EIDSON & PARTNERS

Permission to Believe

My favorite Dallas restaurant is Bolsa, a highly-acclaimed, Oak Cliff-based restaurant that has the right touch.

Bolsa's web site promises, "Fresh, local ingredients. A daily changing menu. The best cocktails in the city."

The focus on fresh and local is evident throughout the menu and even in the bar menu (vodka tonic with cucumber).

The best part about the restaurant is that fresh/local is not hype. They pay off this claim in every detail.

How committed are the owners to fresh/local?

WHAT' S THE PERMISSION TO BELIEVE?

The owners literally built the restaurant on this promise and take great pride in the fact that their kitchens have no freezers or deep fryers.

The only way that works is with fresh, local ingredients and a menu that changes daily.

 

Is This A Good Time To... (Part 5) - How To Derisk Your Venture

Larry Zentner, Director of Inzenka, recently wrote a great letter to the Financial Times' editors with the headline, "What successful entrepreneurs share is a ruthless approach to derisking."

He notes that, "Breakthrough innovations such as.. the iPhone are not simply the result of entrepreneurial luck, but of brilliant commercial management." He points out that successful launches have a solid pipeline of sales long before launch.

That, my friend, is the essence of derisking a venture. Here are several examples of brilliant commercial management.

#1 - In the past year, we were engaged to help launch a US-based manufacturer of all-electric trucks. For two years in advance of the formal market launch, the company's investors had funded a full time sales manager who pre-sold the company's products. For the launch press conference, representatives from three Fortune 500 truck fleet operations attended to show support for this new company and its products.

#2 - During the development of his innovative mutual fund analysis software, Bill Chennault shared the process and the prototype product with an online community that included several prominent financial journalists and notable financial planners. Overlap launched with several key customers and journalists completely engaged with the product. Overlap became an industry standard and continues to evolve today.

#3 - In preparing the launch of the original Macintosh (1984), Apple set the standard for building a pipeline of support long before a formal product launch. In his book, Selling the Dream, Guy Kawasaki details his role as the Macintosh evangelist. His assignment was to sell the third party developers (both hardware and software) on creating hardware and applications for the new Macintosh OS before the product launched. At the time the Macintosh emerged in 1984, the third party developers delivered an array of complementary products that helped make the Macintosh an immediately useful product. The availability of compatible laser printers, PostScript and PageMaker helped to create the desktop publishing category and, ultimately, a huge Apple success.

In launching your product, it is imperative that you start very early engaging the key players in your market space. The more your engage, the more you will benefit from the input from key prospective customers, key prospective distributors, key collaborators with complementary products and key suppliers.

The more you can engage with your key players in your market space, the more you derisk your venture.

Is This A Good Time To Start A Business? (Editorial)

Just when you think no-one really understands job creation, Thomas Friedman got it exactly right into today's NYTimes editorial, More (Steve) Jobs, Jobs, Jobs.

As Friedman explained it, "Obama should make the centerpiece of his presidency mobilizing a million new start-up companies that won’t just give us temporary highway jobs, but lasting good jobs that keep America on the cutting edge."

The history of meaningful, lasting job creation is the history of innovation. Pick any industry -- computers, software, civil aviation, automotive -- and you will find business innovators at the core of job creation. And, these big new industries invariably started as small businesses.

One key point that Friedman missed, in my opinion, is the need for a focus on facilitating access to capital. The current Administration wants jobs, but at the same time, it wants to punish banks and restrict "risky lending". No businesses can grow without capital. No business can grow without investors and lenders who are willing to take reasonable, understandable risks. Banks are not willing to do that today. As a small business owner, I can tell you that banks have the most restrictive lending practices that I have seen in the 27 years that I have owned a business. The answer is not another SBA bureaucracy. The answer is access to capital from investors and banks.

Repeatedly, we hear from Washington that tax incentives for small business will create jobs. That one idea is positive proof that no-one inside the Beltway has ever run a business.

Jobs are created when innovative people see an meaningful opportunity, secure capital (in phases) to build out their businesses, and create innovative products that are in broad demand (ideally worldwide). Then, if all goes well, there will be a taxable business income at some point in the future, often 3-5 years into the future. A tax incentive years into the future is meaningless for job creation.

The option open to the Administration is simple. First, set aside the current legislative agenda and focus on jobs. Don't create another meaningless commission to study the problem. Put Congress to work and:

1. Make innovative new companies the number one national priority.This means celebrating successful business people. Focus on more than just green jobs. Make sure that the effort includes every kind of business from local start-up restaurants to long-time-frame efforts such as lithium ion battery plants. Make sure that the trade policies are in place to facilitate exports. And, help protect intellectual property worldwide.

2. Make access to capital a priority. Make sure that banks can take appropriate risks. Make sure that investors who put money into early stage businesses face reasonable tax rates if and when their investments become runaway successes.

3. Create a supportive regulatory framework that allows small businesses to succeed in the long run.

4. Most important, help the public understand that the Fortune 500 companies are not in a position to create the needed jobs. Unions can't create jobs. Nor, will government be able to create the jobs we need. The only engine of growth that can create literally millions of jobs is small, innovative businesses.

Is This A Good Time To Start A Business? (Part 4) - Finding An Opportunity

The problem of identifying a new business opportunity is best summed up by science fiction writer, William Ford Gibson's observation that, "The future is already here – it's just not very evenly distributed."

Interestingly, the topic of identifying new opportunities does not get a lot of attention. Many experts focus on trying to understand unmet consumer needs. That's tough to do at best.

In his book, Innovation and Entrepreneurship, Peter Drucker summarizes the best approach that I have seen -- look for the unexpected. The genius in this approach is that it focuses on what is happening in the marketplace that is positive and unexpected.

Drucker points out that most businesses tend to focus on what's wrong. As a rule, business meetings focus on the negatives -- low margins, low sales volumes, unsuccessful products, lost customers.

Virtually no meetings have an agenda item for "what went right", "what exceeded our expectation", "which customer ordered more than expected and why". These meetings miss the point. The unexpected is likely the clue to the future –– the clue to the next opportunity.

If you think this is too simplistic to work – remember Ray Kroc, the genius behind McDonalds.

In 1954, Ray Kroc was a salesmen for Prince Castle Multimixers. He called on the McDonald brothers in San Bernardino, CA.

While most restaurants bought one or two Multimixers, which could mix five shakes at once, the McDonald brothers had purchased eight. And Kroc was curious to see what kind of operation needed the capacity to make forty milk shakes at one time. What he learned was the the McDonald brothers had created the prototype fast food restaurant and had, in essence, industrialized food preparation. He bought out the brothers and launched an industry.

If you are working for company today, you need to keep a list of all the unexpected things in the business.

Just one good unexpected business result or outcome, could be your ticket.

Is This A Good Time To Start A Business? (Part 3.0)

(In the first two posts, I covered the ideas that 1. a business is principally about creating a customer (not a job for yourself) and 2. the importance of starting with a small, defined group of prospects.)

The next decision is essentially the most important one that you will make in creating a business.

The operative question becomes, "where do I start in defining the best group of prospective customers for my new business?"

The answer is, YOU. You start with yourself.

Almost without exception, the successful businesses we have seen have one attribute - the founder(s) start a business that is adjacent to their life experiences. Adjacency takes lots of different forms:

- Founders leave large firms (accountants, lawyers, chefs, publishers) and start niche or boutique businesses.

- Founders leave careers and create businesses based on their lifelong hobbies or interests. The movie, Julie and Julia, tracks both Julie Powell and Julia Child's paths that began with their love of French cooking and led to successful publishing careers.

- Founders often pursue a technology or process change to create a business. The founders of Garmin did exactly that and created a benchmark company.

Choosing an adjacent category leverages your experiences and gives you a running head start on your business.

Is This A Good Time To Start A Business? (Part 2)

In thinking about starting a business, the single most important question to answer is, "who will my customers be?" Nothing else is as important, as pivotal to financial success, or as defining for your new company. You need to define potential customers as clearly and narrowly as possible.

Narrow is good. Here's why.

The most common impulse is to think -- "gosh my new business should serve everyone -- all 307 million in the US  -- why not all 6.7 billion worldwide. If all 6.7 billion people will spend just one cent per day with me, I'll be rich."

The problem is that no business can address 6.7 billion people. What one product or service could you create, market, distribute and support that might be bought by both a Bill Gates and a native fisherman in the Andaman Sea?

The initial customer set that you define needs to be very, very small and very addressable. The customer set needs to have similar unmet needs. Ideally, these customers would be in a small universe that could be a natural reference group for your business. This small group could become your launch customers.

The next obvious question is, "how do I find this small group of potential customers with similar needs?"

Stay tuned.....

Is This A Good Time To Start A Business? (Part 1)

Recently, I'd had several friends pose this question. Included in this group were people concerned about their future - both employed and unemployed. They've asked:

- How important is the underlying economy to start up success? Answer: Somewhat important
- Can a new business really succeed in today's economy? Answer: Yes

The core consideration is your personal tolerance for risk. Risk is a great academic concept and a pivotal investment concept. On a personal basis, accepting the consequences of risk can be hellish.

First and foremost, you have to be able to define how much risk (think total dollar outlays for how long) just to get a new business to positive cash flow. Every business has a start up cost -- even a lemonade stand.

This chart represents the concept. Typically, a more complex business requires much more start up investment than a straightforward personal service business. 

If you are thinking that starting a business is a way to create a salary for yourself -- you probably going to be disappointed. 

Creating a business is about customers. It is not about you and your needs.

Peter Drucker famously said, "The purpose of a business is to create a customer."

In the next post, we'll dig into what it means to "create a customer".

Why this recession will last longer than expected

The Bureau of Labor Statistics' July 2 Economic Situation Summary surprised a lot of people: investors, pundits and politicos alike. No green sprouts here.

The facts are clear:

• Total June job losses reversed a recent trend, posting a staggering loss of 467,000 jobs.
• Equally troubling is the decline in weekly hours of work.

This really should not be a surprise. The larger story had already been reported in an excellent article on June 12. Reporting in USAToday, Dennis Cauchon turned in a well researched story that points to the real problem. Unemployment is not the major story.

IT'S THE UNDEREMPLOYMENT, STUPID.

- The hours worked per week in May (then June) represent record lows (data from 1964 forward).
- Weekly earnings for private sector jobs are down since 1Q09.
- Cauchon reports that businesses cut wages by 6.2% in the first quarter. He quotes Laura Sejen of Watson Wyatt as, "this recession is unlike any since the Depression."

No doubt, this recession will be protracted. Before there can a real turnaround, the economy will have to grow enough to reverse both the underemployment, and then the unemployment.

MY PREDICTIONS:

1. High unemployment: 10+% for the next 24 months.

2. Stock market: stagnant with weak earnings for 24 months

3. Commodity prices: soft with the exception of energy.

4. Long term interest rates: rising based on US deficits.

Game-Changing Innovation for Developing Countries: Part 1 of 2

On April 9th, the Climate Change Challenge announced their $75,000 prize winner, the Kyoto Box, an inexpensive solar-powered cooker.

The $5 cooker uses sunlight to cook food and boil water. It is truly revolutionary for the estimated 3 billion people who cook with firewood. The cooker is made of two cardboard boxes, one inside the other covered with acrylic. The addition of insulation (straw), black paint and foil raises the temperature enough to cook or boil liquids. Manufacturing and distribution costs are expected to be low.

The list of benefits include:

- Cooking without consuming fuel or firewood,

- Boiling 10 liters of water in two hours which helps reduce disease,

- An estimated saving of two metric tons of carbon emissions per family annually,

- A significant reduction in deforestation, and

- Significant reduction in the time devoted to gathering firewood.

The inventor, Jon Bohmer, had been working for years on high-tech solar concentrators. He noted, "it's all about scaling it up. There's no point in creating something that can only help a few million people. The needs are universal - everyone needs to cook."

Sponsored by Hewlett-Packard, the competition was hosted by Financial Times and the Forum for the Future.

A Balance Sheet Recession & What's Next

Both the New York Times and NPR have covered the story of a "Balance Sheet Recession" using Japan's experience from the 1990s.

Richard Koo, chief economist at the Nomura Research Institute, summarizes the Japanese experience in the 1990s as not a recession, but a Balance Sheet recession. That is, a recession driven by consumers and businesses going about the process of cleaning their individual balance sheets.

In his NPR interview, Koo notes that when the real estate bubble of the 1980s burst, property values plummeted 87 percent from the peak nationwide. Counting the value of real estate and stocks, Japan lost wealth equivalent to three years' worth of gross domestic product. It was "just about the largest loss of wealth in human history in peacetime," Koo says.

Hiroko Tabuchi's NYTimes article points out that, "As recession-wary Americans adapt to a new frugality, Japan offers a peek at how (consumer) thrift can take lasting hold of a consumer society, to a disastrous effect"

Between 2001 and 2007, per capita consumer spending rose only .2 percent.

Japan eventually pulled itself out of the Lost Decade of the 1990s, thanks in part to a boom in exports to the US and China. But that might not be the only engine of recovery.

As suggested, but unstated, in President Obama's Feb. 24 Address to Congress, it seems that the real engine to pull an economy out of a Balance Sheet Recession is exactly what Japan did -- intense, consistent public spending.

That's not the solution I was hoping for.