Up and Running:

Please join me tomorrow, Thursday Nov. 19, on a webinar about using proper business planning techniques to actually build your business, not just your business plan. That’s happening online for an hour beginning at 11 a.m. PST, which is 2 pm EST and 1 pm CST.

You can click here to register, or click the button below.

Here’s a nice reminder: What Seth Godin is recommending in his blog post today, as alternative financing for a small business, is what we actually did. And it worked for us.

Seth’s post is called Debt, equity and a third thing that might work better.

It works like this: You have an idea, a fledgling business or a new market to enter. You find an amateur investor (a wealthy dentist, a retired executive) and raise the money to bring it to market. And in return? The investor gets $xx for every unit you sell. From the first one until forever.

This is instead of the classic either-or: You get new money to finance a new business by getting either bank loans or new investment. The problem, of course, is that both of those are hard to secure, at best, and impossible for the vast majority of new businesses.

It turns out that back in 1994, when we were first trying to build Business Plan Pro, we contracted programming help for a fee plus a percent of future revenue. My wife and I didn’t want outside investors; we’d already mortgaged ourselves up to the hilt. But we really wanted to do the new product.

That actually worked for us. Business Plan Pro came out early the next year, and the company grew. The developers ended up making good money, too. Everybody wins.

Seth adds:

My general bias for entrepreneurs starting out is to bootstrap their business, because raising money is so hard and so distracting. But if you’ve set out to do something that needs cash you can’t raise any other way, this is worth exploring. Tell a story to an investor that wants to hear it, and create a cash-flow scenario that makes the investment worth it for both of you.

I agree with that. Good suggestion.

(Photo credit: dedek/Shutterstock)

Made to Stick, by Chip and Dan Heath, is one of the most interesting and useful books I’ve read in the last two years. It’s about how we use, lose, push, and forget ideas, stories, news leads and such. In short, how we make ideas stick.

I was browsing the Web over the weekend and found this very good six-minute talk by co-author Chip Heath. It’s a good summary of an important book.

If you can’t see that here, you can click here to go to the original on YouTube.

I received an intriguing e-mail today, well-written and thoughtful, from someone considering going for an MBA degree and asking my advice about it. Here’s a portion of it (quoted exactly):

I’ve been thinking about developing some actual products for sale; but basically I have about a million ideas and as I trudge forth, I am realizing how little experience I really have when it comes to the nitty gritty. Things like accessing risk, being a better sales person, managing and dealing with potential employees, it’s all new to me. And the more I read about it and learn about business, the more interested and passionate about it I become. But reading only gets you so far. I feel like I’m at a stopping point and I need a shove to get over it.

I’m very against just going to back to school because I don’t know what to do or I’m bored or whatever other reason people cook up for avoiding real life. I don’t NEED an MBA. I wouldn’t be going for the degree, I would be going for the experience of it. Which makes me think maybe it would just be better to try to get a mentor and learn by doing, but at the same time… I think it might make me much for successful and give me the confidence to go big. And then of course, do I really want to “waste” 2 years in school when I could be running a business, and I would absolutely need scholarships to get me through.

Great question. I want to answer it. I’ve been posting about this a lot on my main blog (link here). I think it’s an important subject, and I’d like to spread the discussion to this blog. But I need to answer with a somewhat disorganized collection of points. I’d rather have a clearly worded, simple response, but it’s a complex question.

1. Do you like school? Rank yourself from 1 to 10 where 1 is “I hated every minute I ever spent in a classroom or doing homework” and 10 is “I love school as long as it’s a good teacher, and if it weren’t for needing the money, I would just be a full-time student forever.” If you aren’t above a 7, or maybe a conservative 6, you’re going to regret going back to school.
2. An MBA degree from one of the top 10 (or so) schools gives you special job-seeking powers, bragging rights, and, probably, more money. It’s awkward to say in print, but I always say “Stanford MBA” instead of just MBA, and so do the MBAs from Harvard and Wharton and a few other schools. Probably this also means you get a swollen head and swollen ego. But when people stop appending the school name to it, it doesn’t do as much for the job power.
3. I loved my two years back in school getting an MBA degree, starting when I was 31, ending when I was 33. School was exciting. I liked what I learned, I liked studying, I liked the classes and the professors and my classmates. It was a great time. My wife and kids and I lived in family housing on campus, which was a lot like paradise. Even though I consulted full-time to make ends meet while I also studied full-time, I loved it. It kick-started my business career and taught me tons and made a huge difference to the rest of my life. But it was two years on campus.
4. You refer to experience when it comes to the nitty-gritty, and I’m afraid few if any MBA programs give you that experience. Life does, work does, entrepreneurship does, but school doesn’t. School gives you perspective and analytical tools,  deep background, vocabulary, understanding of principles of finance and marketing and all. But not nitty-gritty. Background: this post on five things the b-schools can teach, and this one on five things they don’t.

One final point, one that I’m pulling out of the list for emphasis: Don’t quit working and get an MBA degree full-time for the money. There’s an odd chance, a small chance, that the extra money you generate in your career might compensate for the money you lose in two years of not working; but that’s only if you’re in one of the really top schools, in my opinion, and even then, it’s only a chance. You’d better do the MBA degree because you want to, because you want to spend two years in school again, and you’re interested in the subjects they teach. Otherwise you’ll be disappointed.

If you’re serious about starting a business, take a few minutes and read Paul Graham’s Web essay “What Startups Are Really Like.”

Graham’s essay collection site is a valuable resource. He tends to post essays–a lot longer, and usually a lot more thoughtful, than a standard blog post–about once a month or so. He has a large following for good reason.

The “What Startups Are Really Like” essay includes 19 points and a conclusion, so it’s more like a 10-minute than a two-minute read, but there’s a lot of real content there.

Not that I agree with everything he says there; hardly. But he sticks his neck out a lot, writes a lot of things that could sound wrong when quoted out of context, but even these–such as “don’t worry about competitors” or “investors are clueless”–make much more sense when you read through his explanation. And if it makes you and I think about it, it’s good stuff. There’s no clear, hard, fast truth in this subject area. Thought-provoking can be as valuable a trait as true.

There are also parts of this essay that are unmitigated pure gold. Read the section “Things Change as You Grow,” for example. Oh, and “Lots of Little Things,” and “Start with Something Minimal.” He really nails it.

We all forget too easily: The best startup funding is sales. Sure, we all think of angel investment, friends and family, and SBA loans; all of those options are necessary for most startups. But sales is better.

If you can, find the early customers. Give them a deal, make them important, work with them to optimize their needs; but make a sale.

Even if you do need to go out and find investment–and I speak now as an actual angel investor–there’s almost nothing as convincing as actual sales. People are spending money on your product or service. It makes a new business proposal far more credible.

True, not all businesses can do that. But a lot of them can. And, as we write about business plans and seeking investment and all, we forget the real sweet spot: financing growth by making the sales.

(Note: this is a repost from Planning Startups Stories, where I posted it a few days ago. I can’t remember the last time I reposted from that blog to this one – it has been a while – but I decided to do that today because it seems to be very appropriate here too. It’s been on Twitter a lot already, from the first time I posted it.  Tim. )

Hooray for starting a business at home. I did. And that business now has more than 40 employees, multimillion dollar sales, market leadership in its niche–and no debt.

Still, back then, when I started, there was a certain stigma to the home business. I fought that stigma by never apologizing for the home base and never trying to hide it. But I felt it.

I’m glad to see how much this has changed. I just read Steve King’s The Home: A Great Place to Start–And Run a Business on the American Express OPEN Forum. He writes:

The home has long been viewed as a great place to start a business.  Lower costs are, of course, the key reason.  Many large enterprises such as Ford, HP and Apple Computer started as home businesses.

He cites a recent SBA study that showed a lot of growth in home-based businesses; both in the number of these businesses in the U.S. (some 15 million) and in their likelihood to survive and prosper. He adds data from Homepreneurs: A Vital Economic Force, a study by Emergent Research, conducted on behalf of Network Solutions. Thirty-five percent of home-office businesses take in more than $125,000 in annual sales and 8 percent do better than $500,000 per year. They’ve existed on average for 10 years.

Don’t discount the home-business option.

I like this Plan B idea. Consider this, from Discover Your Plan B, a write up on the Business Standard (from India) on co-author John Mullins’ visit to India:

If you ask investors, how did they make money, they’ll tell you they didn’t make it on the original plan, but on the second or third when the entrepreneur adapted the original plan and found a better plan. Rarely do initial plans with which entrepreneurs begin work the way they have been planned. Almost always there are twists and turns on the road.

This is about a new book, Getting to Plan B. I haven’t read this book, but I like what its authors are saying.

The challenge is not to make a better Plan A, the challenge is to recognize that however good your Plan A is, it is probably not very accurate. So your mind-set, as you enter a process, should be to work out the best plan and at the same time, to get beyond that initial plan. Get it into the market and see if the market can tell which parts of that plan are correct, and which are off base, so that you can quickly adapt to the reality. Plan As are mostly partly correct, but not completely correct.

That sounds right to me.

Amazon.com: Getting to Plan BISBN: 1422126692 ISBN-13: 9781422126691

I have to admit that I like how much this sounds like The Plan-As-You-Go Business Plan, my book from 2008. All business plans are wrong, but vital. It’s about change, course corrections and management.

Browsing and searching last night, I discovered “Why You Need a Business Plan” by Colleen DeBaise on the Wall Street Journal’s website. This is a good, strong post and a good reminder. Her five reasons:

1. Identify your company’s strengths and weaknesses.
2. Figure out how much money you’ll need.
3. Get clear direction, which can help eliminate stress.
4. Summarize for lenders, investors or partners.
5. Evaluate the market for your product or service and size up the competition.

My personal favorite is No. 3, particularly the phrase “help eliminate stress.” It’s not as if the business plan eliminates uncertainty, but business planning does manage and reduce uncertainty by laying things out where you can see them more easily (like cash flow, for example). The interrelationships between the different parts of the business are not all intuitive.

Point No. 4–summarize for lenders, etc.–bothers me. Too many people miss the benefits of business planning because they don’t need to show anything to anybody else. If that’s your case, look at points 1, 2, 3 and 5.

That link is “Why You Need a Business Plan”–WSJ.com

There was a good reminder placed on The Funded yesterday. It’s a note from an entrepreneur entitled The Gift of Not Getting Funded (Early). I really like this quote:

What our lack of funding made us do is go back to basics. We know we had the seed of a good idea but struggled to come up with a sustainable model. Along with lots of hard work we talked with potential customers and came up with a solid way to generate revenue. Our potential customers are now signing letters of support saying they like our product and find it beneficial for their business and are willing to be contacted by investors. We have never had this in previous attempts to raise money and now feel confident in our plan.

The author, who has a screen name but not any additional details, makes this excellent conclusion:

Don’t despair if you haven’t gotten funded yet. It could be a gift in disguise.

Good point. And good example.

Which reminds me: If you’re an entrepreneur looking to get funded, go to thefunded.com and angelsoft.net. Both of those are excellent sites, very valuable for entrepreneurs, free and very useful. Oh, and by the way, if you’re an Oregon entrepreneur and looking to get funded, go to Willamette Angel Conference. Please.

(Photo credit: William Attard McCarthy/Shutterstock)

This may surprise you. From an investor’s point of view, self-sufficiency in a startup or emerging company isn’t always a good thing. In many cases, it’s an investor’s nightmare.

Here’s a hypothetical example. Suppose you just invested $250,000 in Acme LLC, a promising startup. Let’s say you got 25 percent ownership for your money. Years go by, and Acme grows in sales, profits and cash flow. In fact, it’s so good that it becomes cash-flow independent, meaning it’s generating enough cash, month by month, to pay salaries and fund growth.

As a successful high-tech company, Acme doesn’t make high profits. Instead, it pours as much money as it can into more growth through better marketing and better products. It buys ad words and search terms. It grows. Let’s say it reaches $1 million sales in three years, and $2 million in five years. And it keeps a healthy balance sheet, just enough cash to feel safe and no real debt.

In theory, and on paper, your investment value in Acme grows too, along with the company. Let’s say that by the time Acme’s running at $2 million annual sales, it’s worth $4 million, twice sales. So your 25 percent is worth about $500,000, twice what you invested.

Sounds like a great story, right? It is for the founders. They’ve been employed all along, and let’s assume they’re taking fair salaries and working on their own company, and their own dreams. Now they have 75 percent ownership in a good company. As long as they keep minding the business and watching the cash flow, they’ve made it. They can brag on their blogs, join the speaking circuit and send their kids to really good schools.

But it’s not necessarily great for the investor. Because that theoretical valuation of $500K is just that: theory. You, the investor, don’t get paid unless you can turn that value into cash. Acme, without an exit, also known as a liquidity event, is an investor’s nightmare. You end up having spent big money to build a business that may last forever without giving you any money back.

If you ever wonder why investors want majority shares, or why they tend to invest in groups with other investors, this example might help. It’s not that they don’t trust your  motivation, but they know that things change; sometimes entrepreneurs who started a company with an exit strategy end up changing their minds. They want to keep it forever. And where does that leave investors?

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I’m not a baseball fan, and I don’t particularly like sports metaphors. But there’s a lot of baseball in prime time these days, and one of the fundamentals of baseball that applies beautifully to entrepreneurship is about making mistakes.

In baseball, pitchers don’t always throw strikes (good pitches). They get up to three bad pitches per batter. And batters don’t always hit the ball. Players who get successful hits more then 30 percent of their times at bat are really good. In the major leagues, fewer than 10 have ever gotten 40 percent for a season. And the scoring includes errors.

In business, we make mistakes. And you’re going to make them. And when you do, you should acknowledge, file it away so you can use it as experience sometime later, and go on with your day.

If you can’t make mistakes and live with them, don’t start a business. Don’t run a business. Keep your day job.

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