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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Entrepreneurs: Release Early, Release Often

In my experience, entrepreneurs do startups according to their overall personality.

If someone is a perfectionist, then their product or service will almost certainly be in the same vein. This doesn’t mean that the offering itself it will be of high quality, but that the processes and means of delivery will be well-thought out. Think McDonalds. It’s hardly gourmet dining, but you know what you’re getting, and within 10 seconds, usually when you’re getting it.

“Release early, release often” is a software development philosophy coined by Eric Raymond in his seminal 1997 essay “The Cathedral and the Bazaar.”  Definitely worth reading, and you can find it here: (www.catb.org/~esr/writings/cathedral-bazaar/cathedral-bazaar/).

The general thinking, which can be applied to startups of any kind, is to not wait until you have things perfect – get something out, test the market, learn, iterate – then rinse and repeat until you stop making the product or supplying the service.

You’ll never really be ready for primetime. Don’t get venture money while perfecting whatever you’re working on.

Just get it into the hands of customers, now.

Whatever you’re making or providing will need to be changed, and the more time and money you put into it before you learn just how off the mark you are, the more expensive and closer to fatal you get.

By far the best money to come into your company is revenue (as opposed to investment, debt, or grants) and the best revenue is the earliest, as it brings along with it invaluable early stage information.

When I started EZ Numbers I was scared silly about releasing it to the world at large. (“Oh, I’d like to make a new Sales module. And if I could put NPV in Investment, that would be great.” Etc. etc.) Finally I just released the damn thing, and quickly discovered all of the following:

-In many aspects, it was less than what I needed
-In some aspects, it was more than what I needed
-In almost every aspect, it was different than what I needed
-In no case did I correctly predict which was which

When I got to the point, several years ago, that it was a tool I’d pay for, that’s when I released it. I should have made it available for free months earlier – that kind of beta input is priceless. Another of Eric’s phrases is “All bugs are shallow with enough eyes.” Let the market pay you, but even before that, if possible, let the market teach you.

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The Three Second Rule for Entrepreneurs

When I worked in the home office of a large insurance company out of college, they would tell the salesman to always obey “The Three Foot Rule.” Anyone within three feet of wherever a salesperson found himself was a prospect. Pure and simple. A stranger (there are no strangers for long!), your friend, heck, your family. Everyone needs insurance, almost everyone needs better (meaning more) insurance, and most people will buy from you if you just sell them the right way.

As an entrepreneur (unless you’re an insurance salesman) you’re not selling insurance to people 24/7. But you are selling yourself, just the same. Just like insurance salesmen were taught that they had no downtime (there’s no reason, after all, that other people at the bowling alley won’t appreciate hearing about a compelling universal whole life policy) you as an entrepreneur need to always keep the lights on. Not of your physical business, as many entrepreneurs don’t have an office or store per se. But your mindset. You never know who you’ll meet on the street, and how they can be of help to your new business – either as a customer, vendor, partner, advisor, investor, etc. Or they personally aren’t any of these things – but the people who they know could be.

It doesn’t matter if you’re on a cruise ship to Alaska or in the car wash waiting area. People will ask what you do, and if you say that you’re “Off duty” or don’t have a quick and precise answer, you never know what opportunity you may have missed. You need to go from relaxing and drinking a daiquiri to a passionate pitch about your business in about three seconds. When you master this, you know you’re a real entrepreneur. Shouldn’t be hard, most entrepreneurs have a much bigger problem turning the lights off than they do on.

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