infoChachkie

Pour And Stir I – In Pursuit Of The Ideal Business Model

2009-10-20T20:22:59Z

Note: This is Part I in a four-part series on The Perfect Business Model. Click here for Part II, Part III and Part IV

Authentic, hand-crafted Persian rugs always include intentional imperfections. They are said to be, “Perfectly Imperfect, and Precisely Imprecise.” The same is true with many crafts and architecture created in Muslim cultures.

I am not a Muslim scholar, but a layman’s interpretation of this tradition of intentional errors is that it arises from the belief that attempting to emulate God’s perfection is sinful.

Fortunately, entrepreneurs need not fear running afoul of this sin when crafting their business plans, because all of them are inherently imperfect and imprecise.

Attributes Of The Perfect Business Model

Although entrepreneurs need not fear offending God with their flawless business plan, it remains a worthwhile ideal. Falling short of perfection may result in a business with enough positive attributes to succeed.

At the most basic level, the ideal business model is simple: Pour and Stir (P&S). As is true with most business axioms, this formula is straightforward – the more money you deploy, the more money you generate. As shown at left, pour your money into a customer acquisition funnel, apply a bit of gentle stirring to generate a steady flow of mo money, mo money, mo money.
A number of online business models lend themselves to such P&S wealth generating chicanery.

No matter how well honed your P&S business model, every money making machine has its limits. If you pour too much money into the top of the funnel too quickly, it will be wasted, running over the sides and never reaching the bottom. If you fail to deposit adequate cash into the top of the funnel, your results will be suboptimal. The trick is to modulate the inflow of cash with the ever changing market conditions in order to maximize your financial return.
The essence of the Pour and Stir model is represented by the following simple formula:

The cost to acquire a customer < lifetime value of a customer

Although the P&S formula is clear-cut, it presupposes that you have insight into your customer acquisition costs, as well the revenue generated by each customer.

Ideal Business Model Attributes

Some of the market and product attributes which lend themselves to the P&S business model include:

No Inventory – Inventory sucks. It must be manufactured and shipped, it becomes obsolete, employees steal it, it must stored, customers break it, it malfunctions, and it tends to injure your most litigious customers.

Not A Service – Services suck. They must be carried out by humans, who require pesky things like paychecks, vacations, sick time and personal days. Services do not scale, as the more services you provide, the more humans you have to hire. As noted in Pressure, you can create a comfortable lifestyle business by delivering services, but services preclude you from utilizing the P&S business model.

Highly Trackable – Trackability does not suck. If you cannot track the cost required to acquire your customers and their lifetime values, you will be unable to take advantage of P&S. The more aspects of your business that you can quantify and measure, the closer you will come to perfection.

The stirring process involves a bit more than a simple hand crank. To properly operate the P&S model, you need a dashboard akin to a 747 control panel. The more dials you monitor, the greater your insight regarding how market factors impact your business (i.e., competitors, customers, costs, technology, etc.). However, for the dials to be meaningful, you must have the means to accurately track a variety of real-time data.

A bias toward trackability will force you and your team to justify each marketing dollar in highly quantifiable terms. If you cannot mathematically demonstrate that a particular dollar spent on customer acquisition yields more than a dollar in revenue, then do not spend that dollar.

Salient Value Proposition – The more clear and concise your value proposition, the cheaper it will be to communicate. With GoToMyPC, we honed a very clear message, “Access Your PC From Anywhere”. As discussed in How Much For A Rib, understanding your customers’ perception of your value proposition is vital to crafting a profitable business model.

Click, Click, Try, Buy – Ideally, customers should be comfortable purchasing your solution online, without picking up the phone. If this is not possible, offer customers a risk-free trial to utilize your solution before purchasing it. If you cannot offer a trial, capture enough information online so an inside salesperson can readily contact your prospects.

More complex sales, as well as those involving higher price points, are well served by soliciting trackable calls. Companies like RingRevenue offer advertisers the ability to track calls like clicks and thus extend the P&S model to a broader array of products and services.*

At its most elemental level, there are two macro dials you must control to execute the P&S strategy; lowering your customer acquisition costs and increasing your customers’ lifetime values. These issues are explored more fully in Parts II, III and IV of the P&S Series.

Perfect Imperfection

Unlike a Persian artisan, there is no need to intentionally include imperfections in your business plan. No matter how hard you try, your adVenture’s constantly evolving business will always fall short of perfection. However, by understanding the principles of the P&S approach, you may create a business in which you consistently convert a dollar into a dollar and change. Once you accomplish this, your P&S business will create significant wealth for you, your employees and the remainder of your Stakeholders, إن شاء الله.

Full Disclosure: I sit on RingRevenue’s Board in my capacity as a Partner at Rincon Venture Partners.

______________________
John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
______________________

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Sales Kids With Grit – Web 2.0 Paper Routes

2009-10-20T20:24:24Z

What do Warren Buffet, Martin Luther King, John Wayne, Walt Disney, Harry Truman and Wayne Gretzky all have in common? In addition to all of them reaching the pinnacle of their chosen professions, they also all started their careers performing the same job.

All of these extremely successful individuals were paperboys*.

At its peak circulation in 1969, the weekly newspaper Grit had a circulation in excess of 1.5 million. Each paper was delivered by a child and all of the money was likewise collected by children and sent to Grit’s main office by snail mail. Despite its inherent inefficiencies, Grit was able to sustain a profitable business reliant largely on youthful labor for over 80-years. Surely a savvy, modern-day entrepreneur can utilize online tools to leverage young peoples’ collective energy and fervor.

Through Rain, Sleet, Or Snow

Similar to the entrepreneurial attributes described in The Lemonade Principle, a newspaper route not only built character, it prepared children for a lifetime of success. For children with a proclivity toward business, a newspaper route provided an invaluable opportunity to develop the following entrepreneurial skills:

Punctuality – Newspapers had to be delivered on time, irrespective of the weather, the fact that Sunday papers can weigh several pounds each or the requirement to wake up at the crack of dawn

P&L – Each route was effectively a small business. Newspaper boys collected the cash owed by each subscriber and dealt with delinquent payers. Chasing down deadbeats is an invaluable real-world experience. They also accounted for each paper and were often financially penalized for any papers which were lost, thereby developing strong internal controls.

Customer Service – As newspaper boys were the face of their employers, savvy carriers learned to establish healthy customer relationships to facilitate timely collections and generous tips.

Sales – Many publishers, including Grit, encouraged newspaper boys to create new routes and expand existing ones by aggressively selling subscriptions to non-subscribers. This pay-per-newspaper formula directly rewarded the children’s sales efforts and sparked a life-long entrepreneurial fire in generations of newspaper boys.

Make Money – Get Prizes

Newspaper delivery was not the only way that children in the US’s pre-litigious era could learn and deploy important entrepreneurial skills. Other entry-level experiences for budding entrepreneurs included selling items marketed in comic book ads.

The American Seed Company, as shown in the accompany ad, encouraged young people to sign a simple “contract” that read:

“Please send me your Big Prize book and one order of 45 packs of American Seeds. I’ll sell them at 20₵ a pack, send you the money and choose my prize.”

In bold print, the ad also states, “Send NO MONEY, We Trust You”. The ad includes two coupons, under the heading “Mail One Coupon Today – Give the other to a Friend”, an example of old-school viral marketing. Wow, a simple contract, a statement of trust and viral marketing, three great lessons for young entrepreneurs.

Since the late 1980’s, opportunities for children to run their own businesses have been supplanted episodic fundraisers in which children are asked to sell a variety of over-priced items, such as wrapping paper, community coupon books, candy, etc. Unfortunately, such campaigns are generally carried out by parents, rather than their children. In addition, the money generated goes to the charity, not into the kids’ pockets. By breaking the link between work and reward, such endeavors do little to foster youthful entrepreneurship. Understandably, the pricing has to be excessive to provide sufficient margin for the product’s producer and an adequate incentive for the non-profit organization. Yet when a child attempts to sell such mis-priced items, the experience is often discouraging, due to the poor cost / value equation associated with such fundraising products.

Boys To Men

Unfortunately, the paperboy has met the same fate as the iceman, milkman and diaper services. Rather than pining for the past, the demise of the paperboy represents a huge opportunity for an entrepreneur who can harness the talents of enterprising 12 – 17 year olds.

In order to devise a job that will accommodate modern youth, one must explore why the paperboy turned into the paperman.

Plaintiff Trial Lawyers – Plaintiff trial lawyers, who excel at bringing frivolous lawsuits against entrepreneurs, found that juries were particularly partial to young people hurt while working, irrespective of the actual culpability of their employer.

Working Parents – The trend toward families in which both parents worked fulltime made it increasingly more difficult for children to also hold down a job, as the parents’ ability to assist the paperboys during inclement weather were diminished.

Nonsense of Entitlement – Families in which both parents worked increased the average family’s disposable income, which was passed along to their children in the form of relatively large allowances and overall largess. As noted in (Non)sense Of Entitlement, a spoiled, privileged attitude is detrimental to an entrepreneur’s success and to a would-be paperboy’s motivation.

Death Of Dailies – Prior to the late-1970’s, most cities had morning and afternoon newspapers. As newspapers consolidated, morning papers became the sole survivors in most cities. Although paperboys decreasingly delivered morning papers, the early hours, hazardous conditions (e.g., darkness during the winter) and the other issues noted above combined to severely limit their numbers. Once the afternoon dailies ceased publication, the century-long era of the paperboy essentially ended.

Web 2.0 Alternatives

There is little disagreement that modern kids spend too little time playing outside and an inordinate degree of their waking hours in front of their PCs. Rather than bemoaning this reality, entrepreneurs should focus on how startups can harness America’s youthful energy and creativity, without asking kids to wake up at 5:30 and slog through the snow, ice, sleet and rain.

The entrepreneur who devises a modern-day online equivalent to the paperboy route of yore, will print money. A number of online sites support the potential viability of a youth oriented business, including:

Auction & Classified Sites – eBay, Craig’s List and similar sites allow users to easily sell items online, without creating a dedicated website or incurring marketing expenses

Outsourced Self-expression Sites – Cafepress, Printfection, Zazzle, deviantART and a variety of other sites allow users to create and sell their creative works online

Affiliate Marketing – As described more fully in Pour and Stir, anyone with basic web development skills can become an affiliate publisher and generate income by creating websites that market a variety of products and services

Search Engine Management (SEM) – Search marketing can be performed by anyone with a rudimentary understanding of Google AdWords. The key to effective SEM is diligent and vigilant review of the keywords and their respective effectiveness.

A clever combination of these existing tools, coupled with a bit of trust and a business model that allows young people to be directly rewarded for their efforts, will create substantial wealth. If it was possible for publishers during the past century to leverage the talents of hundreds of thousands of young people with the rudimentary technology of their day, such possibilities clearly exist in the Internet age.

Calling All Entrepreneurs

The old-world newspaper business model is vanishing. However, with change comes opportunity. No doubt a young entrepreneur will eventually devise the modern equivalent of the paper route. Not only will such a venture generate significant wealth in the near-term, it will also help a new generation of young people establish and develop vital entrepreneurial skills that will serve them well as they ascend to the height of their chosen careers, in the footsteps of Buffet, King, Wayne, Disney, Truman and Gretzky.

* I realize numerous girls also delivered newspapers, but I could not locate any who went on to prominent careers. I hope that my decision to not use an awkward, yet politically correct reference, such as “paper carriers”, does not offend anyone.

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Fast Follower III – First Mover Disadvantage

2009-09-30T01:58:24Z

This is part III of a three part series. Click here for Part I and Part II

John Fitch was first. He spent the majority of his adult life fruitlessly attempting to capitalize on the novelty and uniqueness of his invention. Unable to raise funds from wealthy individuals, he solicited $300 from a hodgepodge of small businessmen, including tavern owners, grocers and physicians.

In a matter of months, he developed technology that was superior to that created by the world’s leading scientist over the prior 15-years, despite his lack of a formal education.

He debuted his technology in Philadelphia at the 1787 Constitutional Convention. It exceeded his expectations and thrilled those who witnessed it, including a number of prominent Founding Fathers. However, he was still unable to secure adequate funding to commercialize his technology.

Fitch spent the next three years traveling the country repairing clocks as a means of surviving, all the while saving money for the eventual launch his venture. In 1790, he began offering a service that eventually transformed world commerce and generated trillions of dollars of wealth. Unfortunately for Fitch, his adVenture folded 18-months after it began.

In 1798, at the age of 55, a frustrated, destitute Fitch scrimped together enough money to purchase a handful of opium pills, which he used to end his life. His suicide note was prophetic:

“The day will come when some more powerful man will get fame and riches from my invention, but no one will believe that poor John Fitch can do anything worthy of attention.”

First Mover Disadvantage

The alleged First Mover Advantage asserts that companies which are the first to exploit a new technology and/or market have an inherent advantage. Clearly, the allure of being first is significant. Who remembers the second man on the moon, the second person to fly an airplane or the second person to reach the North Pole? However in business, being first is often a disadvantage.

As noted Fast Followers II, fast-follower entrepreneurs must have a solid point of differentiation in order to succeed. In most instances, small companies do not have the financial wherewithal to bludgeon the competition and establish market share through brute force. Thus, it often pays to develop points of differentiation which are not based on product features. In fact, it is often more advantageous for an entrepreneurs to differentiate their offering through an alternative disruptive means.

In long-distance foot races, some teams deploy the “rabbit” strategy. A runner who has no chance of winning the race is designated as the rabbit and is instructed to set a very fast initial pace. The intent is that the runners from the opposing teams, not sure whether or not the rabbit can maintain her aggressive pace, will push themselves to keep up, while the rabbit’s teammates conserve their stamina and eventually pass the rabbit and their exhausted competitors.

Many first mover companies are rabbits. Unfortunately, they do not have teammates who can win the race on their behalf. It is important to identify such rabbits in business, as well as on the racetrack, so that you do not exhaust your company’s resources attempting to maintain pace with such competitors which have no chance of winning.

As discussed in Competing From The Fringe, a fast-follower strategy requires patience and ego containment. The following chart details a number of factors which determine whether you should attempt to exploit a first mover advantage or bide your time and enter the market as a fast follower.

Fitch To Fulton

John Fitch’s invention was the steamboat. He did not just create an esoteric, proof-of-concept prototype. Rather, during its first season, his ship travelled over 2,000 miles. In commercializing his technology, Fitch perfected the tubular boiler (some claim he and his partner outright created this invention) which decreased the weight of a conventional boiler by over 7,000 pounds. During a publicly witnessed time trial, his first steamboat travelled an astounding 8 miles-per-hour in still water.

In contrast, Robert Fulton, who had an advanced education and significant financial backing, was only able to achieve a speed of 3-miles per hour 13-years after Fitch’s maiden voyage. Another 3 years later, Fulton’s famous maiden voyage of the Clermont between New York and Albany traveled at less than 5-miles per hour, with a handful of passengers and no cargo. If Fitch and Fulton had raced to Albany, Fulton would have lost by 52-miles. It was not until 1812, 25-years after Fitch, that Oliver Evans, creator of the high-pressure steam engine, eclipsed Fitch’s speed record, by achieving a sustained speed of 9-miles per hour.

If Fitch’s technology was first to the market and was so vastly superior to that which came before (and for a long time after), why did he fail while Fulton succeeded? Some of the key factors which lead to Fast Follower Fulton’s success include:

Competition – The topography of the Hudson Valley in which Fulton launched his first commuter steamboat made land travel more difficult than travel by boat. In contrast, Fitch’s Delaware River Valley was relatively flat and the high-quality roads allowed land commuters to travel more quickly than those who traveled by boat. As such, Fulton’s market offered consumers fewer competitive substitutes.

Technology – Unlike Fitch, Fulton did not spend his time or financial resources building a steam engine. He used his political connections to export a top-of-the line engine from England, which generally maintained a tight embargo on the exporation of its leading technologies. In addition, craftsmen and metallurgists had made significant advancement with respect to machining capabilities and mechanical materials in the 20-years after Fitch’s failure.

Capital – Fulton secured adequate financial backing early in his adVenture’s life, thus allowing him to focus on perfecting the then state-of-the art technology and not waste time or management attention raising money.

Pragmatism – Fulton was more skilled organizer & a better mechanical designer than Fitch. Fitch was a visionary inventor, as described more fully in Inventors vs. Innovators, while Fulton was a practical innovator.

Theft – As Harold Evans declares in They Made America, Fulton “realized the promise of the known” by canvassing the discoveries made by others and selectively adapting them to apply to the specific requirements of water travel. In contrast, Fitch was forced to develop many of the core aspects of his technology.

Market Segmentation – Fulton capitalized on the novelty of river excursions and catered to wealthy individuals who valued their time and wanted to travel in luxury. The glamour associated with the riverboats of the late 19th century originated with Fulton’s gaudy, garish accoutrements. Conversely, Fitch targeted a utilitarian market, charging 50% of comparable land travel and placing no emphasis on passenger comfort.

Corporate Structure – Fulton created an organizational structure akin to a modern corporation, with department heads reporting to him. Fitch, along with his partner, were effectively a two-man-band, carrying out all the responsibilities of the organization.

Social Optimism – Fulton expected people to like him…and they did. As described in PsyBlog’s The Acceptance Prophecy, individuals who assume people will like them tend to have positive social interactions. By Fitch’s own account, he was, “wretched, haughty, imperious, insolent and petulant”, hardly personality traits which would result in a socially optimistic proclivity. Hudson has been described as “confident”, “handsome” and “charming”, traits which lend themselves to a socially optimistic outlook.

John Fitch’s dying prophecy was not entirely correct. He has not been completely forgotten. Although they may not realize it, the thousands of commuters of the Philadelphia and Trenton corridor honor the inventor of the steamboat daily, as they traverse the John Fitch Parkway.

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Small Ideas, Big Benefits

2009-09-23T00:54:04Z

When viewed from The Fringe, the world is like a cash booth from a bad 1950’s TV game show. Just like in the game show booth, in the real world, you can count on various exogenous factors to generate some proverbial wind that will swirl the cash around and force you to work a bit for the money. However, in the end, all you really need to do is reach out and grab the cash. When you position yourself on The Fringe, you will quickly see that money making opportunities are all around you.

One way to grab some cash and learn valuable entrepreneurial skills along the way is to launch mini-ventures or Venturettes. Such ideas require little-to-no capital, usually last for a relatively short duration and are of nominal size.

If you just ask yourself, “then why bother?” – read on friend, read on.

Once the Ball Starts Bouncing, You Never Know Where It Will Stop

Brownian motion is alive and well in business. You may remember from 8th grade science class that Brownian motion describes the random movement of atomic matter, caused by collisions with molecules of the surrounding medium. Once an atom begins moving, it randomly sets other atoms into motion, causing a domino effect, similar to ripples in a pond. Entrepreneurs create opportunities by creating ripples, and mini-ventures are great ripple creators.

The next time you are part of a large gathering of people, think of how many ways you could monetize the situation. For instance, if it is a hot day, you could sell bottled water, soft drinks, etc. If the crowd is gathered to see an entertainer, you could sell T-shirts, posters, etc. I am not suggesting that you become a sidewalk huckster, just that you begin to open your mind to all the legal ways you can slip your hand into peoples’ pockets and purses and pull out a few bucks.

Three examples of mini-ventures carried out by me and my fellow Wharton classmates are described below. Note that I am not purporting that these are particularly amazing or unique ideas. They merely serve to illustrate how easily you can turn pedestrian opportunities into profitable Venturetts.

Pop Quiz: See if you can guess which one was my mini-adVenture.

Fashion Show

Two Wharton students needed new suits for the dreaded MBA interview season. Rather than schlep downtown and pay retail, they went to one of the most expensive tailors in Philadelphia and offered to host a fashion show at Wharton, featuring the tailor’s suits, in exchange for two free suits each.

The fashion show was a huge success. The students were given valuable dress for success tips, the tailor sold a significant number of suits and the entrepreneurial students got free duds.

It’s Called Business

One Wharton student was too lazy to take notes during lectures. With the first test looming, the entrepreneurial student borrowed notes from three rather scholarly students, consolidated them into a single document and sold copies to other students for $5 each.

The student scholars whose notes were used to create the consolidated document were given a complimentary copy (and thus the benefit of the notes from the other two students). The scholars also enjoyed the prestige of having their notes included in the consolidated document, as it was a clear indication of their intellectual prowess – a status highly valued by the legion of Wharton overachievers.

This enterprise netted the entrepreneurial student a nice fistful of bills before each test. In fact, this mini-venture was so successful that the student continued to sell such consolidated notes for the remainder of the student’s Wharton tenure, earning a number of hefty fistfuls of beer money.

At one point during the second year of this enterprise, the entrepreneurial student was approached by an indignant Wharton Professor who tried to shut down the note selling operation, which was taking place outside of the Professor’s classroom. When the Professor asked, “What do you think you are doing?” the smartass entrepreneur replied, “It’s called business. Last I checked, this was a business school.” Rather than shutting down shop, the student simply moved the operations down the hall and continued satisfy the brisk student demand for the consolidated notes.

Nostalgic Graduation Poster

Another Wharton student contracted with an undergraduate art student and paid him a nominal sum to draw a caricaturized map of the Wharton campus, showing the proximity of all the bars, hangouts, etc.

The entrepreneurial student then had a couple hundred of the maps printed, framed a few dozen, and set up shop in front of the business school. All the prints were sold in a matter of hours, at a profit of $30 each. This mini adVenture did so well that not only did the student earn enough money to travel to Europe after graduation, the entrepreneur franchised the idea to a lower classman, who then sold the same prints the following year and split the profit with the entrepreneur who originated the idea.

From Small to Tall

In some cases, Venturetts morph into substantial ventures. I was once on the Board of such a company.

This mini adVenture began when the Founder agreed to remotely manage a server for a friend as a favor. To make his job easier, he created some security tools to protect the server against hacker attacks. He then showed his security toolkit to a colleague, who laughed at the user interface, built a better one in his spare time, and unwittingly became a Co-founder of the mini adVenture.

The two Founders then offered their security software for free on the Internet and it quickly became one of the most popular open-source security solutions on the market. These free downloads were intended to be solely for personal use. Within days of releasing the personal version, the Founders began receiving inquiries regarding the price of a commercial version of their product. One such inquiry was from the Salt Lake Winter Olympic Committee. With no idea what a reasonable price might be, the company agreed to provide enterprise-wide security to the Salt Lake Winter Games for a few thousand dollars. The Founders were thrilled to get paid for what had previously been a hobby and the Salt Lake folks were happy to pay tens of thousands of dollars less than they had budgeted for such services. For more discussion of entrepreneurial pricing, see “At What Price?”

When checks started arriving at their condo (they were running the part-time business, from their spare bedroom), the Founders realized that the dogs were eating the dog food and it was time to quit their day jobs and focus on turning this mini adVenture into a full-fledged startup. The company thrived for several years, generated millions in revenue and was eventually sold to a substantial software security company.

Track Record

Investors invest in people, not ideas. Thus, you become a more attractive investment once you have a proven track record of executing – even if the ideas you executed were relatively conscribed.

Venturetts can demonstrate to an investor that you know how to make something from nothing. Generating profits, even in a mini-venture, is a good proof point that you can replicate your mini-success on a larger scale.

In addition to providing you with valuable entrepreneurial experience, mini-ventures can also generate enough cash for you to safely exit your day job at Big Dumb Company and strike out of The Herd (see “The Fringe”). This supplemental cash will lower your risk of failure, as you will have some wind under your wings when you make your base jump and thus reduce the speed of your freefall. This will give you more time to build your parachute in mid-air (see “The MBA Education And Other Oxymorons”).

Smooth Operator

Mini-ventures allow you to demonstrate that you can pull together disparate resources and bring multiple parties to the table by creating and then delivering a viable value proposition. Such ventures also demonstrate that you can effectively negotiate with multiple parties and craft mutually advantageous deals. In short, Venturetts prove that you can effectively sell yourself, your idea, your product and your startup’s overall opportunity.

For instance, the students who put on the fashion show had to sell the idea to the retailer, and then plan, market and orchestrate the show. The student who sold class notes had to convince the smart kids that they were getting adequate value by giving up their notes for free (i.e., getting the consolidated notes in return) and the entrepreneur had to negotiate a fair price with the students who purchased the notes. The entrepreneur also had to deal with an exogenous, regulatory factor in the form of a meddling teacher who wanted to shut down the student’s profitable community service.

Exercise: Weekly Business Idea

Force yourself to identify at least one venture idea each day for one week, and then one idea per week thereafter. Looking for small ventures will help you open your eyes to the myriad of opportunities that surround you. See the Weekly Venture Idea worksheet for specific guidance regarding this exercise.

Vincent Van Gogh was clearly a man who saw the world from The Fringe. In his long walks through the countryside, he would come upon a hill, a windmill or a tree and see an intrinsic beauty that compelled him to feverishly paint, even though thousands of other people had passed the same hills, windmills and trees without giving them a second thought. If you carry out the weekly business idea exercise for one month, you will start to see the world in a different way and eventually you will become an Entrepreneurial Van Gogh who can identify opportunities where others see nothing.

However, unlike Van Gogh, who died a pauper, your new perspective from The Fringe will allow you to enter the cash booth and scoop up some cash by identifying and executing mini adVentures.

Answer to Pop Quiz: As you can likely guess, I was the smart-ass kid who told the Professor that I was running a business. Although I am slowly maturing in this regard, when it comes to people trying to meddle with my ventures, decorum is not my strong suit.

Weekly Venture Idea Worksheet

When working on your venture ideas please consider the following:
Structure your idea in six categories

1. Product Name

2. Customer Problems/ Pain Points

State the problem/ pain points of the customers clearly.

Are there any companies out there which already address these problems/pain points?

How do those companies do it?Are they successful?How would you be different from them?

3. Execution

4. Market

Use a bottom up approach when you identify your market. Don’t just state “it’s huge/gigantic”!

5. Personal Applicability

Which position will you hold in the company? Why? (Be honest)Which qualifications do you bring into your company?Which qualifications have to be fulfilled by your team members?Which additional intelligence do you need to start the venture?

6. Feasibility

Would you be able to find/hire your team?
Can you implement your idea with personal money or do you have to raise money?

Final Mark:

Would this idea be good enough to perform a thorough feasibility
study?

Yes | No?

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Bank Robber or ATM Operator?

2009-09-15T17:20:08Z

A Fortune 500 CEO once told me that I was a Bank Robber. Initially, I was offended. However, once he explained what he meant, I was flattered.

A Bank Robber is someone who craves the thrill of the chase. They love planning the heist and experiencing the adrenaline rush that goes along with taking down a bank. They relish the role of the underdog, with the odds are stacked against them. Yet they are able to persevere and accomplish something that few people ever achieve. In addition, Bank Robbers love the seemingly unlimited possibilities of each heist, as they can never be sure how much money each job will net them.

There is a certain thrill in the expectation that the next heist could be the big one. Sometimes that expectation is the most exciting aspect of the robbery – OK, maybe getting shot at as you leave the bank is a bit more exciting, but most bank robbers optimistically assume that they will make a clean escape.

An ATM Operator sees life very differently. They like the comfort of knowing that every two weeks, they can walk up to an ATM and extract a specified amount of money. It is never more or less than what they expect. Every year, if they figuratively “wait in line” like a good ATM customer, then the amount they can withdraw will increase slightly, in line with inflation.

Entrepreneurs on The Fringe are law-abiding Bank Robbers. They enjoy the hours spent plotting and scheming and pulling together the best team to accomplish the heist. The outcome might be jail time (i.e., failure and bankruptcy), or it might be a haul so big that they never have to rob another bank again. Even though the time spent planning the heist is fraught with risk, uncertainty, and more than a bit of anxiety, it is highly preferable to an entrepreneur, as opposed to spending those same hours waiting in line at an ATM.

When recruiting the initial employees into your adVenture, you must weed out the ATM Operators from the Bank Robbers. In addition to the characteristics noted below, you may also want to consult “Finding an Entrepreneurial Gem in the Slag Heap of Big Dumb Company” and “Are You an Entrepreneur”.

Spotting Bank Robbers Without Ski Masks
A Bank Robber will ask questions that are focused on your products, customers, and the potential size of your adVenture’s overall opportunity. They will want to know about the banks you plan to hit, and how much money might be up for grabs. Conversely, the ATM Operator will ask questions centered on the Company’s financial condition, current investors, and potential future investors. They will seek an understanding of the amount of money that is currently in the ATM, who is going to refill it, and how often will this be done.

Entrepreneurs will revel in the small size of your startup. The more bootleg and funky the office space, the better. The fewer people participating in the heist, the more significant they will view their role. They will appreciate that fewer hands in the till when the loot is distributed means a bigger share for everyone. ATM Operators will eye your office space suspiciously and ask questions such as, “When do you plan to relocate?”

Bank Robbers will focus on the role they can play to ensure the team’s success. They will excitedly ask to drive the getaway car or to be the gunman. Conversely, ATM Operators will maintain a reserved countenance and ask about your benefit plans and whether or not you have a 401k Plan. Their intent is to determine what they can get out of the gig other than a biweekly ATM withdrawal.

Bank Robbers want to be assured that the venture is very risky, because they know the size of the potential upside is directly correlated to the risk undertaken. The more security a bank has, the harder it will be to crack, and the more money there is likely to be in the vaults. ATM Operators want to know what you will do to mitigate their personal risk, and they may ask for severance packages, acceleration of their vesting, etc. If something goes wrong, they want to know that they cut to the front of the line and empty the ATM before moving onto their next position.

Thus, when you are hiring your initial adVenture employees, be sure to determine if their preference is a ski mask or pantyhose, because they will need to get used to breathing through a Bank Robber’s mask for years to come. Once your Company is sold and you split up the take from the heist, they can take off their mask, go to Vegas and blow the loot. If the adVenture was personally rewarding for them, they will likely reconvene with you and begin planning which bank to take down next.

— Get real world advice from John Greathouse, Subscribe Today. —

Bro Factor – Intimate Relationships Which Provide Your Startup With An Unfair Advantage

2009-09-08T17:17:10Z

Bro – abbreviation of “Brother”, meaning friend or dude. A term of endearment used to denote a familiarity beyond a casual friendship.

In the world of Big Dumb Companies (”BDC”), there is little likelihood you will establish a professional relationship with someone outside of your company that goes beyond a casual friendship. At large companies, such behavior is often discouraged and in many organizations, it is even considered unprofessional. However, in the world of startups, relationships that go beyond a casual acquaintance can provide your adVenture with a significant competitive advantage.

Obviously, even folks at BDC’s form strong rapports with their counterparts at other organizations. However, in most BDC’s, there is a level of decorum and cultural rigidity that limits the degree to which employees are comfortable establishing relationships that go beyond that of professional colleagues.

The difference between the relationships established by members of a startup and those pursued by employees of a BDC is analogous to the contrast between the teacher / student relationship at private and public elementary schools. At a private institution, it is not unusual for teachers to express their affection for their students via hugs and other forms of appropriate physical contact. In contrast, their counterparts at public schools are generally forbidden to embrace their students or otherwise usurp the institutionalized formality of the teacher / student relationship. Such a distinction is understandable and appropriate in a school setting. However, at your startup, establish rules of engagement which encourage your team to create professional, yet intimate, Bro relationships.

Establishing an effective Bro relationship involves a delicate alchemy – part contrivance and part genuine friendship. The relationship is borne from an artificial situation (e.g., two people involved in commerce, such as a salesman and a buyer, business development executives jointly crafting a deal, etc. However, even though there is an unnatural aspect to the environment in which the relationship is established, the resulting friendship is not phony.

As you establish Bro relationships, be mindful of the natural tension which is always present. Each party’s first allegiance is to their organization. In most instances, relationships can be established in which both parties’ loyalties are aligned. However, there are inevitable instances when what is best for your company may not be optimal for your Bro’s firm. This duality of Bro relationships results in circumstances in which your Bro is also your Bro Foe, as discussed at great length in Kiss of Death.

Bro’ing is not exclusively a male experience. On the contrary, Bro’ing involves establishing a strong connection with another person – male or female. As such, men can Bro up with other men, women can Bro up with men and women can Bro up with other women. Bro’ing is not a guy thing, it is a relationship thing.

Danger Will Robinson

Even though establishing Bro relationships is not gender specific, additional care should be taken when Bro’ing up with a member of the opposite sex. One risk which arises in cross-gender Bro situations is when one of the parties misconstrues the Bro’s overtures as an expression of romantic interest. Clearly, such crossed signals are problematic and can ultimately impair your adVenture’s effectiveness. As such, tread carefully when establishing cross-gender Bro relationships.

In addition, many people are simply not valid Bro candidates. Respect this fact and do not risk making such people uncomfortable. They will interpret affable and friendly actions as a transparent sales ploy. Such folks avoid establishing personal connections in their workplace as they believe that such an approach will allow them to remain impartial. Unfortunately, they do not realize that their professional lives would be more fulfilling if they allowed themselves to form personal relationships outside of their organizations.

There is a fine line between unprofessionalism and bro’ing up. Do not cross it. In particular, never take advantage of your Bro status by making unreasonable requests. If your Bro begins to think of you as an annoying relative who is always looking for a handout, your Bro status will be in jeopardy. Save your favors for things that matter. You want your Bro to feel that they are getting the better end of the bargain. Just like real friends, Bros help each other; it is not a one-way street. Protect and respect your Bro status.

As noted in Single-Serve Bros, the key to effectively Bro’ing up is to only deploy the Bro strategy when the other party is receptive. Do not force it. Too much familiarity too quickly is creepy and a huge turnoff. Be patient; meaningful Bro relationships can take months and even years to establish.

You Know You’re “In” When…

Bro’ing up breaks down the conventional us versus them mentality and allows your Bro to become part of your adVenture’s extended family. You know you have successfully Bro’d up when your fellow Bro starts to share her company’s dirty laundry, often in the form of bad-mouthing members of their team, criticizing their processes, etc. You have crossed over to the other side when your Bro is willing to share such intimate information. When this occurs, it is a sign that you are considered a kindred spirit who can help your Bro overcome their internal challenges.

Bro’s enjoy spending time together outside of work. At one of my companies, a salesperson Bro’d up with a customer to the point that the customer extended his vacation to ride dirt bikes with the salesperson. As every salesperson with an expense account has known since the dawn of commerce, activities outside of work foster Bro’ing up

Brother Oz

What characteristics make an effective Bro? Certainly there are many qualities which will help you enhance your Bro’ing efforts. Some of the more important characteristics include:

Honesty
Sincerity, sympathy and empathy
Active listener
Creative problem solver

One need look no further for an prototypical example of a Bro than the Wizard in Frank Baum’s, The Wonderful Wizard of Oz. You may think, “How can you consider the Wizard to be a Bro? He was a charlatan who tricked everyone he encountered.”

As stated in Time Wounds All Heels, successful serial entrepreneurs are honest, ethical and avoid even the appearance of deception. Thus, as with all analogies, the comparison between a Bro and the Wizard is imperfect, as Baum’s protagonist did initially rely on deception.

With that said, Baum clarifies that the reason the Wizard tricks Dorothy, her companions and the people of Oz is because he fears for his life and the liberty of his people. The Wizard rationalizes his deceptive ways through his concern that the Wicked Witches of the East and West would kill him and the people of the Emerald City would fall under their evil tyranny if they learned that he, in fact, had no magical powers.

After the Wizard is proven to be a fraud, he is honest with Dorothy. When she angrily admonishes him and calls him “a very bad man”, he replies, “Oh no my dear; I’m really a very good man; but I’m a very bad Wizard, I must admit.”

The Wizard was an extraordinary listener, as he was able to determine what each member of Dorothy’s company wanted. He also devised creative solutions such that everyone was satisfied with their reward for eliminating the Wicked Witch of the West.

If you remain unconvinced as to whether or not the Wizard effectively Bro’d-up with those around him, consider their reaction when he departs Oz. Baum notes that Dorothy felt sorry at losing Oz, and so did her companions. The Tin Woodman wept and said, “Truly, I would be ungrateful if I failed to mourn for a man who gave me my lovely heart.” The people of Oz commented, “Oz was always our friend. When he was here, he built for us this beautiful Emerald City…”

Even Baum’s readers loved the Wizard. In The Wonderful Wizard of Oz, the Wizard departs in a balloon, presumably to never be seen again. However, due to demand from his readership, Baum was forced to write him back into the adventure series. In the Introduction to the fourth book in the series, Dorothy and The Wizard In Oz, Baum notes,

“There were many requests from my little correspondents for ‘more about the Wizard’. It seems the jolly old fellow made hosts of friends in the first Oz book, in spite of the fact that he frankly acknowledged himself ‘a humbug’.”

Even after they realized he was a fraud, Dorothy, her companions and the citizens of Oz felt fondly toward the Wizard. This forgiving response is emblematic of a Bro relationship. Even when they fail, Bros are often given the benefit of the doubt. In such cases, the friendship they have forged reduces the other party’s natural disappointment arising from the Bro’s failure.

It is easy to piously declare that the Wizard should have admitted his shortcomings to the people of the Emerald city long before Dorothy arrived on the scene. However, Oz was put in a situation similar to that of an entrepreneur who is trying to survive and satisfy the competing desires of his Stakeholders. As Baum points out near the end of The Wonderful Wizard of Oz, after Dorothy’s companions have received their rewards:

“Oz, left to himself, smiled to think of his success in giving the Scarecrow and the Tin Woodman and the Lion exactly what they wanted. ‘How can I help being a humbug’, he said, ‘when all these people make me do things that everybody knows can’t be done?’ It was easy to make the Scarecrow, the Tin Woodman and the Cowardly Lion happy because they imagined I could do anything.”

The primary secret to becoming an effective Bro is to instill within your Stakeholders confidence that not matter what, you will deliver for them and then simply deliver what you promise. This talent is further described in Great Expectations.

Bros on The Fringe live by the following credo:

“People do not care what you know, until they know that you care.”

Think about it Bro.

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Monopoly

2009-09-01T18:26:17Z

Along with Dr. Seuss’ “Green Eggs and Ham” and Marcia Brown’s “Stone Soup”, the seemingly innocuous board game “Monopoly” has played a pivotal role in the United States’ rise as an economic superpower.

Although Monopoly originated from a variety of sources and evolved regionally over several decades, it was brought to Parker Brothers in 1934 by Charles Darrow. A number of international versions were developed soon after its initial release, but America has consistently remained the bastion of Monopoly’s popularity. In contrast, the USSR and other communist nations foolishly banned Monopoly, thereby denying their citizens an inexpensive yet effective hands-on course in entrepreneurship.

As stated in its official rules, the object of Monopoly is to, “become the wealthiest player through buying, renting and selling property”. A more negative way of looking at this objective is to “drive all the other players into complete and utter bankruptcy”.

Why has Monopoly, which takes hours to play, moves at a relatively slow pace, is completely devoid of surround sound and offers players no opportunity to blow up aliens or other combatants in high definition, remained so popular over the past 70-years? Part of the reason for its enduring legacy in America, and its emergence as a popular pastime in burgeoning free-market economies around the world, is because it acts as a proving ground for budding entrepreneurs to hone their business savvy, negotiation tactics, and communication abilities – all of which are highly compensated skills in capitalistic societies.

Given that over 750 million people have played the game, I will assume that most of you are familiar with the basic rules. If you are not, you may have already blown your chance at becoming a successful entrepreneur on The Fringe, as your future competitors gained hundreds of hours of hands on experience while you played with your GameBoy.

Hands on Learning
Numerous entrepreneurial lessons and skills are developed as you drive your friends and family into the Monopoly poorhouse, including the following:

Lady Luck – Just like in the ‘real world’, luck plays a significant role in the outcome of Monopoly, as two dice dictate each player’s movements. Luck intervenes with the first roll of the dice, which determines the order of play. The players who go first have a much higher probability of landing on an available property during their initial trips around the board.When starting a company, luck plays a bigger role than successful entrepreneurs care to admit, and a smaller role than unsuccessful entrepreneurs like to claim.

Cutthroat Negotiating with a Smile – There is only one winner in Monopoly; ties are non-existent. This winner take all style of gameplay engenders a manic, hypercompetitiveness among the players. Although luck plays a considerable role in the game’s ultimate outcome, you can significantly enhance your chances of winning by strategically cutting deals with your opponents. Monopoly is a ‘social’ game, which requires you to establish a rapport with the other players if you are to be a successful dealmaker. Often, the best deals are the ones in which you form an alliance with another player, to the detriment of all the other players on the board. For instance, you might sell a property to another player that grants them a monopoly, but include in the deal that you can land on any of the properties that comprise the newly formed monopoly rent-free for the duration of the game. Such a deal ensures that your opponents will pay a higher price whenever they land on any of the properties which make up the monopoly, while you simultaneously increase your cash position by selling the lynchpin property at a premium.Even though the game is cutthroat by design, most people consistently play the game with the same basic group of family and friends. As such, successful players realize that a ‘bad deal’ they cut in one game will carry over to future games, and may limit the other players’ willingness to negotiate. This is also very ‘real world’. You can try to screw everyone once, but that is generally an expensive and inefficient business model. You are far better off establishing solid relationships based on mutual gain and trust, rather than cutting a one-sided deal which results in a short-term ‘win’.

Vigilance – You cannot take your eyes off the board when playing Monopoly, as you risk a player landing on one of your properties without paying the appropriate rent. This same dogged vigilance is required in your adVenture. You need to focus on constantly delivering value to your customers and ensure that you are paid for all of the value that you deliver.

Cash Flow – Entrepreneurs on The Fringe know that properly managing their cash is one of their primary objectives, especially during an adVenture’s early phases. Monopoly is a great training ground to develop cash management skills. It also exposes young capitalists to a number of other financial concepts, including: mortgages, interest, counting currency, dealing with a bank, etc.

Government Intervention – As every successful entrepreneur knows, the government prefers to punish you for your success, rather than ‘thanking you’ for risking it all and creating numerous jobs for your fellow citizens. Monopoly is no different. In addition to the Luxury Tax board space, there are also Chance cards that require you to pay a percentage of your net worth in taxes.

Location Matters – In a very real-world sense, the location of your properties is of critical importance. Some properties have a higher rental charge and some have a higher probability of opponents landing on them, due to the distribution of potential outcomes from the rolls of the dice. In addition, there are several Chance cards that direct a player to “Go To” a particular property, as well as cards that require a player to “Go Back Three Spaces”. Each of these factors impact the probability that certain properties will be visited more than others. As noted in “Nurture or Nature”, the location you chose for your adVenture (as well as any retail or satellite office locations) will have a huge impact on your probability of success.

Tenacity, Persistence & Endurance – One of the most important lessons to be derived from Monopoly is that in business, the spoils often go to those who remain at the table the longest. The game usually takes hours to complete, and in many cases it becomes a battle of wills to see which players have the requisite stamina to see the game through to its conclusion. Thus, as is true with your adVenture, doing whatever you can to ‘stay in the game’ will go a long way toward your ultimate victory. If you quit before the game is over, you can be assured that you will never have the chance to ‘win’.

Passing Go – With a few exceptions, every time a player passes “Go” on the Monopoly board, they are given $200 by the bank. Often, these funds are all that sustain a player and allow them to remain in the game. In business, you want to get $200 for passing “Go” as well. One way to do this is to structure a portion of your sales in the form of evergreen annuities, annual maintenance payments, quarterly license fees, or monthly subscriptions. The specific form that such payments will take varies depending on the specifics of your business model. However, the key is to smooth the ‘lumpiness’ of your cash inflows by structuring all, or a portion of your revenue to be recurring.Recurring revenue provides you with far greater predictability, which will ease your cash management responsibilities. Such annuity revenue allows you to ‘stand on the shoulders of each prior month’, and thus grow your overall revenue in a predictable and linear fashion. For instance, if you establish subscription revenue of $10,000 per month, you enter each new month with at least $10,000 of revenue, less any revenue lost due to customers that terminate your service. Investors and acquirers also grant recurring revenue a higher premium, because it reduces the business’s overall risk profile.

Jail – Like it or not, entrepreneurs have a social and a legal contract with their customers, employees, investors and other stakeholders. Just like in Monopoly, if this contract is broken, the entrepreneur can be thrown in jail. The Jail board space serves as a reminder to budding entrepreneurs that ruthless competition is OK, as long as it is kept within the acceptable bounds of fair play.

America’s Not-So Secret Weapon
Monopoly is now sold in over 80 countries, and has been translated into over 26 languages. Even citizens of the former Soviet states are now avid Monopoly fans. There are, no doubt, thousands of lively games of Monopoly being played all over the globe, even as you read these words.

Monopoly is training a global force of entrepreneurs who will internalize the skills which the game embodies and ultimately the rewards as well. Some of these entrepreneurs will join The Fringe and create thousands of jobs, and billions of dollars in wealth.

“Thank you”, Mr. Charles Darrow or should I say, “Без перевода”…

— Get real world advice from John Greathouse, Subscribe Today. —

Are You an Entrepreneur?

2009-09-08T18:05:04Z

“You are forty, out of a job, a newlywed, your wife is expecting a baby, you don’t own your own home, you have no specialized qualifications, the only company you ever launched went bankrupt and you have just been sentenced to one year in jail.”

Source: Harold Evans, They Made America

Pop Quiz: Who was this person and what did they ultimately do with the cards dealt them? The answer is at the end of this entry.

Hint: He was an entrepreneur. Are you?

A Writer Is Someone Who Writes

A writer is someone who writes, not someone who goes about telling their friends that they are “a writer”. The same is true of entrepreneurs.

Robert Johnson, the famed Delta Blues guitarist, taught himself to play guitar by nailing various lengths of wire into the door frame of his parent’s shotgun shack. He was driven to play music, even though he could not afford a proper instrument. As he plucked the wires in the doorway, did Robert gloat to himself regarding his new-found musician status? Unlikely. He was too busy trying to make music.

Entrepreneurship is so highly valued in the Western World that some people try to convince themselves that they are an entrepreneur, when in fact they would be better off at a Big Dumb Company (“BDC”). These would-be entrepreneurs are best classified as Wantrepreneurs, as discussed in Entrepreneurial Enterviewing.

Wantrepreneurs were particularly prevalent during the Dot Bomb era when many folks who should have stayed well within The Herd. Most of these instant entrepreneurs were in it for one reason – quick money. As soon as the bubble burst and it was apparent that early retirement was not just around the corner, the Wantrepreneurs scurried back to their BDC cubicles.

Entrepreneur Does Not Equal Inventor

Some first-time entrepreneurs mistakenly believe that they are not entrepreneurs because they have never invented anything nor have they come up with a novel idea upon which a company could be built. I am firmly in this camp as well. None of the ventures that I have been involved in have been my idea, nor have I ever invented anything. However, these facts make me no less of an entrepreneur.

Only a small percentage of entrepreneurs are also inventors. Conversely, most inventors are not entrepreneurs. As discussed in Inventors vs. Innovators, most entrepreneurs iterate on preexisting ideas to the point that the inventions represent marketable value propositions upon which sustainable companies can be created.

If necessity is the mother of invention, obsession is the father of innovation. Innovations are often sussed out by entrepreneurs who cannot let go of an idea. As noted in The Fringe, most successful entrepreneurs are compelled to succeed by creating something from nothing, not by the lust for money, power or fame. ‘Creation’, not ‘conceptualization’, constitutes who is an entrepreneur and who is a dreamer. Dreaming is great, but if you never wake up and act upon your dreams you might as well stay in bed.

The Past Is Prologue

To answer the question, “Am I an entrepreneur?”, it is often helpful to look into your past. The actions of your youth, when you were not influenced by societies’ norms or the lure of wealth, may offer insight into your true desires and proclivities.

For instance, when you were growing up, did you partake in any of the following activities?

• Repeatedly organize yard sales in which you sold your broken toys, books you wrote and illustrated, along with overly sugared lemonade and burnt cookies

• Distribute gum / candy / school supplies from your locker in Junior High

• Master a musical instrument without your parents hounding you to practice

• Become proficient in a martial art

• Sell the most Girl Scout cookies each year and become depressed when the selling season ended

• Rebel against organizational hierarchies and resent being forced to take orders from someone just because they ‘put in more years’ than you

• Prefer to put yourself in situations where you could make an immediate impact, even it was in a ‘smaller pond’

• Hold several jobs in college, finish college early, and/or earn multiple degrees in less time than most people earn a single degree

• Excel at classes that interested you and perform poorly in those which did not

• Partake in high-energy, extreme sports

Falling Further From The Tree

It is not always relevant to look at your parent’s career and extrapolate your propensity to be an entrepreneur. One or both of your parents may have the personality of an entrepreneur, but if their parents were struggling entrepreneurs who put in long¬-hours and netted meager returns, then your parents may have rejected their latent entrepreneurial tendencies.

However, genetics certainly play a role regarding who is wired to become an entrepreneur and who is not. An alternative way to assess the relative depth of your entrepreneur gene pool is to think of extended relatives who were / are entrepreneurs.

To this end, ask your immediate family which relative they think your personality most resembles. Is it your Uncle Harry, the life-long government bureaucrat or Grandpa Jim who was a career door-to-door Fuller Brush salesman? If people who know you well think that you share traits with good old Uncle Harry, then you may want to think twice about leaving The Herd.

No matter whom you may take after in your family, perform a self-assessment and determine to what extent you exhibit the following entrepreneurial personality traits and characteristics:

• Sincerity
• Humility
• Honesty
• Naivety
• Impatience
• Optimism
• Influencer

This list may strike you as so much “Mom and Apple Pie”. However, these traits are shared by most successful serial entrepreneurs.

Sincerity

The origin of the word sincerity is, “without wax”. In ancient Greece, unscrupulous ceramic potters filled the cracks of damaged ceramics with wax. Once the repaired ceramic was painted, the wax was undetectable. However, when heat was applied to the ceramic, the wax would melt and the imperfections would become apparent. Clearly, buyers of such flawed ceramics felt cheated and wronged.

Successful entrepreneurs need to be “without wax”. As noted in Your Personal Pitch, entrepreneurs benefit greatly from relationships with Donors and stakeholders who can aide in the adVenture’s success. If your character cracks under the heat of a startup, your stakeholders will feel cheated, just like the ceramic customers in ancient Greece.

Humility

Winston Churchill was once asked if he was pleased that people filled large halls to hear him speak. He indicated that it was a nice feeling but that he also realized that twice as many people would come to the same hall to see him hang. Like a successful entrepreneur, Winston did not believe his own press clippings.

John Lennon once said that every time he began to think the Beatles were geniuses, he would look at Ringo and all such allusions were immediately dispelled. In fact, one of the most appealing aspects of the Beatles is that they remained self-deprecating, despite their enormous success. They seemed as surprised by their popularity as the reporters who covered Beatlemania. Their humility went a long way to winning over even the most jaded journalist.

Humility is the honey that will attract donors. As noted in Your Personal Pitch, people enjoy helping appreciative people who are in need. Hubris might be an entertaining trait for an entrepreneur in a Hollywood movie. However, in the real world, hubris will only make your journey more difficult.

Honesty

As discussed in Time Wounds All Heels, successful serial entrepreneurs know that what Momma told them is true, “honesty is always the best policy”. Suppliers, customers and employees are more likely to support an entrepreneur and work with them to ensure their collective success when the entrepreneur honestly communicates the challenges they are facing.

To poorly paraphrase Abe Lincoln, you can screw some of the people some of the time, but you cannot screw all of the people all of the time. No matter where you launch your startup, it will be within the confines of a relatively small community of industry professionals who will frequently communicate. Every market, no matter how large it may seem from the outside looking in, is equivalent to a small town where the key players all know each other. In this small town atmosphere, dishonest people are quickly identified and reputable folks will eventually ostracize them.

Naïve and Not Courageous

“I look with amazement upon our audacity in attempting flight with a new and untried machine”.

-Orville Wright

Entrepreneurs do not acknowledge limitations or barriers. They often have a naive view of the future – not Pollyannaish, but one in which failure is just not a potential outcome. Is it because they read a passage in a self-help book that told them to ‘wish away’ failure? – No. It is because they are too busy contemplating on all the opportunities that surround them to see the associated risks. Entrepreneurs have the audacity to believe that the odds do not apply to them, because they know they are going to win. If a world rich in opportunity and free of risk is a foreign concept to you, you might be well served by a career in accounting, insurance or the government.

If the typical entrepreneur acknowledged the risks and had the foresight to fully comprehend the work required to make their startup successful, they would be in immediate need of a defibrillator. In Mark Twain’s “The Adventures of Huckleberry Finn”, Huckleberry closes the book by saying, “…because if I’d a knowed what a trouble it was to make a book I wouldn’t a tackled it…”.

Many entrepreneurs feel the same way at the end of their adVenture. Although they enjoy a sense of satisfaction, if they had known what they were up against at the outset, it is likely that they never would never have made the ‘Base Jump’ required to launch their adVenture. Entrepreneurs run through walls of fire without knowing what lies on the other side, constantly solving problems with minimal resources, inadequate sleep and a major case of bad nutrition. Does this make them courageous? Hardly.The definition of courageousness entails not being deterred from a particular action, even when you fully understand the associated risks. Entrepreneurs are not courageous. They are militantly optimistic, naive and compulsive. However, once the adVenture is launched, entrepreneurs often do courageous things in order to keep their adVentures float.

Impatient

Nothing happens fast enough for an entrepreneur. Outside third parties may think the startup is moving at light speed, but progress may seem to move at a glacial pace to the entrepreneur. Do not despair.

The best selling book of all time (I’ll let you figure out the title) refers to life as a “battle” four times, a “race” three times and a “walk” over 400-times. Sometimes your adVenture will be a ‘battle’, sometimes it will be a ‘race’, but most of the time it will be a walk, a journey to be enjoyed and savored. OK, so maybe it will be a brisk walk (as compared with other vocations), but it will not be an out-and-out sprint, contrary to what many entrepreneurs believe when they first cast themselves out from The Herd.

Most ventures are marathons, not 100-meter dashes. No matter how fast and efficient you and your team are, products take time to develop, markets take time to mature and customers take time to understand and appreciate your value proposition. If you attempt to operate your adVenture in perpetual sprint-mode, you and your team will eventually run out of gas (emotionally, physically, or both), no matter how Herculean your stamina.

If you just read this and thought, “That advice is crap – my venture will be a nonstop sprint not a brisk walk”, then you may be an entrepreneur after all. Just as entrepreneurs are often in denial regarding the risks they will face, they also tend to believe that somehow their adVenture will be different and will not be forced to conform to the realities faced by everyone else.

Optimism

There was once a pair of twins. One was a pessimist and the other an optimist. On their tenth birthday, their parents tried an experiment in which they hoped to temper the optimist’s Pollyanna view of the world, while encouraging the pessimistic child that sometimes good things do happen.

First they took the pessimistic child to their barn, which they had filled to the rafters with wonderful toys. To their dismay, the child began to cry. Through his sobbing, they learned that he was afraid that he would break some of the toys, that others would get lost and that some might be stolen.

Dismayed, they then took the optimistic child to his room, which they had filled with manure from the barn. Undaunted, the child jumped into the middle of the manure and began laughing as he tossed the manure in the air. The confused parents asked him why he was happy and through his laughter he said, “With all this manure in the room, there must be a pony in here somewhere.”

Successful entrepreneurs prepare for the best. They mentally pack a beach chair and sunscreen, not an umbrella and pepper spray. This approach makes the journey far more enjoyable. Entrepreneurs know that it is better to expect to find a pony in a pile of poop than to worry your way out of success.

Influence not Manipulation

One definition of a manipulator is someone who changes the behavior of others without changing their heart. Successful entrepreneurs change peoples’ hearts. Entrepreneurs lead by influencing their team, not by manipulating them. Manipulation might work in the short term but a manipulative management style will not result in sustainable results. Like the soldiers in Making Stone Soup, encourage people to follow you by welcoming their contribution to your adVenture’s ultimate success. Entrepreneurs must instill a belief deep enough for the stakeholders to pass the Blondin Test and figuratively place their livelihoods, fortunes, reputations, etc. on their back. If you manipulate people into following your lead, it is unlikely you will be able to sustain such manipulation for the duration of the average, four to six year, adVenture.

So Are You An Entrepreneur?

The most definitive way to determine your entrepreneurial status is to walk-the-walk of an entrepreneur. Create something from nothing. Fortunately, you do not have to quit your job and mortgage your house in order to live life on The Fringe. See Small Ideas, Big Benefits for suggestions regarding how you can test the entrepreneurial waters before taking the plunge.

Just as Robert Johnson did not waste time contemplating his status as a musician, if you are asking yourself if you are an entrepreneur, then the answer might in fact be “No”.

Answer to Pop Quiz

Thomas Watson, Sr. Founder of IBM – an entrepreneur who felt that the world only needed a handful of computers. Good thing Thomas Watson, Jr did not agree.

Interview Question Exercise
Draft five interview questions that you would ask someone in order to determine if they are an entrepreneur (see related entry, Entrepreneurial Enterviewing).

Post the questions and your brief answers as a Comment to this entry.

Do you think your answers indicate that you are an entrepreneur? If you are unsure, ask others whom you trust to evaluate your responses, including other Uncle Saul readers.

— Get real world advice from John Greathouse, Subscribe Today. —

Roping in the Legal Eagles

2009-06-25T20:59:35Z

Johnnie Cochran was an effective, albeit smarmy, defense lawyer who would say or do anything to defend his clients (anyone up for a glass of OJ?). He was a master at encouraging jurors to disregard facts and base their legal verdicts on emotions and conjecture. Yet, despite his exceptional courtroom theatrics, you would be foolhardy to hire good old Johnnie to review your software cross-licensing agreement.

A startup-oriented lawyer may not be able to convince a jury of a guilty man’s innocence, but they can guide your adVenture through the menacing legal shoals it will no doubt face. Working with startup lawyers also minimizes the risk of losing control of your adVenture, as they can help you avoid common fundraising and investor pitfalls. Such attorneys can also add tremendous value in your negotiations with Big Dumb Companies (BDCs), as they can ensure that you focus on the deal points that are of most significance to a small entity. As such, a startup-oriented lawyer is a critical member of your extended adVenture team.

Substance Over Form

As outlined in Beware the Consultant, be wary when selecting a professional services firm. Often, the Rainmaker with whom you initially establish a relationship will not be your primary point of contact once the Engagement Letter is signed. As such, you must be comfortable with all of the team members who will work on your engagement. In addition, there is often an inverse relationship between a firm’s size and the amount of attention that you will receive from experienced professionals. The larger the firm, the less “quality” attention you may receive. Do not be swayed by the hundreds of other startups the firm represents. Remember – you are hiring a lawyer, not a law firm. Before you sign an Engagement Letter, obtain written assurance that your lawyer will directly attend to your matters and that you will not be shuffled off to become a training ground for the law firm’s junior associates.

Like most mature markets, the legal profession is highly segmented with respect to the services provided and markets served. Even so, the majority of firms focus on servicing well-established BDC’s. Fortunately, in most communities, there are usually a few firms that cater to the specialized needs of startups. As noted in Nature vs. Nurture, startup lawyers tend to congregate in entrepreneurial enclaves. As such, your likelihood of finding an experienced, top-shelf startup lawyer will be higher if you place your adVenture in a geographic region which enjoys a strong entrepreneurial ecosystem.

Some startup attorneys will accept a portion of their initial fees in the form of equity. This will allow you to defer a portion of your of up-front legal costs. In addition, such an arrangement will further cement your lawyer’s incentive to help you succeed. When you hit the inevitable bumps in the road, a lawyer who has an equity stake in your business is more likely to be flexible with respect to payment terms and more willing to give you quick, off-the-clock feedback and guidance. Ensure that your lawyer’s goal is to establish a relationship, not just a retainer. If you are charged for every nanosecond you spend with your lawyer, consider finding one who is willing to “invest” more aggressively in your success.

When managing your legal affairs, never lose sight of the fact that your lawyer works for you. It is surprising how often entrepreneurs forget this simple fact. Your lawyer is a trusted advisor, but in the end, you run your business, your lawyer does not.

In Search of an Oxymoron – The Ideal Lawyer

When assessing a potential lawyer, consider the following criteria:

Yes Man – Many lawyers think that their job is to say, “No.” You can only hope that your competitors are working with such lawyers. Search until you find a businessman in lawyer’s clothing who will respond to your inquiries with replies such as: “Yes, here’s how we can do that.” In other words, find a lawyer who will take the time to understand the issues underlying your business and advise you how to best accomplish your objectives while minimizing your legal exposure. Such a lawyer will help you look at all sides of each deal, as outlined in Agreements From The Fringe.

Independence – Be cautious of any lawyer recommended to you by one of your investors. The reference may be well-intentioned, but the lawyer’s allegiance may be divided between the investor and you. Such a lawyer will not go out of their way to screw you, but when crafting the investor documents and in future investor-related issues, your lawyer’s allegiance must be to your company. He or she must be willing to fight for your company and go toe-to-toe with your investors. A lawyer with a long-term interest in keeping one or more of your investors happy might sacrifice your company’s best interest at a critical juncture in order to remain in good standing with the investor.

Act Like A Three-Year-Old – Do not be afraid to frequently ask your lawyer, “Why?” Your lawyer should be willing to explain the legal issues that impact your operational decisions. Ideally, you will be fortunate enough to find a pseudo-professor who is willing to take the time to explain the issues at hand. I established such a relationship with a fantastic lawyer and he taught me a great deal over the 10 years we worked together. Even though you will, to some extent, pay for such training in the form of billable hours, understanding the why of the law will ultimately save you money, as you will eventually be able to answer many basic legal questions on your own. However, be respectful of your lawyer’s time and acknowledge the fact that they have multiple clients. In addition, believe it or not, a few startup lawyers actually have a life outside of their legal practices.

In order to get the most out of your discussions with your lawyer, take one or more Business Law classes. A basic understanding of common law precepts, contract law and business law is one of the most important academic foundations you can utilize in your startup. If taking part-time evening courses is not possible, seek out an online curriculum.

Money Is Time

No matter how entrepreneurial your lawyer is, he ultimately is in the business of trading his time for your money. Thus, the burden of maximizing the return on your legal dollars is squarely on your shoulders.

Drop Dead Deadlines – Your lawyer cannot read your mind. Thus, every time you submit a request to your lawyer, make it very clear when you really need a response – this will help your Legal Eagle to effectively manage his time and ensure that he meets your expectations. This is a courteous, professional way to manage your relationship and will also benefit you. If you do not cry “wolf” every time you request something, your lawyer will know when something really is urgent and they will do whatever is necessary to meet your deadline. Nothing is more frustrating for a lawyer than to work late into the night in response to an urgent request, only to have the client not act upon the response for several days.

Draft First – As the businessperson with the most intimate knowledge of a particular deal, you should draft as much of the “business-oriented text” of your contracts as possible. At the very least, you or the appropriate member of your team should document the primary deal points in bullet-point form. The more specifically you document the business terms, the fewer iterations will be required to finalize the agreement. Even a highly attentive, business-oriented lawyer cannot put himself in your shoes. They do not work at your company, so there is no way they will have your insights. Thus, the more work you do upfront to document the business issues, the less you will ultimately be charged and the more closely the agreement will reflect the spirit of your verbal negotiations.

There is no magic language which makes an agreement legally binding; in fact, in most cases, the simpler the text, the better. Many a binding contract has been written on the equivalent of the back of a napkin. Once you draft the straightforward text, sans the legal mumbo-jumbo, ask your lawyer to review the text to ensure your layman descriptions do not result in an unintended interpretation. As noted in Tom and Huck, plans and agreements written in plain language reduce confusion and benefit all parties. If you select the right lawyer, he will not load up your text with gratuitous legal jargon (leave that job to the BDC’s legal squad).

Bill Review – Believe it or not, lawyers and their staff are human (insert “gasp” here). They make mistakes. Just as you expect your accounting department to review your corporate credit card bill, you should always take the time to review your legal invoices. Your lawyer should provide you with detailed bills that describe each charge. Ensure that whomever has the closest working relationship with your lawyer reviews the bills for potential billing errors.

Sometimes You Do Get What You Pay For

Just as you would not ask your family physician to perform a coronary bypass, do not ask your corporate lawyer to help you write your patent application. Most corporate attorneys can give you general guidance with respect to securing your Intellectual Property (IP) rights, especially with respect to trademarks, copyrights and other non-patent-related items. However, you should seek a patent attorney when it is time to craft your patent application.

As noted in Frugal is as Frugal Does, entrepreneurs on The Fringe only spend their cash on items that add value to their adVentures. However, they also know when it makes sense to save money and when it is appropriate to pay a premium. The money you pay your IP lawyer should be judiciously spent, but you should not attempt to save money by working with someone without the appropriate experience in your technical domain. Familiarity with the relevant “prior art” is one of the most important considerations when crafting a patent. You do not want your IP lawyer to learn the prior art associated with your technology on your dime. Save money on your office furniture, not on your IP lawyer.

Appropriate patent “design” can allow you to later add related claims, yet still have the benefit of the initial filing date. It can also ensure that your patent is not too broad, which might make it indefensible, or too narrow, which might limit its applicability and thus its value.

In the eyes of a potential acquirer, your IP may be one of your most valuable assets. You cannot rely on the IP lawyer to coax such vital information from you. Similar to the process of creating a contract, you or the appropriate technical person on your team must first document the novel and unique technical aspects of your solution. In order to enhance its value and reduce the risk of someone easily circumventing your solution, you cannot abdicate responsibility by relying solely on an IP attorney to translate your technology into a patent application.

Your Lawyer is not a Doberman…

Do not be litigious – you cannot afford the loss of focus or the energy required to use the courts as a weapon. It is also unlikely that you will have the financial wherewithal to successfully wage legal battles. Some companies use lawsuits as an arrow in their competitive quiver. Rather than trying to tear down competitors by suing them into financial ruin, spend your time building value within your business.

… but They Make Great Guard Dogs

When you are sued and you are “in the right,” your lawyer may advise you to settle the case in order to put the lawsuit behind you and minimize your cash outflows. Do not do it. Repeat: do not act “rationally.” Even though it may cost you more money in the short-term to fight a fallacious lawsuit, when viewed from The Fringe, it is clear that such spending is a sound investment.

Spending your precious dollars to earn the reputation in the legal community as an irrational entrepreneur who will fight frivolous lawsuits, even when it is in your economic best interest to not do so, is money well spent. The last thing you want is to become an easy mark for unscrupulous lawyers who make a living filing extortionist lawsuits. There is a small army of smarmy lawyers who share “tips” regarding how to extract money from honest, hardworking entrepreneurs such as you. They also trade lists of “easy marks” – companies that roll over when faced with a frivolous suit.

Go Nuclear

During the Cold War, the Russians were fearful of President Nixon because of his heavy drinking and erratic behavior. His threats carried weight, as the Russians could never be sure of his stability or rationality. With one finger on “the button” and a bottle of Jack Daniels in the other hand, they were forced to keep their distance. It is difficult to imagine Brezhnev invading Afghanistan knowing that Nixon was wandering the halls of the White House late into the night in varying states of sobriety. Unfortunately for the Afghans, President Carter poised no such threat to the Russians.

When it comes to nuisance lawsuits, make it clear to the predatory legal community that you are Nixon and the bar is open. Demonstrate that you will act irrationally and outside of your own best financial interests to ensure that every lawsuit filed against you is lengthy and expensive for both sides. Clearly communicate that you have no intention of performing a quick ROI calculation and deciding to pay off the predatory lawyer to “make him go away.”

If you can successfully convey that the lawsuit will be an expensive effort for both parties and that you do not intend to fold, the predatory lawyer will see that the payoff is not there and they will move on to easier prey. Remember, even an unscrupulous lawyer’s time translates into money. If you make it clear that you plan to force them to spend as much time as possible on your case, then they will be more likely to move onto a company that will pay them off early in the process and thus net them a better return on their time.

The rash of spam lawsuits from a few years ago is a good example of how two-bit, loser lawyers who cannot make an honest buck go after companies who are trying to do the right thing. One of my adVentures was hit by several such lawsuits and we refused to pay any sort of settlement. Only one of these cases ever made it to court.

Here Comes The Judge

When we arrived at the courthouse, the judge required us to first meet with the smarmy lawyer and attempt to work out a “settlement.” The lawyer was right out of central casting – he was as creepy a cretin as you can imagine. He initially tried to “settle” for a thousand dollars to “cover his travel costs.” He then asked for “a couple hundred dollars” and encouraged us not to bother taking the case to court so we could “get on with our day.” After a lot of fake smiles and attempts at launching an ingratiating conversation, he finally gave up when it became clear that we had no desire to pay him anything.

Once the case was brought in front of the judge, she levied the lowest possible fine she could impose: $80. She was very unhappy with the smarmy lawyer because her docket for the day was filled with his nickel-and-dime lawsuits. She berated him for bringing such petty lawsuits into her courtroom and told him that each case would be settled for the minimum fine. Sometimes justice actually does prevail.

Judas Suits

If Judas were around today, he would probably get a smarmy lawyer and sue Jesus, rather than turning him over to the Romans.

Treat nuisance lawsuits brought by disgruntled, former employees in the same manner as those filed by a predatory lawyer. If you settle, not only does there appear to be an admission of guilt, your largesse will also encourage future lawsuits. If you feel you treated the former employee fairly, invest the dollars to show the world that you will spend wildly to protect your principles – do not let your lawyer talk you into acting “prudent” and settling.

Most employee lawsuits are brought on a contingency basis, in which the lawyer attempting to perpetrate the extortion only gets paid if: (i) the former employee wins the case and is awarded monetary damages or, (ii) the company pays the former employee to make the case “go away.” Otherwise, the employee’s lawyer is not compensated for the time they put into orchestrating the shakedown. You can greatly reduce a contingency lawyer’s appetite for a particular case by making it clear to them that you are Nixon and they are Brezhnev.

You can also greatly reduce the risk of employee lawsuits with a few simple preventative steps:

Employ consistent and disciplined hiring procedures, including background checks, backdoor references (i.e., speak with at least one person who knows the applicant but was not included among the applicant’s references)

Require all employees to sign iron-clad invention assignment and confidentiality agreements

Enforce the employment policies defined in your Employee Handbook and requiring all employees to sign a form acknowledging that they have read the Handbook and agree to abide by its policies during their tenure

Document all personnel issues, including the specific steps an employee placed on probation must take in order to avoid termination and whether or not the employee abided by the terms of the probation

Include two company employees in all personnel meetings with a problem employee and take contemporaneous notes during and immediately following the meeting

Encourage terminated employees to sign a release which absolves your company of all liability before the termination process is completed

A good startup lawyer will help you establish such policies and agreements from the outset of your adVenture.

BDC Bark vs. Bite

The bark of a BDC lawyer is often much greater than their bite. The usual approach of the BDC lawyer is to initially deal with an entrepreneurial company in a highly aggressive and threatening manner, in the hopes that you will be intimidated and scared into following a particular course of action.

Hold your ground. As every entrepreneur on The Fringe is well aware, BDC’s are most concerned with limiting their liability. Although they may bark loudly, they know that the US courts lean toward the “small guy” and thus they will think long and hard before doing anything that may expose them as a corporate bully.

I once received a very aggressive letter from a Fortune 500 BDC who felt that our remote access product was being used improperly by certain users to circumvent the BDC’s licensing scheme. They demanded that we send them our entire customer list and that we issue a letter to all of our customers indicating that they were not to use our product in violation of the BDC’s licensing terms. The indicated that if we did not promptly comply with their request, they would seek an injunction that would shut down our company.

This ludicrous demand is akin to asking the phone company to send a letter to all its customers telling them not to use the telephone to make prank calls and that if it does not send such a letter, its ability to offer phone services will be discontinued. Just like the phone, our remote access product was simply a tool. Some people will use a tool for the greater good and others will use the same tool for a nefarious purpose. We certainly did not encourage or even make it very easy for users to violate third-party licenses. However, if some of our users did misuse our products, it clearly was not reasonable to threaten our viability with a blanket injunction.

I called the BDC’s lawyer and “nicely” made it clear to him that his letter was insulting and that there was no way we were going to send him a list of our customers, let alone issue a letter to our users asking them to use our product “legally.” I also suggested that if his BDC was so worried about users violating their licensing scheme they might consider revising their legacy, shrink-wrap license to reflect modern Internet usage. Although he was not happy that we did not kowtow to them, we never heard from him again.

In another instance, we received a very strident letter that indicated that one of our product’s URLs was causing “confusion” with a BDC’s URL. However, surprisingly, if we agreed to pay a significant amount of money, the BDC would overlook this “confusion.” Hmmmm … does anyone smell extortion in the air?

Once again, I promptly responded to the overly aggressive letter with a quick phone call telling them that we felt their assertion was ridiculous and we would welcome the chance to prove it to them in court. As with the BDC with the legacy licensing scheme, we never heard from them again. The key to our success in both instances was that we had the guts to speak with them voice-to-voice and communicate our willingness to fight their assertions in court. We did not allow the situation to escalate by sending warring letters back and forth. Get on the phone and let them hear the irrational resolve in your voice.

Capitan and Navigator

Your lawyer may be the most important member of your extended adVenture. The difference between a great lawyer and a good lawyer is startling and you will know it once you experience both.

Despite the importance of this relationship, your lawyer is not driving the bus. They will often sit shotgun, to act as your navigator and help you reach your destination. However, you are in the driver’s seat. It is up to you to fill the bus with the right people, ensure that the gas tank never runs dry, and keep the bus moving in the right direction.

To paraphrase the late, and not so great, Johnny Cochran, “If the lawyer don’t fit, then you better split.”

I rest my case.

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How Much For A Rib? Pricing Should Be Based On The Value You Deliver – Period

2009-06-16T20:43:35Z

In his premier film appearance in the blaxploitation send-up “I’m Gonna Git You Sucka,” Chris Rock inadvertently illustrates a key pricing issue faced by most entrepreneurs when they initially launch a new product or service.

Watch this 93-second clip and see if you can identify the pricing pitfall addressed in this humorous clip. Caution: the clip contains a bit of profanity. It is Chris Rock, after all.

A recurring entrepreneurial challenge is to determine the optimal price of a new product, especially absent a directly competitive alternative. This issue is often further complicated by users who request that individual features be unbundled so they can limit their purchase to a portion of the overall solution.

The questionable “logic” of such requests is, “I only need a fraction of the features offered, so I should only pay for the features I will use.” This is analogous to asking Bill Gates for a discount because you, “never use the mail merge features in Microsoft Word.” At Citrix, GoToAssist customers would occasionally ask if they could just purchase our screen-sharing functionality because they did not intend to use the features it was bundled with, such as reporting, session recording, agent monitoring, etc.

Resist the temptation to accommodate unbundling requests, which essentially are veiled attempts to obtain a price discount. The value of your solution is in its totality, not its individual features. Once you unbundle most solutions, you bring into question the “value” of each of the individual components, which could result in price erosion, as customers pick and choose individual features.

Ironically, similar to Chris Rock’s character, who clearly can afford more than a single rib and a handful of coke, most of the GoToAssist customers who requested that we unbundled our solution could also readily afford, and, in most instances, make use of GoToAssist’s additional features.

Price = Value

The value of your solution will vary by customer, based on the utility they derive from your product. Ideally, discriminatory pricing laws aside, you would charge a different price to each of your customers, based on their willingness to pay. Starting with this ideal and applying it to the pragmatic reality of the markets you serve, attempt to match your pricing with the value delivered to each market segment you serve. Your costs should only be considered in light of the value you deliver. To the extent you can achieve sustainable gross margins, these factors should not influence your pricing decisions.

For instance, at Citrix we offered our GoToAssist customers the option to brand the customer-facing web pages of our solution with their logo, colors and general look and feel. The process to implement this branding involved minimal effort and thus cost us very little. However, the value to our customers was significant. If we had utilized a “cost-based” pricing model, we would have charged a few hundred dollars for this option. However, using a value-based approach, we derived a fairly substantial price (much to the chagrin of some of our engineers), which our customers were happy to pay.

When we initially launched GoToMyPC, the price of the annual plan equated to $9.95 per month. Our Marketing Department championed this relatively low price, as they had received numerous emails from would-be customers who indicated they would purchase GoToMyPC “if the price were lower.” Their concern was that we were forgoing revenue that we could otherwise capture if we decreased our price.

As I was responsible for driving GoToMyPC’s revenue, I was highly motivated to test its price elasticity. To this end, we gathered two very important pieces of data: (i) the large majority of our customers were reimbursed by their employers, and (ii) our customers used GoToMyPC an average of over four hours per month. At the time, our customer demographic was white-collar professionals, whom we conservatively assumed were compensated at the relatively modest rate of $35 dollars an hour, which equates to approximately $140 (4 hours x $35/hour) of “value” delivered by GoToMyPC each month.

Given GoToMyPC’s significant value, I championed a 50% price increase, from $9.95 to $14.95. Although there was significant internal resistance to such a large price increase, the company agreed to test the new pricing, based on the compelling empirical evidence that substantiated the significant value GoToMyPC delivered to our users (and their employers) each month.

Fortunately, our analysis was sound. Even this relatively large-percentage price increase had no impact on our sales. In fact, our overall revenue increased across all our market segments and marketing channels. Although we could never prove it, we suspected that the price increase enhanced the legitimacy of GoToMyPC in the eyes of corporate customers who might have otherwise been concerned that a $9.95 price could not support a sufficiently professional, secure or reliable corporate service.

Too often, entrepreneurs attempt to widen the appeal of their solutions by dropping their prices to attract a larger number of prospects. Although the appeal of this strategy is obvious, it is illusory. Focus on a value-based price that balances gross margin profitability with capturing the largest possible addressable market.

Avoid The End-Of-The-Quarter Trou Drop

Many corporate customers have become conditioned to delay major acquisitions until the end of a calendar quarter. These customers are accustomed to companies discounting their products as a quarter-end nears, in order to achieve their sales targets. As described in Private Means Private, one advantage of a private company is that it is not slavishly bound to monthly and quarterly financial objectives. As such, ignore the temptation to reduce your price at the end of a calendar quarter, simply to attain your internal sales projections.

Avoid end-of-quarter price erosion expectations by firmly communicating to each prospect early in the sales process that your company is private, focused on its long-term growth and thus not subject to quarterly sales pressures. Let your Bro Foe know that you strongly desire to close the sale as soon as possible, but you are also willing to re-initiate your discussions at the start of the upcoming quarter (after the prospective customer is done beating up all their other vendors). Once your prospects realize that you are not subject to the quarterly sales pressure, they will be less likely to withhold their order in order to extort a price discount.

That There Be One Slippery Slope

Discounting is a slippery slope. However, if you never offer price discounts to anyone, it is easier to resist such requests by deferring to your company “policy.” Clearly declaring your non-discount policy is a strong negotiating position. If you selectively compromise this position, your potential and current customers may become alienated, and feel betrayed that they were not the beneficiaries of a discount.

Steadfastly refuse to discount your product based on price. If a customer is serious about acquiring your solution, it is always possible to devise creative, non-price alternatives to deliver customers additional value without eroding your price.

Eliminating the possibility of price reductions removes a crutch which is often employed by mediocre sales people. If your sales team knows that you will approve deals with price discounts, they will be inclined to give away this relatively expensive allowance in order to close the sale and secure their commission.

Price reductions have a dollar-for-dollar impact on your gross margins and ultimately reduce the amount of cash available to reinvest in your adVenture. As such, force your sales team to seek non-price alternatives to price reductions. If you reward your sales team for maintaining gross margin targets, they will be motivated to craft non-price deal sweeteners that can be delivered at minimal cost. To the extent that such non-price incentives have a smaller impact on your margins than a price discount, your adVenture will be well served. Some non-price methods of enhancing your overall value proposition include:

Support – If you provide various tiers of support, offer an enhanced level at no additional cost. For instance, you might provide phone support to a demanding customer, rather than lower-touch and less timely email or chat.

Volume – Offer per-unit price relief in exchange for a larger overall purchase. For instance, if you are selling ten concurrent seats of a software program, consider reducing the cost per user if the customer agrees to purchase an aggregate number of user seats which results in a larger overall sale than you would otherwise garner without the cost-per-seat discount. This strategy obviously is most effective when your product entails low variable costs.

Cash – As noted in Frugal Is As Frugal Does, cash at a startup is king, queen, duke and prince. If you offer a subscription product or a similar solution that is purchased over time (e.g., software as a service), require discount-oriented customers to pre-pay a substantial portion of the fees upfront. For capital goods that may traditionally involve extended payment plans, demand more timely payments.

Duration – Extend the duration of the purchase agreement such that the overall revenue generated exceeds that of a shorter, undiscounted sale. For instance, to the extent it is applicable, require a customer to agree to a longer-term commitment in exchange for a lower per-year or per-month price. If you are selling a product with a one-time sale, such as capital equipment or legacy software, require customers to sign an extended service or warranty agreement.

Protection – Consider offering “pricing protection” to users who are particularly price-conscious. Rather than reducing your price upfront, contractually limit future price increases. Clearly, caution must be deployed when utilizing this tactic, in order to reduce your downside exposure in the event your costs unexpectedly increase.

Transparency – Some customers will value understanding, and potentially influencing, your product roadmap. As long as such customers abide by your confidentiality covenants, your competitive exposure will be minimal. However, never allow such transparency to result in a customer exerting de facto control on your product development process.

Professional Services – Your Professional Services team can be invaluable. When properly managed and motivated, they are akin to spies who cross enemy lines and become trusted members of the opposing side, providing you with invaluable intelligence regarding your customers’ wants, needs and plans.

Your Professional Services team should also be compensated to drive incremental revenue. By solving customer issues beyond the scope of your solution’s current deployment, you deliver more value, become more ensconced within your customers’ organizations and generate additional profits. For all of these reasons, generously allocate discounted Professional Services resources to demanding customers, especially with respect to the installation and implementation stages, when ensuring a satisfied customer experience is of profound importance.

Expensive Chits

Never discounting is an ideal strategy. However, if for strategic reasons you decide to grant price allowances, tie them to one or more non-price deal points as a means of making the discount relatively expensive. A few suggestions of such “quid pro quo” provisions include:

PR Goodies – Secure the use of a customer’s logo, testimonials, inclusion of the customer’s name in press release boilerplate text, joint press release, etc., as described more fully in Thrill The Messenger.

Referenceable – The customer agrees to field a reasonable number of reference phone calls from future, prospective customers. Note: As a buyer, I usually agreed to this provision, as it ensured that the seller would do everything in its power to make me happy and keep me satisfied.

White Paper – The customer agrees to participate in the creation of a marketing document which details its successful use of your solution; ensure you have access to the raw data, such as cost savings, usage, productivity enhancements, return on investment, etc.

As noted in Kiss Of Death, rebuff customers’ requests for Most Favored Nations (MFN) status. Such a provision dictates that the MFN customer is guaranteed the “best” deal that you offer to any future or current customers. MFN covenants are difficult to administer and they amplify the financial impact of any price concessions you are forced to make with any customer.

For instance, if you grant a new customer a deep discount in order to close a strategic deal, a MFN clause will require you to offer an identical discount to all MFN customers. However, if the discount is accompanied by one or more meaningful quid pro quo provisions discussed above, the discounts will only apply to MFN customers who also agree to abide by the favorable provisions.

The Customer Is Not Always King

The essence of Chris Rock’s cameo in “I’m Gonna Git You Sucka” became a watchword at Citrix. Whenever we encountered a prospect who attempted to nickel-and-dime us with an unreasonable request, we referred to them as “wanting a rib.” In other words, they were a prospect that was unlikely to become a profitable customer.

As Chris Rock runs from the ribjoint, chased by Isaac Hayes, actor Bernie Casey enters the scene and admonishes Isaac Hayes’s character by saying, “Don’t do it. The customer is always king.” Experienced entrepreneurs know this is simply not true. Some would-be customers, such as those who are unwilling to pay an equitable price for your solutions, should be sent fleeing, just like Chris Rock’s character. If they are not, it just may be you who is gonna get it, sucka.

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