More rules for the road when starting a new business
Ronald D. Schaeffer
Editor’s note:In Part 1 of this two-part article (May 2006) the author, a well-known and respected entrepreneur-as well as a pretty good musician-laid out business startup fundamentals, as he experienced them. Now he cranks up the heavy artillery firing at a coterie of those he sees more as roadblocks than helpers, with a strong dose of vitriol for the bean counters and legal eagles. Some readers will have had different experiences; when I started my first business I called the accountants historians, always telling what went wrong but never forecasting the future. Schaeffer offers his views heavily laced with sardonic wit. - DAB
Weasels are little critters that drink blood and fit into small spaces. They are extremely aggressive and they communicate in a language called ‘weasel words.’ When starting a new business you will encounter several species of weasels, including bankers, accountants, lawyers, politicians, and insurance agents. Bankers will gladly lend you money, but only when you don’t need it. When you need it you might as well try to get blood from a stone.
Accountants are usually thin, pale, near sighted, have cheesy little mustaches, and roll their pencils between their fingers. They put numbers in columns, add and subtract them, and sometimes get the right answer. Right, of course, depending on which set of books they are using at the time as these guys seem to have at least three sets: one for the taxman, one for the investors, and the ‘real’ ones that nobody else gets to see. CPAs are super weasels, or accountants on steroids.
Lawyers can be best defined as people who find two people who are fighting, get them to take their clothes off, then run away with their clothes. You can always tell when a politician is lying-his lips are moving. And finally, the insurance agent will be your best friend while he is taking your money, providing nothing in return, but if you actually need his help he will hem and haw and say that things are out of his control or point to some clause in fine print that negates the deal you thought you had.
The above account is definitely a tongue-in-cheek description of people that most technical entrepreneurs find distasteful to deal with, but it is very important to have good relationships with these critters as it is much easier to have an established relationship earlier rather than later. There is no need, however, for the startup to have these guys on the payroll. Their services are for sale and they should be used as consultants and not as staff-at least in the startup phase. And, under no circumstances should they have decision-making power, as their interests are usually short sighted and in conflict with the ‘dream mentality.’
Your marketing plan as a high-tech startup is the most important thing in your arsenal. You have to get the word out in an efficient and cost-effective manner. There are many vehicles by which to accomplish this, listed below in order of cost effectiveness. The first and most important is to have a great web page and make sure it is registered with all appropriate search engines. It may cost a little to set up the page (only if you are computer illiterate, as very cheap software is available and any high school kid can make a web page), but once it is set up it is almost free. Monthly maintenance costs are negligible. Web pages should be easy to browse, information rich, and dynamic.
The next best ‘bang for the buck’ comes from referrals by former customers, colleagues, and others in the industry. These referrals are essentially free and are well qualified. As for the print media, take advantage of ‘freebies’-put out press releases and write technical articles. Publishers are always looking for quality material, and if you establish good relations with the many different technical magazines in your field you can gain great credibility at minimal cost.
The final marketing component is print advertising and trade shows. I have found that advertising had limited effect on getting business, but when combined with an effective and complete promotional campaign, including all the elements mentioned, it can be beneficial. Trade shows are costly and the payback is minimal. Consider attending trade shows and meeting with vendors and attendees, but not incurring the expense of actually having a booth. Of course, as you grow your ‘absence makes you conspicuous,’ so advertising and trade shows will have better payback value, but in the beginning be careful to maximize your precious resources.
One big question is how much to charge. The answer is-as much as you can get away with, within the win/win scenario. Remember that you are selling value, so charge as much as you can. A good equation is to first reflect on how much a job will cost and how long it will take. Use your first thoughts, and then double the time and triple the cost and you will probably be near the mark.
Of course, the purpose of marketing is to grow the business. One has to answer the questions of how much to grow and how fast to grow. Why do you want to grow? What is the long-range strategy? Growth for its own sake is not always desirable as growth burns cash, creates stress, involves risk and-most importantly for the small company-changes team dynamics. The graph on the previous page shows market maturity with respect to time. Note that in the beginning stages of a company the customers buy on the basis of technology, referrals, etc. It is assumed that you have product differentiation or you would not be in a new business. Therefore, marketing is much more effective than sales. It has been shown that customers buy from the first person that can solve their problems in a reasonable and cost-effective manner and that they do not put much time into looking about. At this stage entrepreneurs run the companies. As the curve reaches the plateau, there is market consolidation and you have a few big players whose specs differ only slightly, so sales plays a much bigger role as product differentiation is less and customers buy on specs and price. At this stage accountants usually run the company.
Here are a few noteworthy observations. First there exists what I call Time Wasters. These include Tire Kickers, PIAs, Nickel/Dimers, and Nickel/Richers. The Tire Kicker will constantly pick your brain and waste your time with thousands of questions, but never buy anything. The PIA is a customer that may buy, but is such a hassle to deal with that it is not worth it. The Nickel/Dimer is the person who always wants a lower price. If you quote $10, they want it for $8; if you quote $5 they want it for $4. You have not even done the first part and they want to know how much making a million will cost, and then it is too much. The Nickel/Richer is the guy who says, “If you only do this for me for free, it will lead to big business.” If I only had a nickel for every time I heard that I would be a rich man. The ironic part is that these guys are almost always from the large Fortune 500 companies, and not from the small companies who really may not be able to afford it. Avoid these types at all cost as they waste precious time and resources. If a company is not willing to pay up front to develop a product, there is probably no future in the effort for you.
The 80/20 observation can be stated in several ways. Eighty percent of revenue comes from 20 percent of customers. Eighty percent of profits likewise come from 20 percent of customers-and the above two may not be, and probably are not, the same! Likewise, 80 percent of problems come from 20 percent of customers (or employees). As a corollary, never let any one customer (long term) be more than 20 percent of your business, and never let any two or three customers be more than 50 percent of your business. This would be a recipe for disaster.
A final observation is that if you make money, Uncle Sam wants some of it. This can be more than 40 percent of profits when counting Federal, state, and local taxes. Keep this in mind when planning and don’t get caught short at tax time. This is an area where a good weasel or two on your side can be very helpful.
It is easier to get into something than it is to get out of it! Therefore, it is never too early to think about an exit strategy. What is yours? Keep it small and ‘in the family’? Pass it on? Milk it and fold-a lot of people have made a lot more money closing their businesses than running them. Do you sell the company to an individual or another company, a competitor, etc.? Are you willing to stick around? Most small companies are highly dependent on a few individuals and will not be sold unless those key people are willing to stick around for some amount of time; and then you are working for someone else again. Finally, keep in mind that companies are bought, not sold-so your best value at cash out time is for someone to come looking for you, rather than to announce your intentions to sell up front.
In the end, whatever you get out of your efforts will be determined by what you put in. Starting a company is no different than many other endeavors; put nothing in, you get nothing out. Also, make sure that you remember to have fun while starting and building your company. There are two reasons: mental and physical health will last longer and also it is the right thing to do in order to be successful. It is easy to tell when someone enjoys what they do, and this comes across to everyone, including employees and customers. Maintain a childlike wonder with the world without acting childish!
So, do you have to be crazy to start a company? Perhaps it helps. And besides, nobody wants to cross a crazy man!
The author would like to thank Bill Lawson, Lori Beer, Bill Clark, Jeff Sercel, and others in the industry for their valuable help and from whom he has shamelessly stolen ideas.
Ron Schaeffer (rschaeffe[email protected]) is CEO of PhotoMachining Inc., Pelham, NH.