Strategy step one was understanding identity.

Step two is market focus, but always with the realization that you think these two through together, not one by one. Your identity is about uniqueness, strengths, and weaknesses. That influences your choice of target market. And your market influences your identity. They mix together.

Most of us make the mistake of aiming too broadly. Think of the Bill Cosby quote: “the secret to failure is trying to please everybody.” If we were a restaurant, we’d be trying to offer the best food at the lowest prices with the best service and a drive-through as well. Which is disastrous. Most successful restaurants focus narrowly. They want the foodies who pay high prices, or the quickies who want fast and cheap; but never both.

Really strategic target marketing is like sculpture. You start with the big block and then knock the pieces off of it. Be able to define who isn’t your target market.

Try to imagine in detail your absolute ideal buyer. Experts call this working with a persona. Give her age, family, education, job, commuting habits. Know what kind of car he drives, what websites he likes, and what he watches on TV. Know her politics. Know what he reads. The more you know this person, the better to manage your market message and media.

Make sure you understand this person’s underlying buying decision. Understand the real needs. With restaurants, for example, the needs and wants involved in an expensive low-lighting romantic meal for two are very different from those involved in a quick cheap drive-through hamburger happy meal. Free yourself of features, and think of benefits. Tell yourself the story of you this person finds your business, what he is looking for, and why that matters to her.

(Image: istockphoto.com/ with my modifications)

Last week I spent three days in Houston as a judge of the Rice Business Plan Competition. I haven’t been home since I left April 7 to judge the University of Oregon’s New Venture Championship. Both of these competitions include four components: the business plan, the business pitch, the responses to questions, and the elevator speech. Every team has at least one MBA student, most of them are all MBA students. The winners get a lot of money.

Rice is the richest. Last Saturday night they distributed $1.3 million in investments, services, and cash awards. Some of that, however, involves investment for equity, or conditions like moving to Houston.Judging these contests is fun. You read business plans, then listen to the entrepreneurs pitch the plan with slides and demos, followed by questions and answers. Later, you give them feedback. The hardest part, at least this year, is that you have to rank the teams and choose winners.

Here are my 10 reflections:

1. A great ending: The Rice contest was a $1.1 million contest until the absolute last minute, the last presentation in the awards banquet, when the Texas GOOSE (grand order of successful entrepreneurs) doubled its investment in the winner, from $150K to $300K. The GOOSE society is a phenomenon in itself, worth another post here. I couldn’t find a good link to it to share here, but among the names I recognize are Rod Canion, co-founder of Compaq Computers, and Bob Brockman, who gave the award on Saturday. Right there, with the winners on the stage, they took a marker and, writing by hand, doubled the amount on the check.
2. A good response to feedback: Clearbrook Imaging, a team from the University of Texas, has a product in its early stages that could, if it works and gets into the hands of doctors, make some kinds of heart surgery much safer. Unfortunately they’ve also got a thick, turbid business plan, and a slow-paced presentation. The underlying product/market fit looks so good my group of judges passes them onto the finals before lunch, then coaches them, in the afternoon, on how to turn their pitch around on empathy and stories and plot. The next day they win the Oregon contest.
3. Mixed feelings: Innovators from The Indian Institute of Technology at Kharagpur has a way to rig some plastic together to filter water in villages without using electric power, for $6 a unit, to reduce the horrifying death toll of water-borne preventable diseases among India’s rural poor. They didn’t make the semifinals. It’s hard to compare plans offering frills in a consumer market to plans that offer real improvements in health and life for people living in poverty.
4. Disappointing: The financial projections for a lot of the plans had horribly unrealistic profitability and little or no sense of cash flow. I’m surprised at how many strong teams had flawed financials. Good news: except for the flawed financials, the business plans are getting better than ever. These are exciting new companies with strong markets and excellent teams behind them. And flawed financials are not fatal flaws.
5. Growth and change: business plan competitions started in 1984 with the University of Texas’ Moot Corp, now called Venture Labs. They were originally a lot like that name, moot, hypothetical, academic exercises in mock businesses. These days the vast majority of these plans are real, with real prospects, real value, and real likelihood of launching. Brad Burke, managing director of the Rice Alliance that puts on the competition, says since they started in 2001 they’ve had 116 teams launch businesses, which raised $337 million in venture capital.
6. Four for four: For my flight at the Oregon contest I reviewed four plans. All four were believable, launchable businesses.
7. Six for six: For my flight at Rice I reviewed six plans. Two were a bit early, but promising. Four were real.
8. Disproportionately male: It’s getting better these days, but it’s still true that judges and competitors are maybe 80 percent male. There’s no good reason for that. I hope it changes fast. And for more good news on this front, the winning team, TNG Pharmaceuticals,  was led by CEO Jenny Corbin, and two others of the six finalist teams included strong women. Priyanka Bakaya of MIT and PK Clean, another finalist, won the $10,000 nCourage Courageous Women Entrepreneur Prize. And Priscilla Silva had the main speaking part for Cyclewood Plastics, of the University of Arkansas, another of the six finalists.
9. Meanwhile, back in the real world: QRCodeCity, one of the plans I reviewed for Rice, had started in January with an iPhone app called “Scan.” When the Rice contest started in had been downloaded more than 250,000 times. Three days later, at the awards banquet, it had been downloaded more than 300,000 times. They didn’t make the finals.
10. Toughest finals ever: The Rice event included 42 teams chosen from more than 150 applications. They filtered them down to six teams for the finals. It was incredibly hard to choose between those six. Any one of them could have won. One of my favorites fell behind only because they hadn’t signed the technology license agreement. The team that won, TNG Pharmaceuticals from the University of Louisville, which has vaccine to relieve cattle of fly infestations, was fabulous. But so were the five other finalists.

I’m not done with this subject. In two weeks I do it again for the University of Texas’ Venture Labs, formerly Moot Corp, the oldest and maybe still the best known of these contests. Venture Labs gets the winners of several dozen other contests.

I’m well into my business plan marathon again this year, in Houston today looking forward to judging the Rice Business Plan Competition, one of my favorites.Regarding business plans, instead of just complaining (again) about unrealistically high profitability projections, today I have some specific suggestions. And this has nothing whatsoever to do with the six excellent plans I’ve read for my part of the judging today. But, as my mother used to say: “if the shoe fits, wear it.”

The underlying problem is that projecting high profits doesn’t usually mean you have a great business plan. It almost always means that you’ve underestimated expenses or direct costs. It’s usually a bad thing, rarely a good thing.

So here are those concrete suggestions:

1. Compare your projected profitability (net profits or pretax profits as percent of sales) to standard industry profiles. The most well-known source in the Annual Statement Studies published by Risk Management Associates (RMA). These will give you standard profitability rates for more than 700 common types of business. I searched the site for information business, narrowed it down to software publishing, and I was offered a download for $120. Oxxford Information Systems competes with RMA with more profiles for more different types of business. And Business Plan Pro bundles the Oxxford Information profiles with a searchable database linked to the ratios table [disclosure: I'm the conceptual author of Business Plan Pro and my company publishes it.] And there are other competitors in that market. Standard profitability isn’t that hard to find.That doesn’t mean that I recommend your projected profits always match some standard industry profile. Not at all. What it does mean, though, is that you should know what profits are reasonable for similar industries, and don’t project huge profitability that’s 5 or 10 times higher, in percent of sales terms, than the standards. That kills credibility.
2. Compare your projected profitability to results of publicly traded companies in your industry. You don’t need an exact match, but you should know how different your projections are, and you should satisfy yourself on why they’re different. The publicly traded companies tend to be larger and more established than new startups. Sometimes a startup is so new and innovative that it is much more profitable than industry leaders; but that’s rare. If you don’t know where to find financial reports of publicly traded companies, start with Yahoo Finance.
3. Do a good web search to see if you can find comments on blogs or in interviews where entrepreneurs talk about actual profits in real businesses like yours. Maybe you’ll find somebody who might be a competitor. People give a lot of information away these days, in blogs, and on the web.
4. Try to find somebody with actual experience in a similar company. Use social media, use your mentors, talk to the nearest business school or chamber of commerce. Get somebody to tell you, from real-world experience, what kind of profits are likely.
5. If all else fails, remember that across the real world of business, normal profits run about 5, 10, maybe 15 percent of sales. If you’ve done your best and it still shows 30 percent or more, take a good look at your payroll, headcount, and marketing expenses. When it doubt, add marketing expenses to take your projected profits down to a credible level.

Is this you? Does your business plan project profits way above standard levels? That doesn’t make your plan look better. First, make it credible. Only then are the numbers really interesting.

(Image: Elnur/Shutterstock)

… is when the research stifles common sense and kills discussion. And I think that happens a lot. For example:

• Say you did a focus group on packaging colors. The focus group liked the green package, but what you don’t know is that the group was overly influenced by one charismatic person who liked green that day. It didn’t reflect the whole population. But now you’re stuck with green, regardless of what’s really right. And nobody in your group is going to be comfortable suggesting red or blue. After all, the research is done, and the answer is green.
• You did a customer survey, asking people whether they liked your idea and what they would pay for a subscription. The truth behind the scenes is that the survey went out wrong to a list of people already biased in favor, and since they knew about you and liked you, they overestimated their willingness to pay. So you build the business and launch, and discover, way too late, that people in the real world, spending real money, won’t pay what the people in the survey said they would. And nobody on your team can question the advisability or the pricing “because we did the research.”

So it isn’t that I don’t want information. It’s a matter of information that takes on more certainty than warranted. I like research to be there, used, considered, but taken with healthy skepticism. If it doesn’t seem right, it might not be. Whether you call it research or not.Does that make sense?(Image: Adam Radosavljevic/Shutterstock)

I was talking to a group of determined entrepreneurs, a food business boot camp in Corvallis, Oregon, and finishing up on business plans when one of them asked me:

What do you recommend for getting angel investment?

I recommend that unless you have a good investment opportunity, you don’t waste your time. What’s a good investment opportunity?

1. First, it has to be something scalable, defensible, that can grow. That means it’s either a product business, or one of those web services that scale easily. Can you add sales without adding employees? That’s a good clue to scalability.
2. Second, you need people on board with experience in startups. It’s tough if you’re just beginning, but investors worry about risk and nothing reduces risk like having some experience. If you haven’t been involved in a startup, it’s really almost impossible to get investors to take a chance on you. Look for partners or team members who’ve had some startup experience. Ironically, having failed with a startup isn’t always bad; failure is better than no experience at all.
3. Third, you need a believable exit strategy. And you need to be able to convince investors you really want that. Investors don’t want just a small piece of a healthy growing business; they don’t make money unless that business wants to be sold in a few years, meaning it gets acquired by a larger company, and investors get to convert their ownership back into money.

The hard part, as a speaker talking to entrepreneurs, is entrepreneurs want encouragement. But then when I think of how much time and effort some people spend trying to get investment that’s never going to happen, I try to just tell the truth.

This morning I start my annual business plan marathon. This is my day as a semi-finals judge at the University of Oregon’s New Venture Championship. From here I go to Houston next week for Rice University’s million-dollar business plan competition, and then in early may to Austin for the University of Texas’ Venture Labs competition. The illustration here is from last year’s competition at Rice.

I call it my business plan marathon because it includes reading several dozen business plans and watching several dozen business pitches. It also incudes reading some plans for the University of Notre Dame business plan competition, and plans submitted to the Willamette Angel Conference, where I’m a member investor. All of this happens between now and May 12.

I do enjoy reading business plans, and I enjoy even more meeting the entrepreneurs, watching them pitch, and asking questions. These events are good for everyone involved.As I was reading plans in preparation, I found that one error I’ve complained about before — the totally unrealistic profits — is still quite common. Way too many of these business plans project profits at 40, 50, 60% and even higher, as if the way to show a good business is to project very high profitability.

The extremely high profits in the projections leaves me very unimpressed. Real businesses are happy to make 5 or 10% profit on sales when they do real well, maybe more when they are new, innovative, and spectacularly profitable. Nobody makes the high rates that show up too often in business plan contests.Those sky-high projections don’t mean you have a great business plan or a great business; no, what they really mean, to me at least, is that you don’t really know the business you’re getting into. You don’t have a good grasp of normal costs and expenses.

A couple of weeks ago the editor of my entrepreneur.com column poked me sideways a bit with the suggestion that I explain how planning is management. He said (I’m paraphrasing):

What do you really mean when you say planning is management? It’s not immediately obvious. Can you explain how a business plan becomes better business management?

Which led to How Business Planning Leads to Better Management, published yesterday.

The key is going from strategy to numbers:

In order to chart your path, you’ll need to define long-term goals. Think broadly about how you see your business in several years. From there, get specific. You’ll want to establish milestones for when you want to accomplish certain goals, and know who you will want to carry them out. Go beyond sales, costs and expenses, and look at what really drives your business. It might be conversions, page views, clicks, meals, trips, presentations, seminars and other engagements.

And then, more important, you track and manage those numbers. You set a regular review schedule and manage performance based on the numbers in the plan plus the difference between plan and actual results.

Can you see the management brewing? Tracking and analyzing numbers can help you manage the work behind the numbers. You’ll be in a better place to recognize and highlight what’s working and what isn’t working for your business and your team. Managing your business successfully requires more than just praise and pats on the back. Sometimes it means focusing attention on problems, helping people solve them if possible, discussing and embracing mistakes, and, in the worst case, weeding out people who don’t care about bad results. This can all be accomplished more efficiently when you have a plan in place.

So that’s why planning, done right, is management. It’s controlling your destiny and steering your company. And that’s not just a plan, a single, use-once plan; no, it’s planning process. It’s regular use, review, and revision, that makes planning management. Like Eisenhower said: “the plan is useless, but planning is essential.”

Yesterday I got this comment to my post Maybe You and I Aren’t As Good At Strategy as We Think, from last November:

I’ve been wondering: How do you define “strategy?” Is it possible to brainstorm to arrive at one? What are the “parts” of a good strategy? 

That’s a really good question, worth a blog post, or actually, maybe a book, or a series of books (not that I would be the author) or a whole graduate curriculum. But I do have 37 posts in the business strategy category of this blog, including this post from last October, which had this summary:

It’s really about focus. You can’t do everything, so you do the right thing.You can’t please everybody, so you select who you please based on common sense, your strengths and your weaknesses, and how you’re different.You can’t sell everything, so you sell what you’re really good at, what makes you appealingly different, and what sets you apart.You can’t do everything so you do what’s most important, what gives you the most benefit per unit of resources, what aligns you best with your target market and your focused business offering. 

In my Plan-as-you-go Business Plan book I divided it into three interrelated parts: identity, market, and focus.

Your Business Identity: This element is about you and your business, what I call your identity. How are you different from others? What are your strengths and weaknesses? What is your core competence? What are your goals?Your Market: Telling the market story is about knowing and understanding your customers. Understand why they buy from you, what their wants and needs are, what business you are really in.Strategic Focus You can’t do everything. In restaurants, you can’t credibly offer great food at bargain prices with great atmosphere. If you say you do, nobody believes you anyhow. So you have to focus. Make this focus intertwined and enmeshed with your choice of key target customer and your own business identity. All three concepts have to work together. 

I hope that helps to answer that question from a reader. I’m glad she asked.

Pop quiz: what relationship factor is the single most common trait in the successful entrepreneur?

My answer: the relationship with uncertainty.Why?

First let me say that I’m not sure. Second, that I might change my mind tomorrow. (Irony intended.) Third, that I know there are seemingly endless lists of traits of the entrepreneur, and I’m guilty of producing several (including my own top 10 list, which is the most popular post on this blog).

Today I’m thinking that the single most important trait of the true entrepreneur is establishing a good, healthy long-term relationship with uncertainty. As an entrepreneur, you don’t know for sure, but you act. You program, you contract, you create, you hire, you borrow, you spend, and you act, all like the explorer setting forth into unknown territory.Planning helps. Research helps. But you have to be able to live with the educated guess.

(Image: dny3d/Shutterstock)

In a darkened arena with a spotlight on a fighting ring in the middle, the crowd hushes as an announcer walks to the middle of the ring and announces the next battle. “In this corner…” — his voice echoes through the arena — “… we have the analytes.”The analytes can’t move without the numbers. They study. They research. In their world, answers are there for the taking, if you just do the numbers hard enough. You resolve uncertainty by looking harder at the data. Every problem has an answer. There is no uncertainty that can’t be resolved by further research. Their critics call it paralysis by analysis.”And in this corner,” the echoing voice announces, “we have the justdoers.”The justdoers trust hunches. They want action. For them, it’s all just guessing, so let’s take our best guess and get moving. They don’t worry so much about uncertainty because it’s all uncertainty, and the answer is to guess.The justdoers drive the analytes crazy. “Come on,” they shout, “what are you waiting for? We’re going to miss the market. Let’s go.” And the analytes drive the justdoers crazy. “That’s irresponsible,” they say, “we haven’t done the research.”And, unfortunately, never the twain shall meet. I think the happy medium is somewhere in between. Especially with entrepreneurship and small business, I think you have to remind yourself to slow down and educate those guesses … and that you can’t ever study enough to eliminate uncertainty. The past doesn’t predict the future.This difference in style is really significant. Each of the extremes makes the other extreme very, very nervous. We have the paralyzed vs. the loose cannons.I’d like to think there’s a medium range in between the two extremes, where people understand that they are guessing, so they educate their guesses with practical research wherever possible, but they take only the right amount of time before taking their best guess and moving forward.And I’d like to think I’m close to the medium, because I like to absorb the data before I discount it in favor of common sense. I hope the data affects my decisions, but only in a non-specific osmosis sort of way. And when in doubt, I know that it’s all uncertainty, so we might as well get moving.Where are you on this scale? Where are your key cohorts? Are you compatible? What do you think: should everybody be the same on this scale, or is it better for a team if it includes a mix?