Conventional wisdom tells the entrepreneurs that they should always write a business plan before a new venture. When isn’t this a good measure of advice?

I went to the local library and did a survey of all the how to write a business plan books. This is what I found in these books.

Entrepreneurs must develop a business strategy with backward integration, horizontal integration, and forward integration plans. Plans should also have market-intensive strategies, diversification strategies, adaptive strategies and defensive strategies – not to mention the assessment of diversification, retrenchment, joint ventures and partnerships. For each strategic approach entrepreneurs should consider return on investment, growth potential, stability of earnings and employment, corporate ownership, social responsibility, and its effects on branding campaigns and our market traction trends. They need to examine whether their planned channels are expensive, unreliable, inadequate, or experiencing scare supply. They must have an operational management plan. They must identify linkages and critical paths and perform capacity planning. They should flow chart every aspect of our business. They must produce financial projections and estimates for the next three to five years. They must identify risk in each area and have contingencies plans. They must employ the state-of-the-art project management techniques.

No wonder entrepreneurs dread writing a business plan. When you just have a product idea, this is all meaningless dribble. The result is the business plan becomes a work of fiction and its opening statement should be …

Once upon a time …

I decided to read a novel – Valley Forge by Newt Gingrich and William R. Forstchen. My house is filled with non-fiction books. While there are many fiction books, most belong to my daughters who read Dr. Seuss and Harry Potter. There was one novel, a gift, sitting on our book shelf and so I read it. The events of the book are about a well-known historical account in American history that school children learn many times over. Oddly, I found myself taking notes. The book had so many parallels to what I see go on in start-ups. The book focused on the people involved in the event, not the event itself. It was how people behave in a new organization that was so accurate.  Many of the situations resonated with me because I had been involved in these situations, as well as having reached the same revelations as the characters did. 

After a start-up has become known and successful, everyone wants to know the founders and leaders of the new company. What most don’t realize is that it was not smooth sailing to get there. There will always be those in the organization that doubt the correctness of the current direction, and openly scheme to try to take control of the company – to pursue a different direction. George Washington acted like the CEO of a company, his officers were the other key people of the start-up, and the new Congress was the investors.

As the authors noted, “As to George Washington as commander throughout these crucial months of the Revolution: He showed remarkable genius and a gambler’s instinct, so crucial to victorious generals…It is easy today to assume that our heroic image of the memory of General Washington stood as solid then as it does now…Oftentimes, men who are judged to be icons were mistrusted and indeed hated by their contemporaries. Only victory at the end proved their wisdom and their place in history. And so it was with Washington. The conspiracy to destroy his reputation and have him removed was indeed real.”

One common reason entrepreneurs start a new business is to control their own destiny. They believe they will be in charge, that those joining the start-up will have their passion and embrace the mission statement and direction of the start-up. Like Washington, they don’t realize that when the risk and stakes are so high, people behave in ways they never encountered before.  As to the above, I’ve seen many founders removed or replaced by the investors for various reasons. In Silicon Valley, the pushed aside founder often takes on the title of Executive Vice President.

Here are some more parallels …

“What the rebels lacked in proper training they more than made up in enthusiasm and their passion – the later was something that was indeed lacking in nearly all the armies of Europe.” Large companies are filled with big staffs of people who just do their job, who put in the hours, and have no passion for their work. They mindlessly follow processes and procedures because they were done before or someone told them to do it, not because they make sense. This is a weakness start-ups must exploit.

The American army was different than the European ones. It took three years to train a soldier for a European army and a strict command structure was enforced. The American army was comprised of short-term volunteers, who might not be in the army for a year much less three years. It demanded a new type of army.  According to Washington, “he didn’t wish to see, nor would he tolerate the type of mindless discipline instilled by the British army in their troops. He wanted an army of men that could think, could seize the moment and lead without looking over their shoulders for direction. He wanted one that could beat their professional opponents at their own game.” Start-ups can’t afford mindless drones that simply know how to push buttons, use computer software, and create paper work procedures; everyone needs to be able to think for themselves. I would rather hire someone with the right attitude and the ability to think, than hire someone who has experience.

“A year and a half after the signing of the Declaration of Independence, there was a staggering collapse of fortunes in just one year. The bravado of the colonists was gradually overwhelmed by a series of defeats. After the initial victories, even George Washington naively believed the war would indeed by over with by summer.” This is one business lesson I’ve noted time and again. It’s a hard fought and long road to the top, but the decline can be as fast as falling off a cliff.  In my experience, new start-up workers have between 12 and 18 months of unbridled enthusiasm for the new venture before settling back into a daily, mundane routine. Similarly, early adopters may love your new product, but the mainstream customer is quite different. It’s often naïve thinking on the part of a start-up when they believe the warm reception by the first customers will translate into droves of mainstream ones.

And my favorite passage that takes place as a battle is going badly due to the conservative approach of his second in command. “Gone was any remaining self-doubt. While in the future Washington would seek counsel and advice, he would always do so with the knowledge that his instincts and judgment would be the final arbiter of what needed to be done.” This really hit home with me.  Everyone spends many years in the school system that teaches us to think and reason before we act or make a decision. We are led to believe that the thinking process is superior to our gut reactions.  What I’ve learned is that instinct is of equal importance because in a start-up, you never have all the information needed to make an accurate thinking choice and what remains is your instinct.

Watch this animated cartoon video of an investor’s meeting to see what investors dislike about start-ups and why they don’t get funded.

Topping the list of investor dislikes is

1. Neglecting the business of the product and focusing on the development of the product
2. Declaring a BIG market for the product by citing market research numbers without knowing how they are going to break into the market, get their first customers, and start to gain market traction.
3. Declaring there is no or little competition. There is always competition, even if it’s indirect and comes from in-house development or simply business-as-usual.

Many entrepreneurs believe they need game-changing, disruptive, or revolutionary technology to attract investors. What investors know about truly new, never-been-seen-before products is it takes a long time for market adoption. Such a lengthy time frame means the start-up needs to have great skill in raising funding just to keep the start-up operating for the needed period of time. The longer it takes to exit and the more capital required, the smaller their share of the company becomes.

Investors’ biggest concern is having their share of the company diluted to almost nothing.

We’ve all heard it over the years. If you want to succeed, you need to have a passion for what you do, but why it is so important to entrepreneurs and start-ups?

I am a big fan of replacing the traditional business plan with the concept plan for fledgling start-up companies. There are many famous start-ups. While it’s unlikely, deep down every first-time entrepreneur hopes that they will be the founder of the next corporate icon. A common misconception is the founders of those great companies created the perfect product and had the all-knowing business plan at the very beginning. That’s not what happens at all.

So what does passion have to do with it?

Most entrepreneurs are impatient people. They want to introduce their product to their customers quickly and they dream of an instant success.

There are no overnight or quick successes. When an entrepreneur starts a new business, it usually takes 2 to 3 years to determine the right product and business model. No matter what the founders’ backgrounds, markets are dynamic and experimentation creates the company and its product.

Every new avenue and experiment brings hope that this will be the one that works and propels the company into stardom, only to have those hopes dashed over and over again. And once the current business experiment fails, there is despair as the entrepreneur desperately tries to think of what to try next. It’s difficult to continue to believe that every failure brings the entrepreneur a step closer to the success desired – even if this progress is imperceptible. It’s the passion for what one does that sustains the entrepreneur through these times because it surely isn’t the absentee customers or the disappointed investors or the naysayers all around them.

We all heard it said that success is the result of a series of failures. While we all accept this wisdom, it’s not so easy living through the failures. It’s true though that once you succeed, no one remembers the failures – and this is where the media creates the impression that there are overnight successes.

What I’ve learned over the years is there aren’t any easy businesses to be in, they all have their challenges. In every market, there are the businesses that fail and those that succeed. The problem is we don’t often hear about the ones that fail. The overnight success is a myth.

Many want-to-be entrepreneurs ask what type of business they should create and what product should they offer. I’ve actually put this question to investors and the response I always get is, “If we like what we hear and see, then we will invest”. However, the answer is simple. Entrepreneurs just need to ask themselves the question, “What am I passionate about?” because another lesson I’ve learned is that any and every type business can be highly successful. It’s the passion that not only sustains the entrepreneur to work through the failures and the process of starting a new business, but it’s the passion that attracts the customers and investors to the company as well. Passion, enthusiasm, and attitude are huge factors in achieving any goal.

Draft Picks and Venture Funding

Draft picks work a lot like funding a hot start-up. In the movie, the N.Y. Yankees and Boston Red Sox had a budget four times larger than the Oakland A’s, as such they could buy what they wanted. Likewise, the more prestigious venture capital firms attract the best start-ups, the smaller or new VC firms can’t get into the best deals. I remember Michael Dell moving his investment firm out of Silicon Valley because he couldn’t get into the great deals.  Who are the VCs play a big role in who is willing to join the company – the better known the VCs, the better talent that can be attracted because the more compensation can be paid. Big names and backgrounds of key players in a company create the image that VCs need to take companies public or sell them to acquirers.  I’ve seen stats on how many IPOs are venture-backed, but I’ve never seen stats on how many of those IPOs are around 5 years later.  I suspect not many. VCs have perfected the art of dressing the pig and placing a ‘for sale’ sign up.

Trading Players and Portfolio Companies

The trading of players in mid-season was fascinating. As the season was unfolding, the Oakland A’s were trading away viable and good players just so they could get crucial players from other teams. When a start-up is venture-backed, it simply becomes a portfolio company.  VCs shut down or close portfolio companies, not because they aren’t viable businesses, but because they need to divert funding and attention to the more promising ones in their portfolios. The fate of any one start-up is connected to the other unrelated start-ups in the portfolio, even though they have different products and address different industries. Many entrepreneurs begin start-ups so they can control their own destiny. What many don’t realize is that when your start-up is in a portfolio company, this is just a myth.

Scouting and Deal Flow

The baseball scouts searched for new, upcoming youngsters for their teams, but even with a great athletic track record, the scouts can’t predict whether any one young recruit with be a major league superstar in the future. Every ventured-backed start-up is considered to have the potential to be a corporate superstar. Yet in the past ten years, they’ve funded twice as many start-ups as the number of companies listed on the US public exchanges and few of their funded start-ups have made it to the level of an Amazon, eBay or Google.

Opportunities Don’t Always Come From Where Expected

Most VCs agree that success isn’t within the control of a start-up: the start-up controls one-third of the factors for success, the competitors control another one-third, and chance accounts for the rest.

In the movie, Oakland A’s are in deep trouble. They didn’t have the season they wanted, their star players were leaving the team for better ones, and they didn’t have the funds to buy top talent to replace them. To make matters worse, most of the team’s back office workforce was entrenched in the business-as-usual attitude and wanted to rebuild the team in the traditional way. However, the GM knew he needed to do something different, to take a path no one had ever used before. It was the only way to succeed with the lack of team talent and budget. Doesn’t this sound just like a start-up company?  During a meeting, the GM meets a youngster that told him to look at team building with a completely different perspective – this was the unpredictable, chance happening that turned the tide.

Another clear lesson for self-funded or bootstrapped start-ups; you can’t play the game the same way as the venture-backed start-ups with big funding or large Fortune 500 companies do. Too often, high tech start-ups are founded by geeks that want to figure out how to create a start-up from behind their computer screen. It doesn’t work. Founders need to get out and meet people so they can have that chance meeting or spark of inspiration.

Youth Matters

In the movie, there is much descent from those with decades of experience. If you are going to do something new and different, the reality is that it is easier with younger employees who are willing to embrace the new approach. Seasoned or older employees have experience in older approaches and are often resistant to take a new path – some will support it and some won’t. The unfortunate truth with a limited budget and constrained resources, those unwilling to accept the new approach can’t be allowed to stay around the new organization. This is the reason start-ups are filled with young professionals and maybe just a few seasoned ones. It’s also why VCs don’t often fund seed or early stage start-ups unless the founders are less than 40 years old.  This comes out in the movie, where the GM had to fire an older employee and had to manipulate others so they had no choice but to comply with the new approach.

The Moment True Success Comes to a Start-Up

There is a statement, which appeared years ago in Harvard Business Review that has stuck in my mind, “True management vision can only be found through true desperation.” At the beginning of the movie when the team loses it star players, what do you think the GM’s first solution to the problem was? He went to the owners and asked for a bigger budget. When he got rejected, he had to become creative. He had to think outside the box. He had to risk doing something different. I encounter this with startups. They try to take the big company path until they have no other choice, and that’s when they start to succeed.

Most entrepreneurs don’t get funding from investors, but many do want to have investors. Here is a true story of two entrepreneurs wanting funding.

What went wrong for these budding entrepreneurs? They had no interaction with customers, no development of partners, no contract manufacturer, and no proven business. They had spent all their time developing the product prototypes. Investors fund businesses, not products. Many entrepreneurs never get this point.

When the New Year arrives, everyone thinks about what they want to do in the upcoming year. Some people write a New Year’s resolutions list, others just put some thought into what their goals are to be for the year. Entreprenuers always have a list because they tend to be goal-oriented people.

Here’s a useful technique for becoming what you want to be. I have to admit that it’s not original. I wrote it down some time ago and I have no idea where it is from.

“Acknowledge yourself for the characteristics that reflect you to a high degree. Then choose a few characteristics that aren’t part of your personality or daily habit, and ACT AS IF you already embody these qualities. Acting AS IF breaks down subconscious resistance and helps you assimilate new ideas and traits more easily.”

I see many aspiring entrepreneurs. Oftentimes, they feel the need to know all the answers before they act on their ideas.  Or they feel that everything has to be in place, as expected or planned, before they will get going with their start-up.  Sometimes I think we need to grow back down and be kids again, because ‘not knowing’ would never stop a child. For them, just inching one step closer to their goal is good enough.

A preschooler will see a television commercial and ask for the toy on the commercial. Mom says, ”No, you have enough toys”.  Next, the child will ask Dad and if he says “No” too, then ask Grandma. A child will ask anyone. A child will even ask a stranger to convince Mom of the worthiness of the toy. Once that avenue is exhausted, the next words spoken by the preschooler, “Can we go to the toy store?” Mom says, “No, but I’m going to the supermarket, do you want to come with me?” And the preschooler responds, “Yes”.  When they pull into the parking lot, the preschooler will say, “Look, there’s the toy store right next door to the supermarket. Can we go and just look?” Every parent knows where this is going. Once in the store, the preschooler looks for that toy, and will ask to take it home. My husband always falls for this strategy, my youngest always get her toy. Kids are fixated on the goal, the method of achieving it doesn’t much matter. It’s great if they achieve their goal in one big leap, i.e. Mom said “yes” immediately, but just moving closer to the goal works too. There are times when entrepreneurs need to think more like kids – how would a preschooler solve your problem?

We all need to be inspired from time to time.  The New Year is the perfect time to do this.

Everyone needs to believe that the best is still yet to come.

It’s a common pricing strategy for new businesses. Break into the market by offering your product or service at the lowest price. The long term intention is to build a customer base, audience, and experience, and eventually raise prices. It makes sense, but why doesn’t it work?

There are famous examples of the low cost provider technique working. Often the reason it doesn’t work is because the start-up isn’t implementing it in the same manner or they are missing the nuances. Like many ideas, the general concept is sound, but the devil is in the details.

Let’s take a look at my neighborhood. It was built about 100 years ago. As such, there are both many home remodeling projects and homes being torn down only to be rebuilt. When a construction company is working on a home, the company places a big monument sign out by the curb to announce their company to the neighborhood. Every year there are two construction companies that seem to have most of the projects, and every year the names of those two companies change. Why?

Someone decides to start a home construction company. They figure they will be the lowest bidder on every project. Since homeowners have no real experience on which to judge the quality of proposals, the primary consideration with choosing a contractor is cost. So that season, they win most of the proposals. The next year, they raise their prices because they learn that being the lowest cost provider is a marginal business. They need better margins in order to be a viable business. They don’t get as many projects the following year because there is always some new entrants looking to buy their way into the market, just like they did the year before!

In the second year, the upstart was trying to offer the same product or service, but just charge more for it.  They didn’t realize that there were no barriers for new players and there would always be someone trying to break into the business.

Toyota is one of the famous examples of getting this strategy to work. When Toyota first entered the US market, they made the most basic car possible and offered it at a low price. It was the smallest car offered – the mini of minis – and it was cheap. When Toyota raised their prices, they didn’t just take this same car and slap a new price tag on it. That little car got a reputation for being more reliable than any other car. The people driving those bigger cars wanted a more reliable car as well, but they didn’t want to go small or give up the luxury perks of their big cars.  So Toyota made a bigger car with features beyond the basics, and offered it at a higher price. And then they offered an even bigger car with all the luxury bells and whistles, at an even higher price. Toyota made a bigger and better product and charged more for it. Also, it’s expensive to start a new car maker or even a new car line, capital is the barrier to entry. There just couldn’t be a new set of players ever year.

Another car example is General Motors. Long ago, when cars were the latest high tech product, large scale manufacturing gave them the ability to significantly reduce prices as volumes and demand increased. But they didn’t do that. Instead they keep their prices high by adding more features to the car. 

This is a common mistake many new businesses make. They enter a market as the low cost provider.  To increases sales, the strategy should be one of increasing volumes to capture greater margins from the economies of scale, not to simply offer the same product at a higher price.  If a higher price is desired, the company has to offer a better product.

What is Buyvite?

Buyvite is a group payment system that is set to launch in December 2011. We have created a unique web/mobile based application that is designed to leverage the power of social commerce in a very streamlined and user friendly way. Our proprietary system functions differently than similar companies. 

How did you get the idea for the company?

I have been working professionally in Internet marketing for many years.  I project manage a lot of interactive and ecommerce development projects and work with clients on digital marketing.  I work at the agency level and have also launched a side company that builds iOS apps. So the idea for the company sprang from my existing technical and marketing background, but also came from seeing a need that wasn’t necessarily being addressed in the most user friendly way. I go into every interactive project with the philosophy that form follows function.  From the smallest website build to a large scale Fortune 500 intranet project, I always want to make sure that the UX is intuitive and easy to navigate.  For me, I think that helps generate ideas. I like to look at how something is currently designed for the user and think of ways to make it a more satisfying experience.

 What were the first steps in going from the idea to actually starting the company?

The game changer for starting Buyvite was when I aligned the company with Rocket Ventures. They are a local seed fund and incubator that were instrumental in helping to source funding for the company, assisting with team building and offering expertise with crafting investor presentations, an area I was not that experienced with. I think anyone interested in starting a company should find a regional start up incubator. It can be invaluable to partner with a group solely focused on getting good ideas to market. 

What have you learned so far from the experience of beginning a start-up that you didn’t know before?

Starting a company or venture is not an easy undertaking and there are definitely hard lessons learned along the way. Some of these lessons are obvious and often iterated but ring true. Statements like you have to fail to succeed, have a thick skin, believe in your idea and never give up. But for my experience the top three lessons are to believe in your idea and other will too, go into every project with the intention of learning from the experience, not necessarily for immediate success, and be conscious of who you are bringing to the table to join your team.

-Perseverance is critical. If you have experience in a particular vertical and can deconstruct the landscape to see a different or more efficient way of doing something that already exists, persevere. There will be a lot of people who don’t see the value of your concept, maybe even from inside of your industry. But if it’s an area you understand and clearly have a vision for, then investors will trust in your passion and ability.

-For me, lessons of past failures have often have led to future successes. Investors always want to know what experience you have to help get your company off the ground. For me, I complemented my full-time job at an agency with side businesses like launching a magazine, an iOS App Development business and a Facebook App. None of these efforts were ground breaking or made millions, but these experiences built confidence in my investors that I had the skill and ability to create and direct a technology startup.

-Be careful who you hire. It’s no secret that the technology startup climate seems to favor young men, fresh from college with big ideas, but little business knowledge. I have made the mistake of hiring people lacking in professional experience in hopes of being able to leverage knowledge of their demographic and hire them at a reduced rate. This has proven to be a mistake more than a few times. It’s been my experience that it’s much better to hire professionals than to have to roll the dice with an unpredictable situation like a college intern. This is definitely not a knock against college interns, but when you are outsourcing work to someone not on your payroll, it can be precarious.

How did you plan the trajectory of buyvite for the next few years? 

The plan for Buyvite over the next few years is to grow the company organically with strong partnerships, excellent customer service and by staying true to our company mission. Someone I respect in the industry recently said “startups don’t need to boil the ocean.” I think that’s a great way of looking at the best way to launch a new venture. Coming out with a beta product and a Times Square Advertisement is not the approach we are interested in. Our goal is to thoughtfully and methodically grow a successful enterprise that prioritizes the experience of our partners and our site members.

For investor-backed start-ups, particularly those in venture capital portfolios, it is absolutely imperative. Funding depends on notoriety. Start-ups need to leverage the excitement, they need to heavily promote and market the deals. By one venture capitalist’s estimate, thousands of people in the investment and start-up community need to know about the start-up in order to attract more investors. Hype builds market, investor, and customer confidence.

Hype builds momentum, not only with investors but also among the customers and market.  A venture capitalist noted that for venture-backed companies, building their audience and gaining market traction is crucial in the first 5 years. During this time, they aren’t overly concerned about revenue and profits. It’s only after this initial market penetration phase that they look for the big push with revenue traction.

If you track media coverage of start-ups, note that whenever a start-up is looking for a new round of funding, they suddenly are appearing everywhere in the media. If the start-up is positioning itself to go IPO, it becomes an overnight sensation in the press. If a start-up is seeking an acquisition, there will be an announcement in the press about the pending deal. The reason is they want to see if they can flush out more bidders. If you are a competitor of such a start-up, don’t believe everything you read or hear about the start-up; it’s meant to paint a rosy picture.

If entrepreneurs want to turn their start-up into a big, corporate icon then they not only have to understand the importance of hype, but entrepreneurs must embrace it. And this is where have an extroverted CEO is quite helpful.

But does this hold true for those bootstrapped or self-funded start-ups?

Yes, of course. Because ultimately, what this all comes down to, is people wanting to buy from companies that are familiar to them. This is true not only for customers but also investors.

Hype was simply seen as vision; a grand vision of what the company could become. This may come down to Henry Ford’s famous quote, “If you think you can do a thing or think you can’t do a thing, you’re right.”