EIDSON & PARTNERS

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? (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".