When and Why to Withdraw Money From a Start-up

Working with entrepreneurs all day every day produces a certain fixation with what is most important to their survival. Unfourtunately, what is best for the business may not (in the short run) be what is best for its founders. Constantly, with existing operating businesses, there is the challenge of how much to compensate the owners and be fair about it. With start-ups, the goal is to get to the place that one can get paid at all. 

Recently, I ran across the story of Vinyl Me, Please. This new business is seeking to capitalize on the revived appreciation of vinyl records. While the number of records sold nationally has increased each of the past five years andby over 17% in 2012, the co-founders are trying to realize the benefit of the trend in their own business and wallets. They still are not earning a living from their efforts, though the prospects of doing so are better than at any prior point.

Vinyl recordsJeff Cornwall at Belmont University writes that, “The niche that Vinyl Me, Please fills is to bring new and interesting music to a new generation of vinyl record enthusiasts.  Each month the subscribers to Vinyl Me, Please are sent a brand new, hand-wrapped vinyl album from a relatively undiscovered artist. In addition to the monthly vinyl record, subscribers are assigned a personal music consultant who gets to know their musical tastes and preferences.  Every month the consultant creates a personalized playlist specific to each subscriber. Vinyl Me, Please brings together in one service what today’s young music enthusiasts want.  Their customers love the sound of vinyl, they like to interact on social media with friends about new music to try, and they like the surprise factor they get from services like Pandora.”

As a daily user of Pandora (and demographic that grew up with LPs), I can truly appreciate this business concept. Interesting to every new venture is how to make the most of market trends to create customer experiences that are profitably delivered and fun to pursue. Cornwall observes of the Vinyl Me Please business model that, “although they have identified what their market wants, their model has proven to be a challenge to scale to a large enough size to pay the founders a consistent salary.  They need to grow to at least 700 subscribers to reach this important milestone.”

He goes on to provide an account of his interaction with one of the co-founders, Matt Fiedler, and what he feels needs to occur next in their business development:

“The biggest challenge we face is keeping the personal touch,” says Fiedler.  “We think this is what makes the experience unique to a lot of people and is something we’re going to have to fight through in order to achieve true scalability.  We need to find a way to maintain a personal touch but be able to bring a massive number of customers into the system without it straining the resources of the company.”

They have recognized that it will not be possible to continue to hand wrap the albums as the business grows.  They also are looking at ways to make the personal consulting more efficient.

“We have plans to set up an internal database that allows us to categorize and sort music to create a more efficient process around creating playlists,” explains Fiedler.  “We are also looking at rolling out a playlist-only offering that will help us capture more users and, at the same time, start paying our consultants without dipping into the revenue that comes in from standard, full-membership subscribers.”

This commentary demonstrates the need for business launches to be very iterative, flexible, and responsive. Finding some group who will purchase your product or services is not enough; sustainability comes with staying attuned to original and ensuing target market needs.

 

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Picking a Small Business Niche That Will Grow in 2013

Some business owners just started their enterprises since the 21st century “great recession.” Others have been in business considerably longer. Whether new or “seasoned,” most want to know what trends their businesses face. Knowing growth rates of a market sector can be very helpful–if for no other reason than benchmarking one’s own performance against the average of one’s peers. A company that compiles a lot of research data on small businesses in my own back yard of Raleigh, North Carolina is Sageworks. In an interview with Catherine Clifford of Entrepreneur.com, Libby Bierman of Sageworks said that a recent study by her company showed the average growth rate of small businesses across all industries was 8% in 2012.

While growth is a very good sign, there are winners and losers in every statistical average. Certain sectors, however, performed poorer than others. According to the research, the slowest growth industries for U.S. small businesses in 2012 were:

  1. Skilled nursing care facilities: -3.29 percent
  2. Printing and related support activities: 1.86 percent
  3. Automotive repair and maintenance: 2.81 percent
  4. Offices of physicians: 3.00 percent
  5. Highway, street, and bridge construction: 4.24 percent
  6. Insurance agencies, brokerages, and other insurance-related activities: 4.32 percent
  7. Lessors of real estate: 5.07 percent
  8. Other miscellaneous manufacturing including jewelry and silverware, sporting and athletic goods, dolls, toys, and games, office supplies other than paper, and signs: 5.55 percent
  9. Offices of health practitioners other than physicians and dentists, including chiropractors, optometrists, mental health practitioners, speech and occupational therapists: 5.98 percent
  10. Other amusement and recreation services including bowling centers, golf courses, and recreational centers: 6.03 percent

As I reviewed the list above earlier today, it occurs that personal services, low technology manufacturing and discretionary spending-based businesses have been it hard. Why would this be the case? In terms of  the personal services businesses, many of them are healthcare related. The Affordable Care Act may have a lot to do with this poorer performing sector, as many have shunned making decisions to invest capital in an arena that is in extreme flux. Many before me have written about the loss of manufacturing jobs to overseas competitors. In the United States, we have become less competitive in manufacturing that is not highly customized or based on a technology. Whether infrastructure projects or amusement, spending is down on items that don’t seem necessary. Take note if you have a business in any of the above sectors. While you may be able to outperform your sector, you may consider how your sector as a whole is not growing as quickly as others. How should you respond? This question should drive your strategic planning.

Professional officeHowever, the list of fastest growing sectors (below) identified by this research highlights some additional trends and opportunities. Many who have the flexibility to diversify or move their efforts to one of these sectors should seriously consider doing so.

Fastest-Growth Industries for U.S. Small Businesses in 2012

  1. Residential building construction: 14.77 percent

  2. Building custom software and servers for businesses: 14.29 percent

  3. Machinery, equipment, and supplies merchant wholesalers: 13.75 percent

  4. Management, scientific, and technical consulting services: 12.31 percent

  5. Architectural, engineering, and related services: 11.40 percent

  6. Foundation, structure, and building exterior contractors: 11.37 percent

  7. Building finishing contractors who make additions, alterations, maintenance and repairs: 11.32 percent

  8. General freight trucking: 10.41 percent

  9. Services to buildings and dwellings, including pest exterminators, janitorial services, and landscaping: 10.11 percent

  10. Other specialty trade contractors, including site preparation activities and other specialized trades: 10.04 percent

Most of these businesses, as Bierman mentions in her interview, require very little capital to get going. They do not require the purchase of expensive assets and can be successful based on the strength of human capital. As a result, business services firms are performing strongly and should continue to do well.

 

 

 

 

Does Your Company Have an Innovation Identity Crisis?

 

Intrapreneurship – some would argue it to be a subcomponent of innovation; others, an outgrowth of; still others, a precursor to. Regardless your perspective, the concept that some organizations lack the culture to innovate effectively begets the question of how to change said culture. Many wonder what makes the greatest difference in an organization’s ability to innovate. Matthew May is a blogger on innovation and consultant at EDIT Innovation. He wrote recently of the”things that prevent a company from cultivating a companywide culture of innovation:”Corporate culture

1. Innovation identity crisis. If you assume that the consultants at Booz & Co are correct, there are perhaps three distinct approaches to innovation: needs-based, market-driven, and tech-centered. The first is the “humanist” approach good designers take.  The second is the “capitalist” approach…the fast followers that optimize…like a Hyundai, or in many respects Toyota. They capitalize on Clayton Christensen’s “innovator’s dilemma,” quickly copying and even improving on game-changing innovations as they hit the market. The third is the “technologist” approach, like an Apple. Many big companies simply don’t know or can’t easily conceptualize which of these categories they fall into, or should fall into, given their bench strength. 

2. Unclear innovation strategy. Roger Martin, dean of the Rotman School and coauthor of Playing to Win, likes to ask “given your chosen approach, where will you play and how will you win?.” It’s a question of focus, which is something different (albeit a nuanced difference) than prioritization. It’s the ability to identify what you’re going to say NO to. Steve Jobs was great at this, and you’re now seeing the clear picture under his rule become blurry. 

3. Inaccessible definition of innovation. People hear innovation and think: gizmo. Or app. Or code. Or product. Or service. Or feature. JetBlue’s founder David Neeleman said,  “Innovation is figuring how to do something better than it’s ever been done before.” 

4. No common methodology. We’re not taught in school to innovate. We lose our natural born capacity to learn and create new knowledge. Unlearn the ways of business execution and (learn to) define a problem by observing or experiencing it, guessing how to solve it, creating a solution based on that guess, and quickly seeing if what you assumed might work actually does. 

5. Methodology doesn’t feature experimentation. The mindset has to be “I think this may work so let me try it out.” Scientists work on hypotheses, which is a fancy term for guesswork. If people aren’t getting their hands dirty out in the field with users and customers, testing early low-fidelity prototypes and adjusting a solution, they won’t be able to truly innovate. 

6. Mismatched talent-to-task fit. Innovation is about divergence, rapid prototyping, testing and failure. Big outfits might go to school on Lockheed’s Skunk Works. Kelly Johnson, Lockheed’s maverick Chief Engineer (broke) away from the main operation, (stole) away the hip thinkers many consider the lunatic fringe, and set up shop in secrecy to essentially get back to the garage, with the charge being to design a working prototype under a few intelligent constraints. 

May’s points are well-taken. Companies that haven’t worked through their internal language of innovation find it hard to have productive conversations about how to go about improving their ability to “do something better than it’s ever been done.” Being able to have clear definitions provides the basis for shared goals, methodology, and talent strategies.  The sharing of desired outcomes, coupled with high level commitment to venturing, is the starting point for cultural fitness. 

 

Midlife Entrepreneurs Better Prepared Than Younger

One of the most gratifying things I get to do is work with entrepreneurs and business owners to optimize their businesses. In the area where I live, most of the media attention is focused on technology startups usually run by people in their 20s. What I find interesting about the new businesses in our area is that the founders who are willing to rent an office and hire a consultant or take some classes tend to be mid-life entrepreneurs. These older entrepreneurs actually are more prevalent than the younger ones. Dane Spangler, a researcher at the Ewing Marion Kauffman Foundation wrote in a 2009 report, “in every single year from 1996 to 2007, Americans between the ages of 55 and 64 had a higher rate of entrepreneurial activity than those aged 20-34.” Also, according to the 2011 Global Entrepreneurship Monitor U.S. Report — a survey of a representative sample of the U.S. adult-age population — 15.4 percent of Americans aged 55-64 and 12.8 percent of Americans aged 45-54 run their own business, compared with 0.8 percent of Americans aged 18-24 and 4.9 percent of Americans aged 25-34.midlife entrepreneur

Bureau of Labor Statistics data on both incorporated and unincorporated self-employment show an even more extreme pattern. The rate of self-employment is higher among people in their 60s than even those in their 50s, let alone those in their 20s or 30s. In fact, the bureau’s surveys of American workers reveal that people aged 65 to 69 are self-employed heads of corporations at four times the rate of people aged 25 to 34. 

The Small Business Administration reports in its recently released publication Small Business Economy that, from 2000 to 2011, self-employment among people under 25 dropped 9 percent. Among those aged 25 to 34, it fell 8 percent, and for those between 35 and 44, it declined 24 percent. By contrast, self-employment among those aged 55 to 64 rose 54 percent, while it increased 36 percent among those over 65.

Scott Shane (A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University) shares an interesting observation that, even in high technology, entrepreneurs are much more likely to be over 50 than under 25. Research by Vivek Wadhwa, Richard Freeman and Ben Rissing shows that these older entrepreneurs, while they fly under the media radar, are very prolific and on the rise.

Shane asks (as you might), “Why are baby boomers more likely than their kids to be entrepreneurs?” He goes on to answer his own question:

Researchers have two hypotheses, the second more plausible than the first. The first explanation is a cohort effect: Today’s young people don’t want to run their own businesses as much as their parents did were when they were young. The more plausible explanation is an age effect.

The reason Shane provides for the cohort effect being a weaker argument is a body of research conducted at UCLA within the Cooperative Institutional Research Program (CIRP). CIRP points to a trend over the past quarter century whereby college freshmen are less likely to want to be a “business executive,” “accountant,” or “actuary.” Instead, a higher percentage want to own a business now than previously.

So, while more freshmen want to be business owners, fewer people in their early twenties are actually starting businesses. This is where the age affect provides an explanation. Those who prefer this argument would say that the experience gained and savings accumulated over a period of fifteen years or more give one more confidence to start a business later in life. While there are certainly more responsibilities for the stereotypical midlife entrepreneur on the home front, this age group appears to have figured out how to address those responsibilities and still be willing to start businesses at a higher rate than the younger counterparts.

What’s holding you back? Start a business as a second career!

 

Know the Customer Before Business Planning

Previously, I have referenced the column from Inc.com on “Herding Gazelles,” written by Karl Stark & Bill Stewart. These guys have a consultancy that works with businesses on strategy as it relates to attracting investment. Their contributions to Inc are well thought out and I enjoyed this morning’s edition:

We have been working with an early-stage enterprise tech company to help them get their product to market. We recently gathered to watch their first customer installation. They were naively fearless–they knew things would go wrong, but they didn’t know what or how severe the problems would be.

No one, however, expected the install to go as badly as it did. If there was a feature that could be broken, it was. If there was a process that could be challenged by the new technology, it was. If there was a remote possibility that some network setting would cause chaos, it did.

All the testing they did in advance didn’t prepare them for “real” users. The tech team was at first horrified by the volume and severity of the challenges they experienced. But then something amazing happened. They showed us exactly why we are excited about their potential.

They took a deep breath, stopped trying to gloss over the challenges, and instead embraced their flaws. They encouraged users to try to break things. They feverishly took notes as they learned what they needed to do better.Customer insight wordle

The customer wasn’t scared off by the bugs because our client had prepared them for possible issues. The team was honest about where the problems were, but more importantly, they showed the customer their resolve to learn everything that they could to develop a great product. The customer’s attitude actually shifted from tolerance to excitement as they realized the system was going to be refined beyond just fixing flaws and that they were going to be a part of designing a system that they would love to use.

The tech company accepted that they didn’t know it all and eagerly solicited feedback from the customer. The experience gave them the best free product development input they could ever expect.

We thought to our own client experiences, and the experiences our other clients have with their customers. If we can all listen to customers as openly as this tech start-up did, we will not only build great products and services, but we will forge the sort of lasting relationships that most companies seek.

When developing new products and services, it’s good to trust your intuition and your internal expertise–to a point. But when an opportunity to learn from a real live customer presents itself, you need to be all ears. You can’t possibly know it all if you don’t recognize the wisdom of others.

What is recommended here echoes what I am sharing with entrepreneurs on a recurring basis: until you fully understand the needs of your (target) customer, you are fooling yourself as to the viability of your business model. Taking the time to first identify target market segments, then messaging appropriate to each, followed by testing your proof of concept in an effort to revise your offerings is Business 101.

We are passionate about the need to understand how your target buyer thinks, what is important to them, and how you can produce something that they perceive as highly valuable. Asking is a great start! Slowing down from product or service development, let alone ongoing business operations, and asking yourself tough questions requires discipline and commitment. Kudos to those who are strategic enough to realize the potential compound payback on the investment!