all of their resources tobear upon your enterprise

This is a major risk to consumer product panies since they compete primarily on a nation-

com-al basis Therefore, they have little time to buildtheir businesses without competitive attackunless they are in small markets as Umbrollerwas in strollers and American Power was withsmall UPS’s before PC’s became popular to runbusiness applications

Y o u Do n ’ t S a y

Control the alternative and you will prosper ”

George Eastman, Founder of Kodak

“

Remember that Microsoft began by writing

contract code Then they wrote DOS for one

customer, IBM Ten years after being founded,

they began to sell DOS to customers other than

IBM Microsoft stayed small and focused for a

long time, a fact often overlooked in

entrepre-neurial lore!

Portable & Transferable The greater your

free-dom to move the business and replant it

some-where else, the greater your chances for success

and good financial results This is a marvelous

aspect about retail and restaurant chains If a

chain picks a poor location or has employee

problems at one store, it can simply close it

with-out unduly harming the overall chain and in

fact help it by bailing out appropriately Single

location companies do not have this competitive

advantage

When we opened our second stroller plant, the

first one got back on the page of good

perfor-mance Diversification in terms of portability

and transferability gives a business startup much

more flexibility to grow and prosper

George Eastman, founder of Kodak, told young

business people, “Control the alternative and you

will always prosper.” One reason for the upsurge

in business startup activities is that new ventures

are much less subject these days to being pinned

down by governments, employees, unions, or a

concentration of customers or suppliers

Summary. In analyzing markets to enter and

which to exclude, keep these ideas in mind It is

far easier to enter a market or business than to

leave one The first business startup choice of

selecting a market often determines what market

you will work in for the rest of your career

When I entered the juvenile furniture market in

1970 with the Umbroller in 1970, I did not

leave it entirely for 22 more years!

I entered the semi-tech business with American

Power in 1982 and am still in that business 20

years later It took a ten year transition period toextricate myself fully from the juvenile business!Choices made at the outset of your career whichmay seem temporary at the time, just like minedid to me, often have a longer term impact onyour career and life’s work than you ever expect-ed

Seven Sources of Innovative Opportunity

Now that you have worked your way throughmarket choices, you should choose a product orservice in one of the seven sources of entrepre-neurial opportunity defined by Peter Drucker.The simplest ideas are at the top of the list andthe hardest at the bottom If you want money,take one at the top of the list; if you want a shot

at the brass ring it is at the end of the group

The Unexpected This is the magic cle of things that work unexpectedly well.Interestingly managers are quick to fix thingsthat don’t work and give little attention to thosethat do Your challenge is to find products orservices that work unexpectedly well andlaunch your startup in that area

cir-Macy’s, the #1 department store in New York inthe 1940’s, found that housewares sold unex-pectedly well They were concerned with thissuccess that put apparel in the shadows that theyworked hard to bring down housewares sales toincrease the percentage of their business comingfrom apparel All of this, according to theMacy’s CEO at the time was intended to regu-

Video 3: First Steps to

Take

costs As Sam Walton said in Made in America,

“We beat K-Mart by 3 cents on each item wesold due to our lower costs.” Since the dis-counter business has thin profit margins, thisdifference funded Walmart’s growth and con-sumers appreciation for Walmart’s resultinglower prices

Change in Industry Structure

or Market Structure These changeshappen quickly and often catch complacentinsiders off guard Barnes & Noble and Borderscaught independent bookstores by surprise asthese chains grew quickly within a decade todominate the retail book business Amazon.comcreated its growth by riding on the back of theInternet explosion and caught both Barnes &Noble and Borders off guard Both had to reactquickly just to catch up This is always a majoropportunity area for outsiders since insiders tend

to be wedded to their supposedly expert view ofthe world

D e m o g r a p h i c s o r P o p u l a t i o n

C h a n g e s The aging of the baby boom is anexample Financial self-help books like theSurvival Series are popular because the babyboom is thinking about building businesses andsaving for retirement

Changes in Perception, Mood,and Ideas Starbucks capitalized on this.They rode the market trend shifting towardslighter more flavorful non-alcoholic beverageswith a touch of old fashioned community feel-ing Snapple did this with ice tea and relateddrinks

New Knowledge This is absolutely thehardest to do yet the most exciting if achieved.FEDEX, Apple, Thomas Edison, Henry Ford,and Sam Walton did this This is about doingnew things in a new and inventive way, withextraordinary talent In other words, to achievethis, you have to do one impossible thing after

larize things.Bloomingdales’, the #7 department

store in New York at the time, saw the

opportu-nity, and rode it to become the leading

depart-ment store chain in the New York area and much

of the country They just did “more” of what the

customer wanted rather than “fight” the

cus-tomer as Macy’s did

The unexpected outside event is a similar simple

opportunity to follow up The recent explosion

of the Internet is such an example Consider

how you can apply your efforts to these

unex-pected kinds of opportunity areas that arise all

the time

The Incongruity This is the difference

between what is and what people in the

market-place think it ought to be An example was the

Umbroller Industry members discounted the

invention despite consumers liking it because

industry people believed that bulk not

conve-nience should be what consumers wanted

As outsiders, Alex Goodwin and I were not

bur-dened down with the old ways of thinking and

jumped on the idea So did the consumer As a

result, we were off and running with full

con-sumer support from the outset and complete

industry disdain for our efforts This gave us

time to build the business before our

competi-tors owned up to the incongruity being an

opportunity and not a problem

Innovation Based On Process

Walmart used its technology to beat K-Mart on

S u m m a r y

The most productive ideas are at the top of the

list and the most seductive at the bottom One

reason older entrepreneurs do so much better

than younger ones is they have worked through

seductive ideas to the simple ones later in their

life that actually work

Business Model

Now that you have selected a potential market or

two and examined the seven sources of

opportu-nity within that market, match up your choices

against the following set of criteria

Since you are in fact investing in your own firm,

review the data as one of the great investors

would do so Peter Lynch of Fidelity and

Warren Buffett of Berkshire Hathaway are two

such investors They believe in being highly

selective and only investing in “wonderful”

busi-nesses You should do the same in analyzing

which business opportunity you will select

There are far too many mediocre businesses

Your challenge is to find a wonderful one The

essential aspects of a wonderful business are:

Franchise in its trading area

Walmart had this in the small towns they

com-peted in Small retailers can do this as can

locally oriented service companies

Simple and understandable The

ideal business does not take a genius to run

Geniuses are hard to find and a scarce

commod-ity This excludes most high tech companies

Substantial free cash flow Great

investments throw off lots of free cash This isthe true measure of the value of a business.Much of Dell’s strength related to its cashflow.Virtually instant cash for its products; tightinventories on the fulfillment side Both thingsallowed Dell to grow explosively on its ownwithout needing much outside debt or equityfinancing

After a business startup opportunity passes thesetests, as a Survivalist you should review yourcompeting business ideas against the followingten point grid using a 1 to 10 scale:

pro-ductive to more propro-ductive opportunities.

Highest Rating (10) Lowest (1)

No investment large investment

Few employees per dollar sales lots

Small facilities per dollar sales lots

No government involvement lots

90% gross margin low gross margin

Low breakeven high one

Established distribution none

Large customers lots of small ones

Long product lifecycles short ones

No investment (10) to large investment (1) 3 5 8

Simple (10) to complex (1) 3 5 10

Few employees per dollar sales (10) to lots (1) 2 4 9

Small facilities per dollar sales (10) to lots(1) 2 4 9

No government involvement (10) to lots (1) 8 10 10

90% gross margin (10) to low gross margin (1) 4 8 6

Low breakeven (10) to high one (1) 3 7 9

Established distribution (10) to none (1) 9 3 9

Large solid customers (10) to small ones (1) 9 9 9

Long product lifecycles (10) to short ones (1) 9 9 9

These numbers clearly show that each business was successively better than the previous one Infact, this has been borne out in the marketplace Now let us use the same criteria to evaluate somefamous entrepreneurial startups:

No investment (10) to large investment (1) 9 1 1

Simple (10) to complex (1) 5 3 1

Few employees per dollar sales (10) to lots (1) 6 4 9

Small facilities per dollar sales (10) to lots(1) 7 2 10

No government involvement (10) to lots (1) 5 7 10

90% gross margin (10) to low gross margin (1) 9 5 1

Low breakeven (10) to high one (1) 9 2 1

Established distribution (10) to none (1) 3 1 1

Large solid customers (10) to small ones (1) 5 3 1

Long product lifecycles (10) to short ones (1) 5 9 1

Y o u Do n ’ t S a y

“ As an entrepreneur, you have to know when ”

to hold ‘em and when to fold ‘em, w h e n t ofreeze and when to run

Deaver Brown, 1988, with thanks

A quick review of these numbers shows why

Microsoft made money coming out of the gate

and why it took so long for FEDEX to turn a

profit despite it offering a uniquely valuable

ser-vice Early FEDEX investors were so diluted

due to heavy capital requirements to launch and

sustain the business that they never fully

recouped their investment Amazon has

won-derful highs and tremendous lows in their

rat-ings by item; that is why the jury is still out

about whether they will ever really be a good

company, they have clearly been a speculative

stock

Partners & Employees:

Beware the Company you

Keep

Tip: New companies fail more often due

to partnership problems than for any other

reason.

Conventional wisdom suggests your firm stands

a better chance of survival with partners than

without them Edwin Roberts, the MIT

profes-sor of Entrepreneurship, did an extensive study

of this subject and determined this was true for

large venture capital backed companies His

research did not cover over 98% of business

startup types

Partners supposedly provide balance by offering

complementary skills to bolster other people’s

weaknesses This approach works in an

educa-tional environment where interaction and

edu-cation are the principal objectives However, in

a business startup, partnership issues usually

divert management energies from direct action

and submerges them in internal discussions,

bickerings, and conferences

Since partners must be consulted on every

important issue, this inevitably slows down the

decision process The time lost through this

counseling usually jeopardizes rather thanimproves results This is different than you con-sulting with your staff and key outsiders to reachappropriate conclusions In those cases, you canseek knowledge far and wide secure in that factyou make the final decision The elimination ofpartners avoids the inevitable tendency of part-ners to tamper with the evidence in order to getpeople to ally with them

As a result of these inherent problems with nerships, successful ones seem to be either alterego relationships as I had with Alex Goodwin atUmbroller or relationships which the differingskills of the partners were so distinct that theydid not intrude on other’s territory as was true

part-at American Power These situpart-ations are tively rare So the odds are against a smoothlyfunctioning partnership in most business star-tups As a consequence, most experienced entre-preneurs pursue new business opportunitieswithout partners

rela-If you can manage your business startup withoutpartners, do so If not, read on carefully Notrickier or more time consuming problem existsthan trying to select appropriate partners andeliminating the wrong ones New companies failmore often due to partnership problems thanany other

These failures occur so frequently because ness startup partners must decide jointly somany different things on a daily basis, and oftenunder very trying circumstances indeed Smalldifferences tend to accumulate and becomemagnified as a consequence These disputes, inturn, can divide your organization into factionsand give employees a place to hide from havingtheir feet held to the fire to accomplish theirjobs

busi-These problems can take on all of the negativeassociations of a family fight and create a ton ofunproductive emotional turmoil which can be

far more disruptive than the worst marketplace,

production, or cashflow problems This process

has paralyzed and destroyed many small

compa-nies over the years

You should select partners with all of the

dili-gence you would have liked to choose your

fam-ily precisely because of the potential seriousness

of partnership problems Much of the cause of

your potential selection failures will relate to

your innate optimism coupled with your

inexpe-rience in making these selections The two

major causes of failure are partners inability to

grow with the business and their unrealistic

expectations

Consider the challenge: at the inception of your

firm you must make this critical choice about

your long term corporate family This decision is

so critical and potentially life threatening that

most experienced entrepreneurs simply go it

alone It is entirely a different matter in large

VC backed companies because they put

togeth-er the core corporate team from Day One, or

require you to do so before they invest This

happened to me at Umbroller and American

Power It is a much different issue for the

typi-cal bootstrapping business startup without the

enormous funding to take on this kind of risk at

the outset Ultimately your selection must be

subjective which in and of itself adds to the risk

Tip: The five common partnership traps

are:

1 I owe it to them;

2 They worked hard in the beginning;

3 It is owed to me;

4 I worked hard in the beginning;

5 They introduced the company to this that or

the other thing.

These traps are summarized in two words: past

orientation The hard work is ahead of the firm

The company must retain the flexibility to

rein-vent itself continually in its growth period and

not be burdened down by unrealistic tions of the owners

expecta-Investing owners need to be incented based ontheir future, not past, contributions to the com-pany Firms that do not exert this disciplinewind up with burdensome baggage that getsheavier to carry every year If you have theseproblems, clean house immediately

Tip: If you can not resolve a partnership problem, you are often better off leaving the company yourself These issues don’t get easier over time Your first loss is your best loss in these matters.

As Roger Fisher says in Getting to Yes, there is no

one correct approach to negotiations every time.They must depend upon circumstances Whenthese problems arose at Cross River I sold thecompany; at American Power I left the firm; atSimply Media I cleaned house The one unac-ceptable decision is not to act and be victimized

by these kinds of circumstances

Partnership Evaluation

Four steps should be followed in evaluating yourpartnership situation

Ability to do useful work Partners must be able

to do important useful work Thus the first test

is the prospective partner should have importantskills to contribute to the success of the business.These skills are generally limited to sales (Kroc

of McDonald’s and Walton of Walmart), uct or service development (Case of AOL andGates of Microsoft), or product concept andfund raising (Smith of FEDEX and Thomas ofWendy’s)

prod-Four C’s The second test is the bankers four

C’s: capacity, capital, character, and credit ing Capacity relates to their ability to grow andhave the capacity to take on more responsibility

rat-and use their talents wisely Capital relates to

what cash and equity they contribute to the firm

itself Character will be important with regard

to them standing up to the difficult personal

challenges in any growing business Credit

rat-ing suggests the reliability of the individual to

meet the company’s obligations based on their

ability to meet their own

Partnership goals Write them down Compare

each set of goals to all the others Most partners

aspire to retiring on the job This is in direct

contradiction to what the company needs If the

company works, as Microsoft did for example,

there is nothing wrong about a major partner

such as Paul Allen taking his stock, leaving the

company, and retiring Many successful

partner-ship have seen this done after the work was

done

Others may have goals that directly conflict with

those of other participants These issues must be

worked out at the outset or will be cancerous to

the organization over the long term

Choose the Boss. Co-bosses don’t work

Someone must have the final call even if the

stock is evenly divided between several people

This choice provides the inside and outside

world clear direction and corporate definition

If you can not make this decision initially, don’t

select the partner or don’t join the business

your-self

This is a decision that can not be postponed In

discussions of leadership in famous business

startups, note that no Co-CEO’s are

men-tioned because it doesn’t work There are “Mr

Outsides” and “Mr Insides.” That is a different

matter

Summary Now that you have concluded your

investigation and comparison, be tough on theproblem and easy on the people If you can’twork it out, or it seems tentative or risky, eitheryou or the prospective partner should not jointhe firm Period As Drucker says, all results areoutside the business Your business startup cannot devote its attentions to settling up insidepartnership issues as the company tries to growand become a successful going concern by seek-ing outside strategic partners and customers

Employees

Choose employees primarily based ontheir fit with the small company profilediscussed earlier Each person has to beable to get stuff done quickly, be indepen-dent, require little supervision, be quiet and notquarrelsome, and have nerve and shrewdness

This profile is often in direct conflict with thekinds of people most entrepreneurs like andadmire In fact, this emotional distancing canhelp your business startup become more success-ful because you and your employees maintainyour personal distances and don’t get too close orpersonally involved

At some stage all companies must develop acalm emotional maturity If not, the companyusually lurches towards disaster as Apple,Cabletron, and People’s Airline all did Applecame back because Steve Jobs acted like a grown

up the second time He maintained his mitment to excellence, quality, and being differ-ent; he dumped the quarrelsome erratic behav-ior Much of this change was just a matter ofage and experience; this is one reason so manyyoung entrepreneurs, and I certainly includemyself when young, have so much trouble lead-ing companies from the front

fast growing sales such as Amazon,

A simple point of information may help shed

more light on the matter My best employees

have never had dinner at my house; several of my

worst have Why? The best employees have a

life, stuff to do, don’t relate to you on a personal

basis, and don’t want to disrupt the relationship

by getting too close The worst ones often want

to be like you, get personally involved with you,

become an entrepreneur themselves, and have

little interest in doing the actual work

them-selves These people usually try to slide out of

sales or product/service development as fast as

they can into administrative or marketing work

Robert Half describes the hiring dilemma best

There are three parts involved in doing a job

well: technical skills, ability to do the job, and

the willingness to do the work agreed to in the

interview and job description The first two are

relatively straightforward and easy to check out

The last one is hard to determine because only

the prospective employee knows whether they

will do what they say or not

Unlike Half, I believe you can not get around

this problem through interview techniques You

can learn to do the interviewing job better as you

become more experienced, But, you need to

accept the fact that most people will lie to you

and themselves about what they “will do” on the

job

So get over being upset about it and deal with

the repercussions of this enormous problem

Hire the best you know how; but control thealternative by eliminating the liars quickly those that say they will do the sales job, forexample, but wind up fussing with marketing oradministrative work Not withstanding thisnegative line of thinking, you can help yourselfenormously by implementing an effective set ofhiring plans as you need new people

Hiring Plans

Identify clearly and in writing what the job is.You should be seeking line people virtuallyexclusively This means sales not marketing;operations not administration; bookkeeping notfinance; and so on and so on

Line people Line people are tough interviews

because they tend to be doers and not talkers.This is good on the job but a challenge to theinterviewer in the employee selection process

Good job fit To make a good match, the key

thing for the interviewer to do is to help the jobcandidate and you identify what they are good atand like to do The secret to interviewing suc-cess is not to ask the the candidate leading ques-tions but to find out indirectly what they like to

do, then see if it fits the job to be done

Interview with Open ended questions Open

ended non-leading questions such as “What doyou like about sales and what sales jobs have youliked doing?” are the best sources of informa-tion Then the candidate can say he or she likestelemarketing, personal visits, or putting materi-als together You then see if their preferences fityour needs; if they don’t, go to the next candi-date Better to hire no one than the wrong per-son

Job Description as conclusion to interview.

Once you decide to hire a candidate, you want to

be clear about the job and the consequences ofnot doing it “We need you to make 40 sales

calls a day If you don’t want to do it, or can’t do

it, don’t take the job We will review your

per-formance strictly against that criteria.”

Hiring tips The best candidates are those that

contact you directly For a host of reasons, they

have shown the initiative to sell you on

them-selves They have clearly worked out the

per-sonal factors (i.e commuting; type of company;

job function)

Opportunity hires Displaced people through

job transfers, company transitions, downsizing,

moving into the area due to a spouse, just

grad-uating from school in the area, are all good

moti-vating reasons for them to be looking and you to

be attentive

Recruiting Job recruiting is always a torturous

process because first you have to sell them; then

you have to evaluate them A tough proposition

Hiring Managers Hiring managers between

yourself and your employees is fraught with

dif-ficulty They must start by working both as a

subordinate and a boss in your small company

It is usually best to bring managers in first with

no subordinates so they can get a feel for the job

and the environment The good managerial

hires lead by their example of getting stuff done

Once they establish this reputation, people will

generally accept working for them

On the other hand, if your new management

hire doesn’t like to get stuff done, and tries to

work through your small staff, he or she

proba-bly won’t work out anyway So starting them to

the side, so to speak, without subordinates, gives

them a chance to get adjusted as well as your

people adjusting to them

New manager’s subordinates To the extent you

can, let them hire these people so they are not

grandfathered in and they can manage the

hir-ing, motivathir-ing, and evaluation process This

may involve some short term disruptions and assignments But, in the long run this approachstands a much better chance of working

re-Summary At the end of the day, you

must be willing to go through the hiringprocess many times to find the right peo-ple It is very difficult to tell in an interview

if they will do what they say they will The bestyou can do is weed out as many as possible in theinterview process and eliminate quickly thosethat do not perform adequately on the job itself

The next step in your business startup is to

incorporate your company You will find a

click-able button on the main screen to do so

Selecting a Name

Your corporate name should suggest

conser-vatism and financial stability The name

select-ed should suggest the nineteenth century not the

twenty first Your company is risky enough; a

bow to the past endows your firm with an aura

of stability that will please customers, lenders,

and suppliers alike It may not appear as cute to

your neighbors and friends!

Choose a straightforward name It should be

simple, memorable, dignified, spellable, and not

catchy or faddish Consider the straightforward

names of many of the best know growth

compa-nies: Amazon, Cisco, Dell, Home Depot,

McDonald’s, Starbucks, and Walmart Most of

the blue chips have similarly sounding solid

sounding names: the Generals Foods, Mills,

and Motors; the Founders Ford, Proctor &

Gamble, and Sears

Consider customer response Who wants to

make a purchase order out to Yahoo or Get a

Life Inc Customers want solid, reliable,

conser-vative vendors that sound that way As a senior

marketing executive said about the well written

brand name Idiot’s Guide series, “I sure wish we

didn’t have that brand name Now we are stuck

with it.”

No joke names You can win with a joke name,

just consider the success of Yahoo or ForDummies But it is like carrying around extraweight in a handicap race Better to not carrythe weight at all!

Final name test: what would your mother say?

It passes the test if your mother or former highschool English teacher could proudly say yourcompany name If not, rethink your decision

Incorporation

You have now selected an appropriate market,product or service, partner(s) if any, and corpo-rate name Incorporation is the next logical step

Formal incorporation creates an aura of stabilityand a recognized corporate vehicle to developcontacts with the outside world while providingyou substantial personal legal protection fromliability It also allows you to apply and receive aFederal Identification number in order to payemployees, set up bank accounts, and get yourcredit record established with various reportingagencies such as Dun & Bradstreet

A corporation has an independent standing inlaw It becomes responsible for its own actionsand those enacted by its officers, employees,

Incorporation

Making It Official

physical assets (such as a defective boiler that

explodes), and products or services (such as

product defects) This limits the liabilities of the

founders, employees, and stockholders or owners

of the business In an age of frequent lawsuits,

incorporation provides a substantial amount of

personal protection for you and the people

involved with your business startup

Method to incorporate The methods to

incor-porate vary by state but are relatively simple A

number of excellent legal services provide the

service for less than $200 plus actual state license

fees involved See button on the main screen

Forms available at Secretary of State’s office.

Forms are available at your secretary of state’s

office Check out www.taxsites.com to get the

proper contact information for your state

Although you can easily handle this matter

yourself, or through a legal services firm, you

may want to consult an attorney or accountant

about the legal or accounting issues related to

your incorporation These issues include whose

name to list the stock in, 1244 stock, subchapter

S corporation advantages and disadvantages, and

similar issues

Ideal state for incorporation Delaware is

tradi-tional for public companies Nevada and

Wyoming have recently offered important new

incentives to incorporate there and the rapid rise

in their state incorporations testifies to the

ben-efits offered by their programs

As a rule, however, most business startups are

better off incorporating in their own state rather

than incorporating elsewhere and having to go

through the added step of qualifying to do

busi-ness in their home state If your company grows

to substantial size and wishes to take advantage

of the extra benefits offered by Delaware (in

sum, additional protection for the directors and

officers of the company), an appropriate

corpo-rate lawyer can do this relatively inexpensively

and painlessly

Benefits of early incorporation Early

incorpo-ration puts you in a better position to negotiatemore effectively with outside vendors, lenders,and prospective investors Your firm has thetrappings of stationery, phone number, businessrelationships, an earlier corporate birthday, and afederal ID number Admittedly these factorsmay be of minimal economic importance in thelong run But, they can be extremely helpful inthe early days of your business startup

Federal ID Number

Each corporation must have a federal tion number for federal tax, employment, bank-ing, and other business relationships

identifica-Ordering the form: phone Order your SS-4

form over the phone at 800-829-3676 Onceyou fill it out, you can call them back on thephone, answer various questions relating to whatyou filled out, they will give you a number overthe phone, and you fax it back to the numberthey provide you

Ordering the form: IRS website You can also

contact the IRS website This tends to be amore cumbersome process due to the need forinteraction Verbal interaction permits you toget the FED ID # before they receive the actualform The website choice means you fill it outand have to wait for them to process it If youmake an error, it will take twice as long This isone case where the phone is much faster TheIRS website is: www.irs.ustreas.gov This siteoffers a lot of other valuable information; youshould make a note of it for other purposes aswell

Investors are hard to find for even the mostexperienced and successful entrepreneurs It isnever an easy task so do not be unduly discour-aged by the difficulty of the task

Where to find them The best place to find

them is close to home Most business startupsfind them among their friends, family, associ-ates, doctors, lawyers, accountants, and angels

Angels. Angels have begun to organize Youcan find them on-line A few places to start are:amisventures.com,garage.com edie-on-line.com,vcr1978.com, and linc.com Check out theseangel networks to see how they work and howthey can help you in your business startup

Selection Criteria Money is harder to come by

than partners or employees so you often mustcompromise your standards in accepting money.This tendency is understandable given the diffi-culty of the task However, for your own longterm survival try to exert the same standards forinvestors you use in selecting partners oremployees

Agreements with investors Pure stock is

usual-ly the best arrangement for all parties It lets youinclude their investment as equity capital Thishelps you with vendors and prospective lenders.You should grant them the first right of refusal

on later rounds of financing, should they becomenecessary, which they usually do

Complicated agreements abound in this area.Generally, though they simply must be rewritten

at a later date to conform to changing stances Better to get them right in the begin-ning Since this is not always possible, you oftenhave to hold your nose and sign some pretty uglydocuments in the early days of your adventure

Duns Number

Dun & Bradstreet provides credit reports on

companies and furnishes a Duns number for

each one Many large firms pay their vendors

using Duns numbers Therefore, it is wise to

apply for one and include it on all of your

invoic-es Most customers will not tell you they use

Duns numbers for payment purposes; so this is

merely a wise precaution on your part

Ordering your Duns number Contact them at

800-362-3425 D & B occasionally changes its

phone numbers; if they do, call information at

800-555-1212 to get the most current one

Payroll Service: Paychex

Always use a payroll service because they will

make sure and file all of your required local,

state, and federal employment tax forms In

addition, they will scoop your account for the

appropriate taxes and make sure they are paid

properly and on time They can also do direct

deposit for your employees so they need not

leave work to deposit payroll checks They can

assist you to set up medical and 401k deduction

plans as well

Paychex: the preferred vendor Paychex is a

worldwide leader in payroll processing They

process over 15 million paychecks per pay period

worldwide Many of their customers have less

than 10 employees They also service companies

with thousands of employees They can do all of

your payroll filings for you and keep you up to

date on all local, state, and federal rules and

required payments Set up your account by

going to the main screen and clicking the Payroll

Services button At a minimum, contact them

to get the forms prepared and your account set

up so you are ready once you have employees

Buying a Business

Most successful business startups are founded on

a good deal It may involve identifying a

promising market niche, finding an appropriate

product or service to exploit, acquiring

advanta-geous intellectual property rights, or simply

buy-ing an established business on good terms

Some of the best deals have been a combination

of buying an established business on good terms

with the idea of launching a new product or

ser-vice from that established base of operations

Purchasing an established business This is the

simplest and safest approach if you can afford it

The initial cost is higher than starting from

scratch But you cut the risk of failure

substan-tially due to having an established customer,

vendor, and employee base, as well as an ongoing

concern

Finding opportunities. After incorporating

your firm, you now have a base of operations to

seek an acquisition within your financial means,

which generally includes outside investors

and/or lenders as well

Market & product or service selection process.

Use the same selection process you used

former-ly to identify appropriate markets, markets to

avoid, and product and services that make sense

Parameters of the deal. If you search hard

enough you should be able to find a small

com-pany for sale for about $250,000 to $500,000

with a 10% downpayment required

Evaluation of the business in question Try to

find at least two businesses to look at It willgive you a major negotiations advantage andhelp you avoid signing a really bad deal

First step: dominant in a niche Seek an

acqui-sition that is dominant in its niche Thisrestricts you to small markets but it provides youwith a reasonable chance to maintain the firm’sstrengths while you assist it in taking the nextgrowth steps

In the consumer software business, I identifiedthe value priced general interest category Thisprovided the base for the business From thisbase, I could expand it to include new productswithin the niche, new distribution in larger retailoutlets, and add the affordable Survival seriesbook line In strategic terms, the base camp wasthe CD line The growth was in the book &book and CD businesses Longer term growthwas to come from strategic alliances and websiteopportunities All of this was made much easierthrough the initial acquisition of a base camp

Now there are four more steps to review indetail

Integrity of owner & willingness to leave The

major owner (s) must be both honest and willing

to leave immediately If not, your “new” ideas,the reasons you bought the company in the firstplace, will cause him or her anxiety and take upvaluable time in discussions that should bedevoted to doing new stuff well

My worst acquisition was when I allowed theowner to stay through a concession late in ournegotiations He knew the company had tomove on to survive but opposed every new idea

as “nuts” or “risky.” I wound up selling it back tohim at a moderate loss to myself Whoops!

Net worth of at least $50,000 Negative net

Video 4: Purchasing An

Established Business

worth is simply too hard to finance and deal

with in a new business venture You can do

bet-ter Look harder

Breakeven income statement The company

must be making money And this includes the

owner’s salary and perks If this is not the case,

you must work on two flanks saving the old

business as well as starting the new one This is

overconstraining the problem and too tough a

task for you to take on voluntarily

Solid customer base You need a solid customer

base to keep the old business strong as well as

launching your new ideas Fortune 1000

cus-tomers are best, even if there are only a few of

them that account for most of the firm’s sales

You need to check this out by visiting a few of

these customers with the old owner, after you

have worked out the other details about the

acquisition You need to learn how the customer

sees the vendor in terms of its future

relation-ship; would they like to do more business; or is

the relationship tattered and this is why the

owner wants to sell

Tip: This request will kill some deals In

our opinion, they should stay killed then.

You need to know what you are facing If

the owner won’t do it, show him this part of

the book Tell them that while it is our idea, you

believe we are right Stick to your guns.

Negotiations for Purchase

Books and books have been written on this

sub-ject The best in our opinion are Negotiations by

Roger Dawson, Negotiations by Mark

McCormack, Negotiations by Herb Cohen, and

Getting to Yes by Roger Fisher.

Over-negotiations kill many deals. Get the

owner’s offer on the table If you can accept it,

do so If not, pick a few key point and work on

getting them Good deals come together

quick-ly; bad ones start hard and end hard You are

usually better off walking away from toughnegotiations because the parties lack the reser-voir of good will to make the deal work after thefact when cooperation is so very necessary

Lawyers do not make good negotiators.

Lawyers tend to be poor at math despite the factall commercial law is about numbers The initialscreening device for law school, the law boards,

do not include a section on math It is the onlymajor profession that does not do so As a result,very smart people who tend to be poor at math

go into the legal profession

As a result, many lawyers are uncomfortablewith numbers and tend to shift the negotiations

to other subjects such as contracts, personal tions, and the like This, in turn, often results ininflaming the other side and stirring the fires ofconflict Our advice: make the deal withoutlawyers Memorialize it with lawyers but restrictthem to their contract and enforcement exper-tise

rela-Opportunity negotiations. Deals that workgenerally involve two parties that share mutualinterests In other words, the seller wants to getout of the business and retire; the buyer wants tobecome active in the same line of work and movethe business to a new higher level Both partiesshare an interest in the success of the new owner

in making his dreams come true

Final warning: Watch out If in doubt,

don’t buy the business Remember thatyou do not need to justify your decision toanyone If it feels wrong, don’t do it

Instinct is only uncodifed intellect (in otherwords, you know something is wrong you justcan’t describe it well)

The time and money invested in the explorationand negotiations is gone It is a sunk cost (insimple terms, gone) Next is the operative word

If you get cold feet at the last minute, don’t signthe deal and move on

Tip: “The shortest distance between two

points is often not a straight line Indirect

movement often gets you there more

quickly.” Deaver Brown, 1971

Intellectual Property Negotiations

The purchase of intellectual property tends to be

smoother than other businesses because people

and facilities are not involved The transfer of

ownership is simpler and has fewer

complica-tions The corporate seller generally wants to be

done with the project and the buyer has

enthu-siasm for the untapped possibilities

This leads to performance based agreements

which reward both parties If the property is

truly a good one, results will dictate higher

pay-ments; if not, lesser payments will be called for

High minimums can be a stumbling block The

best deals are purely variable: if the property is

as good as the seller says, the payments will be

high; if not, the payments will be low Both

sides have their goals in alignment provided they

are not trying to con the other side

Minimums controvert this and often lead to

dis-putes and litigation High minimums kill many

deals, as well they should Interestingly, many

intellectual property holders would rather get no

money than settle for a low minimum deal that

they believe might tarnish the perceived value of

their property

Tip: This problem, in and of itself, should

warn you as a prospective buyer to be wary

of high minimum deals They often betray

the lack of confidence the seller has in his

pro-ject or his over-inflated views of its value.

When dealing with individuals, you may have

the additional problem that the seller has

invest-ed far more time and energy into the project

than can be recouped through a sale Since you

can not cure this problem, you often must

sim-ply walk away from the deal Of the literallyhundreds of deals I have walked away from,none has been produced in the marketplace.Nothing could more eloquently describe theemotional problems of the sellers They wouldrather get nothing than take a small somethingfor their project, which, in their minds woulddetract from their perceived value of theirefforts

Where to find the best deals The best deals are

spin-offs from large companies that wish to pose of unused or underused intellectual proper-

dis-ty Being professional business people selves, and not inventors or creators, they tend tohave a more reasonable and rational sense oftheir property’s worth

them-The worst deals them-The worst deals are those

con-trolled by one individual in a small closely heldprivate company They often have an inflatedsense of the worth of the project and an unrea-sonable buyout price in mind It is as they sooften will tell you, “their baby.” Since no one has

an ugly baby, let them keep it

Tax implications Royalty agreements can be

expensed easily Most business purchases can beexpensed as well Consult an accountant and alawyer about this point The wrong decision cancost you dearly over the long term

Execution of the purchase. You must get fullunrestricted ownership of the property If notyou are subject to a ton of problems if your pay-ment plan does not work out As a rule, themore complicated the purchase and sale agree-ment, the worse it will be for you Some seller’slawyers rig these agreements like terroristbombs Don’t sign them Almost withoutexception, you will violate some rule or covenantand the terrorist bomb lawyer will ride you like acheap suit If they demand to make the transac-tion complex, you are advised to pass on itentirely

Personal Guarantees Avoid them if you can.

Many times you can not When you can not it

is even more important to avoid complex

puni-tive purchase and sale agreements

If you must sign them, consider putting all of

your assets in your spouse’s name to avoid them

being attached at a later date You are best

advised to do this prior to signing the purchase

and sale agreements to be sure they do not

accuse you of fraudulent conveyance And, you

must be sure the assets transferred were not in a

personal financial statement given to the seller as

an inducement to enter into the contract

Lawyers and collection people have become

more vigilant and less compassionate in recent

years about these matters As a result, you need

to protect yourself and always do

pre-bankrupt-cy planning prior to signing onerous personal

guarantees The best solution, of course, is to

simply pass on the deal

First Office

If possible, set up your first office in a spare room

in your house This will save you time, money,

and the effort of locating and dealing with a new

office in the first days of your business startup

In our Umbroller company, my partner and I did

this for the first year This decision kept us

focused on the business by minimizing our early

expenses and time spent on office

administra-tion

Getting grounded With modern office

tech-nology, you can create a quite effective office out

of your house You can use your phone, fax, and

e-mail to contact customers, suppliers, and

lenders You can set up a small tightly run office

with a PC, printer, fax/copier, small shipping

area, and related items You can ship and receivepackages promptly while visiting outsiders attheir premises when such meetings are required

Home environment Above all you need a spot

out of your home traffic area and away fromnoise A corner room away from children andfamily gathering spots is the best choice

How to meet those important people Flatter

them and see them in their offices or meet themfor lunch Use an airlines club such as AmericanAirlines Admiral’s Club They even have specialconference rooms that can be reserved withcomplimentary coffee and a cash bar In smallertowns, use an office of an accountant or lawyer

Use your imagination and establish good lowoverhead habits from the beginning.MacArthur, now of MacArthur fellowship fame,one of the richest men in American before hedied in the 1980’s, used to meet people in coffeeshops He said he felt it simplified things andmade people get to the point Good advice!

How long should you work this way As long as

you can work this way, do so Few VIP’s willvisit your office in your first years in business

By your second or third year in business, unlessyou have a simple home business, you may need

a real office to accommodate other employees.Recent trends make home offices more accept-able as more and more companies deal success-fully with such enterprises and are not put off asmuch by the experience

First Communications

Your first communications are far more tant with regard to your business startup’simpression upon the outside world than your

differences.

first office Entrepreneurs spend far too much

time decorating their first offices rather than

focusing on their first impressions through first

communications with prospective customers,

suppliers, lenders, and investors Since most of

your important business associates will never see

your office, they will know you by your other

means of communications

Communications strategy Your

communica-tions strategy should underscore your firm’s

reli-ability, streli-ability, and effectiveness All forms of

your communications should be coordinated

from the beginning of your enterprise to give a

consistent theme that underscores your message

This includes consistent corporate and product

or service logos, brochures, business cards,

cata-logs, packaging, point of sale materials, product

information sheets and stationery This

maxi-mizes the impact of your limited

communica-tions budget

Large companies out of habit, and perhaps

bore-dom, often give their communications an

annu-al face-lift with the purported intent of

suggest-ing innovation It usually winds up only caussuggest-ing

modest confusion and weakening of corporate

focus In Positioning, Trout and Ries point out

this is an ineffective strategy for large

compa-nies It is a potentially life threatening one for

small ones

Your venture is new by definition and needs to

down play this with your outside stakeholders

and business associates Your firm will be going

through all too much change as it finds, defines,

and redefines its strategies A major objective of

your communications strategy is to play down

this turbulence and newness Maintaining a

basic clear communications strategy can subtlely

get your firm over some tough spots in the

mar-ketplace

Communications stability became such a watchword at Umbroller that we used the same blondehaired model, with exactly the same hair styling,for years She became a symbol of the corpora-tion itself The K-Mart buyer remarked to meover lunch one day that he recognized our com-pany stuff by the model In a similar way atAmerican Power the company has used the sameproduct information layout formats that wereestablished with the first brochure

This approach leverages your scare tions dollars plus reassures the outside world ofthe consistency and reliability of your company.This is often most effective with your loyal out-side business associates, such as the K-Martbuyer for the Umbroller, who want to be assuredthat your firm is all that they hope it is In sim-ple terms, after buyers buy a product they want

communica-to avoid buyer’s remorse and be assured they did

“the right thing.” Consistent communicationscan subtlely help you enormously in this regard

Get back to them An important part of your

communications strategy is to encourage yourteam to return in bound fire quickly This meansconcentrating on getting all calls, e-mails, andfaxes answered as soon as possible Fast turn-around time assures people your firm is in con-trol, responsive, and not asleep at the switch

Process to make it happen Get the simple stuff

done quickly When you get the daily mail,stand over a wastebasket and dump out the junk.Deal with the simple stuff quickly Then handout the mail to others with the objective of get-ting as many of the answers out in the first hour

as possible and the rest that day Any thing thatwill take longer should be seriously reviewed and

a possible interim communications considered

customer.

Summary: What to Expect in

the Early Days of Your

Adventure

The early days of running a new venture, or

hav-ing it run you, are similar to ridhav-ing an

emotion-al roller coaster On some days everything seems

exhilarating and fine At other moments it

seems as if everything is falling apart and it all

seems depressing, chaotic, and brutal The

whipsaw effects of these gyrations have

destroyed many a budding entrepreneur

Being alone The most startling contrast to

organizational life for many people is being so

totally alone You must deal alone with

appoint-ments and decisions You are alone in the most

direct way in your office, with your phone and

mail There is neither a community of interest

nor system for support with fellow workers as

there is in a corporate office, university, or

non-profit organization

The business runs you When you make a good

decision, no one applauds When you make a

poor one, no one is there to help The biggest

surprise for most first time entrepreneurs is the

way their business so dominates them when they

actually expected the reverse You are compelled

to go where the business dictates, immediately

and without much discussion as to your

conve-nience

Instant response time When a supplier,

lender, or customer beckons, for whatever

reason, you must comply promptly or often

risk the loss of your entire enterprise In largeorganizations, outsiders can rarely commandnearly this much attention so suddenly and cav-alierly Even if these people do demand thislevel of attention, the response is generallymuted and deflected by other insiders In factthe quick immediate attention entrepreneursgive to these problems is what distinguishesthem positively in the minds of these very peo-ple But it is a very wearing process on theentrepreneur It is like being on 24 hours perday, 7 days per week ER duty alone, or nearlyalone, without a substantial staff as doctors have

in a medical environment

Most depressing element The most depressing

part of new business life is you must deal withindividuals and companies you would neverchoose to do business with if your venture were

a going concern In retrospect, I believe this isthe area I have found most painful in entrepre-neurial life

Solution! This is one reason seasoned

entrepre-neurs often try to skip this phase of ping by raising a sufficient amount of seed capi-tal so they will not This is an area that SiliconValley entrepreneurs shine in and the rest of uscould learn a lot from

bootstrap-How to cope without lots of seed money You

need to concentrate on the 90% that treat youand your company well, not the 10% who riderough shod over you, your company, andemployees The issues that cause these problemsrelate to how your firm should do more, whichusually means paying them faster, funding moreactivities, and the like Since most of theseproblems have their roots in your lack of capital,you can head off many of the problems throughplanning

Recognizing the demand for more In the early

days of your venture you are vulnerable fordemands for more You simply have fewer alter-

Video 5: The Early Days

natives than you will have if your company

becomes a true going concern Also, certain

kinds of people recognize that they have unique

leverage by being in your venture or associated

with it at this time

It is not so much that you can or will give more,

it is a human tendency noted by Alexandre

D’Toqueville in Democracy in America that

revo-lutions happen in periods of rising expectations

Some people recognize this unique opportunity

and want to grab for more; this can be outside

contractors, employees, or a supplier

Complex solutions There is no one size fits all

solution to these problems You must learn to

deal with these issues on different planes First

and foremost, time is on your side To the extent

you can wait these people out, new sources and

replacements will become available Contrary to

conventional wisdom, entrepreneurs usually

benefit from turnover of early contributors This

tendency is dealt with well in Managing the

Equity Factor or “After all I’ve Done for You ” by

Huseman and Hatfield

Some people focus on what they have done and

neglect their current duties with the justification

of “After all I’ve Done for You ” This happens in

many large companies as well Large firms deal

with this problem with job reassignments and

downsizing Your firm has fewer options

You must solve the genuine problems In other

cases you have to hold off angry and upset

peo-ple who want more now despite the company’s

inability to provide it You must protect your

good employees from these assaults or they will

get discouraged and quit or brought over to a

negative position You must get rid of the bad

offenders as soon as you can but not too soon

Sometimes, painful as it is, you must let the

sit-uation fester until you have the outside worldunder enough control that you can deal directlywith these problems and the harsh consequences

to your firm and you personally

Justifiable conflict Many times outsiders will

justifiably stop doing business with your

compa-ny Customers may lose confidence because oflate deliveries or poor performance.Contractors may doubt your ability to pay.Lenders may lament earlier financial commit-ments Employees may find better situations.Seasoned entrepreneurs expect these problemsand deal with them calmly by always controllingthe alternative with backups ready at a moment’snotice

Final note Recognize you are not alone in these

issues In Made in America, Sam Walton

described numerous people he had problemswith of this kind at Walmart It obviously stilltroubled him at the time of the writing eventhough many of the events happened yearsbefore The hardest part is the contentious atti-tude that some of these people take in braying tothe outside world and disrupting your business.Several of Sam’s dissenters did just that andspread the bad word about Walmart and him If

it happens to you, remember that you are ingood company and it is a penalty of entrepre-neurship With this bad news out of the way, therest of your adventure should be fun Enjoy theride and the entrepreneurial high along the way.All too many entrepreneurs don’t and regret itlater!

busi-ness startup initially.

Quick Planning Tips

1 Give each new employee a buddy. A

buddy helps new people make the transition

effectively into your company Most

employ-ees make or break their career in the first 30

days It relates to both what they do and how

they are perceived working and fitting in A

buddy can give them early individual

sup-port, knowledge, and a place to go in their

first critical weeks in your firm

2 Constant job redesign. Missions change

all of the time in new firms Communicate

to all of your employees that job descriptions

must remain fluid and open to modification

and redesign as goals and objectives are

accomplished or abandoned, and new ones

established There is little room in emerging

companies for people who want to do “sameold, same old.”

3 Outsource rush and peak load projects.

If you do this you won’t have people ing new things to do when old things areaccomplished Retailers do this brilliantly byannually hiring lots of part time workers.The part timers know they will leave; the fulltimers know they must continue when thehigh season ends Perfect

invent-4 Weed out pessimists Murphy’s law isalways present Few things are as easy to do

as you had planned You need optimists togrin at the failures and applaud the successes.You don’t need anyone to step on your handsand say, “see, I told you” this that or the otherthing!

5 Weed out sewers of dissension.These arechronic attention seekers They always have

a bad word to say or a dispute, argument,thing, action, or conflict brewing with some-one at work, home, or on the highway (theroad rage crew) Dante called it right many

centuries ago in The Inferno, in his circles of

hell he put sewers of dissension below derers!

mur-6 Three year employee itch. After aboutthree years on the job, many employees start

to coast and take their job and position forPlanning

Chapter Two

granted They can decline into pessimism,

politics, and gotchas It is important you try

to motivate people at this stage to take a

career step forward in your company If it

doesn’t work, you must separate them from

the company

7 Trial employment. Put all new employees

on a 30 day trial basis This is especially true

for management ones Encourage new hires

to take a week vacation, paid or unpaid, from

their old job and work at your place before

committing to long time employment by

either party As the Chinese proverb says, “A

peak is worth a thousand inferences.”

8 Successful new hires: the “will do it”

group.The magic group are those new hires

who will do what they say they could in their

interview You can usually tell this in the first

few days on the job If will do isn’t part of

their make up, use the trial employment

peri-od to terminate them

9 Good employees welcome change. Most

people thrive on variety and change Those

that don’t and get potted like plants can’t help

you much in your business

10.Everyone must absorb some stress.Everyone must absorb some stress so a fewpeople are not overwhelmed with it Helppeople learn to cope with stress by changingthe situation, moving people around, creat-ing different contact points, and defusingyourself and those around you

11.Be the boss. Every organization needs aboss You need teams but every companymust have a boss; that’s you This rubsagainst the grain of some talk that companiesare “all one happy family.” Like most fami-lies, companies have their ups and downs especially small ones If you aren’t willing to

be a boss, comfortable in the role, or can notseparate yourself somewhat from other work-ers, keep the day job

12.You can’t have it all. When youdecide to run your own business you can’tmake all of your kids soccer games, PTAmeetings, and Friday night parties withfriends 9 to 5 ers can; you can’t Get over it

or keep the day job

13.Priorities, priorities, priorities. To getimportant things done, you must give others

up You can’t do it all in the hopes you willget the right stuff done along the way Youhave to focus yourself and company on yourkey products, services, customers, andresources You have to be tough on eliminat-ing marginal activities to make room for theimportant ones

14.80/20 Rule. The 80/20 rule is really the95/5 rule The fancy term is the ParetoPrinciple, “The vital few.” A “few” cus-tomers employees, products/services, andsuppliers make or break every business.Concentrate on the “few” not the Mongolianhordes

Did You Know?

The founders of KFC and

McDonald’s were over 50

when they started their

firms

15.Overnegotiation kills deals. Don't fall

prey to reach and grab in negotiations Get

what you need which is usually less than you

want Let the other side get enough so both

parties feel they got “enough” so you can

weather the inevitable bad times that occur in

most ongoing deals

16.Why not? When told something can’t be

done, ask why not? Big things start with

challenging the status quo and “perceived”

wisdom Who thought that women would

love driving Jeeps and working out? Who

thought that PC’s would be useful in the

home and in business? Industry experts

thought this stuff would never happen

Outsiders who thought differently made this

stuff work

17.Get stuff done Priorities are what youconcentrate on You still need to get all thesmall things done along the way Don’t pushthis stuff aside Handle it once and get itdone

18.Do what you are good at.Hire smart ple to do what you do less well Accept thefact the Renaissance man died in theRenaissance Get over it!

peo-19.Technology is only a tool Technology isnot an end in itself Screen out job candi-dates and eliminate employees who thinkotherwise Employees should only use tech-nology that assists them in their jobs.Anything else is a distraction or belongs intheir personal lives

Business plans are developed to attract capital.

They are used primarily to solicit equity

invest-ments Occasionally they are employed to gain

loans from lenders or increased credit lines from

suppliers The one size fits all approach does not

work for business plans Equity investors seek

growth Lenders and suppliers prefer steady

operations

The Executive Summary

Most investors decide whether to even

con-sider your deal based on skimming through

the first few pages of your plan The way to

turn this process around so it works for you

is to write a concise two or three page executive

summary with a final page of numbers Then

put your complete business plan behind it as a

backup document The executive summary

should include:

-short business summary

-description of primary market

-your product or service

-product or service positioning

-competitors & competitive products/services

-comparison of how your lineup matches theirs

-planned R & D

-consumer & customer analysis

-sales & marketing plans

-operations & execution

-cashflow pluses & minuses

-people

-harvesting & exit plans

-final page of financials

Short Business Summary: Start with your

busi-ness strategy State how your product or serviceexploits one of Drucker’s seven market opportu-nities Then support the logic of your con-tention Indicate the stage of your businessdevelopment, names and backgrounds of keypeople, financial goals, exit strategies, and capi-tal requirement with stock percentages offeredfor its receipt

A sample from the Simply Media ExecutiveSummary: “Simply Media was founded toexploit the incongruities and demographicchanges in the general interest software, busi-ness Simply produces high value concise works

at low prices focused on the X and baby boomergenerations Simply products range from $4.99

to $9.99 retail so they can be distributed widely

on the Internet for direct sales and distributed inthe mass market drug, discount, grocery, book,electronic, and club store outlets where the vastmajority of X’ers and baby boomers buy theirproducts.”

“Products are developed in-house; productioncontracted out with major suppliers; sold by in-house people assisted by independent reps; andfinanced through accounts receivable financing.The line has 60% margins not including adver-tising and Internet revenues, sells to credit wor-thy large national retailers, and thereforerequires a minimum amount of initial capitaliza-tion to reach its financial objectives of $10 mil-lion or more in sales and $2 million or more inprofits.”

Making the business plan

Writing Down Your Dream!

Now that you have written this kind of compact

summary of your business, most investors can

decide whether they are interested in pursuing

your concept further Instead of letting the

investor leaf through your plan at random, you

have guided them to the key summary, or

eleva-tor ride presentation, you want to give

After completing this short summary, you need

to address each component of the plan listed

above succinctly Tip: 90% of investors

make their investment decision before

they ever pick up your complete business

plan So make your executive summary

sharp!

Primary Market This is the overall market your

product or service competes in An example

from our plan: “The annual general interest

budget non-application, non-game consumer

software market is $100 million and growing

20% per year.” Note that these markets fit well

within the parameters of substantial yet not too

large primary markets that are growing but not

explosively You need to define your

opportuni-ty within similar market and growth rate

para-meters for the best chances of receiving external

financings

Products or Services This should be a concise

definition of your product or services The

example from our plan: “Simply has developed

26 software titles in house and acquired another

10 at low cost These are evergreen backlist titles

with long product lifecycles.” Attach product

or service information to your plan for

them to browse through at their leisure

(T i p: angels love to leaf through real

stuff, the more the merrier for many of

them).

Positioning & Competitive Lineup Your firm

must have a clear position or niche in your mary market that is easy for the customer torelate to and understand Is your firm the lowcost, premium, or new offering competitor? Theexample from our plan, “Simply positions all ofits products as the concise complete fun low costmarket entry.”

pri-R & D Plans The riskiest investments are pri-R &

D ones If your products or services are alreadyselling, or are ready to go, your offering has a leg

up on most competition for these equity fundsfrom angels Nothing burns money like funding

a strictly R & D deal Once you are selling stuff,investors love to invest in R & D to do “more.”Emphasize these opportunities

Customer Analysis. Demonstrate why yourproducts or services will be bought because theymeet your customers needs in terms of quality,price, margin, cost, and other factors that areviewed as important in your marketplace Listthe names of large customers, if you have them

Sales & Marketing Plan This is where the

rub-ber meets the road in your plan How are yougoing to sell your stuff? To whom? Be concreteand specific in your response The example fromour plan: “Simply uses PR and retailer spon-sored advertising to reach the consumer Thecompany markets through mass merchants byusing high visibility, compact point of sale dis-plays and employing two key account managersand independent reps nationally to call on keyaccounts.”

Operations & Execution This part must be

carefully thought through and scalable as yourbusiness grows Although complex and difficult

to manage, most investors are not particularlyconcerned about this area because they believegood managers can be hired

ser-vice competes in Ford’s primary market is the automobile market, for example.

Cashflow The above information will dictate

the cashflow requirements of your business

Recap this point so investors match it up with

their proposed investment This section should

be a soft sell Investors know you need some

money and accept that point in principle So

you do not need to overstate your positives here

A cautious approach is respected by most

investors

People Describe not only your current group

but also explain why good people will be

attract-ed to your venture in the future Talent scarcity

is a major problem for most high tech startups

If you do not have this problem, broadcast it

Harvesting & exiting This is the payoff pitch

for the investors All too many plans do not

even include such a section Yours will stand out

if you do include it and emphasize its

impor-tance Investors love to hear about exit plans

Emphasize your plans to liquefy your investors

shares Investors biggest fear is a firm that turns

into a lifestyle company to accommodate the ego

and personal needs of the founder (s), with no

exit strategy for its investors

You can not repeat exit strategies too often in

your writing or conversations with investors

The example from our plan: “Simply plans to

liquefy its equity through an IPO or sale of part

or all of the company The company currently

has buyout interest but no concrete offers at this

time.”

Financials Summary financials should include

three years of projected income statements,

bal-ance sheets, and cashflows These should be

brief in the executive summary

The Business Plan Itself!

The business plan is an expanded form of the

executive summary The simplest way to write

both your executive summary and business plan

is to do the long job first Get the business plandone first Then extract only the most impor-tant points for your two or three page executivesummary plus the last page of financials AsFDR said, it is much harder to write a conciseshort document than a long one

Primary Market Devote at least three pages to

this section Provide brief summaries of keycompetitors and their business strategies Create

a matrix showing price on the x axis and quality

on the y Fit your various competitors into thisgrid The fast food business provides an excel-lent example of a market in harmony for themajor players:

McDonald’s low price/low qualityBurger King mid price/mid qualityWendy’s high price/high quality

The lack of direct overlap is a major reason whythese firms co-exist neatly in the mind of theconsumer and the marketplace, crowding outtheir other competitors over the years

Prospective investors try to determinewhether your firm can fit in your desiredniche and hold your position there just asthe three hamburger chains have

Your Products or Services. Dedicate severalpages to this section Compare your current andprojected offerings to those of your competitors,much as was done in the competitive matrixabove Investors seek market expansion prod-ucts These kinds of products do not directlythreaten current competitors offerings and pro-vide new competitors such as your businessstartup with a chance to grow before they suffi-ciently annoy competitors enough to draw acompetitive response

Microsoft had this situation initially as a ness startup They did small software projectsfor years, without bothering any competitor,

busi-before doing the DOS project for IBM Even

then they provided little threat to any

competi-tor Only ten years later did they go head to

head against major competitors when they

intro-duced Windows 3.1

Positioning & Competitive Lineup This falls

out of your analysis of your primary market and

your product or services offerings Describe the

current situation as well as the one your project

will unfold over the next few years In

particu-lar, investors are seeking clues to indicate

whether your firm will survive in the medium

and long term

They usually need to believe you will be big

enough in comparison to your competition to

withstand the inevitable competitive response if

your products or services make a splash in your

marketplace Compaq grew quickly enough to

survive IBM counter attacks in PC’s

Netscape did not get big quickly enough to

sur-vive Microsoft’s competitive response and had to

be sold to AOL Most early investors made

enough money along the way, though, for the

project to have been considered an investment

success

R & D Plans Concrete plans that emphasize

exploiting the low hanging fruit are the most

appealing to investors Commit to staying in

your niche This will help allay investor fears

you may wander too far afield in your research

and marketing activities, an all to common

busi-ness startup failing

This is a totally legitimate concern Few new

businesses have the self-discipline to avoid

deworsification American Power’s strength

over the years, and a major reason for its

amazingly orderly growth, was their

mar-keting commitment to develop only

prod-ucts in their UPS niche They chose to expand

into more countries with the same products

rather than the riskier approach of developingnew product lines for new markets This is amuch safer and more profitable approach since itreduces overall overhead as well as R & Dexpenses Plan the same way

Customer Analysis Provide the most evidence

possible about your targeted customer, theirbehavior, and how it favors your products or ser-vices Supporting demographic data is veryhelpful A clear target market is the most salablepoint of all

Sales & Marketing Plan A detailed analysis is

mandatory Specify how you will reach yourmarket (s) Direct? Indirect? House sales reps?Outside Reps? Internet? Distributors? A com-bination of some or all of them? Be as concrete

as possible Describe the stages and evolutionyour plan will undergo as your business develops

In the marketing portion, show a creative use offunds featuring PR and low cost targeted adver-tising when appropriate With Umbroller weused a controlled circulation magazine to reachour narrow band of consumers with new bornebabies

At American Power we emphasized the use oflow cost PR focused on PC specialty magazines.This worked well with the investor community

If you talk about high flying ideas such as tising on TV most investors will burn your plannot just throw it out

adver-Strike a balance between a certain boldness with

a conservative touch This is a tough

proposi-tion However, this is the area in which most

new ventures fail getting their products or

ser-vices marketed and sold effectively

Operations & Execution. Companies make

their money here Despite this fact most

investors skim this section and find it boring

American Power profitability and long term

value related directly to operational excellence

Yet this aspect of the business was off putting to

most early stage prospective investors and

lenders In fact, several banks turned us down

for being “boring,” to quote a loan officer from

BayBank, now Fleet bank (note: the bank

offi-cer was clearly respected within the firm because

he was promoted several times subsequently)

You need to demonstrate your interest and

com-petence in this area but not discuss it too much

or they will fear you are another boring

compa-ny Peter Lynch emphasizes finding these kind

of companies as wonderful prospective

invest-ments Most investors do not follow suit

although they may pay lip service to the Peter

Lynch approach

Strike a balance between providing enough

operational detail to indicate competence but

not too much to suggest boredom Many angels

would scream upon hearing this Bottom line,

though, operations excellence doesn’t excite

them

T i p: This is the classic marketing

prob-lem that people “say” they do or believe one

thing, and in practice do quite another.

The marketing trick is to work the

incon-gruity in your favor as we suggest you do here in

the operations section of your business plan.

Cashflow. All investors worry about this

ongo-ing issue Your plan must address this matter

thoroughly

Tip: Small companies die because they run out of cash, not profits This is the ugly fact that torments most business startups.

Work out your cashflow plans in detail withmilestones as to when you will become bankableand finance your capital needs through outsidefinancing Describe these steps realistically withcontingencies built in for the inevitable short-falls

People. Biographies of key people and advisorsare both helpful and necessary Most plans needsome window dressing with experienced notablepeople involved Put the dressing on the board.You need line people to run the show itself

Staff people usually have better resumes but linepeople get stuff done once you have set yourstrategy This positioning of people in your plan

is a balance Outside investors tend to be moreinterested in the sizzle so give your staffers frontrow billing while your line people make it hap-pen in the actual business

Harvesting & exiting. This is the most tant section for investors It works but I can’t getout is every investor’s nightmare This happened

impor-at American Power It required a major down with the CEO, backed by the outsideinvestor’s legal leverage, to make this work

show-Everything worked out wonderfully well But itwas touch and go for awhile So talk exitand talk it up some more in your plan

Control the alternative by having variousexit plans in parallel: a new round offinancing to offer old round members liq-uidity; sale of part of the company with oldinvestors being able to piggy back their shares inthe offering; a sale of the whole company; or anIPO, the ultimate investor home run The IPO

is the home run because it generally has a muchhigher valuation than if you choose the simpler

approach of selling the whole company.

Remember that all investors can do is get money

out of your company, plus a little rub off glow

from its success As the founder you gets lots of

things, including the money Keep this in mind

when formulating this section Think, “exit, exit,

exit” because money is all they can get

Financials Three years of detailed projected

income statements, balance sheets, and

cash-flows are required The first year should be

monthly; thereafter quarterly is sufficient

These should include assumptions, both high

and low forecasts (we recommend two sets of

financials; one to cover each projection, high and

low), and a great deal of thought underpinning

the numbers

The best financial plans, like wartime ones, get

disrupted upon contact with the real world But

well designed plans based on resilient business

models tend to stand up well The hallmark of

planning excellence are well thought through

contingencies, alternative planning, milestones,

and similar attempts to cope with the

unfore-seen which usually happens

Most plans work like ladders If you can reach

one step, you are ready for the next one A great

and credible way to build flexibility into your

plan is to lay out your growth and expense plans

but make clear that the time to get there is

uncertain but the growth curve, like the ladder,

will be consistent

Summary Executive summaries and business

plans are more than an academic exercise trying

to raise money They should be your game plan

for success At the same time, you need to gear

your plan towards the interests of most outside

investors, using the suggestions throughout this

chapter These should be working active

docu-ments that you modify as circumstances change

Keep them vital and up to date

Using the Plan to work for you

Tip: Investors invest with emotion and defend their decisions with logic.

Therefore, use the executive summary tointerest outside investors in your businessemotionally Solidify their emotional interestwith the logical support of your complete busi-ness plan

Executive summaries get read Business plans

get skimmed at best or given to junior people toreview for due diligence purposes 90% of duediligence merely supports the original emotionaldecision based on the executive summary orskimming the business plan This is as true forVC’s as it is for angels, friends, or family

Shrewd entrepreneurs try to get in front of asmany potential investors as possible Eachmeeting lets them work out the executive sum-mary to see what works, what doesn’t, and refinethe plans accordingly It also increases the odds

of making a sale

Improving your plans Use an observer to

mon-itor the impact of your oral presentations toinvestors Have them debrief the investors aboutwhat worked, what did not, and what changeswould convince them to invest if they have notalready done so Most plans start with a certainmagic and hidden mine fields Your task is toidentify the mine fields and eliminate them

Raising money is a sales task. Since raisingmoney is a sales task, read one of the great sales

books such as Strategic Selling or Spin Selling to

get some pointers (these books will helpyou with your sales mission in general)

Tip: The most effective sales people are those that describe themselves as some- thing else entirely Bill Gates, for exam-

ple, was a great salesperson that started withquite average products

Dell, Polaroid, H-P, and IBM were all led by

great sales people in their early days who talked

as technologists They used their commitment

to technology to sell people emotionally on the

fact their products and services were excellent

Over time they made them excellent; they didn’t

necessarily start that way! Good salesmanship

got them started and provided them the time to

work on their products and services

Describing yourself as an entrepreneur

commit-ted to your product or service works Just don’t

forget to close the investors on your deal!

Raising the Cash & Financial

Structure

Cash analysis Your first step in financial

analy-sis is to determine how much cash and credit

your venture will need to get launched and then

survive for two years To accomplish this, first

complete your executive summary and business

plan Then divide your needs into different asset

types described in previous chapters The major

distinction will be between working capital,

which has a group of logical prospective lenders,

and long term capital, which has others

Cash businesses. Businesses that receive cash

or the equivalent for their sales have an

enor-mous leg up in financing their business startup

and growing capital needs This takes all the

pressure off the firm for raising moneys to

sup-port accounts receivable Credit card purchases

are virtually cash transactions with only a small

time delay by your bank COD shipments

qual-ify in a similar way though the delay in receipt of

the check may be a few days

Since over 50% of the working capital needs for

most business startups not losing money are

required to support accounts receivable, theadvantages of not having to do this should bereadily apparent This is one major reason why

so many business startups begin in cash orientedmarkets These include such businesses as retail-ers, restaurants, and most service companies

Credit term businesses Manufacturing

busi-nesses and those with a physical fulfillmentcomponent require much more working capitalbecause they usually must provide credit terms

to their customers For this reason, many ufacturing companies start by subcontractingout their work to gain credit terms for them-selves from their suppliers to lighten the burden

man-of financing their own accounts receivables

Contractors will often extend up to 90 day terms

to a business startup if they see enough profit tothem in their products or services Given thepressure of your working capital needs, it is oftenadvisable to forgo some extra initial gross margin

to improve your working capital position by ing on outside vendors for this indirect form offinancing This was done successfully atUmbroller, American Power, and Simply Media

rely-Calculate your working capital needs Working

capital needs are the moneys you need for lar expenses, not long term ones, minus yourreceipts After you have determined what youcan outsource to improve your cash position, youneed to determine the timing of cash needs, bypayroll period, so you can secure the appropriateamount of lender and investor financing Sinceyour firm usually needs to pay suppliers andemployees prior to receiving your own payments,unless you are in a cash business, shortfalls willoccur that must be covered by outside financing

regu-Plan for the worst scenarios so there are no prises for investors Most would rather dig a lit-

assure that they get the goods before releasing their check.

tle deeper into their pockets than be called

urgently at the last minute for additional help

Often, of course, this prudent course is

imprac-tical and you have to try to muddle through ,

hoping for the best and preparing for the worst

Calculate your long term needs Estimate what

fixed assets your company will require to operate

for the next two years Triple that amount and

your numbers should be about right on average

This is not excess caution but advice based on

long experience Early planning inevitably

overlooks the extra printers, desks, packaging

equipment, graphic computer, and other items

that are required as your business startup

pro-gresses Much of this financing can be obtained

by the original equipment sellers themselves

which removes most of the burden from your

immediate cash needs

Summary You now have sufficient information

to plug into your business plan to determine a

broad range of your cash requirements Include

a miscellaneous category of 5% of sales to cover

unforeseen contingencies This will both

impress your investors and provide you with a

cushion should things not work out as

expected which is usually the case in business startups

Capital Sources

Obtaining credit is similar to finding and selling

new customers Seek out and identify prime

prospects; then pursue them aggressively until

they are closed, just like with a key sales account

Materials or contract vendors Vendors are the

easiest source of credit for business startups

because most need new business and

purposeful-ly accept a certain percentage of bad debts in this

area to encourage customer acquisition Most

vendors recognize that there are three types of

Your task is to sell them on the fact your

compa-ny fits squarely in the third magic category sothey will do business aggressively with your firm

Office Suppliers Most suppliers of goods,

ser-vices, and equipment for offices have veryaggressive credit granting programs for businessstartups and small companies in general Thesecompanies rely on new firms for their salesgrowth They want to create an initial relation-ship and then expand it as the small firm needsmore products or services

Their articulated objective is to get in on theground floor and expand as their customers do.IBM did this brilliantly in the past when theirsales people scoured the world for business star-tups so they could be first in the door of startupsnew offices to sell them office equipment Otheroffice vendors learned this lesson well IBM haslong since abandoned the practice and onemight add, their growth

In some cases you will have to select your pliers based more on vendors’ granting creditthan on comparison of their products or services

sup-to others Do so You need credit for everythingyou can get it for, both to defer spending yourscarce cash and build up your corporate credithistory Cash is king in the business startupworld

machine, PC, or desk.