Monthly Archives: May 2012

Execute The Idea

Many businesses start these days by vetting a good idea in front of an audience. We present at conferences, competitions, and events like the IdeaSlam at Cary Innovation Center. For some, the whole process of deciding what idea to pursue can be daunting. (The director of a small business center at a local community college who has been asked to tell an inquirer what kind of business to start validates this fact.) Those who never start a business, but envy those who do, will say that they could have been rich if only they had thought of a concept first. Whichever category above fits you, know this: the initial idea is not the key to success–execution is!

Herein lies the “rub” — that many entrepreneurs expend enormous amounts of energy, financial capital, and (often) human capital in an effort to make an idea work that needs to be rethought. Frequently, we call in favors and have been know to burn bridges in the headlong pursuit of our personal holy grail. Emotionally, it is easy to become consumed with the idea to the point that we are blinded to any and every other thing around us–even important things! Along with the emotional “sunk cost,” we often lose our objectivity because of the amount of money invested in the initial idea.

Far more important is a rock-solid business model that creates value for a customer, especially relative to existing solutions. When the business model is battle tested through the incubation process, it becomes invincible. Very few businesses end up creating billions of dollars of value based on the initial idea – superstars such as Facebook, Apple, and Microsoft changed their business models many times before settling on a scalable solution.

-Karl Stark & Bill Stewart

Stark & Stewart go on to say that too many folks are afraid to share their idea with others for fear it will be stolen/copied. They are quick to point out that the true value lies “not in the idea, but in the execution.” Their approach is to share the idea broadly enough with others with different points of view, more experience, and who can offer healthy skepticism that will help you to re-work the idea. It is the supreme compliment to have your idea “stolen.” But, fear not–you still win the competition with superior execution. Three tips they offer for improving execution:

1. Stop perfecting the idea, and get out in front of customers.

The business you develop through a test and learn approach will be worth multiple times more than your original idea.

2. Don’t focus on things that don’t exist.

Instead, look at existing solutions and figure out ways to create more customer value than what those solutions offer.

3. Positively differentiate yourself from the competition.

Most products can’t be all things to all people. A differentiated product will attract a segment of customers that value different things. An innovative start-up is almost always advantaged when chipping away at a market leader if they can offer something different that appeals to a small group of customers.

What is needed, in the final analysis, is a process to create value. One process that I’ve observed to work is the Six Steps to Success program being used with mentees of EntreDot:

  • Ideation – Determine if the idea has any commercial merit
  • Conceptualization – Complete the concept development and determine market value
  • Creation – Perform R&D and establish proof of concept
  • Evaluation – Complete the business plan and determine business value
  • Preparation – Prepare the launch plan for the business
  • Commercialization –  Commence business operations

As the business owner goes through the steps, sustainable customer and shareholder value is created. When the process is “complete,” it is, in fact, just beginning as entrepreneurs are encouraged to go back to the drawing board with the next idea. The commitment to executing idea after idea creates a strong market position that is hard to duplicate.

Watch Your Burn, Then Take Off!

When entrepreneurs start businesses, one of the last things they want to think about is running out of money. Whether the money is one’s own, that derived from friends and family, angel investors, or the bank, it has to be managed so that cash outflows are balanced by reserves and inflows. The term “Burn rate” is used commonly to describe  negative cash flow in a start-up. It indicates the speed of depletion of invested capital form shareholders. Once the cash reserves are used up, the company will either have to start making a profit, find additional funding, or close down. Venture Capitalists (VCs) are obviously very concerned about burn rates because they don’t want to see their investments wasted.

[Tom Tunguz, of Redpoint Ventures, in his blog, Ex Post Facto, writes the following:]

How does a VC think about your burn rate? First, it’s important to note that every company is different. Second, geography is an important factor. Third, pure consumer companies’ finances will differ dramatically from  e-commerce or SaaS companies. Given all those caveats, I’ve made a table of the rough figures that I expect to see in a company of various stages, immediately after financing.

When I make an investment, my aim is to fund the company to a milestone that enables the company to raise a subsequent round. Such a milestone tends to be achievable in 12 to 14 months. But a startup should raise 18 to 24 months’ capital to ensure some flexibility in case things don’t go according to plan.

A good rule of thumb in Silicon Valley is that every employee costs about $10k per month. By that estimate, a company of 20 people burns $200k for staff plus 25% for overhead, or $250k per month/$3M per year. This is on the richer side of burn rate calculations but given the rate of increase in engineering salaries recently, it may be closer to the norm.

For revenue generating companies, net burn (revenue – expenses) should be kept under $400k – $500k. A company burning more without the immediate prospect of revenue can be a concern because of how quickly these high burn rates reduce runway. Additionally, the company should aim to reach cash flow break even sometime after the Series B, before a Growth round. Again, every company is different, these guidelines are the mental model I’ve built of typical companies who have pitched us and worked with us.

Granted, Silicon Valley is more expensive than many other locales. Similarly, labor rates/salaries that drive the burn rate math are higher than in other regions. Even still, Tunguz makes a good point about the need to raise about 50% more than one expects will be required in terms of time to reach milestones. The “runway” referred to is the total amount of time before the venture crashes and burns due to lack of cash. As your company grows from solopreneur to employing 5+ people, these guidelines should come in handy to successfully manage the enterprise and its valuable cash.

Resurgence of Manufacturing Entrepreneurs

 

Any study of the world of design reveals that concepts go through cycles of acceptance, falling out of favor, and rebirth. New renditions using different media or materials are brought to market and find life. In the world of entrepreneurship, similar patterns exist. E-commerce stores allow small businesses to compete with acclaimed retailers like Costco. The old-fashioned corner store emphasized personal service. Now, there are customer service “departments” that are outsourced to stay at home mom businesses in the heartlands. Back in the day, before either the industrial or information age, there were many businesses operating out of the home. Now, with internet access, we see a return to “cottage industries.”

One of the sectors that has experienced severe shrinkage and job loss domestically is manufacturing. The decline has been steady over several decades and many have lamented that we can never get back to where we were. What if the principles of design, retail, etc were applied to manufacturing? Could it experience a resurgence that makes it a key economic driver again?  We are living in an age where start-ups are more plentiful and the amount of capital to get into business and keep it afloat is perhaps less than ever before. It stands to reason, then, that we could see a flurry of manufacturing start-ups, but what would have to happen for it to occur?

Bradley Starr writes in a blog for Entrepreneur Country about the (re)new(ed) trend of people who want to make products again, rather than intangible services–he refers to this group as “Makers.” He argues that the Makers are a movement that is good for small business and that many are realizing that they don’t have to become huge to be financially successful. Themes that ignite manufacturing entrepreneurs include technology, networking, and mass customization:

New technology driven tools such as the first of the low cost 3-D printers, numerical manufacturing machines cheap enough for the home and Arduino electronic controllers, enable small organisations and individuals to manufacture components, complete assemblies and machines that were previously the province of large organisations with big machinery.  Collaborating with other Makers, designers and business services amplifies the skills, capability and capacity.

Networked small business is a most powerful force.

So Where’s the Market?

In two places:

1)    Where made to order locally is more efficient than shipping in bulk from the other side of the world
2)    Mass customisation and other small run products

If, for example, you need spare parts for a car, does it make sense to tie up cash and warehousing holding stock?  The new machines can manufacture to order locally at a competitive price, and the low cost of the machines means that an engineer can run their own small business supplying this market.  You just need to hold a relatively small amount of easily available raw material in order to make a wide range of products to order.  Low cost of financing, fast delivery, great service.

The ability to produce small to medium runs of products cost effectively opens up the enormous opportunity of more individual products, giving free reign to design ambition and consumer choice.

Global product uniformity could be on the way out to be replaced by a far more interesting world.

Nothing short of a mini-industrial revolution is on the verge if enough believe what Starr says, in part echoing a Wired magazine article last year celebrating the Maker movement. This may become the “shot in the arm” so needed in former factory towns where “made in America” still carries a swagger and mentors abound with deep manufacturing experience. The potential to pair these experienced mentors with entrepreneurs, utilize new technology tools, benefit from networks and market conditions is an opportunity economic development groups should not ignore. Likewise, our educational institutions and chambers should champion the effort. Who’s game?

 

Good insights, Dan. We run into these issues with many clients.

Leadership Freak

You can’t lead when you know too much.

Education establishes barriers to thinking. Everything that comes your way is instantly judged by what you know. In some cases the less you know the more open you are.

People with knowledge say things like, “We can’t do that because…”

Another reason you can’t lead is too much experience.

You’ve been doing your job for years. You say things like, “We’ve always done it this way.” People with experience resist change.

Knowledge and experience hold leaders back when they result in closed minds.

Three qualities:

New worlds antiquate old worlds. Turbulence, new regulations, cultural shifts, and technological advancements make old knowledge and past experience less relevant. During changing times leaders must possess three qualities, in this order:

  1. Character.
  2. Curiosity.
  3. Courage.

Character is acting in harmony with who we are and in alignment with noble virtues.

Curiosity is the ability to withhold judgment long…

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A Cord of Three Strands For Start-Ups

You know the old saying…that a cord of three strands is not easily broken. Yet, a cord with only one strand has much less strength. In the sports world, we see this concept played out most clearly in tournaments or playoffs. During the regular season, a dominant athlete can carry the team on his or her shoulders to seemingly improbable heights. Yet, under the microscope of postseason competition, the stakes are higher, the other team has similar talent, and the group with the most balanced attack with strong chemistry usually wins. Think Michael Jordan early in his career versus mid-career. Or, Robert Griffin III more recently. There are many stories of similar outcomes.

In the world of entrepreneurship, the principle rings true as well. Rare is the company founder who reaches great success who hasn’t enjoyed some substantial help along the way. Sometimes, it can be a co-founder. At other times, key employees. Externally, the founder may rely on a mentor or some key strategic allies. Whatever the dynamic, it is important to recognize our need for objectivity, resources, and expertise that we personally lack. 

Steve Olsher, the author of Internet Prophets, writing for Under30 CEO, espouses the virtue of serving before being served, and explores joint ventures versus alliances as a way to build a company. In the article, “You Can’t Do it Alone,” Steve defines joint ventures as being a more short-term relationship established for mutual benefit. He compares this approach to  the real estate market where someone invests in a condominium development, expecting a return as soon as the unit is built and sold. Alliances, continuing the analogy, are more like apartment investing because the return is longer-term and the fundamental math lends itself to retirement of debt early and increasing profits later.

Olsher offers the following advice on how to build a strong alliance:

Developing and maintaining strong alliances requires understanding the art and science behind the magic.

The first step is to know yourself. Grant yourself time and permission to understand who you are. Devote focused, quiet time to identifying your WHAT—that is, the one thing you were born to do. In order to form powerful alliances, you must know who you are. The reason is simple: an alliance is predicated upon providing value to others. If you’re unclear about what you have to offer, providing meaningful value will be met with consistent incongruities. The successful know exactly who they are and how they can best serve the world.

Before seeking to form alliances, understand who are the most likely beneficiaries of your knowledge and identify partners who can provide access to those who fit your desired profile. Ideally, the more you choose to live like a sniper and takes aim for the center of the bull’s eye, the more success you’ll realize. The successful focus on forging alliances with perfect partners and bring tangible value to the relationship. Like marriage, creating long-term mutually beneficial alliances takes work—a lot of work. The time and effort required for this to happen represents the single biggest difference between a joint venture and an alliance.

The “fiber’ of the strong cord is recognizing that one does not have a corner on knowledge–that there are others who have just as much–if not more–knowledge and/or experience in other areas. Taking the time to truly understand those with whom you need to build a strategic relationship is the “yarn” that is woven into your approach to business, and hopefully, your company culture. If you can systematically seek to know what will make others successful and determine to play a role in their success, you add strength to  their efforts as well as your own. Strands, then, are the individual interactions that you have with these allies, mentors, etc. They are periods of time when a significant exchange of ideas, perhaps monies, occurs and the interaction reaffirms the value of the relationship. While it is more allegorical than empirical, I’d argue that three mutually beneficial “strands” of interaction are a minimum for long-term success. Don’t be in a hurry to get an immediate return, as would a condominium investor–think about who and what you need for the long-term!