How to Start a Business

It’s easy to start a business. Anybody can do it. Having a profitable business? That’s harder! Plus: When to hire. Where start up capital comes from.

My answer to a question by Brent Russell

Anybody can start a business. It’s pretty easy. Having a profitable business? That’s harder!

First, have something that someone else wants to buy.
Sell it to them for more than it costs you.
Sell enough of it so that the surplus between cost and revenue (i.e., the Gross Profit) is enough to:
— cover your other business costs, like marketing and admin, and
— make you a living.

After you’re sure you’ve got this part down, then start the business officially. Get your business license, tax ID, insurance, rent an office, etc. But spend no overhead before you have to.

When to hire help. To justify hiring, the employee must help the business bring in enough additional revenue so that his/her wages (including payroll taxes) are covered by the Gross Profit from the additional sales. Your employee can do this in several ways:
— Sell more of your products or services
— Do billable work for your customers
— Free you up from admin stuff so that you can sell more
— Bring an essential skill to the team so that everybody’s productivity is raised

Where to get start up or growth capital. First, where you won’t get it from: VCs, bank loan, the government.

Most small business start up capital comes from
— your savings
— personal loan, or 2nd mortgage
— family or friends (very risky)
— initial contract that pays some money up front (very savvy if possible)
— charge it on your credit card (very stupid)

Where your initial sales come from. Knowing you have potential sales out there is the reason to start a business. So if you don’t know the answer to this question, you shouldn’t be starting a business.

 

Alternatives to Bootstrap Financing

Bootstrap financing may be unavoidable initially, but it’s a huge barrier to healthy growth, and you should get outside growth capital as soon as possible.

Bootstrap financing may be unavoidable initially, but it’s a huge barrier to healthy growth, and you should get outside growth capital as soon as possible. Besides bank loans, what other sources are there?

• Borrow from yourself, even from your retirement fund. To do this, you must be as hard on yourself as any banker would be. You’ve got to demonstrate to yourself just as you would to  a banker that your business plan is sound and profitable and will pay back this loan in a timely fashion.

• Friends and family. Same thing goes. Before taking your rich uncle’s money, be able to demonstrate convincingly that this is a good business to invest in. He won’t give it to you otherwise.

• Leasing equipment and fixtures. Leasing can be very expensive but it’s worthwhile to shop different options to see where you can get the best deal. It’s best to have the advice of someone who is familiar with this type of financing.

• Vendor financing. Companies that want to do business with you and are convinced you are a good credit risk will extend you terms that will allow you to purchase goods from them. Use them to make money and then pay for these goods out of the resulting sales revenue.

As a last resort . . .

• Credit card. Financing via our credit card is an expensive trap. You’re playing with fire–or dynamite. Yet, sometimes we must do it. There’s a way to make it work if you are an excellent manager. If you have a good credit score, you will get offers for low cost balance transfers into a new account. Sometimes at 0% for a time. If you manage very well, you can replace one loan with another loan before the interest rate increases to a higher level. This is a dangerous game to play but it can be done successfully.

Downsides of Bootstrap Financing

Bootstrap financing may be necessary initially, but it has major downsides. You need to find other sources to capitalize your growth.

Bootstrap financing means to fund your business launch or growth without outside capital, relying on internal savings or cash flow generated by operations. This severely limits their rate of growth.

Some entrepreneurs bootstrap out of necessity: they have access to no capital. But many rely on internal resources even when they could obtain capital. I see two main reasons:

• Fear of debt, perhaps out of prior bad experience. They don’t trust their own resolve to repay debt so that it doesn’t just pile up.

• Lack of trust in their own business model and acumen. They’re just not convinced they can make their business succeed so that it is a good investment.

Owners achieve a major leap in business maturity when they overcome these fears and become willing to invest in their own company—via loans or equity investors.

Many small companies that self-finance their launch or growth are chronically under-capitalized. They are always running on empty. This can lead to some very bad habits in the way you run your business.

• You take any work that comes along because you are so cash starved. Thus you take unprofitable work that can actually put you deeper in the hole.

• You’re more worried about revenue than about making a profit.

• You work all the time. If you bill by the hour, anything that is not billable is suspect, such as planning, marketing, developing strategic relationships. When you make commitments to yourself, to develop new products or service for example, you are always willing to break these commitments to take paying client work. You always bump your commitments to yourself—or your family.

• You operate as the “lone ranger.” You are reluctant to get outside advice and expertise because of the time and money it requires.

• You wear all the hats. You do everything yourself. You are reluctant to spend on outside services, even if it would allow you to use your own time more effectively.

• Thus, you use your time poorly.

No plan. No strategy. Just work. This is the route to burnout or bankruptcy. And staying tiny.

“Alternatives to bootstrap financing” are described in my next post.

How to sharpen your entrepreneurial skills

To sharpen the entrepreneurial skills needed for business growth, join or create a forum where you can match wits with other entrepreneurs.

from a LI question by Lalit Bhojwani

My answer. Join or create a forum where you can match wits with other entrepreneurs.

My business is leading ongoing advisory groups of business owners. Just took eight of them on a three day retreat to a remote spot with no internet or cell connection. We took turns brainstorming on our vision, our opportunities, our challenges, our “elephants in the room.” Friendly and supportive but hard-hitting. People came away with business-changing ideas and plans.

This is a great way to sharpen entrepreneurial skills among people who are already entrepreneurial.

Bootstrapping. How did you start your company?

Starting up by bootstrapping, while often necessary, is limiting. Get past this strategy as rapidly as possible and bring in growth capital.

LinkedIn question from Marie-Dolores Anderson. She selected my response as Best Answer!

My answer: I bought my training/consulting company–for something like $1,000–from the guy who wanted out. I worked from home. I did shoe leather marketing. I traded for services, such as printing. People paid me in advance.

As a result, I was profitable from the beginning, and never had significant debt.

This turned out to be a problem, however. Since I relied on organic growth rather than rustling up growth capital, I grew slower, and was eventually overtaken by VC-backed competitors. I still have a good business, but not as large as I had hoped.

So bootstrapping, while often necessary, is limiting. Get past this strategy as rapidly as possible.

Can Your Business Run Itself?

“If I leave, my business will fall apart!” Does this sound like you? Want to change that? Then ask yourself: What must happen so that you feel comfortable taking a three-week vacation—without your cell phone?

I.e., can you ever take a vacation?

“If I leave, my business will fall apart!” Does this sound like you? Want to change that? Then ask yourself: What must happen so that you feel comfortable taking a three-week vacation—without your cell phone? “Three week vacation?” asks the owner of a busy store incredulously. “When I look at my floor managers, I fear taking a three-day weekend!”

What’s the #1 requirement for a stress-free vacation? You must have good people in place. The better your people, the longer you can safely be away. Some of us have “long weekend assistants”—that is, we can rely on them if we take off a Friday or Monday—and some of us have “world cruise assistants.” It’s a great feeling to return after a sojourn to Italy and find everything running smoothly. 



Do you say, “The business is me”? If so, then you can never leave. What do you handle in your business that no one else can? This is what limits the length of your absences. Start by listing the tasks and responsibilities that someone would have to handle in your absence. How frequently must these tasks be done? 



More prep = longer trips. How many high-level tasks can your people handle? The more lead-time you have, the more you can do to prepare them. Here are four levels: 



Level 1. Delegate tasks to those already capable of handling them. Takes a few days to do this, and allows you to be gone a few days. 



Level 2. Simplify tasks so that others can more easily do them. This process can take a few weeks. 



Level 3. Train your people to take on more. This may take a month or two. 



Level 4. Hire and groom the person who can run your business in your absence. May take six months to hire and train this person, but then you can be gone for an extended time. 



Perhaps you should start with a short trip. See how your people do when you are gone for a week, and work up to longer trips. Your people gain confidence, and you gain confidence in them. 



No cell phone on the beach. While you are gone, how often should you check in? Again, the more you trust your people to handle whatever comes up, the less you worry about this. DO NOT keep your cell phone with you 24/7. Instead, set specific times when you will check in with them. Be reachable in an emergency, but make sure they understand what constitutes an emergency. 



How did it go? 
When you finally go and then return, de-brief your people: How did they do? What went well? Where did problems arise? What should you do differently next time? Time after time owners report to me, “There were a few glitches, but things went amazingly well.”

“How to Have a Life” lessons for the busy business owner. 

1. Schedule your vacations far in advance. Put them on your calendar, buy the airline tickets, tell people you are going, and start making the work preparations.

2. Hire, train, and retain the best people—those who can free you up. Don’t let mediocre people keep you chained to the office. 
Do this even if you have only one part-timer.

3. This is about more than vacations. Running your business this way is the route to growth, profitability, and ease. 



The booby trap. You return, everything has gone well; your people have stepped up to the challenge and handled things better than you anticipated. But within a week or so, they fall back into the habit of relying on you more than they have to. 



Ah, yes! That’s the topic for another post.

Have a question about how your business can run well in your absence? Post it on my blog.

The 3 Barriers to Small Business Growth

Your business is growing and profitable, then BOOM, you hit a speed bump. Or you get stuck in a swamp. What happened? You ran into one of the growth barriers that are dang near universal.

Your business is growing and profitable, then BOOM, you hit a speed bump. Or you get stuck in a swamp. What happened? The bigger you grow, the tougher it can be to grow yet larger. I call this the “paradox of small business growth.”

As your company grows, you’re likely to run into three barriers at different stages of growth. Seems to me these are dang near universal!

Barrier #1. You’re a solopreneur, yet you want to grow beyond what you can handle working by yourself. But you get stuck in “the business is moi” trap.

Your growth challenge: Learn how to find good employees, then trust and manage them well.

Barrier #2. It’s you and the crew, but further growth is limited because everybody reports to you, and it’s running you ragged.

Your growth challenge: Learn how to be the CEO and entrust day-to-day operations to your skilled managers.

Barrier #3. You’re a successful, strategic CEO of your growing company, and now it’s time to move on to the next thing—sell, retire, start something else. But you’re so tied to the business, you can’t bear to turn it over to others.

Your growth challenge: Learn to let go.

I’ve been working with owners at all three levels for a lot of years. Here’s what they have in common: They have a management style that has worked very well to get them where they are. But to get to the next level—and they definitely want to get there—they must change what works. “It works, but break it anyway!” And this is very painful.

Many can’t make the leap. They decide to stay the same, and come up with very convincing explanations why further growth is not desirable for them. Alas.

There are straightforward ways to tackle these barriers. Once you see them laid out, you say, “Oh yeah, I could do that. I just need some guidance.”

This fall I’m going to offer a program that addresses each barrier. (You can only be at one barrier at a time.)  I’ll elaborate on each of these barriers in later posts.

In the meantime, I’d love some examples from the Peanut Gallery. If you read one of these and moan, “Ohh, that’s me right there you’re talking about!” let me know your story. Where do you want to go; what’s in your way?

We learn best from each other. You learn to transcend your barriers by seeing how others have done so (or even by watching them be stuck).

Why Did You Go Into Business?

I went into business by accident. I was at a party . . .

from a LinkedIn question asked by my friend Christopher Richards. I think this is a good question for all of us to ask ourselves. In “Success in 2010,” our annual plan workshop, the first question is, “Why are you in business?” It completely stumps some people! But once you answer that, it really helps you to organize your business to give you what you want.

Here’s my answer:

I went into business by accident. I was at a party. I overheard these two engineers talking about a project they’d gotten to produce a big conference for Jet Propulsion Labs. They were puzzled how they were going to handle the group interaction, which wasn’t their strength.

I butted in and said, “I could do that for you.” I ended up as #3 guy on the project, which went really well, and we were offered follow-on conferences. The two engineers said, “This really isn’t our thing; we’re turning this over to you.” So there I was, sole owner of a technical conference production company, with up to ten employees.

Since that time, I’ve only had one “real job” (i.e., one with paid vacation), when I made the mistake of going to work for my best client. That lasted two years. Since then I’ve owned an export management company (which lasted till Japan’s economy went in the tank), and my current company, The Business Group.

I’m in business because I like to create and organize big things. Yes, I like the money, and yes, I like contributing to others, but those aren’t the main drivers.

At heart I’m a teacher and  communicator and organizer, and my businesses have all been designed as venues for me to exercise these strengths in various ways.

And to schedule time off when I want it.

Oh yes, then there’s the fact that I’m such a hard-headed, autonomous sumbeech that no employer could long put up with me!

What qualities do you look for in a partner for a start up?

Don’t take on a partner; instead, hire the person. Except in a few circumstances . . .

Asked by David Shaw on LinkedIn

1. First of all, never form a partnership, period. Use some form of incorporation instead. Partners have 100% liability for each other’s actions. But we often say “partner” when we mean fellow stockholder.

2. Never take on a “partner” if you can hire the person instead. Giving someone an equity stake because you cannot afford to pay them a salary will turn out to be the most expensive hire you ever make.

3. The only justified reason to bring in an equity “partner” is that they bring in something that you cannot obtain in any other way, such as:
— Capital. But even this is chancy. Much better to use a line of credit, or sell shares to a handful of investors.
— Synergy. The two of you have a proven wonderful working relationship and have complementary skills. For example Doer and Rainmaker, or Creator and Implementer.
— Connections with customers or resources that will make you rich.
— Access to a market that you could not otherwise enter.

If you do get a “partner,” get your working agreement (“pre-nup”) drawn up by the most hard-harded, cynical lawyer you can find, so it will have contingencies for all the worst-case scenarios starry-eyed newbies never think of.

By the way, the only thing worse than seeking a “partner” for your start-up is bringing in an equity “partner” to your established business. I’ve never seen a single instance where this worked out. Instead, hire them as a consultant.

If you want to bring in an equity “partner” to get a capital infusion for rapid business growth, don’t sell them a stake in your existing business. Instead, have them become a shareholder in a new venture the two of you start, while you retain control of your original company. The new company can contract for services from your original company.

mvh

What are the leading indicators of business success?

With the entrepreneurs and small business owners I work with, here are some of the personal success indicators I look for.

Asked by John Cameron on LinkedIn

Good questions, John!
With the entrepreneurs and small business owners I work with, here are some of the personal success indicators I look for:

— Desire to be a manager and executive, not just a worker and detail person. (Many prefer just to keep working away.)
— Habit of stepping back and looking at the big picture regularly
— Planning, even in the face of uncertainty; then review their plan regularly, take corrective action, and update it as needed
— Willing to hire top quality people–even people smarter than they are
— Delegate as many things as they can to others, to free them up to focus on strategic issues
— Willing to invest in their own business; to take a risk; to hire a person they cannot afford right now, but who can help them break out
— Get support from peers and experts who have been where they want to go. Listen to and learn from these people, even when it’s uncomfortable.
— Continual learning: improving management skills, mastering new technologies, broadening industry knowledge

Note that these are about the individual, not the business concept or model. However, I also look for:

— A business model that promises profit margins adequate to pay them well, but also to fund growth, pay back investors, and provide a cushion for tough times.

Also, notice that I said nothing about working 24/7. I do not think that correlates well with business success.

I have a Business Viability Test that I use to assess business models. I haven’t yet included that in my e-tools, but I think I will.