Up and Running:

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. )

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

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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I found this list in a very good post from Charlie O’Donnell on his blog This is going to be BIG. I don’t know him, and I didn’t know his site, but on digging I discover he has done time with Union Square Ventures, teaches entrepreneurship and practices what he preaches with a couple of startups that he runs.

But what really matters is that this is a very good list. It matches my dealings with startups and investors, on both sides of the table.

1) Strong sense of the key milestones–Entrepreneurs often ask what metrics they need to get to in order to get an investment. I often turn that question around and get them to tell me what the important milestones are.

In a nutshell: Metrics. Trackability. He adds: “Milestones are a waterfall–and having them as goals should inform product, marketing, financing, etc.” Agreed.

2) Implementation of a product strategy–More so than any other aspect of the business, the thing I see early entrepreneurs tend to drop the ball on most–myself included–is product strategy.  I’m not saying you have to know all the answers, but you should at least know what your landing pages are trying to accomplish, where they’re going wrong and what steps you’re taking to identify the solution. I like to know that, even if you haven’t figured everything out, you have a process around product–so this way I can bet that you have the tools to figure it out.

The product road map included, and this gets even more powerful when you add on the milestones in the first point. In the post he adds the practical question, “How do I know you’re not going to spend the whole financing moving the search box around when it turned out that being on mobile was more critical to your success?”

3)  A theory on customer acquisition–You may not even have your product out yet, but having a reasonable sense on how people are going to discover it–past the buzz around your launch–is necessary. Just tell me how the first 10,000 users who aren’t your friends find it–and if it’s viral, tell me why people pass it on other than “because there’s an invite friends link.”

And, within that, this very real note about what doesn’t work:

If your strategy is to reach out to all the bloggers in your industry and get them to write about you, that’s pretty much what every other startup is going to do–and anyone who has done it will tell you the results will likely be underwhelming.

So make it real, and also realistic. Don’t just do what everybody else has done.

4) A financing strategy that gets you *somewhere*–When I say *somewhere,* I really mean one of three outcomes: getting critical mass (whatever that is for you) or at a product milestone that makes your venture fundable, starting to get revenues or cash-flow positive. When someone asks you, “What does this money get you?” they really want to know that it gets you to some amount of users, coverage of certain platforms, first enterprise customers, whatever it is. Just something more mission critical than “18 months.”

Notice that it’s not necessarily all the way to the exit strategy. I find this very refreshing, looking at some real next step, and going back to the foundation of metrics and milestones, trackability.

5) Specific value creation –The easiest way to show value creation is to say that each customer is worth X dollars in revenue. Pair that with the cost of customer acquisition and net worth; there’s your business. I don’t care if these are wild-ass guesses–at least make some attempt at showing that at customer N, your business is worth X.

That’s a very nice summary of “value creation.” Units times price.

What I like about this post is that it gets away from the standards I find myself listing too often: exit strategy, differentiation, growth potential, defensibility, management team and so on. This different way of looking at it seems very useful to me.

Once upon a time I was a vice president at a small consulting firm called Creative Strategies. That was in the early 1980s–and it still exists today, due mostly to the hard work and intelligence of Tim Bajarin, who took it over after I left. One thing that struck me as I worked there is that strategy is a hard service to sell. Maybe I’m just a cockeyed optimist, but most people, it seems to me, have a pretty good instinct on strategy.

1. Strengths and Weaknesses

Strategy is about focusing on strengths. It’s about managing resources. It’s about working around the side to minimize the impact of weaknesses. And one of the hardest parts of strategy is having the discipline to say no. Focus on what’s most important.

2. The Key to Failure

My favorite quote on strategy is from Bill Cosby:

“I don’t know the key to success, but the key to failure is trying to please everybody.”

3. About Consistency

Better a mediocre strategy well-implemented over a longer period of time than a series of brilliant strategies each implemented over a short term, contradicting each other.

4. When to Stay the Course and When to Change It

And then there’s that old country song, The Gambler, that makes life into a card game, in which the secret is knowing when to hold them and when to fold them. With strategy, that comes up a lot. When things aren’t going right, do we abandon the strategy? Or do we stick to it longer because it needs more time?

There’s no simple rule for this. That’s why people run strategies, not algorithms. But it helps to look hard at whether the strategy has been well-implemented (hint: that’s why I like business planning) and whether assumptions have changed.

5. In a Nutshell

A good friend and client, Hector Saldana, who had a brilliant career with Apple Computer from 1982 to 1994, once said to me: “Management is nothing more or less than knowing when and how to say no.” So is strategy.

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The programming may not be any better, and the advertising is threatened, but the televisions themselves, the hardware, are a growing market. Steve King points that out in his post today called The Death of TV Exaggerated on his Small Business Labs blog.

The average U.S. household has 2.86 televisions. That compares to 2.43 per household in 2000, and two per household in 1990. And that’s more TVs than people, since our last census showed only 2.56 people per household. Research also indicates that Americans watch more TV than ever, an average of 153 hours per month.

I’m guessing that one thing confusing about television trends is the gradual decline of major network market share of viewers and relative growth of internet advertising compared with television advertising. Both of those trends would seem to fit with growing importance of cable alternatives and cable programming.

Another thing that I’m guessing has happened is the impact of the new HD and thin-screen technologies. I was looking at televisions in Costco last weekend and I was shocked at how much prices of HD televisions have dropped since I last bought one a couple of years ago.

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I posted here Tuesday on Seth Godin’s very useful post about business development. That got me thinking about the critical principle of win-win in business deals.

It’s really very simple: The only way to make sure you win a business negotiation is to make sure that both sides win. If you think you can win by making the other side lose, you’re wrong. Both sides win or nobody wins.

It’s business, not boxing.

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Marketing expert John Jantsch, creator of Duct Tape Marketing, posted this list today on the American Express OPEN forum. He introduces it by recognizing that it’s not necessarily that big idea you’ve been waiting for that makes the startup successful. He offers these five factors:

1. The owner is the customer. Meaning that you make a product or service that you want to use. Jantsch says: “You can acquire some measure of knowledge from various research techniques, but nothing beats living, breathing and feeling the same things your prospects do.”
2. The market understands the offering. He mentions this problem: “If your innovation simply solves an incredible problem people don’t yet know they have, you may wind up burning through the money before they get it.”
3. The market already spends money here. John says: “If people are already spending money on a product or service, then two-thirds of your work is done.”
4. It’s an innovation that simplifies. Amen to that.
5. Nothing is precious. This is a tough one. “If you’re in love with your bright, shiny, baby startup and all that it offers, you may become blind to the reality the market suggests.” Keep an open mind, Jantsch says, “talk to your customers, talk to your competitors, talk to your employees and remember nothing is precious but what the numbers prove to be so.”

Here’s the link: 5 Attributes of a Sure Fire Startup: Marketing: Idea Hub: American Express OPEN Forum

I’m off today for the annual convention of the Association of Small Business Development Centers in Orlando.

The small business development centers are an excellent resource for startups and small businesses. There are about a thousand of them in the United States, and you can click here for a map of locations and contact information.

What you get at an SBDC is experienced business counseling, one-on-one help, classes and seminars for a relatively low price. The centers are funded by a combination of federal money (the SBA), state money and local colleges.