Category Archives: Bootstrapping

Is All Good Business Inherently Social Enterprise?

I liked the phrase social entrepreneurship instantly when I first heard it. It’s doing well by doing good, I assumed, building businesses that help people. A business doesn’t have to not make a profit to do good, so the idea of social entrepreneurship makes sense. Teach kids to read, help people stay healthy, clean the environment, fight discrimination, and make a fair profit doing it. The world will be better for it.

But wait: Don’t all businesses have to make the world better, and solve problems, just to survive over a long term?  A business can poison people or the Earth, or cheat people, for a while, maybe … but eventually that business will die.  Won’t it?

So doesn’t all new business have to be social enterprise? Or is it not so much doing good as just simply not doing harm? That’s a tough question.

Confused, I asked  Google to define: social entrepreneurship. The illustration here shows some of what comes back. It talks of making social change, solving social problems, and creating innovative solutions to society’s most pressing social problems.

What’s hard, though, is working some of this into real life. If social enterprises solve “society’s most pressing problems,” then damn, that rules out a lot of very good and very well intentioned business that I would have called social enterprise.  Does a restaurant serving healthy, local, organic  food qualify? How about a business selling all-natural no-animal-testing cosmetics? What about a business selling electric cars? Chevrolet and Nissan (the Bolt and the Leaf) are social enterprises now?  And if you start to expand, then what about AT&T (communication) and Exxon (energy)? Are they social enterprises? Maybe they trip up on the “innovative” qualifier, as in “innovative solutions to society’s most pressing problems.”

I’m still confused. I will say, though, that in my lifetime I’ve seen a gradual but steady increase in the general consumers’ concern for social and environmental considerations. Frustratingly slow, perhaps, but it’s there. And it also seems like we’re in a new age of transparency, whether the big behemoth companies like it or not; bad businesses have trouble keeping their badness secret for very long.

The underlying story of a business, the people behind it, and its values, these all matter more now than they used to.

Or am I just being too optimistic?

Are You Planning to Sell Boxes or Hours?

All of these are just “in general” points. There will always be exceptions. But still, it’s good to understand the huge difference between service businesses and product business. Selling hours has advantages, but selling boxes does too. And there are huge differences, things I think you need to understand.

My wife and I spent several years working on converting our business planning business to “sell boxes, not hours.” It took a long time, but eventually that worked. But we started with a service business, and it was only after several years of that business that we started to convert it to products. Here are some of the standard tradeoffs.

  1. Service businesses take less capital to start. Particularly professional service businesses, like consulting, graphic design, landscaping, bookkeeping … you don’t have to buy products to sell, or materials to build products. You need credentials, yes, and a computer, and in most cases a website. But you’re not worried about design, prototypes, packaging, inventory, channels of distribution, and all that.
  2. Service businesses are harder to grow. With a product business you sell more and you make more money. Succeed with online marketing, open up a new channel, and you can build more of those things. Product businesses usually – obviously not if a lot of hand labor is involved – scale up. On a classic service business, though, to double sales you have to double your payroll. That’s what investors call a “body shop.” Classic service businesses can be great businesses for the owners and workers, but they’re rarely good investment opportunities for outside investors.
  3. Investors like Product businesses. I’ve been spending a lot of time lately looking at pitches for our angel investment group, and evaluating businesses for some major business plan competitions. Investors like product businesses because you can lever up, and scale. And you can sell a product business – the whole business – to somebody else. And you can make sales while you sleep. And of course, to make this perfectly clear …
  4. Investors don’t like service businesses. It’s the body shop problem. The assets walk out of the door every night. The assumption is that they don’t scale. Sure, there are exceptions.
  5. Web service businesses act like product businesses, without the inventory drag on cash, or the problems of physical distribution. A web service can scale up, if it’s designed correctly, and go from 100 to 1,000 to 10,000 without needing a lot of hand labor or human intervention.

So what? I think it’s good to know. Service businesses start up all the time with only a few thousand dollars of initial investment. All you need is that first good client, and off you go. There is less risk. It’s easier to get from nowhere to covering costs.

But if you want to go big-time, or if you want to build a business you can sell, build products or web-based services.  Sell boxes, not hours (or a web app).

(Image: Quang Ho/Shutterstock)

True Story of Business Disaster With a Compensation Plan Lesson

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.

dollars flying

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)

The Paradox of Location vs. Technology

Did you see this piece over the weekend? In Start-Ups Follow Twitter, and Become Neighbors the New York Times presents several San Francisco companies (including klout.com, my personal favorite) that purposely located offices near Twitter for good business reasons.

Steve King called it The Real Magic Comes from Being in the Same Place in his new blog on coworking. He quotes the Times piece:

‘Even though it’s all about tech and the Internet, the real magic of Silicon Valley comes from people being in the same space,’ said Burt Herman, co-founder of Storify.

He calls it "Accelerated serendipity"

It is a belief that coworking increases the generation of business ideas and productivity.  The concept is when smart people from diverse backgrounds come together in a coworking community, good things happen – including business innovation.

Which is all cool, for sure. And of course, in my years in the Silicon Valley from 1981 through 1992, I saw that happening a lot.

But still, wait a minute: Isn’t this the opposite of 2011 and beyond? Aren’t we all – you reading this blog, me writing it, and all the information we both share on Twitter and Facebook – braking the barriers of physical space and geography with a new online landscape? One that brings us closer despite the distance in miles? Haven’t we seen lots of accelerated serendipity online?

In a comment to Steve’s post above, I quoted his (well, his company, Emergent Research) trend number 7 for 2010, from a piece about a year ago, the convergence of social, mobile, and cloud computing. And, come to think of it, trends number 4 and 5, the new localism and the growth of home businesses, are also counter to the idea of being in the same place.

My conclusion: I love a good paradox. And business is full of them.

True Story: Do Entrepreneurs Like Risk?

The answer to that question is: no. Not any more than the next person. They just like their business better. They took risks because they saw the goal. It was the dark side of building the company. They had to. But when it comes to savings and investment, no.

Well, actually, the most correct answer to that question is:

You can’t generalize. Some do, and some don’t. Entrepreneurs are a bunch of hard-to-categorize individuals, and who has good data, because all we really get are successful entrepreneurs.

True story: An investment advisor noted once that my wife and I have the most conservative portfolio he manages. He thought for just a second that might be odd for an entrepreneur. But then he thought about the risk we’ve taken over 30-some years of building our own business, financing it at times with multiple mortgages and credit card debt, signing owner guarantees all the time, raising children, paying colleges … walking around for years with the knowledge that something as beyond our control as one of the major software distributors going under, not to mention a software giant accidentally rolling over us,  could kill the business and leave us with a lot of debt and no house.

And it was suddenly clear to him. No wonder we don’t want to prospect now with what we’ve managed to save through the years. It was clear on his face, he understood. Capital preservation is what we want, now, not more risk. We’re safe now, at least to some degree, because of savings not dependent on the business. But we don’t want to lose those savings.

Yesterday, meanwhile, I read Are Business Owners Risk-Takers? Not When It Comes to Their Finances by Rieva Lesonsky on Small Business Trends.  It turns out, as Rieva points out while summarizing research, that the story above is a good example of exactly what she’s talking about in that post.

(Image credit: Ruslan Grechka/Shutterstock)

Business Plan Contests Leave Out Bootstrappers

I consider myself something of an expert on business plan competitions. I ran one myself for several years, I’ve judged several dozen including several of the most prestigious, my company sponsors more than a dozen a year, I’ve had students in my undergrad business classes competing in them, I’m an investor member of an angel investor group that holds an annual contest, and perhaps most important, I enjoy them.

business planSo when the National Association for Community College Entrepreneurship (NACCE) asked me to do a webinar on business plan competitions, I said yes. That’s going to happen August 18 at 1 pm PDT (and you can click here to register). And it also got me thinking about what’s right and what’s wrong with most of the business plan competitions I see. Which led to this post, about a problem I can’t solve. While it might come up in that webinar, it’s not going to be the main topic. But I do want to write about it here.

The problem is that business plan contests almost all undervalue bootstrapping. While the vast majority of startups are bootstrapped, meaning they start without venture capital or angel investment, the vast majority of business plan competitions award the best investment, not the best company.

And I’ve seen many a good-looking plan, and good-looking business, that should have been winning something but wasn’t a great investment for outsiders. It hurts to not find a prize for the startups that look really good for the owners and operators, long term, without an obvious exit, which makes them a good business but a bad investment. Why don’t they get a prize?

However, this is a hard problem to fix. How do you decide what’s a good business? High risk, low risk, change the world, maybe? It depends a lot on who you are.

Back in the late 1990s I judged some intercollegiate MBA-level contests that left the criteria for winning up to the judges. Most of the judges were investors so they leaned naturally towards awarding the top awards to the startups that seemed to offer the best investment.

I still remember a conversation we had in the judges room in 1998. One of the best businesses we’d seen said outright that they could do it without outside investment. They were there for the cash prize. They had a strong team, a good product, and a believable plan for financing themselves using early sales. Several of us thought that the best possible businesses grow themselves that way, bootstrapped; and a good shot at a $5 million business owned by its founders was, to us, a better business than a 1-in-100 shot at a $25 million business owned by investors who put in $2 million. Several others thought that a business plan competition prize should go to the best investment opportunity.

How do you compare the relatively low risk cool bootstrapped startup to the high risk, high-profile startup that might change the world? Sure, we all say the risk and return ratio, and the MBA world offers technical analyses like internal rate of return, but, as they look into the future, it’s all very subjective. It involves guesses about the future cash flows and the discount rate. There’s a lot of unequal comparisons.

But the classic business plan for investment, and the investment process, and the investment filter, are also what’s generally taught at the MBA level, a lot more than bootstrapping.

A few years ago half a dozen or so of the leaders of MBA-level business plan contests got together and, trying to solve this problem, agreed on some general standards. At that time – or so I was told; I wasn’t there – they standardized on using “the best investment” as the main criterion for determining a winner. I do sympathize. Although even this one is a complex and difficult standard to follow, it gets way worse when you drop it in favor of something even more vague.

Most of the major competitions go along with that standard. Some of them have added special channels for social entrepreneurship, with different criteria. And for the angel investment competitions, like our Willamette Angel Conference, it’s not a problem at all because we’re actually investing, so of course we want the best investment.

But in the meantime, the bootstrappers are still left out; and that’s a shame. I think it’s a problem we can’t solve easily. And it might come up in my webinar, but I won’t have a solution.  What do you think?

Moot Corp Lesson: Even the Best Plans Change

My favorite moment in a arecent business plan contest: The entrepreneurs put up a projected income slide. One of the judges commented that what was on the slide was different from what he saw in the business plan. The entrepreneur immediately answered “no, of course not, that was an earlier iteration.”

Moot CorpThis was during the finals of the University of Texas’ Moot Corp business plan competition last Saturday. I judged the first round Friday, watched the finals Saturday, and ended up in awe at the level of competence and competition.

That favorite moment wasn’t part of the flawless finals session of the winner. It was in the finals, though, as a Carnegie Mellon team presented a technology to monitor glucose levels using contact lenses. What I liked about that quick answer was the underlying assumption that plans change. New information matters. There was no reason to keep the numbers from last week after new information this week suggested they should change.

If the projections today don’t match those from two weeks ago, no apology is necessary.

The winner, BiologicsMD, also won the Rice University competition a few weeks ago. If you get a chance to see the video of their performance, both with their pitch and their business and their answers to judges’ question, take it. That’s the best I’ve ever seen. The company, one of two finalists from the University of Arkansas, has developed a new medicine to treat osteoporosis. It included a PhD researcher, an MD researcher, and two business executives. The panel of judges, three of the four of them with backgrounds related to medical technology and FDA approval and such, asked an amazing array of detailed industry-specific questions. And they were presented with an even more amazing array of straight-on answers. That was as good as it gets.

I’ve noted this trend in previous posts here, and it happened again at Moot Corp: more companies with more viable plans, relatively fewer Web applications and software companies, and more companies out to change the world with medical solutions, medical technology, clean energy, and so on. The four finalists this year included, besides the treatment for osteoporosis and the glucose level monitor, a team intending to cut costs of solar panel manufacturing, and a team with a new way to inject medicines.

Other interesting notes: the semi-finals round of 10 teams included teams from five different nations; the University of Arkansas had two teams among the four finalists; and the Moot Corp, the first and best known of all of these MBA-level business plan competitions, is going to change its name to Venture Labs Investment Competition next year. Too bad: I like the name it’s carried since 1984. But that’s just me. And, on the other hand, plans change.

10 Lessons Learned in 22 Years of Bootstrapping

(I posted this yesterday on Small Business Trends. I’m reposting here because this is my main blog, and it belongs here too. 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.

Mark Cuban’s Real-World Stimulus Plan

Billionaire Mark Cuban announced his own stimulus plan earlier this week. It's sheer genius.

Here's how he describes it in his blog post, The Mark Cuban stimulus plan:

Rather than trying to be a Venture Capitalist, I was looking for an idea that hopefully could inspire people to create businesses that could quickly become self funding. Businesses that just needed a jump start to get the ball rolling and create jobs. I'm a big believer that entrepreneurs will lead us out of this mess. I just needed a way to help.

Then he lists the rules:

  1. It can be an existing business or a start up.
  2. It can not be a business that generates any revenue from advertising. Why ? Because I want this to be a business where you sell something and get paid for it. That's the only way to get and stay profitable in such a short period of time.

So far, so good. But now pay attention to these next four rules, as a group:

  1. It MUST BE CASH FLOW BREAK EVEN within 60 days
  2. It must be profitable within 90 days.
  3. Funding will be on a monthly basis. If you don't make your numbers, the funding stops.
  4. You must demonstrate as part of your plan that you sell your product or service for more than what it costs you to produce, fully encumbered.

Do you see it with those four rules? He's promising to fund companies only if they don't really need funding; only if they have real value; only if they're perfectly set up for bootstrapping. It's sheer genius. I don't think he's being cynical, or deceptive; I think he's making a point. But we go on…

  1. Everyone must work. The organization is completely flat. There are no employees reporting to managers. There is the founder/owners and everyone else.
  2. You must post your business plan here, or you can post it on slideshare.com, scribd.com or Google docs, all completely public for anyone to see and/or download.
  3. I make no promises that if your business is profitable, that I will invest more money. Once you get the initial funding you are on your own.
  4. I will make no promises that I will be available to offer help. If I want to, I will. If not, I won't.
  5. If you do get money, it goes into a bank that I specify, and I have the ability to watch the funds flow and the opportunity to require that I cosign any outflows.
  6. In your business plan, make sure to specify how much equity I will receive or how I will get a return on my money.
  7. No multi-level marketing programs (added 2/10/09 1pm).

So there you have it. This is somebody who's made it, multi-billionaire, showing a whole lot of common sense. He calls it "open source funding," which is apparently a reference to making the business plan transparent.

Not, by the way, that the country doesn't need the full formal stimulus plan as well, for about 300-some million reasons … but let's hear it for old fashioned ideas like making something people need, selling it for more than it costs to make, and minding the cash flow.

Biggest Startup Business Obstacle, Counterpoint: Biggest Boost

I posted my biggest obstacle here Saturday: When I started my business in 1983, needing the money was my biggest obstacle. I had a good job, which I left on purpose; and mine was the only income. And we had heavy debts left over from business school, and four kids, 10 years to one year old.

There was also a biggest boost to starting a business: My wife said "go for it; you can do it." And she meant it. At several key points along the way, she made it clear that we would take the risk together. There was never the threat of "I told you so, why did you leave a good job, you idiot!" What she said was "if you fail, we’ll fail together, and then we’ll figure it out. We’ll be okay."

If you’re starting a business and living a relationship, then think about that one. Call it a "make or break" factor.