In my entrepreneurship class at Duke we always start out the semester talking about recognizing problems, specifically problems that at they see every day around them, with the idea that problems often lead to opportunities. One of my students brought up the subject of the incredibly small dorm rooms at Duke, and all the students agreed that they were small as compared to other schools that their friends attend and a drawback to going to school at Duke. I asked them: what possible benefit would it be to the school to increase the room size. One noted that larger rooms would make the school more attractive and could result in better students.
I then asked them how many of them even considered dorm room size when looking at schools. Zero. Not even considered. It probably ranked even lower than zero in the eyes of their parents, who are heavy decision influencers. The point? Entrepreneurs and marketeers often make assumptions regarding how benefits that their products and services provide will translate into sales. What they fail to understand is that many of these benefits, no matter how valuable, may not get their customers to pull the trigger on a buying decision. There is no substitute to digging into the customers buying and decision making process.
Saturday, August 31, 2013
Thursday, August 29, 2013
Friends and Family
Some of the worst personal disasters I have witnessed involved entrepreneurs raising money from friends and family. It can be done properly, but seldom is. Professional venture investors and sophisticated angels understand what risk capital really means. Friends and family usually do not. There are many risks, but here are a few.
The first is that when things don't go perfectly they panic and want to pull money out even when success might be in the future. The second is that they most often don't understand dilution that inevitably occurs when a company is successful and needs more capital for growth, even if it is explained to them beforehand. Finally, when money is lost, relationships can be severely damaged. Look for a paper with some suggestions on how to avoid the pitfalls coming soon on my web site.
The first is that when things don't go perfectly they panic and want to pull money out even when success might be in the future. The second is that they most often don't understand dilution that inevitably occurs when a company is successful and needs more capital for growth, even if it is explained to them beforehand. Finally, when money is lost, relationships can be severely damaged. Look for a paper with some suggestions on how to avoid the pitfalls coming soon on my web site.
Wednesday, August 28, 2013
Consulting Malpractice.....
Business schools and marketing consultants are great at helping their students/clients develop a strategy to turn that great idea into a huge success with a huge exit strategy. Sometimes that ends up being terrible advice. I watched student at Fuqua a few years ago who had started a high end custom jewelry design business and had seen demand grow so fast she hardly had time to breathe. She was getting a lot of advice on how to scale her business to get to that desirable run rate in the tens of millions a year that all B-school students wanted.
The problem was that this would require that she compromise the artistic element of her personal design work and take her brand into the mass market. A key part of her value was a custom design. Every time someone talked about the idea she looked like she was going to be sick. They never considered the possibility that perhaps for her a better path would be to stay at the high end / low volume world and keep doing the design work that made her happy. That concept seemed foreign to most of the B-school world around here.
I encouraged her to pursue a different path. One way to expand revenue was to generate more repeat business from each high end customer leveraging common design across multiple products. She did not really need my expertise as she was already on that path. She did need me to point out to her that any time you cannot keep up with demand you are almost certainly not charging enough. She mostly needed a voice to balance the others screaming at her not to choose a path that would lead to failure. By failure they meant having to "settle" for a business where she did what she loved, generated a few million a year in revenue, and had to learn to survive on a half million to a million a year in net personal income.
Don't get me wrong. I more often encounter the struggling business owner who hangs on to his or her dream as the company goes down in flames. I'm not talking about refusing to adjust to market reality. I'm talking about the ability to make conscious choices between profitable paths where the trade-off is between success at different scales and other personal and life objectives.
Most of my life I have dealt with venture funded companies where it was understood from day one that the objective was high growth and a very large exit. I am very comfortable in that environment; it seems normal to me. However, those of us in the business of teaching and giving advice need to be careful when dealing with small business owners, especially sole proprietors. Try to discover not only where they want their business to go, but also what they want their lives to look like 5 to 10 years in the future.
Business schools and marketing consultants are great at helping their students/clients develop a strategy to turn that great idea into a huge success with a huge exit strategy. Sometimes that ends up being terrible advice. I watched student at Fuqua a few years ago who had started a high end custom jewelry design business and had seen demand grow so fast she hardly had time to breathe. She was getting a lot of advice on how to scale her business to get to that desirable run rate in the tens of millions a year that all B-school students wanted.
The problem was that this would require that she compromise the artistic element of her personal design work and take her brand into the mass market. A key part of her value was a custom design. Every time someone talked about the idea she looked like she was going to be sick. They never considered the possibility that perhaps for her a better path would be to stay at the high end / low volume world and keep doing the design work that made her happy. That concept seemed foreign to most of the B-school world around here.
I encouraged her to pursue a different path. One way to expand revenue was to generate more repeat business from each high end customer leveraging common design across multiple products. She did not really need my expertise as she was already on that path. She did need me to point out to her that any time you cannot keep up with demand you are almost certainly not charging enough. She mostly needed a voice to balance the others screaming at her not to choose a path that would lead to failure. By failure they meant having to "settle" for a business where she did what she loved, generated a few million a year in revenue, and had to learn to survive on a half million to a million a year in net personal income.
Don't get me wrong. I more often encounter the struggling business owner who hangs on to his or her dream as the company goes down in flames. I'm not talking about refusing to adjust to market reality. I'm talking about the ability to make conscious choices between profitable paths where the trade-off is between success at different scales and other personal and life objectives.
Most of my life I have dealt with venture funded companies where it was understood from day one that the objective was high growth and a very large exit. I am very comfortable in that environment; it seems normal to me. However, those of us in the business of teaching and giving advice need to be careful when dealing with small business owners, especially sole proprietors. Try to discover not only where they want their business to go, but also what they want their lives to look like 5 to 10 years in the future.
Monday, August 26, 2013
First day of class at Duke today. It doesn't seem like it but this is the start of my third year of part time teaching here. 18 seniors ready to learn about entrepreneurship. Many of them are excited to be moving beyond the "well rounded liberal arts education" that Duke has provided and learn something "practical." What they don't realize is just how important the problem solving and critical thinking skills that they have acquired are to the entrepreneurial process. In fact, I would say that the skills they have are preferable to those of the business school grads I have worked with. It also doesn't hurt that they had to be super smart to get into Duke in the first place. :)
Watching a new show on TV called The Profit in which a billionaire entrepreneur invests in distressed businesses if they will allow him to help turn them around. After the first few shows several themes have emerged which resonate with my experience. First, people often mistakenly associate revenue growth with a well managed company, even when their business is losing money and about to go under. Second, many entrepreneurs are so set on their original "dream" that they would rather their dream go down in flames than modify it slightly and make millions of dollars. Finally, many first time entrepreneurs would rather own 100% of a business that is worth nothing than 50% of a business that is worth millions.
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