Category Archives: Entrepreneurship

You Have to Know When to Quit

I recommend you read Nat Eliason‘s piece No More Struggle Porn. He’s attacking one of the more pervasive startup myths around, the idea that the struggle itself, the overwhelming and overpowering struggle that pushes everything else out of your life, is a good thing. He defines struggle porn as:

I call this “struggle porn”: a masochistic obsession with pushing yourself harder, listening to people tell you to work harder, and broadcasting how hard you’re working.

And his take on it, in a nutshell, is this:

Working hard is great, but struggle porn has a dangerous side effect: not quitting. When you believe the normal state of affairs is to feel like you’re struggling to make progress, you’ll be less likely to quit something that isn’t going anywhere.

The Myth of Persistence

I agree with him. Emphatically. I’ve posted here before on The Myth of Persistence:

Why: persistence is only relevant if the rest of it is right. There’s no virtue to persistence when it means running your head into walls forever. Before you worry about persistence, that startup has to have some real value to offer, something that people want to buy, something they want or need. And it has to get the offer to enough people. It has to survive competition. It has to know when to stick to consistency, and when to pivot.

So persistence is simply what’s left over when all the other reasons for failure have been ruled out.

Knowing When to Quit

And, with that in mind, I like Seth Godin’s take on quitting, which is the main point from his book The Dip (quoting here from Wikipedia🙂

Godin introduces the book with a quote from Vince Lombardi: “Quitters never win and winners never quit.” He follows this with “Bad advice. Winners quit all the time. They just quit the right stuff at the right time.

Godin first makes the assertion that “being the best in the world is seriously underrated,” although he defines the term ‘best’ as “best for them based on what they believe and what they know,” and ‘world’ as “the world they have access to.” He supports this by illustrating that vanilla ice cream is almost four times as popular as the next-most popular ice cream, further stating that this is seen in Zipf’s Law. Godin’s central thesis is that in order to be the best in the world, one must quit the wrong stuff and stick with the right stuff. In illustrating this, Godin introduces several curves: ‘the dip,’ ‘the cul-de-sac,’ and ‘the cliff.’ Godin gives examples of the dip, ways to recognize when an apparent dip is really a cul-de-sac, and presents strategies of when to quit, amongst other things.

Don’t let the struggle porn startup myths get you down. I’ve been through startups. I’ve been vendor and consultant to startups for four decades, and I started my own and built it past $9 million annual sales, profitability, and cash flow positive, without outside investors. And I’ve never believed that anybody is supposed to give up life, family, relationships, and the future to build that startup with 100-hour weeks and forget-everything-else obsession. Here’s what I say:

Don’t give up your life to make your business better. Build your business to make your life better.

 

 

 

Pervasive Startup Myth: Don’t Work for Free

Startup myth: The one about founders having to work for free to impress angel investors. This supposedly shows passion. Don’t believe it. Investors want people committed to working their startups, and that usually takes getting them paid. I’ve been getting a lot of upvotes on my answer to this question in Quora:

How do entrepreneurs live without a salary to sustain their families and pay bills?

My Answer

That startup founders are supposed to work for free, and that investors want them to work for free, even as there is capital to work with. That’s just a myth. IMO.

As an entrepreneur, I built a business and supported my family at the same time by continuing to consult in the same field I was developing software for. That’s not unusual. I did not have the luxury of not making an income. When I started Palo Alto Software, we already had four kids and a mortgage. Not making money was not an option.

So that was a lot of work. It was hard. But it’s what really happens most of the time … entrepreneurs do a lot of work on the side, in between, to build their business without the luxury of working full time for free.

As an angel investor, I expect founders to work without formal compensation only during the very earliest phases, because they have to. I expect that to be temporary. And when I invest in them, I want there to be enough money to pay them. I don’t believe startup founders working for free is a sustainable idea as they grow a business. People have lives. They need money.

I don’t like it when founders promise to work for free over any extended period. It doesn’t work. They burn out. They need jobs and income so they quit.

(Click here for the original on Quora.com)

Business Success: Talent, Skill, or What?

I received this question: Is succeeding as an entrepreneur a matter of luck or do only the talented ones make it?

And this is my answer:

Luck isn’t enough, and talent isn’t enough either. You can have either one, or even both, and still fail. What you’re missing, with your question, is the work. Business success takes work. You can succeed without luck, and also without talent; but not without work.

 

Interested in other answers to this question? They are on Quora, my favorite question-and-answer site.

10 Business Plan Myths That Hurt Your Business

The need for good business planning is as strong as ever, and the potential benefits are as important as ever. Every business owner ought to have a business plan. But the best strategies for business planning are different than they used to be. And these 10 pervasive business plan myths get in the way, much too often.

This post includes the 8 business plan myths that I listed on my March 2 post on the SBA Industry Word blog, plus two others that weren’t included.

Why does it matter? Because business planning, done right, is a management tool that can help you steer your business.

1. A business plan has to be long (false)

Not necessarily so. A business plan can take whatever form is most useful, even if that’s just a few lists and tables.

2. A business plan is hard to make (false)

It doesn’t have to be. List your key strategy points and key tactics, and a few important major milestones (like deadlines, tasks, the new launch or new website, and necessary hires). Include projected sales, costs, expenses, and cash flow. Voila! You have a business plan.

3. Nobody creates business plans anymore (false)

Well-run businesses use business planning the right way. They keep a simple, lean plan up-to-date and refreshed. The review and revise it monthly. In straw polls I’ve taken for years at management workshops, the best 20% or 30% of the companies represented have a management process that includes a lean business plan as well as regular reviews and revisions.

Smart startups use basic business planning to help them see starting costs, projected early sales and spending, cash flow, and key strategy points and milestones before they launch. Then, they review these monthly.

4. Business plans are for only startups (false)

True, well-run startups generally use business planning to help figure out which steps they need to take, and which resources they need. But that doesn’t mean mature businesses can’t use business planning to constantly set milestones, strategy reminders, and forecasts. Mature businesses keep a business plan up-to-date, and review and refresh it often. The more a business grows, the more it can benefit from good business planning.

5. You can’t plan because change comes too fast (false)

In the real world, a good business plan manages change. It isn’t voided by change. You keep the plan current by making revisions as real events unfold.

It’s like dribbling in basketball: if you plan to go a certain direction, and the other team blocks you, then you go a different way. Having a plan means that you’ll have the information you need to make quicker, easier, and more natural revisions.

6. Forecasts are useless (false)

Forecasts are almost never accurate. But having a forecast gives you a tool to instantly compare what you expected to what actually happened (we call that plan vs. actual analysis, or variance analysis). Then you make business decisions to adopt to change.

Are sales better than expected? Then you look at the causes, and adjust marketing and other expenses to take advantage. Not what you expected? Use your plan vs. actual analysis to make the best changes.

7.   Having a plan means you have to follow it (false)

There is no virtue whatsoever in just sticking to a plan because you have a plan. It has to make business sense. Good business planning is about a bare-bones plan and tracking with review and revision to make it useful.

When things change, your plan changes. The benefit is in the tracking and information that serves like a dashboard, helping you manage the change and make adjustments.

8. All business plans need market research (false)

I read and review lots of business plans from mature businesses that don’t include fancy market research. Business owners have to know their market, and taking a step back to review your market is a good idea. But with good planning process in a business, you can stay on top of your market. You don’t need to include market research in every version of your business plan.

Only in special cases will you need market research to prove your market to outsiders. For example, startups looking for investment, or businesses applying for loans, might need market research. Mature businesses know their market and plan without the research requirement.

9. Investors don’t read business plans (only half true)

I was in an angel investment group for eight years. We didn’t read business plans for all the proposals that came in. We rejected many on the basis of summaries alone. For those that interested us, we invited them to present their pitch decks. From there, we narrowed the list down further.

For those that remained, the business plan was a vital part of due diligence. And for all of them, they should have had their bare-bones business plans made before they wrote their summaries and pitch decks. Without the business plan, the pitch and the summary are like movies made without scripts. Ultimately, seeking investors without a plan doesn’t work.

10. Nobody needs a business plan

Does every business need a plan, strictly speaking? No. But every business would benefit from good business planning.

People, even experts, still say nobody needs a business plan, but only because they are locked into the decades-old mentality of the big business plan document. If we redefine the business plan the way it should be, as a flexible record of key strategy points, tactics, milestones, and essential numbers, then all those experts would agree with me – that every business deserves a business plan.

5 Secrets of Creating a Great Business Team

team working together

My favorite five secrets of a great business team? This list came to me first as an answer to the question how do you build a great business team on Quora.  These five points aren’t something from the business school curriculum. They come from the experience of actually doing it, recruiting a team and growing a business from zero to millions. (For more on that story, click here).

My list

  1. No skill or experience justifies lack of integrity. You need to trust the people you work with, and particularly, the people who become key team members to build on.
  2. Diversity makes better businesses. Not for fake political reasons, but for real business reasons. Teams of different kinds of people – gender, background, ethnicity, and so forth – have broader vision than teams of people who are all the same. Diversity has been given a bad name by bigots. It’s not just morally correct, it’s also better business.

What diversity does and doesn’t mean.

  1. Different skills and experience. You don’t want all developers or all marketers, you want developers, marketers, administrators, producers, leaders, and so forth. I see student groups that are three and four people who share the same major; that rarely works.
  2. Shared values create strong bonds. Palo Alto Software was built by a team that shared my founder values about good business planning, startups, and small business. Jurlique was built by a team that shared founder values about cosmetics with only natural organic ingredients not tested on animals. And don’t confuse shared values with diverse types of people, skills and backgrounds. They are compatible, not contradictory, ideas.

Avoid the all-C-level-officers team

  1. Beware of title inflation. Having the first four people all have C-level titles is usually a sign of youth and lack of experience. In the real world, founders are rarely all fit to be C-level officers for the long term. I recommend vague non-committal titles in the beginning, like “head of tech,” “marketing lead,” and so forth. Leave room to recruit stars later on, as needed, with the big titles.

 

7 Things Wanna-be Entrepreneurs Need to Know

What do entrepreneurs need to know as they get started? Of course there’s need to know, absolutely; and there’s ought to know.  I was asked to come up with a list, and here is my best guess.

  1. Know the difference between cash and profits. You Think in Profits, but You Live on Cash. Things like sales on credit, inventory, and waiting to get paid can make a huge difference. Profits are accounting. It takes cash to pay bills.
  2. Know that business owners have legal constraints related to dealing with employees, employees vs. contractors, copyright and intellectual property, and dealing with tax authorities and investors. You can’t just say “I don’t know” later on. You are supposed to know.
  3. Know that getting outside investment is the exception, not the rule. Be familiar with the pros and cons of bootstrapping. Read this: 10 Good Reasons Not to Seek Startup Investors.
  4. Know that bad behavior and selfishness, which seems to correlate with other people’s success sometimes, doesn’t often work out on the long term. Things like integrity and fairness matter.
  5. Know that good decisions sometimes have bad outcomes. Not every bad thing that happens is your fault. Bad things will happen. And you have to live with that.
  6. Know that you will make mistakes. We all make mistakes. You have to live with them. If you can’t deal with mistakes, don’t start a business. You Will Make Mistakes. Deal With ItMistakes About Mistakes.
  7. Know how to live with uncertainty. Understanding Uncertainty is Vital to an Entrepreneur.

Note: This post is based on my answer to What should first-time entrepreneurs know that can help them on the road to success, a question posted on Quora.

Good Data Debunking Popular Startup Myths

Contrary to popular startup myths and misunderstanding, tech founders aren’t mainly younger than 30. They are generally well educated, not dropouts. They tend to start up where they are, instead of moving to Silicon Valley or other tech hubs.

Here’s a summary of data published by the Kauffman Foundation:

We observed that, like immigrant tech founders, U.S.-born engineering and technology company founders tend to be well-educated. There are, however, significant differences in the types of degrees these entrepreneurs obtain and the time they take to start a company after they graduate. They also tend to be more mobile and are much older than is commonly believed.

Founders are in their late 30s, 40s, and older

  • The average and median age of U.S.-born tech founders was thirty-nine when they started their companies. Twice as many were older than fifty as were younger than twenty-five.

90+% have college degrees

  • The vast majority (92 percent) of U.S.-born tech founders held bachelor’s degrees. Additionally, 31 percent held master’s degrees, and 10 percent had completed PhDs. Nearly half of all these degrees were in science-, technology-, engineering-, and mathematics- (STEM) related disciplines. Onethird were in business, accounting, and finance.

  • U.S.-born tech founders holding MBA degrees established companies more quickly (in thirteen years) than others. Those with PhDs typically waited twenty-one years to become tech entrepreneurs, and other master’s degree holders took less time to start companies than did those with bachelor’s degrees (14.7 years and 16.7 years respectively).

  • U.S.-born tech founders holding computer science and information technology degrees founded companies sooner after graduating than engineering degree holders (14.3 years vs. 17.6 years). Applied science majors took the longest (twenty years) to create their startups.

Top-rank universities are over represented

  • These tech founders graduate from a wide assortment of schools. The 628 U.S.-born tech founders providing information on their terminal (highest) degree, received their education from 287 unique universities. But degrees from top-ranked universities are over-represented in the ranks of U.S.-born tech founders. Ivy-League universities awarded 8 percent of the terminal degrees to U.S.-born tech founders in our sample.

  • The top ten universities from which U.S.-born tech founders received their highest degrees in our sample are Harvard, MIT, Pennsylvania State University, Stanford, University of California- Berkeley, University of Missouri, University of Pennsylvania, University of Southern California, University of Texas, and University of Virginia. U.S.-born tech founders with Ivy-League degrees tend to establish startups that produce higher revenue and employ more workers than the average. Startups founded by those with only high school education significantly underperform all others.

They start closer to home

  • Nearly half (45 percent) of the startups were established in the same state where U.S.-born tech founders received their education. Of the U.S.-born tech founders in our sample receiving degrees from California, 69 percent later created a startup in the state; Michigan, 58 percent; Texas, 53 percent; and Ohio, 52 percent. In contrast, Maryland retained only 15 percent; Indiana, 18 percent; and New York, 21 percent.

 

 

 

 

Understanding Uncertainty is Vital to an Entrepreneur

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

My answer: understanding uncertainty. Living 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 one of 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)

Do You Believe the Legendary Startup Failure Statistics. I Don’t.

This recent piece on startup failure statistics caught me eye on Twitter first, and I followed the links to discover Startups: Conventional Wisdom Says 90% Fail. Data Says Otherwise. | Fortune.com. Here’s a direct quote from author Erin Griffith:

“I recently found myself carelessly repeating a statistic that I’d heard dozens of times in private conversations and on public stages: ‘Nine out of 10 startups fail.’ The problem? It’s not true. Cambridge Associates, a global investment firm based in Boston, tracked the performance of venture investments in 27,259 startups between 1990 and 2010. Its research reveals that the real percentage of venture-backed startups that fail—as defined by companies that provide a 1X return or less to investors—has not risen above 60% since 2001. Even amid the dotcom bust of 2000, the failure rate topped out at 79%.”

I was happy to see this because I’ve agreed, including here and here on this blog and also here in the bplans.com articles, that failure statistics are bogus. Overblown. Exaggerated. And taken for granted.

What drives the startup failure statistics myth

I’m not so sure about Erin’s explanation of why that occurs. She says, in the paragraph explaining the one above:

Yet the denizens of Startup Land continue to cite the 90% figure because it serves a purpose. It comforts failed startup founders who burned through their investors’ money, laid off staff, and shut down their companies. It supports the startup world’s celebration of failure. “Sure, you failed, but that’s the norm,” the thinking goes. “The odds were against you.”

I don’t buy Erin’s explanation there. She’s too kind. I think the 90% myth is driven by bogus would-be experts who clutter the web and even business publications spouting worn-out startup clichés to bolster their alleged expertise. I think it’s a side effect of our everybody-is-a-publisher society. People can get attention with certainty untempered by experience. I did a rant on that subject here, not that long ago: Bogus experts give bad startup advice.

An important clarification

Although it doesn’t quite support my point, I can’t leave the subject without pointing out that the data we’re looking at there is not for all startups. It’s just about venture-backed startups, which are the cream of the crop. Of course they do better than the average startup. They are the ones that get through the investment filter process.

And this also shows that so much of what we value in information depends on the definitions. What’s a startup? To me it’s a new business of any kind. To many other experts, the term startup applies only to high-growth new businesses suitable for outside investment. So we have to look, with any of these studies, on what they are really studying. All businesses, or just high-end tech businesses?

And then, before we leave the subject, there’s the obvious thought that not all businesses, startups, small business, or whatever, are equal. When you start your own business, if you do, your odds are not the same odds as everybody else who starts a business. Your odds depend on what you’re trying to do, how well you do it, how well you plan and manage, and what resources you bring with you.

Last thought: I can guarantee you that your odds of failure go way down when you run your business with good planning process. Start with a lean plan and review and revise it regularly.

 

 

A Two-Day Startup Fest at Rice Business Plan Competition

A portable device to quickly diagnose strokes. An additive that doubles the strength of fiberglass and carbon fibre materials. A new way to use magnesium to heal broken bones. Those are just a few of the dozens of startups I saw earlier this month at the annual Rice Business Plan Competition. This was the tenth year I’ve been a judge. It gets better every year. Two days of plans and pitches. I wouldn’t miss it. The picture here shows the finals, six amazing finalist teams competing for 300 judges in a very full Rice business school auditorium.

RBPC Finals 2017

More than $1.2 billion in funding

As a judge of this event, I read six business plans cover to cover. Then I spent two days watching and asking questions as several dozen startup teams pitch their startups. I do six of them on Friday and 10 on Saturday, which includes six finalists. The pitches take 20 minutes or so, and of course they include questions and answers. The 42 startups chosen from more than 700 applicants must have at least one student, and only the students can do the pitch. They come from all over the United States, plus Canada, U.K., Germany, India, and Hong Kong.

In the 10 years I’ve been doing this, the startups get steadily better. At least 80 percent of the ones I saw this year look like they should be getting angel investment, and all of the six finalists will get funded for sure, and launch. The statistics get steadily more impressive. Here are some numbers published by the organizers:

In 2016 we screened more than 750 applications. More than 180 corporate and private sponsors support the business plan competition. Venture capitalists and other investors from around the country volunteer their time to judge the competition, with the majority of the 275+ judges coming from the investment sector. 161 past competitors have gone on to successfully launch their businesses and are still in business today, with another 15 having successful exits. These companies have raised in excess of $1.2 billion in funding.

Serious investment possibilities

This year’s winner developed a portable device that identifies stroke victims fast. Although their pitch at Rice isn’t public, they link to a previous pitch presentation. This is Forest Devices, from Carnegie Mellon.

Forest Devices earned $635,000 in prize money and investment. Most of this is conditional, tied to angel investment that comes with fairly standard conditions including equity for the investors. Most of the teams end up accepting the terms and taking the investment, although that generally takes a few weeks of legal work before it’s final.

Medical Magnesium, which finished in third place, landed $709,000 in proposed investment with term sheets. It is developing bioabsorbable magnesium implants that turn into bone instead of being removed. It came from the University of Aachen, in Germany.

Palo Alto Software gives a prize for the best written business plan entered. This year that prize went to AIM Tech, from the University of Michigan. It develops low-tech, low-cost medical devices for emerging marketings, including an award-winning low-tech infant ventilator.