Category Archives: Back to Fundamentals

The Joy of Startups, Revisited

Back to Fundamentals, Business Stories, Starting a Business,

Getting really into a new startup, when it goes well, is exciting like a clear mountain morning, like a warm spring rain, like falling in love.

Cheesy? Sure. But I’m doing it again, and loving it. I’m not just saying what people always say; I’ve been there, and I’m there again right now.

If you’re a regular here you may have noticed I dropped my normal posting rate from five per week to just one last week and this is only the third this week. One reader emailed to ask if I’m okay, which made my week, (and, by the way, if that isn’t a good reason for blogging, I don’t know what is.)

The long-term business love of my life, Palo Alto Software, is going just fine, thanks, and I’m still there a lot physically and there in spirit always. But some new startups are making me feel that spark again, the excitement of building something new.

Unfortunately, neither of them are ready for prime time yet. If you’re curious, you could go look at apps37.com but that’s just a bare-bones placeholder, and doesn’t say much.

And, because these have come up in twitter lately, I think I should clarify that neither of these startups is either LiftFive or Rebelmouse. Yes, the founders of those two, @meganberry and @teamreboot, respectively, are two of our five grown-up children. And I’m pleased that they occasionally share ideas with me. But those two startups are their things, not mine.

I love the smell of a fresh new startup in the morning.

 

Paul Graham: A Company is Defined by the Schleps It Undertakes

Back to Fundamentals, Starting a Business

Paul Graham has posted a(nother) brilliant essay, this one called Schlep Blindness, which is about hackers and startups and “tedious unpleasant tasks” (which he calls schleps, from the Yiddish, and of course popular culture).  Here’s what he says:

No one likes schleps, but hackers especially dislike them. Most hackers who start startups wish they could do it by just writing some clever software, putting it on a server somewhere, and watching the money roll in—without ever having to talk to users, or negotiate with other companies, or deal with other people’s broken code. Maybe that’s possible, but I haven’t seen it. …schleps are not merely inevitable, but pretty much what business consists of. A company is defined by the schleps it will undertake. And schleps should be dealt with the same way you’d deal with a cold swimming pool: just jump in.

To me that’s a sudden gust of cold-but-fresh air, a badly-needed reminder of fundamentals, a refreshing change from most of the standard stuff of entrepreneurship lore and literature. Notice that in this case it’s not about the idea, or the funding, or the plan or the pitch — it’s about the work. And doing things you don’t like to do.

I particularly like this point, clearly one of those sad-but-true realities:

The most dangerous thing about our dislike of schleps is that much of it is unconscious. Your unconscious won’t even let you see ideas that involve painful schleps. That’s schlep blindness.

Paul Graham knows what he writes about. He’s a startup veteran, successful, and still investing. For a great reading list on startups, try the list of Paul Graham’s essays.

Reflection: 10 Lessons Learned in 22 Years of Successful Bootstrapping

Back to Fundamentals, Bootstrapping, Family Business, Reflections, , , ,

(I posted this about two years ago on Small Business Trends. I’m reposting it here today because this is a good time of year for this kind of reflection. And maybe also for not writing a new post. Tim )

Last week a group of students interviewed me, as part of a class project, looking for secrets and keys to success. They were asking me because after 22 years of bootstrapping, my wife Vange and I own a business that has 45 employees now, multimillion dollar sales, market leadership in its segment, no outside investors, and no debt. And a second generation is running it now.

Frankly, during that interview I felt bad for not having better answers. Like the classic cobbler’s children example, I analyze lots of other businesses, but not so much my own. As I stumbled through my answers, most of what I was saying sounded trite and self serving, like “giving value to customers” and “treating employees fairly,” things that everybody always says.

I wasn’t happy with platitudes and generalizations, so I went home that day and talked to Vange about it. Together, we came up with these 10 lessons.

And it’s important to us that we’re not saying our way is the right way to do anything in business; all businesses are unique, and what we did might not apply to anybody else. But it worked for us.

1. We made lots of mistakes.

Not that we liked it. At one point, about midway through this journey, Vange looked at me and said: “I’m sick of learning by experience. Let’s just do things right.” And we tried, but we still made lots of mistakes. We’d fuss about them, analyze them, label them and categorize them and save them somewhere to be referred to as necessary. You put them away where you can find them in your mind when you need them again.

2. We built it around ourselves.

Our business was and is a reflection of us, what we like to do, what we do well. It didn’t come off of a list of hot businesses.

3. We offered something other people wanted …

… and in many cases needed, even more than wanted. You don’t just follow your passion unless your passion produces something other people will pay for. In our case it was business planning software.

4. We planned.

We kept a business plan alive and at our fingertips, never finishing it, often changing it, never forgetting it.

5. We spent our own money. We never spent money we didn’t have.

We hate debt. We never got into debt on purpose, and we didn’t go looking for other people’s money until we didn’t need it (in 2000 we took in a minority investment from Silicon Valley venture capitalists; we bought them out again in 2002). We never purposely spent money we didn’t have to make money. (And in this one I have to admit: that was the theory, at least, but not always the practice. We did have three mortgages at one point, and $65,000 in credit card debt at another. Do as we say, not as we did.)

6. We used service revenues to invest in products.

In the formative years, we lived on about half of what I collected as fees for business plan consulting, and invested the other half on the product business.

7. We minded cash flow first, before growth.

This was critical, and we always understood it, and we were always on the same page. See lesson number 5, above. We rejected ways we might have spurred growth by spending first to generate sales later.

8. We put growth ahead of profits.

Profitability wasn’t really the goal. We traded profits for growth, investing in product quality and branding and marketing, when possible, although always as long as the cash flow came first.

9. We hired people slowly and carefully.

We did everything ourselves in the beginning, then hired people to take tasks off of our plate. We hired a bookkeeper who gave us back the time we spent bookkeeping. A technical support person gave us back the time we spent on the phone explaining software products to customers. And so on.

10. We did for employees’ families as we did for ourselves.

Family members — not just our own family, but employee family members too — have always been welcome as long as they’re qualified and they do the work. At different times, aside from our own family members, we’ve had two brother-sister combinations, an aunt and her niece, father and daughter, and husband and wife.

And in conclusion…

Bootstrapping is underrated. It took us longer than it might have, but after having reached critical mass, it’s really good to own our own business outright. It might have taken longer, and maybe it was harder — although who knows if we could have done it with investors as partners — but it seems like a good ending.

Family business is underrated. There are some special problems, but there are also special advantages too.

Use Business Lines to Read Warnings in Numbers

Back to Fundamentals, Business Financing, , , , , ,

Are you minding your business? I’ve found through the years of minding my business that most of the important insight in the numbers comes in lines, not dots. I mean that tracking the change in key indicators over time, with lines, is much more valuable than looking at them at any specific point, as a dot.

For example, if your business sells to other businesses, you probably deliver the goods or services along with an invoice that establishes what your customer or client owes you. We call that money your customer owes you Accounts Receivable. The sales you make like that, delivering an invoice instead of getting paid immediately, are called sales on credit.

For business that deal with sales on credit the Accounts Receivable balance can be critical to a healthy cash flow. Every dollar in that balance is a dollar that’s already in sales, but not in the bank. You are waiting to get paid. The higher the Accounts Receivable, the more the danger.

You can’t measure Accounts Receivable with a single number. $32,812 in Accounts Receivable might be way too much or way too little, depending on how long it’s been there, how it’s trending, how that compares to other balance items, and the original sales amounts.

I like to watch the number as a line chart so I can see how it’s trending. Your accounting or bookkeeping software might be able to do this, and if not then any of the leading spreadsheet software applications can. I recommend you generate a line chart showing sales on credit on one line and Accounts Receivable on the other. If sales go up quicker than Accounts Receivable, that’s good. That’s the case in the second line chart here. If Accounts Receivable go up quicker than sales, that’s bad. That’s the case in the second line chart here.

The sales in both line charts are identical, but the behavior of the Accounts Receivable balance is different. In one, there might be reason to worry. You start with the line chart, which is like an alert. Then you go into the details, like who owes your business how much, and how long have they owed it to you. You call, you ask, you investigate, you deal with a problem. In the second case, seeing how Accounts Receivable is behaving, you probably look at the chart and go on to deal with something else.

With most of your business numbers the trends — the line — tell you much more than the specific numbers — the dot — at any one point. If you manage inventory in your business, draw the line of inventory turnover. Every business should watch the lines of the trade payments you have to make (called Accounts Payabe), and of course sales vs. costs, sales vs. expenses, sales vs. profits, sales vs, employees, and so on.

It’s not the numbers you watch as much as the change in numbers. Draw your line charts. Every month.

5 Things Entrepreneurs Need to Know About Valuation

Back to Fundamentals, Business Financing, Business Planning, , , , ,

Valuation is one of those four-syllable business buzzwords you’re going to have to deal with, eventually, if you either want to start a business or own a business. If it doesn’t come up when you start, it will come up later. Here is what I think you need to know, in five short points.

  1. The word has vastly Different meanings: don’t you hate it when the same words mean different things? Valuation means at least three different things:
    1. What a business is worth to accountants for legal purposes, such as divorce settlements, inheritance taxes, and gift taxes. A certified valuation professional, usually a CPA, makes a guess. Most of them use financial statements and analyze financial details.
    2. What a business is worth to a buyer. Small businesses go up for sale with  business  brokers. Hardware stores, for example,  get about 40-50% of annual sales plus inventory, as a starting point. Plus a bonus for growth and special strengths, or a discount for lack of growth and special problems.
    3. The pivot point in an investment proposal: it’s simple math, but tough negotiations. If you say you want to get $1 million for 50% of your company, you just proposed a valuation of $2 million.
  2. What’s anything worth? Like your car, your house, and a share of IBM stock, something’s worth what somebody will pay for it. The valuation in A is theoretical, hypothetical, but legal. With B and C, though, valuation is as real as agreeing to buy a house. It’s not what the seller says it is; it’s what the buyer is willing to pay. And this cold hard fact drives many entrepreneurs crazy.
  3. For Small businesses, there are guidelines and rules of thumb. If you do a good search, or work with a business broker, you can find general rules of thumb for what your long-standing small business is worth. For example, a hardware story is worth roughly half a year’s sales plus inventory, with bonuses for positive factors like  recent growth,  and discounts for negatives like lack of growth. You could read up on it in bizbuysell.com, bizequity.com, or business brokerage press. Or do a web search and check the ads for valuation experts.
  4. For Startups, it’s what founders and investors negotiate. Startups and investors and culture clash over valuation.  Investors care about valuation. Founders often misunderstand valuation. And never the twain shall meet. I’ve seen these kinds of problems many times:  Founders walk into the valuation discussion full of folklore and fantasy like stories of Facebook and Twitter. They want lots of money for very little ownership. Investors see two or three people with no sales history thinking their dream startup is already worth $2 or $3 million.
  5. Irony: sometimes traction, and revenues, make things worse. It’s easier to buy the dream than the reality. The same investors who’ll seriously consider a $2 million valuation for a good idea, business plan, and a credible 3-person management team – but with no sales ever — might just as easily balk at a valuation of $600,000 for a company with three years history, 20% growth, and annual sales of $300,000.  Despite the irony, it makes sense: few existing businesses are worth more than a multiple of revenues, but, still, before the battle, it’s easier to dream big. Or so it seems. I’ve been on both sides of this table, and I don’t have any easy solutions to offer.

If it hasn’t come up yet, it will. Every business deals with valuation eventually. The place any business sees it is during the early investment phases; but most businesses don’t get investment, so they can ignore it at that point. But then if it survives, or grows, valuation comes up again, because even if the business is immortal, the people aren’t: so eventually you either sell it or pass it on to a new team, an acquiring company, or your own family. And there’s the divorce and estate planning elements that require valuation. So every entrepreneur and business owner should have some idea what it is.

(Image: courtesy of wordle.net)

3 Business Planning Posts in Different Places

Back to Fundamentals, Business Planning, , ,

I’ve been busy this week, with posts about business planning appearing on my column at entrepreneur.com, my post on Industry Word, and a post on Amex OPEN Forum. Meanwhile, I had one of those travel disasters — boring, you know the drill — getting out of San Francisco. Well, not getting out of San Francisco, stuck instead in an airport hotel. So it seems a good time to share those three other posts:

  1. First, on my column at entrepreneur.com, 5 questions your business plan should answer. Hire people? Change locations? Change pricing? The idea is that if you keep a business plan alive, and maintain good planning process, then your business plan can answer those questions.
  2. Second, as a guest blogger on community.sba.gov, I posted 5 planning fundamentals for every business.
  3. And on Amex OPEN, the real heart of planning as management, steer your business with plan vs. actual.

All three of these are about real business planning, not just a business plan document, but running your business better.

(image: Dimitri Shironosov/shutterstock)

True Story of Business Disaster With a Compensation Plan Lesson

Back to Fundamentals, Bootstrapping, Business Mistakes, Business Stories, True Stories, ,

This is a true story. Names aren’t included for obvious reasons. Don’t ask.

Once upon a time a product-obsessed software entrepreneur who didn’t like sales hired a sales-oriented entrepreneur who liked selling software. It seemed like a match made in heaven, as they say. Both of them could focus on what they liked doing.

The company was just starting. The software guy owned it, and paid the sales guy’s salary, and they both agreed on some very attractive incentives for the sales guy if he could double sales to a million dollars in the next year.

So they agreed, and both of them went to work. As time went by, the product-obsessed software guy focused on his computer and the code, while the sales guy made calls in the next room. When the code was ready, they worked together to create packaging. They had somebody duplicate disks (this was before the Internet) and assemble packages. And the product launched. The sales guy made more calls, and a major distributor agreed to carry the product. Soon after, several major retail chains agreed to carry the product.

When the year ended, the sales guy had made his million dollar quota. And two months later the company was swamped in debt, broke, and threatened with bankruptcy. About a quarter of the million dollar sales had been sold into the channels, but not out of the channels to actual end-user customers. So it was coming back.  And the distributors expected the broke company to buy the software back for what they’d been sold for, less a substantial amount for shipping and co-promotional marketing.

What happened?

The worst thing was that the software packages didn’t sell well from store to end user. The sales guy got it into the channels, and the stores put it on the shelves, but people didn’t buy it. And channels don’t take those losses. They send the stuff back.

To compound that problem, neither the sales guy nor the software guy knew about sell-through reports. Had they asked, the stores would have given them advance warning that the stuff wasn’t selling, called sell-through reports. Then they would have known disaster was brewing, and maybe they could have slowed things down, changed the packaging, or at least known what was about to happen to them when the stores started shipping the product back to them. (Which is a great example of the old adage: you think education is expensive? Try ignorance.)

And the second worst thing was that the sales guy had done deal after deal to get product into the channel by offering distributors and retail chains deep discounts and special deals with freebies, like two units for the price of one, or 5 for 3, and so on.

So, although sales had in fact passed the the million-dollar mark, after the returns were netted out it was only about $750,000. Plus, costs had gone from about 20% of sales to almost 65% of sales. And the $250,000 received for the software that hadn’t sold through had been spent.

The compensation lesson: the sales guy had been offered a huge bonus for getting sales to $1 million. The gross margin had nothing to do with it. And returns weren’t even considered. So he met his numbers, and it was a business disaster.

The whole fiasco reminds me of one fundamental principle of compensation: whatever the compensation plan rewards is the behavior it encourages. If sales is all that’s mentioned, then sales — not management, not information, not optimizing your company’s position — is all you’re going to get. Do you give commissions on sales, or gross margin? Do you pay commissions when the sale is made, or when the customer pays? Do you have a return allowance that holds commissions up?

(Image: Losevsky Pavel/Shutterstock)

That It Didn’t Work Then Doesn’t Mean it Won’t Work Now

Back to Fundamentals, Management, Marketing,

I’ve had another stark reminder this week: with the way things change so fast, these days. we can never assume that what didn’t work for our business even two or three years ago won’t work now if we try it again.

That’s tough. It’s so easy to get locked in mentally.

I’m thanking my lucky stars right now that I shut up a few weeks ago. I was in one of our regular coordination meetings. As the marketing team shared its doings, I recognized one new campaign as very much like one that had failed spectacularly a few years ago. I almost said that it had failed in the past, and that it wouldn’t work, but I’m not in charge of marketing and they do a great job. I hope I didn’t roll my eyes. I was sure it wouldn’t work.

So earlier this week I saw the results, and it did work; quite well, in fact. And now I’m very glad I shut up in that meeting.

Just because it didn’t work before doesn’t mean it won’t work now. Things are always changing. 

The Pull of Bloat and Feature Addiction

Back to Fundamentals, Productivity Software, Technology, , , ,

This one struck a nerve: This is by Jason Fried, founder of 37 Signals, in How to Kill a Bad Idea earlier this month at Inc.com. He’s talking about how software and websites grow too big.

The software grows. Version 2.0 comes along. It does more than Version 1.0. More features, more options, more screens, more stuff. Or the website is redesigned with more pages, more words, more images, more departments, more tools. Nothing has gone wrong yet. In fact, Version Two is pretty good, too.

But over time, yet more stuff is added. Remember our water bottle? Imagine what would happen if more stuff was added to it. Pretty soon it wouldn’t be functional. The physics would push back. Not so with software. You can just add more pages! Or you can just add more features or more settings or more preferences and hide them behind yet another button or menu. It’s just one more button, right?

This is where it all begins to fall apart. Future versions are loaded with more and more stuff. Nothing pushes back; nothing says no. And eventually, the product or the site becomes unmanageable. It’s too big, too slow, too confusing, but it’s still all subjective. Unlike the water bottle, the software can just keep growing. Software can’t overflow. It has no edges, so it can never be too big.

That is so true. I’ve been there. In fact,  I’ve been in the software business since 1983, and in the web business since 1994. We always want to do everything for everybody. What you’d like to do is have as many features in the software and there are users to suggest them, because you never want to say no. This is how Microsoft Excel, to cite just one example, does linear regression. And how many people use it for that?

As you might guess from the three paragraphs I quoted, Jason gets to the problem of when to say no. And that you have to say no sometimes. He says:

The only way to stop this perpetual growth of an object without physical borders is for you to create your own borders. Those borders are discipline, self-control, an editor’s eye for “enough.” The ultimate border is one simple word: no. Someone in charge has to say no more than yes.

If the laws of physics govern the physical world, the word no governs the virtual world. “No, that’s one feature too many.” “No, that’s just not worth it.” “No, no, no.”

I know. I was right there, at that very spot, for about 25 years. And just reading Jason’s spine tingling account of it, I know immediately he’s been in the same place a lot, and I’m glad that others are now doing that for the company I started.

Saying no was so damn necessary, and so damn hard, at the same time.

(image: istockphoto)

Fear is Nothing to be Afraid Of

Advice, Back to Fundamentals, Entrepreneurship, ,

(I posted this last month on the American Express OPEN Forum as Harness the Power of Fear. I’m reposting it here, with permission, because I like it and I want to share it with you.)

The power of fear, you might ask? How can that be? We’ve been taught that fear is bad, as in Winston Churchill’s “we have nothing to fear but fear itself.” And heaven forbid you should relate the power of fear to those loathsome fear tactics in advertising and politics, scaring people to do buy something, or to think something.

No. I’m not referring to fear tactics as marketing. But I am serious about the business power of fear.  Let me explain:

1.  Understanding Power

First, think of the raging hurricane, lightning, flood or tornado. These are all raw power, truly fearsome. Fearing them is common sense and self preservation.

Then think instead of water power generating electricity, flowing through the grid, powering your house and office. Think about wind powering huge sailing ships. With these you have power harnessed and turned useful.

Human thought and emotion can be power too. You women who are mothers know how powerful that maternal love and protection instinct (think of grizzly bears) can be.  And there’s a lot of varieties of love that create power, plus the power of ideas and inspiration and, yes, fear too.

Power makes thing happen. It drives wheels and sails and water and wind and – yes – people too.

2. How Can Fear be Power?

Contrary to popular opinion, fear isn’t always bad. Sometimes fear is common sense. Fear keeps me from jumping off the edge of Nevada Falls. Fear makes me get a flu shot and buckle my seat belt.

Sure, paralyzing fear is bad. Nobody wants to be that deer caught in the headlights. But what about the deer in the meadow, standing still so its camouflage works, its ears perked to hear any sounds? It senses something coming. It stands still, or runs, depending on what danger it senses.

But back when Churchill was talking about fear, he was also running a nation that turned off the lights and ran to the basements when the German bombers flew overhead. They weren’t paralyzed. Despite the rhetoric, they had a lot to fear besides fear itself. And they took precautions. They ran to basements.

Fear in business means staying alert, keeping a fresh lookout, being aware of the competition, new markets developing, new trends, and changes. It shows up in good planning. Have you heard of the classic SWOT analysis? and the O and T in SWOT are opportunities and threats, right? So you look for threats before it’s too late. And you see them coming, early, so you can move away and avoid them.

3.  Harness the Fear and Put it to Good Use

Here are my recommendations:

1. Develop a regular planning process for your business. That means having a business plan that’s a plan, not necessarily a document, and is just big enough to manage the business. And it also means having a regular review schedule, so that the plan is subjected to good plan vs. actual analysis, and it changes as needed, which of course is often.

2. Build antennae and watching points into that plan. That means you see the threats. You recognize competition and think about what it might be doing, not just now, but also in the future. Make it your normal routine to step away from the business every so often and take a good look at what’s happening around you – and, when you do, keep your eyes open. See the threats.

Always knock wood, don’t spill salt, and don’t break mirrors. And keep your fingers crossed.

(Image: Leonid Tit/Shutterstock)