Pick your venture carefully

Service businesses tend to be cheaper to start up than product-based ventures.  They have less overhead, and rarely require large investments for equipment and inventory.

Consider a service for people (or companies) to do what they don’t want to do themselves.  Doggy daycare and pet cleaning services come to mind, both fast growing sectors that require minimal investment. Consulting is another field that’s easy to get into.

Cheap Marketing

Marketing is typically the biggest expense for a service business.  So don’t pay for it.  Really.  Instead, participate in online discussions.  Fire up your Facebook and Twitter accounts.  Write a regular blog (gulp).  Go to conferences and workshops.  Even introverts can excel at networking.  Just do it.  Most importantly, use word of mouth marketing to your advantage.   Do a great job (for a good price) for your initial customers, and ASK them (don’t assume) to refer you to other folks who might want your service.

Cheap Business Plans

Similarly, writing a cheap business plan is possible too.  Don’t hire a consultant (double gulp).  Check out my earlier blog listing sources of sample business plans.  Use your networking contacts to find someone who runs a similar business, in your town or somewhere else.  It’s amazing how much they’ll tell you if you approach them the right way.  They usually LOVE to talk about their business!

Good luck!

• Copyright © 2012 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

My father-in-law, a former business executive of a large communications company, says his company viewed complaints as invaluable market information that was often more useful than focus groups, and MUCH cheaper.  Customer feedback is how you build your business.

Think of every complaint as a learning opportunity.

Take the time to listen, carefully, not only to what they’re saying, but what this tells you about how they perceive your company, your products, and your competitors.  Within that information, in combination with the complaints from other customers, lies answers to how you can change your business to get and keep even more customers satisfied and coming back for more.  And no, the customer is not always right, but remember in their mind they are.  They just might know something about how to make your company and its products even better.

So, if you handle each complaint well, by listening well, responding well, asking good questions, taking good notes, and addressing their genuine concerns as best as you are able,  you increase the odds that that customer will come back.  And very possibly recommend you to all their friends and colleagues.

That’s advertising you can’t buy.

Good luck!

• Copyright © 2012 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

There’s also a new book, Startup Weekend: How to Take a Company From Concept to Creation in 54 Hours, that provides some useful information but is largely a sales tool to get readers to sign up for a Startup Weekend.

Startup Weekend

While I have not attended a Startup Weekend, I do like the idea.  Getting a team together in an intensive environment with skilled trainers to focus for 54 hours on brainstorming, exercises, pitching, and, ideally, creating a business plan to present to founders and investors, sounds great.

Is that realistic?  Probably not.

But to solidify your team and make solid progress on your plan — with more work to be done afterwards — that can really jumpstart your efforts?  That’s worth the time and money that goes into a Startup Weekend.

Feasibility Testing

My biggest concern, a common theme in this blog, is that in the pressure to create a compelling business plan you can easily ignore or minimize genuine problems in your idea.  For my work, that means you need to do feasibility testing first, to determine if in fact your great idea is such a great idea after all, before you jump into business planning. Solid feasibility testing — including customer interviews, market research, competitor analysis, and pricing assessment — cannot be done in a weekend.

Confirmation Bias

Otherwise, during the business planning process, in a long weekend or some other time, we all tend to get caught up in what’s called “confirmation bias” — the tendency to look for data that confirms our initial impressions and to ignore everything else.  That’s dangerous for your business, and often prevents you from seeing solutions that would come from gaining a better understanding of that disconfirming data.  Or from just dropping an idea that won’t succeed no matter how much business planning you do.

Has anyone attended a Startup Weekend?  Would be great to hear from you!

1. No viable market for their products

Many businesses start with the strong conviction that customers will want their products, but without solid experience or data to back that up.  Sure, a few with good instincts and even more good luck, succeed anyway, but most fall by the wayside.  Market research is indispensable, and that usually involves  talking with real customers to find out what they really want.  The odds are your first idea is off the mark, which you can adjust if you catch it early enough — during the business planning process.

2. Insufficient Startup Capital

Most entrepreneurs underestimate how much time and money it will take to get started and grow the business before it begins to pay for itself.  Talk to similar businesses that have started up recently to get a better handle on what it will take.  Then revise and adjust your business plan to make sure you have the resources you need to grow your business.  Running out of cash is the most common explanation given for shutting down a business, sometimes even when there is no shortage of customers.

3. Single Founder

Most successful small businesses start with more than one founder.  Why?  Well, for one thing, business is all about relationships, and if you can’t find (or won’t ask) anyone to join you, what does that say about your willingness to work with others (employees, suppliers, investors) to achieve success?  Moreover, psychologically, you need someone to be in the trenches with you when things fall apart — as always happens at least once in the first three years with any business.  It’s just too hard to carry this burden (not to  mention do all the work) all alone.

4. Closed Mindedness

Entrepreneurs need to carry a paradox in their brains.  On the one hand, they have to be so determined, even obstinate, to drive their idea forward no matter what barriers get between them and success.  On the other hand, they need to be open to new ideas, to listen to complaints, to change their ideas and strategies if that’s what needs to be done.  Keep an open mind for new knowledge as you push forward.

Good luck!

• Copyright © 2012 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

Entrepreneur Access to Capital Act

The bill, called the Entrepreneur Access to Capital Act, passed the House 407 to 18.  That’s the kind of vote you expect for apple pie appreciation month.  This bill would encourage small businesses to use crowd funding to raise capital, by eliminating many of the security fraud regulations designed to protect investors from unscrupulous scam artists.  If passed by the Senate and signed by the President (which seems quite likely), the law would allow a business owner to raise up to $2 million from individual investors who put it a maximum of $10,000 per person.

Read more about it from NPR at: http://n.pr/w4tc2g

Would this be a good thing?  For web-savvy entrepreneurs who want to do more than just ask friends and family to get startup capital, this could be a great new source of investment funds.  Currently, you’d violate SEC (Securities Exchange Commission) regulations if you tried to raise money this way, and find yourself in deep, deep hot water.

On the other hand, I’m sure there are con artists watching this legislation very carefully.  What the Internet offers in access to so many possibilities, it also often lacks in accuracy and accountability.  The SEC currently protects small investors from being drawn into fraudulent offers; this law would prevent them from doing so.  Almost every day we hear about honest, well-eduacated people getting hoodwinked out of their savings by shysters.  This act could offer them a new way to do so.  Time will tell how serious a problem that will be.

That said, every entrepreneur and small business owner looking for capital will want to watch this legislation carefully.  It might just help you move forward with your business plan!

• Copyright © 2011 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

Here’s an example.  Some years ago I was involved in a business that sold musical CDs through radio stations.  The stations promoted the service (“the music you just heard can be purchased right now by calling 1-800-etc”) in exchange for a commission.  The venture started off well, attracting 100′s of stations and millions of dollars of sales.  But there was one catch: we were losing money.  More than our business plan projected, which led us to wonder if we could every achieve profitability.

So we did value chain analysis.  We  concluded that our strengths were in marketing & sales and customer service.  We were weakest with inbound logistics and operations.  With so many radio stations with so many different formats promoting our service, we could keep very few products in inventory, which forced “double-shipping” — from the supplier to us, and then from us to the customer.  That was expensive, in terms of operations, and created delays that annoyed our customers.  We also were not hitting the volume levels where discounts would lower our costs and increase our profitability.

We were in a hole but at least we knew what kind of a hole we were in.

Next, we looked at cost advantages.  Our lower than expected sales created underutilized capacity in space, equipment and management. The final area we identified was that the commission we paid stations was too high for us to be profitable.

Based on this analysis we did three things.  We reduced management levels, renegotiated royalty arrangements, and expanded inventory as we learned more about buying trends of our customers.  Over time, these changes improved our profitability to the point that the business appeared to be viable again.

We also worked on improving our competitive advantage, also known as differentiation in Porter’s lexicon.  We set out aggressively to keep both our marketers (the stations) and our customers happy, through good relationship management and top notch customer service.

The business changed in many ways over the years, but continues to this day in its current incarnation, the Public Radio Market.

Value chain analysis helped it survive its early years.

• Copyright © 2011 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

Some of the alternatives include for-profit, for-profit with a social overlay, hybrid, nonprofit with a mission-related enterprise, or nonprofit.

A very thorough article on just this topic can be found in the Spring  2011 edition of the Stanford Social Innovation Review.  SSIR is a publication well worth a subscription, but in this case, the article is available for free.  It’s call “For Love or  Lucre,” and was written by Jim Fruchterman.  Here’s the URL:

http://bit.ly/oTcnxo

This is a good thing to get ironed out early in your business planning process.

• Copyright © 2011 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

Yes, I know.  Social media is a good way to throw away good money and time into something that rarely demonstrates a clear ROI.  You still gotta have one.  Why?  Because your customers expect you to have one, and your competitors probably have one (check to be sure), and you need to play if you want to stay (in business).  So what are some tips on how to do it?

First, social media is all about interaction. Direct promotion often has to take back seat.  That means asking questions, responding to issues and concerns from customers, receiving feedback early and often.  It also means giving them something of value for being Friends with you on Facebook or following you on  Twitter.  That could be discount coupon, insight into changes you’re planning to implement, including changes based on suggestions made on Facebook.  Make sure your customers know about what you’re doing online, via your web site, your brochures, your products, and any other ways you connect with customers.

Secondly, social media requires constant feeding.  People will come back if they get new stuff from you, but you need to keep updating your status, adding new tweets, offering new deals, and so on.  That doesn’t have to take a lot of time, as posts can be short and informal to match the character of the social media world.

Finally, have some fun with social media.  Tell some stories, quote from something a customer told you, mention a recent insight you had about the business.  Keep it lively, interesting, and valuable, and people will tell their friends about you and keep coming back. More importantly, they’ll feel more connected with you and your business, which will help keep them as loyal customers.

So be sure to design a social media strategy as part of your marketing strategy in your business plan.

Good luck!

• Copyright © 2011 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

Profit is determined by performing these activities efficiently and/or with suitable quality results such that customers are willing to pay more for the resulting product than it cost you to carry out these activities.  And customers will buy from you rather than your competitors if you can tweak the value chain to lower costs or achieve superior differentiation. Value chain activities include:

1. Inbound Logistics: Ordering, receiving, warehousing inputs (such as raw materials), then distributing them to operations as needed
2. Operations: Transforming inputs into finished products and services
3. Outbound Logistics: Warehousing/distribution of finished goods
4. Marketing & Sales: identification of customer wants/needs, creation of sales
5. Service: Customer support after the goods are sold

Support to these activities are provided by:

• Firm infrastructure: Structure, leadership, control systems, and company culture
• HR Management: Recruiting, hiring, training, compensation
• Technology to support value-creating activities
• Procurement: purchasing inputs such as materials, supplies, equipment

Achieving a Cost Advantage

Once you’re clearly defined your value chain for your proposed venture, then the next step is to perform a thorough cost analysis by assigning costs to each value chain activity.  Porter mentioned 10 cost drivers where you might gain a cost advantage by controlling these drivers better your competitors.

• Economies of Scale
• Learning
• Capacity utilization
• Linkages between activities
• Interrelationships between business units
• Degree of vertical integration
• Timing of market entry
• Firms policy of cost or differentiation
• Geographic location
• Institutional factors (regulation, unions, taxes, etc)

Differentiation

Another way you can gain competitive advantage is through differentiation, which can occur anywhere in the value chain.  Differentiation comes from providing unique value at some point in the value chain which lowers costs or improves the quality of the final product.   Here’s Porter’s drivers of uniqueness:

• Policies and decisions
• Linkages among activities
• Timing
• Location
• Interrelationships
• Learning
• Integration
• Scale
• Institutional factors

Finally, your company’s value chain links to the value chains of suppliers and buyers in a larger stream of activities that Porter calls the value system.  Development of your competitive advantage will depend not only on your value chain, but also on the value system within which you will operate. Good luck!

• Copyright © 2011 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

Rivalry among Existing Competitors

For most companies, competition comes from existing companies operating in that market. Competitive strategies involve deciding  how to achieve and maintain superiority over those existing competitors, in areas such as quality, price, innovation or service.

Threat of New Entrants

New competitors could show up any time, unraveling your business plan.  Best to focus on market segments where that’s less likely to happen.  Similarly,  it’s a good thing if it’s easy for firms to leave the market.  Sometimes firms continue to exert competitive pressure even if they’re losing money.  Think airline industry.

The best market segments present high entry and low exit barriers.

A good estimate of entry barriers is how much effort and money it will take to start your company. If it requires substantial development time and capital (say, more than a year and $1 million), you probably have high entry barriers. That makes it difficult for new competitors to show up suddenly to eat your lunch.  Ideally, you have something that provides advantages that lower your market entry costs, such as unique intellectual property (e.g., patents), areas of expertise, exclusive location, or access to capital.

Exit barriers can be determined by evaluating longevity of current competitors.  If companies come and go quickly, such as in the restaurant industry, the odds are exit barriers are relatively low.

Bargaining Power of Buyers (Customers)

Customers will make or break your business; even more so if they have lots of power.  If Walmart is your primary customer, you have no bargaining power. They dictate all specifications and all prices.

You have more power if you have more customers, if your products are unique, or if you have information the buyer does not have (such as your cost and profit structure).

Bargaining Power of Suppliers

When there are few substitutes, suppliers such as raw materials, labor, or components have power over your firm.  They know your choices are limited and can set their prices accordingly.

You’ll have more bargaining power if you have multiple suppliers, and if any  one type of supplier represents a small portion of your completed product or service.

Threat of Substitute Products or Services

You’ll be better off if there are few substitutes for your offerings.  The last thing you want is to enter a market where customers can easily choose unrelated products to meet their needs.  In that case, your competitors are the providers of any of those substitute products, which can mean far more competitors than you imagined.

Good luck!

• Copyright © 2011 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning