When Is the Right Time to Start a New Company?

I’ve had people ask me when is the best time to start a new company.

-“I better wait until after the election.”

-“This sequestrations business – better to see how this all pans out.”

-“I heard that crowd funding for startups will be legal soon. That’s the perfect time.”

There’s always that “perfect time” around the corner. Past that big uncertain event, or after something that will make things more advantageous for you.

Don’t buy into that.

The right time is now.

Right. Now.

Two reasons.

The first is that you starting a new business can be exciting and terrifying all at the same time. You want to wait either because of some important external event like ones listed above. Or it could be something internal – the product’s not perfect yet, you need to get the intellectual property nailed down, or that key partner/employee needs to be locked into place first. There’s a huge difference between doing the prep work for you new company. It’s all too easy to keep putting off actually starting your company, and to find a rationalization.

There’s never a perfect time. You’ll never find all of the internal and external stars all aligned perfectly. The universe just doesn’t work like that.

The second reason is that if you have a great idea for a new company, a truly great idea – it needs to be a novel solution for an existing market problem. If the market has a need for your idea, it needs it now. In these days of lean startups and fast and furious flowing information, you simply don’t have the luxury to wait – the market will promote other solutions. Your idea has a very short shelf life.

So don’t wait for that new tax law or until you get that first big contract. Start your company now. Today. That doesn’t mean you have to throw all caution to the wind – quit your job, and pour all of your savings into your company immediately, but you need to commit – because once you actually start it, you’ll think about it in whole new way. And with a little luck, it won’t be too late.

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“The Pivot”

A friend of mine has a new software solution to help hospitals better plan nurse shifts. It works really well, and he’s gotten some nice early adoption.

Question: What’s his business?

Well, sure, it’s nurse shift software. But I’ll argue that it’s still too early to really know what his business is, as he hasn’t yet been presented with the strategic choice that will really illustrate what his business is. It’s what I call the “Pivot.”

Now let’s fast forward two years. Assume he’s going gangbusters, and getting lots of profitable clients, but starting to run out of hospitals to approach. To keep growing, he needs to expand past the nurse shift software.

Let’s pose the question again – What is is his business?

The way to answer that is by seeing how he will expand:

a) Create other software for hospitals
b) Adapt the scheduling software for different clients

Will he pivot off customers and create new solutions for the same overall customers, or pivot off the product and find entirely new clients? This is a central strategic choice. If the former, then it’s a hospital solutions company. If the latter, then it’s a scheduling software company.

That’s how you really know what your business is – by deciding not just where you are now – your location, but where you’re headed – your direction.

It’s easy to get so involved in your startup that you don’t sit back and think about where you’re headed, and all-too-often, it can be the allure of a big contract that will pull you in one specific direction, sometimes a direction that turns out in the long term to not be where you wanted to go.

So take some time early on and think about your pivot – because the day could well come much sooner than you think when you need to know where you’re going.

Another advantage to figuring out your pivot early on is that it always helps to know where you’re going so that you can lay the groundwork early on.

Finally, it helps to have follow through. I saw an interview once with a karate black belt who would chop through boards and such. He was asked what he was thinking when his hand came down on the boards. He replied that he was visualizing his hand having already successfully gone through the boards.

So think about this in terms of your current business, or when you launch your next startup.

What is your business?

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Cannibalize Your Own Products, Because Your Competitors MIghty Hungry Too

In a former life I was Vice President at a company in Japan that among other things taught expensive classes. Very profitable classes. We also put out books on the same subjects. Very good books that showed our philosophy, and that had a very successful track record.

I started making plans to showcase the books, and get them into as many hands as possible. What better way to get our name out, and create subsequent interest in our lucrative classes?

My partner was worried. “But we’ll cannibalize our class sales. The books are so good that people won’t feel they need the classes.”

We were worried about a $20 book cannibalizing sales from our $3,000 class. We’re the only company in the world who wanted the class to continue, and if we were worried that the books might give people enough to not want to take the classes, what did that say about our confidence in the classes?

How long is that $3,000 class going to last, do you think? What kind of opportunity was there for our (well-entrenched) competitors? They could teach a similar class for, say, $1,000 and look great by comparison. Or make an even nicer book than ours and charge $45 and beat us on that front too.

Very few businesses come up with products or services that can last forever. You need to be more ruthless than your competitors in examining your products and services. If you come up with something that threatens to tank some of your other products – charge forward full steam, and just be glad that you’re the one who came up with something much better.

If you don’t compete with yourself, you’ll be just about the only one who doesn’t.

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Dispatch From the Field – Davis Smith

Davis Smith is a recent Wharton grad. His latest entrepreneurial venture in Brazil is really cool, so I thought I’d share it here.  It’s a write-up that first appeared in the alumni newsletter that I put out every month. I think you’ll enjoy it.

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After six incredible years as an entrepreneur, I decided it was time to roll the dice with Wharton/Lauder admissions. I was fortunate enough to be admitted, but when starting the program in May, I didn’t know what exactly I should do post-MBA. It became clear to me after a couple months that there was only one path for me … that of a trailblazing entrepreneur. My business partner (and cousin) was simultaneously completing his MBA at HBS and we decided to forget recruiting and committed to each other that we’d start another business while in school. We spent the first year in business school brainstorming business ideas on a shared Google spreadsheet. Eight months and 60 ideas later, we met in Silicon Valley. We had applied to a couple incubator programs at VC’s, but had been rejected, so we created our own incubator of two.

We literally worked out of a Silicon Valley garage and methodically narrowed our ideas list from 60 to four. We spent the rest of the summer analyzing, vetting and testing those four ideas. Ultimately we decided on an idea that was Lauder at its very roots, an idea born out of a discussion with a Brazilian classmate.

My cousin and I came out of the summer with a firm decision to focus on the e-commerce baby vertical in Brazil. In September I made my first trip to Brazil, not speaking Portuguese, but confident in ability to navigate a new country, language and business challenge. I began making regular trips to Brazil on weekends, leaving Thursday afternoons after class and returning Tuesday mornings, just in time to make my first class of the week.

Being a student entrepreneur at Wharton provided some distinct advantages. I negotiated our term sheet/valuation while taking Wessel’s venture capital finance class and brokered a deal on a web property while taking Diamond’s negotiations class. Let me tell you the story of both:

With nothing more than a PowerPoint, we walked out of our first VC pitch with an offer to invest $1 million at a $2 million pre-money valuation. We high-fived each other, but knew that we had something even more valuable on our hands. We still didn’t have a domain name and we felt strongly that a great web property would add rocket fuel to this business. We believed in the value of generic domains, as we had previously built and sold a generic domain e-commerce business. After researching dozens of names, we found that the domain Baby.com.br (Brazilian domains end in .com.br) would likely be for sale, as the site was little more than a couple landing pages. We contacted the owner and discovered that he had purchased the domain in 1999 along with 70 other domains. He had yet to sell any of them … when I heard this, I knew he was either not interested in selling, or he was irrational. Turns out it was the latter.

After a month of almost daily discussions, I convinced him to give us a price range that he’d be willing to sell at. He said “somewhere between $500k and $1M.” Based on our calculations, we estimated the value of the domain between $300k and $500k, so we felt we were within the right price range. He made it clear he had received many offers already and would not accept any offer outside of that range. We came back with an offer to pay $500k, but with the condition that he allow us pay over a five year period. If we ever missed a payment, the domain was his and he could keep all previous payments. I told him we needed a decision by the end of the day or that we would purchase another domain. He came back a couple hours later with an email, “I accept your offer to pay $500k for the domain over five years. Upon completion of the five years, in order to complete the purchase, I will need a $1M payment or 10% of revenues of the business for the next 10 years.”

Clearly, something had gone wrong. In my negotiations class I had learned that it is impossible to reason with people in a negotiation, that it is all about understanding the goals of the other party and keeping control of your emotions. I asked him if we could delay negotiations for the weekend. I needed some time to collect myself. On Monday I proceeded to ask him why his counter offer was so far out of range from his previous suggested pricing. His answer? “Risk”. He saw the five years of payments as a major risk and felt he needed to be compensated for it. I then clarified, “So if we gave you $500k today for the domain, you would sell it.” He answered in the affirmative. I knew what I had to do. I asked him to allow us to pay a $5,000 non-refundable deposit and then give us 90 days to pay the balance payment. With a bit of negotiating, he agreed.

We had 90 days to convince investors that we had the gun powder to create an e-commerce empire in Brazil. Armed with this new domain, we suddenly saw a flood of interest in the business. Our once $2 million dollar pre-money valuation skyrocketed and we ended up raising $4.5 million over two successive rounds with a post-money valuation in the double digit millions.

We launched Baby.com.br less than a month ago, and have already seen some great success. We’ve had nearly a million pageviews and hundreds of thousands of unique visitors to the site. We are days away from announcing a major celebrity endorsement that should catapult us into the lead as the largest online baby retailer in Brazil.

Many people questioned me why an entrepreneur would possibly need an MBA. Because of the influence of my peers, professors and alum, I am here in Brazil, building what I hope will be a billion dollar business.

~~~Davis Smith

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Get Money For Your Company with Revenue Share

Raising money for your startup can be brutally difficult.

Do you give up part of your company in the form of equity? You may find that the valuation of your company that an investor will agree to is far lower than you expected, which means that you’ll be giving away a large percentage of your company.

Or do you get a loan and take on debt which be an albatross around your neck whether or not you’re making any money?

There is an alternative, which may or may not work for you – Revenue Share.

With a revenue share deal, you agree on a timeframe, a cap,  and a percentage of your revenue that you’ll use to repay the funder. The advantages are that you don’t give away any shares in your company, and you don’t have to pay anything if you don’t make any revenue in a given month.  That’s not to say that you could always easily devote part of your revenues to paying back the funder, but for a growing number of companies, it’s a much easier alternative.

If you can get capital for your company without negotiating the valuation of your company or having an inflexible payment schedule, it might be the easiest money you can get – next to, of course, selling your product or service.

Here are three funders that provide revenue share deals:

Lighter Capital
www.lightercapital.com

Next Step Capital Partners
www.nextstepcapitalpartners.com
Angels IP
www.angelsip.com

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SBA,SBDC, and Score: The Three S’s All Entrepreneurs Should Know

Starting a business is no easy business.

Fortunately, there are some free resources that every entrepreneur should know about.

Most people have heard about the SBA – Small Business Administration, but in my experience, most entrepreneurs don’t know that the SBA, and its sister organization, the SBDC – Small Business Development Center, provide numerous free services to anyone who wants them.

Here are things you can get for free from SBA:

-Numerous articles and templates about many aspects of new businesses – company structure, licenses / permits, finance, legal, marketing, etc.
-Help getting federal and private loans and grants (especially if you’re minority or woman owned business)
-Tons of information about being a federal contractor
-Export assistance
-Counseling and mentoring

To learn more, or find an SBA office near you: www.sba.gov

SBDC

The SBDC is network of parternships between the government and universities. There are offices in every state, and counselors there provide a wide range of counseling and resources. They can share all manner of best practices with you.

http://www.sba.gov/content/small-business-development-centers-sbdcs

SCORE

SCORE provides mentoring, events, and templates & tools for free to entrepreneurs. Founded in 1964, and affiliated with the SBA, there is much value in their help.

www.score.org

With SBA, SBDA, and SCORE, starting your business doesn’t have to be as uncertain and uncharted as you think.

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Start From Where You Want to Get To, Not From Where You Are

Start From Where You Want to Get To, Not From Where You Are

Most entrepreneurs know where they want to get to in terms of what their product or service should be. Typically the vision is so clear and distinct in your mind that it’s acutely frustrating to not be there already, just because you need a little more time and money.

Sometimes, however, we entrepreneurs can limit ourselves by focusing on where we are, not where we’re going.

Let me give you an example. A few years back I entered a business plan competition in which you have to describe your business idea – on a napkin. Yes, a napkin. It was put on by Entrepreneur Magazine and Southwest Airlines because the founder of Southwest, Herb Kelleher, drew the first flight plans for Southwest as a triangle between Dallas, San Antonio, and Houston.

I had an idea that I thought we be great for this competition. And I had tons of stuff I’d written, images, forecasts, you name it.

I sat down and started editing it down, down, down.

The problem was that it was basically impossible to edit it down that much.

So finally I did the opposite. I took a piece of paper the size of a napkin, and started working on some key bullet points and drawings that I thought would tell the story. Before long I had my basic layout, and then it was just a matter of polishing. So instead of cutting away what shouldn’t be there like that line about sculpting, start with only what has to be there, and see if you can add just a wee bit more

I won the contest, got written up in Entrepreneur Magazine and got free tickets on Southwest.

Focus on where you need to be, and go backwards from there.

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Ten Ways Profitable Companies Go Out of Business Everyday

When planning a new company, many entrepreneurs think of these three milestones, if applicable:

1. Get funding
2. Get a patent
3. Become profitable

Make no mistake, they’re all good milestones to reach. But in and of themselves, they’re not enough.

“Whoa there, Numbers Boy, the whole point of starting a business is to become profitable. That’s when you know you’ve arrived. Or did you miss the day they taught business in business school?”

Make no mistake, profitability is an important milestone. (And for the purposes of this article, I’m referring to Net Income profitability, or breakeven) It’s a necessary but not sufficient condition, however. Companies that are profitable go bankrupt all that time. New entrepreneurs are often rudely introduced to that old saw “Cash is king.” Put another way, profit is theory, cash is fact. I’m sure you’ve heard someone say that they made money / were profitable “on paper.” That’s where profit lives, on paper – and it’s not the kind of paper they print money on.

Profit is really just a theoretical accounting term. Other than people being impressed that you finally made it that far, it won’t get you far in the real world.

Here, are ten ways you can still go under after reaching breakeven.

1. Debt

Loan payments aren’t part of your operating expenses, only the interest on them is. So if you’re turning a profit of $5,000 a month, you have little money in the bank, and you have a $35,000 debt payment come due, that’s all she wrote.

2. Receivables

If you’re using the accrual method of accounting, you book revenue when you make a sale. But what if your customer(s) suddenly can’t pay you? Now the $5,000 profit is even more theoretical, and you can’t pay your bills.

3. Key Personnel Challenge

Business aren’t sales, they’re the people who make them. Few small businesses can withstand the loss of a truly essential person.

4. Supplier Issue

Suddenly your factory in China tells you that the large order they’re manufacturing for you has had major cost increases – past the amount even where you can sell the units at. This happens.  If only you could make it up on volume.

5. Legal Problems

Maybe your patent gets rejected, or your trademark gets opposed, or someone sues you for breach of contract. You might not be able to withstand the distraction from your business, much less a full-blown lawsuit.

6. A Big Deal Falls Through

Most of us have spent months working on a killer deal, putting most or all of our eggs in the basket, only to have it go south at the worst possible time. Life happens. Many businesses can’t hold on after their hopes are dashed, and the sales pipeline has emptied out while everyone concentrated on the big “done deal.”

7. A Big Deal Comes Together

Let’s say you do get that huge deal. But sometimes a huge deal between a small company and a monster company wind up being next to impossible for the little company to successfully implement.  Customer service, compatibility, shipping deadlines, returns – you can wind up making some money on the deal, but spending all your time so that you can’t make money anywhere else.

8. Profitable, but not Profitable Enough

You’re in the black, not perhaps you can’t “scale” up enough to really make the business worthwhile. Profitability, as many have seen, can be a low benchmark. You’re not in business for yourself to eke by, after all. Hey, you can always make more money with someone else dealing with most of the stress. It’s what they call a “job.”

9. Obsoleted

Sure, you probably could have made money selling buggies and carriages in 1907, but for how long? The world is moving faster and faster, and so are customers’ tastes. If you’re an under-funded tech company in 2010, you have to be fast.

10. General Cash Flow

Although many start-ups go under because of some dramatic overnight event, more often, it’s a mundane combination of some of the above factors. It doesn’t take much to strap a small business’ resources, and if you combine debt payments with uncollectable receivables and a deal that falls apart, it could be curtains for you, with them all happening at the same time.

So while being profitable definitely beats the alternative, think more about cash flow.  Do cash flow forecasts all the time. Get on a first name basis with your cash flow if you can.

Good luck out there.

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How to Get Contracts Agreed to Faster

There are few things worse in business than waiting, waiting, waiting on a contract that should be a formality, but that drags on for weeks, and sometimes months or even years. Good relationships can sour, conditions can change, your key contact can leave the other company, or momentum can simply be lost. For want of a signature on a dadburn contract, businesses have gone under.

I’ve had more situations than I care to remember where a potential partner told me on the phone “I’ll send you a contract, it’s all just standard stuff” and then realize with chagrin that there were important terms in the contract that we had never discussed. Nothing like feeling a bit of bait and switch, and staring at it in full-blown legalese. Best way I know to tank a deal. Sometimes people feel awkward bringing up the terms before sending out a contract, sometimes they may actually think they can sneak them through.

One really effective way to speed up the contractual time table is to first agree on a simple bullet point list of basic terms. Include price / fees, term, territory, conditions, payment terms – anything that could cause disagreement. Get everything out in the open on the concept level. That way the contract really is about formalities, what happens if something goes wrong, etc.

Have the basic terms agreed by the business people in a bullet point term sheet. You’ll not only save on legal costs, you’ll likely get your deal signed sooner, and you’ll keep your important relationships in good shape.

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A Superfabtastic Free File Management Tool

Every now and then, along comes a new thingamajig. Actually, “thingamajig” is such a great word, but it’s just so dang encarcassed with old school analogness. We need a new digital equivalent for it – how about “pixemabit.” One part pixel, a dash of data, and a soupcon of “e.”

So my new favorite pixemabit is Dropbox.

Dropbox is a freemium service that allows for online file storage and easy peasy lemon squeezy synchronization. You get, as I write this, 2 GB of free storage. It’s seamless, your “My Dropbox” folder appears in your “My Documents” folder for you PC users. (Mac folk, I’m sure it’s similar.) When you work on a file, save it to a folder in your Dropbox, and never worry about it again. Then you can access the file from any computer whether you’ve downloaded the simple Dropbox program or not.

For me, developing EZ Numbers, it’s been a lifesaver. I no longer e-mail myself the latest version, which was a pain the best of times, and then when I would forget which was really the most recent version, it was, well, not the best of times. And I no longer have to worry about my hard drive crashing and losing crucial data.

When you’re working on your EZ Numbers file, this could be really helpful in making sure that your file is always available to anyone who needs it.

I have no stock in Dropbox, wish I did.

These guys are the first to really tame the online file storage beast.

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