The Hedgehog Principle

In “Good to Great”, Jim Collins (citing Isaiah Berlin) compares a fox to a hedgehog. The fox knows many things, the hedgehog knows one big thing. The fox spends its day figuring out how to attack the hedgehog in various cunning ways, but the hedgehog remains safe because it knows that it is better than anyone else at one thing: curling up into a ball of spikes. The point of this is that companies should know what their “hedgehog” is — they should know what they are the very best at and stick to it. What is your company the very best at?

This question is one of the harder questions for a small business owner to answer because it’s quite likely that your small business isn’t the best at anything (yet). Answering the question is also complicated by the fact that even if you are the best at something, it’s hard to determine how narrowly to define what you are the best at.

I remember having this discussion at Sharp Analytics — what were we the very best at? Was it marketing dashboards or was it more narrow than that? Maybe we were the best at marketing dashboards for advertising agencies. Or maybe it was even more narrow - perhaps we were the very best at marketing data source integration for international advertising agencies. Or was it more broad? We knew that we weren’t the best at the larger category of business intelligence, but we had some thoughts about business intelligence that we felt could change the industry. If we defined ourselves too narrowly, would we miss the big opportunity? Answering the question would define our strategy. We would either be helped by the laser focus or we would choose the wrong “hedgehog” and get stuck doing something we weren’t the best at — a recipe for disaster.

I am of the opinion that if you are in the Crappy to Good stage of your business, you might not have a hedgehog. A startup should be a little bit more like the fox. Let’s look at the fox for a minute. The fox isn’t the best at anything yet (at least in our example) but he is cunning and willing to learn from his mistakes. I’d like to believe that at some point, the fox gets it right. He figures out that if he can get to the hedgehog before the hedgehog rolls into a ball, the fox can flip him over and win. Maybe the fox needs to take a lesson from the badger who knows how to pry open the rolled up hedgehog and eat him.

The worst thing a startup can do is define what it does so narrowly that it misses the big opportunity. It’s critical to have a strategy and a plan backed by a well thought out financial model but you have to recognize when you were wrong and learn from mistakes. In a startup, I value agility over focus until you find out what you really are the very best at. In the early stages there is clearly a balance and you have to be careful not to be so unfocused that you are out of control but again, the fox is probably a good example. The fox is going to turn over that hedgehog but he doesn’t know exactly how he is going to do it. So every day, he puts a plan of attack together and tries a different tactic. He’s still focused on the hedgehog and committed to eating it, but he’s agile and willing to change strategies to meet his long-term objective.

Business Process and Continuous Improvement

At Franchise Foundry, we spend a lot of time talking about process and thinking about how to improve processes. We do this for our partner businesses and we do it for our business too. For example, yesterday I was talking to the marketing team about how we could streamline the application process for potential franchisee candidates. The current process is good, but it isn’t good enough.

I have also been preparing several presentations that outline some of the sales and marketing processes at Franchise Foundry. In doing that, I reviewed presentations on our sales and marketing process from a year ago and I realized that we’ve come a long way. So the question is, why couldn’t we just do it right the first time?

I think that part of the answer to that question is that it may never be right. Or maybe it would be more accurate to say that we will never be done analyzing and trying to improve the processes in our business. I don’t have a blackbelt in kaizen, but I do believe in continuous improvement. When it comes to process, I think there are two mistakes that will kill you:

1. Refusing to start until you get the process right.
Just get started. You learn a lot by doing. If you measure your results at each step, your weaknesses become very apparent. It’s a lot harder to see what’s happening if you’ve only mapped out your process on a whiteboard. Don’t jump in without thinking, but don’t overanalyze things because no matter what, you are wrong and you won’t know how you are wrong until you get a little dirty.

2. Thinking that you’ve got it nailed.
Just because you are better than the competition doesn’t mean that you are good enough. One of the mistakes people make that leads them to believe they are doing everything they can is they either don’t measure the results or they only measure the inputs and the outputs. If we did that at Foundry, we would be very satisfied with our Lead to Close ratio since it is significantly higher than national averages. However, when we break the process into steps and break the inputs into segments, we are able to identify groups that we are less effective with and steps in the process that could be improved. If you think you’ve got it nailed, you probably aren’t measuring effectively.

There probably comes a time when you are going to see diminishing returns from your continuous improvement efforts. But as long as you are a crappy company on the path to being a good (or hopefully great) company, you probably don’t need to worry about wasted efforts in process improvement.

Raising Money for Your Business

A couple weeks ago a friend asked me to answer the question, “Where is the best place to raise $30k, aside from FFFs (Friends, Family, and Fools)? The person asking the question included this with his question:

I have found it difficult to find lending on such a small amount for my business. VC’s and Angels usually aren’t too keen and financial institutions aren’t lending. I haven’t tried the SBA. If anyone is interested I will give you double your investment as a return.

This was my response:

1. SBA
2. Personal Savings
3. Home Equity
4. Credit Cards
5. 401k Loan

Feedback

This is a guest post by Clayton Blackham, partner at Snapp Conner PR. I first met Clay while I was at Sharp Analytics. He crafted a PR strategy that helped us gain great momentum in the market - momentum that I believe helped us sell our business to iCrossing.

Your company might be small or fledgling. There’s a good chance that you wear a lot of hats, that time is of the essence and you often move at a break-neck speed and expect your employees to do the same. I work in an public relations. Probably not unlike the industry you work in, it is not uncommon for me to be required to make decisions at a moment’s notice and get results. And of course, I am judged by those results.

Over the course of the last few months we’ve felt an increase in the pressure to “move the needle” for our clients. They are paying the same as or less than they were paying before the downturn, but they are demanding twice as much work. We’re OK with that because we all need to get through this recession.

With that preface out of the way I can focus on the real reason for the post: feedback.

Despite having to run a million miles per hour, what I’ve seen with friends’ companies, clients and even our own company is that there seems to be ample time for meetings that really don’t change the bottom line. But when it comes to giving feedback and teaching people how to do the job right, no one wants to touch it. Typically, the person asking us to do the work looks at it, makes a couple of changes and tells us it looks good. They approve the work and move on.

The problem with this approach is that nothing is learned and the same mistakes or the same quality of work will be produced over and over again. By not providing feedback, you are doing your employees or vendors a real disservice. It’s true that talking to people about what’s wrong with their work isn’t fun and it isn’t always well received, but it’s critical.

I can think of dozens of cases where I was given feedback on how to do something right after not doing it the way they expected. I hate to think of the hours lost in productivity – not to mention the frustration on the boss’ part – because two people had to do the job one person could do was significant until feedback was given. It usually only takes one time telling someone how to do it and that’s the end of the story.

Next time someone gives you something instead of saying, “It looks good, but made a change or two.” explain the change and why you made it. It’ll make your life easier next time around and strengthen your company.

A Change in Plans

I’ve been thinking about business plans lately and how they are both extremely important and irrelevant at the same time. It reminds me of something my high school algebra teacher used to say to us whenever someone would ask, “Are we ever going to use this in real life?” He would always respond that algebra was like Phys Ed for the brain. He didn’t care if we ever used it and he didn’t think we should care either. We were exercising our brains, changing the way we approach problems, and becoming smarter in the process.

To me, a business plan is like Phys Ed for your business. It forces you to answer really important questions like “Who is my competition?”, “What makes this business unique”, and the all-important “How am I going to make money at this?” If you have never started a business before, you naively believe that these questions are answerable. And I guess, that at a single point in time, they are answerable. The problem is that once you’ve put it on paper, it’s wrong. A new competitor has sprung up or you’ve made a change to your management team, or you realized that your pricing strategy will never work. But the process helps you understand your business better and makes your strategy sounder. By writing a business plan, you start to poke holes in assumptions you’ve held and you inevitably strengthen part of your business that was weak.

This coming week, I will be at Scout Camp with a group of 12 and 13 year old boys. My son is one of them and he and his friends decided that they could make some money at camp by purchasing pocket knives for $1 at Walmart and then selling them to boys at camp for $5. Had they gone through the process of creating a business plan (nothing formal, but a simple process) they might have asked themselves a couple of key questions like:

1. Is there a commissary at the camp?
2. If there is a commisary, do they sell knives?
3. If so, how much do they charge?
4. How much would I pay for a knife at camp?

I don’t know the answers to those questions, but I am going to guess that the answer is that yes there is a commissary at the camp and they probably sell pocket knives for about $5 which is probably about what a 12 year old scout would pay. If they had gone through this exercise, they could still proceed with their plan with a slight change — maybe they need to lower the price to $3 per knife when they are at the camp to beat out the commissary. Unfortunately, they didn’t do the planning exercise and when they got to Walmart and saw that knives were $5 a piece, they just figured they could sell their knives at camp for $10. They made a classic mistake since they hadn’t done any planning. They just assumed that the market would bear whatever price they wanted to charge. I’m predicting a loss for their fledgling knife business, but I hope they prove me wrong.

The point is, a change in plans is going to happen. If you have gone through the exercise of planning, you will be much better at adapting to the changing circumstances than if you are just flying by the seat of your pants. Your business plan will probably gather dust on a bookshelf somewhere, but your business will be better because you exercised your brain.

Social Entrepreneurship

As I have said before, I’m not creative enough to come up with business ideas. I admire people who can come up with one good idea after another. I also admire people who can come up with business ideas that have a “double bottom line” — ideas that generate a profit and are socially conscious. I had the opportunity to participate in a focus group for The Community Foundation of Utah this week and it was a lot of fun. One of the things I learned at the focus group is that someone I admire, Matt Minkevitch, has been nominated for the Ernst and Young Social Entrepreneur of the Year award. Way to go Matt.

As much as I enjoyed the focus group, I also left a little frustrated. I was frustrated by the attitude of one entrepreneur specifically who characterized social entrepreneurs as “cute”. I found that attitude so arrogant that I couldn’t help but comment. At the same time, I think I know what he was trying to say. I believe he was trying to say that he admires social entrepreneurs — even those who aren’t organized or who don’t know how to get from where they are to where they want to be. I think (hope) he was saying that he admires even the less effective social entrepreneurs because they have good intentions.

The reason I found his characterization of social entrepreneurs so condescending is that as I have become more familiar with social entrepreneurship, I would say that it is anything but cute. I had the opportunity to judge the Romney Institute’s Social Venture Capital Business Plan Competition this year and nothing I saw there was “cute” — it was real business with a social consciousness that was admirable. And if you look at what Matt Minkevitch has done at The Road Home to promote self sufficiency and to find homes for the homeless I suspect the very last word that would come to mind would be “cute”. I suspect words like “humbling” and “inspiring” would be more likely to cross your lips than the word “cute”.

And then I realized that maybe this young entrepreneur had a point. I’m sure that for every Matt Minkevitch out there, there is a “cute” social entrepreneur who has an idea without the ability to execute. Maybe there are ten “cute” social entrepreneurs for every Matt. But being being cute isn’t limited to social entrepreneurs. I would bet that there are probably ten “cute” non-social entrepreneurs for every real one. And there are probably another 10 Yo-yo entrepreneurs for every real one. And there are probably another 25 entrepreneurs that my wife would hate.

It’s like Jim Collins Commented on My Blog

Well. Not really. In fact, not at all. But I did find this Inc. article where Jim Collins is being interviewed about entrepreneurship and he talks about Steve Jobs as an entrepreneur. Here’s what he says:

I think we saw the best of entrepreneurship in the ’80s. I invited Steve Jobs to my entrepreneurship class at Stanford in 1988 or ‘89. He was doing NeXT at the time. He said, “We aren’t creating computers. We are creating bicycles for the mind.” That was his phrase. He said the most efficient locomotive vehicle is a bicycle, and you could create a bicycle for the mind. It just happened to be a personal computer. Now, that way of looking at a business is very different from thinking, We’re creating a company so everybody can get rich and retire. If that’s how Jobs had seen it, he would have quit a long time ago. Same with Yvon Chouinard at Patagonia. He wanted to make incredible products, but those products would be part of something bigger — creating a role model for people who wanted to build a sustainable organization. It was a noble vision of entrepreneurship, and a lot of these entrepreneurs shared it.

I’m not the kind of guy that could say, “I’m creating bicycles for the mind” with a straight face but I love the idea that these entrepreneurs were focused on something bigger than themselves. In the process of achieving their vision, both of Collins’ examples were rewarded handsomely, but I love that the real reward for them was more about building something they cared about.

The Yo-Yo Entrepreneur

Most of us are familiar with the concept of a yo-yo dieter. This is the person that you hate to eat dinner with because he tells you how many calories are in the entree you just ordered. He probably orders a side salad (dressing on the side, hold the croutons) but can’t leave without dessert. Or maybe the person you’re thinking of is the type of person who goes on the squash soup diet for 12 weeks and loses 25 lbs, but gains it all back just as fast. Either way, these people just don’t get it. Somehow they have convinced themselves that they can have a healthy body without healthy habits. Despite the fact that any reputable source will tell you that the best way to get a healthy body is to exercise and eat well, these people think that somehow they can avoid the hard work and the long-term commitment and end up with a fabulous body in six weeks.

I see the same type of behavior in some of the people that call themselves entrepreneurs. Instead of focusing on building long-term value through hard work and discipline, they want to get rich quick. There’s nothing wrong with getting rich quick, just like there is nothing wrong with losing weight quickly. But there is a problem when you want the rewards of entrepreneurship but you are unwilling to make the sacrifices.

Every entrepreneur is different, but here are a few of the things that I think will make you a healthy entrepreneur instead of a yo-yo entrepreneur:

1. Take a calculated risk. Yo-yo entrepreneurs take risks. Healthy entrepreneurs take calculated risks. When it comes to taking that first step into entrepreneurship, you see all kinds. One of the most difficult decisions I’ve had to make was the decision to step into the unknown and quit my day job to focus on my first real business. But I didn’t do it without dipping my toe in the water first. I took a calculated risk after I had tested the waters enough to know that I had a reasonable chance of success. There were, of course, no guarantees, but I had some idea what I was getting myself into and I knew how I’d get out if it blew up in my face.
2. Make your sacrifices early. Yo-yo entrepreneurs reward themselves too early. Healthy entrepreneurs sacrifice early to reap a greater reward later on. If you are worried about what your salary is going to be in the first year, you aren’t ready to start your own business. If you are more inclined to worry about how you are going to make your first sale, how you are going to fund ongoing operations, and how you are going to knock the socks off the competition, then you have a much better chance of building a strong business.
3. Allow your company to be bigger than you are. Yo-yo entrepreneurs are likely to wear the badge of entrepreneur or startup founder and CEO like a badge of honor. If you are more worried about your title or your personal PR, then you are less likely to make your business successful. If, on the other hand, you are willing to let your business be bigger than you, if you are willing to do whatever it takes to make your business successful, the personal recognition you receive at that point will be a lot more meaningful. The opportunity to let your business be bigger than yourself will present itself early and often. At some point, you will have the chance to make an interview with a newspaper about you or about your business. At some point you will have the opportunity to take credit for the work that people in your organization did or give credit. It can be tempting to take credit and focus attention on yourself but remember that it will feel hollow if you take it when you don’t deserve it and it will cost you dearly if it comes at your company’s expense.
4. Hire the best people for the job. This is related to #3 because it is very tempting to make yourself look like a bigshot by hiring family and friends. DON’T DO IT. That’s worth repeating a couple more times. PLEASE DO NOT DO THIS. Hire the best person for the job. If that person is a family member or a friend, he or she better be the best person for the job by a mile. Be willing to hire people who are smarter than you are, more connected than you are, funnier than you are, better looking. Don’t let your ego get in the way of hiring people and don’t let your ego trick you into hiring the wrong people. It’s just not worth it.

In the end, you need to decide what you care about. Are you interested in building value in a business or in making a name for yourself? These aren’t mutually exclusive. In fact, I would argue that they go together like losing weight and being healthy. But the best way for you to make a name for yourself is to focus on building a strong business.

Questions Guy Kawasaki Wants to Ask Entrepreneurs

I saw that Guy Kawasaki tweeted about an interview that he did about ghost tweeting. The fact that Guy ghost tweets really bothers some of my friends and it seems to bother Shaq too, who is quoted in this NYT article as saying:

As for the temptation to rely on a team to supply his words, he said: “It’s 140 characters. It’s so few characters. If you need a ghostwriter for that, I feel sorry for you.”

But I don’t care. I really don’t. But I read the article and I came across this interesting section where the interviewer asks Guy what he would ask entrepreneurs. It’s towards the end of the interview, so I will quote it here:

IamPaddy: You have conducted countless interviews and surely get asked all the time ‘What advice would you give to entrepreneurs?’. Instead I want to know if there’s anything you would like to ask the world of entrepreneurs? Anything you are struggling with or can’t wrap your head around?

Guy Kawasaki: This is an excellent question. Here’s a list of things I’d like to ask entrepreneurs:

1. Why do you think venture capitalists will sign non-disclosure agreements?
2. Why do you try to use sixty PowerPoint slides in a one-hour meeting?
3. Do you really believe that venture capitalists can add value to your company?
4. Why do every one of you think your business is “revolutionary”?
5. Why do you believe that the wireframes and prototype that you cobbled together is better architected than Amazon, Oracle, Microsoft, and Apple (pick any big company)?
6. Do you really believe beta sites when they tell you that they “love” your product?
7. How can you create a forecast that shows you will generate more sales in the first five years of operation than any other company in the history of man?
8. Why do you believe you and your co-founders are “proven entrepreneurs” when you’ve never been successful as an entrepreneur?

These questions made me laugh in an obnoxious way. I was thinking to myself, “Oh man. People who do that are so dumb.” And then I realized that I have probably made every mistake on that list (to be honest, I don’t understand question #6 — if you do, please explain it to me). So I finished laughing at how stupid entrepreneurs are and I came up with a list of questions that I would like to ask venture capitalists / investors. Here’s my list:

1. Why don’t you use your website to educate entrepreneurs about how to pitch to your firm? I know that some of you do and I think it’s great, but too many of you have some of the lamest websites I have ever seen and you just assume that somehow an entrepreneur who is busy trying to build a business will somehow magically figure out how you like to be pitched. Why not include a frequently asked questions section that explains why you don’t (can’t) sign an NDA?
2. Why don’t you figure out ways to add value to your portfolio companies that extend beyond giving them money? Again, some of you do, but too many of you don’t. Rather than asking the entrepreneur how she thinks you can add value, why not tell her? Or at least enter into a dialogue about how the partnership would work and the value that could be added.
3. Why do you think that just because a company is in your portfolio, it will be a great strategic partner for the companies that are pitching you? I’m sure there are scenarios where one of your portfolio companies will be the best strategic partner for another portfolio company, but I’m guessing that those would be some long odds.
4. Why do you think every one of your portfolio companies is revolutionary? Maybe the reason entrepreneurs think their businesses are revolutionary is that they have been told that your portfolio is revolutionary when it seems pretty ordinary. If you set the bar low, we’ll step over it.
5. Why do you insist on asking “What stops Google from doing this?” Can’t we just say, “Nothing. Absolutely nothing.” Because that’s the truth, isn’t it?
6. Why do you require that we create forecasts that show that we will generate more sales in the first five years of operation than any other company in the history of man in order to get a term sheet? Guess how I got laughed out of my first VC pitch? I actually showed 4 years of achievable sales. Sometimes it feels like VCs don’t want to invest in achievable. Achievable is boring.
7. As for the last question, good point. If you aren’t a proven entrepreneur, don’t say you are.

I’m not anti-venture capital by any means. There are investors in my community who are devoted to educating entrepreneurs and I respect that. Despite my criticism of Guy’s questions, he has actually done a lot to help entrepreneurs hone their pitches. I know that I have used many of the rules in Guy’s 10/20/30 Rule of PowerPoint and you should too. A lot of VCs and angels do a lot to prepare entrepreneurs. After all, these guys keep us entrepreneurs in business.

At the same time, I think it is relatively easy for an investor to get stuck in an ivory tower and assume that entrepreneurs are dumb because they bring an NDA with them. Maybe what it really means is that your VC corporate website sucks.

Ideas vs. Execution

I recently had the chance to talk to a university class about entrepreneurship. I think talking about business might be the thing I like most, so having the microphone for an hour and half was a lot of fun. During my 90 minute rant about entrepreneurship, I somehow started talking about two types of entrepreneurs: idea people and execution people.

In my opinion, you are one or the other and it is important to know which one you are. I started thinking about the difference between the idea entrepreneur and the execution entrepreneur after reading this post on 43 Folders. Merlin Mann was inspired by this post at the O’Reilly ONLamp blog.

So I started talking about how you are either an idea person or an execution person and there is no question in my mind that I am NOT an idea person. I’ve had a lot of ideas, but they all sucked. I’m not bad though at spotting a good idea, and I think I’m halfway decent at figuring out how to make a good idea work. But my weakness as an entrepreneur is that I’m totally dependent on getting someone else to come up with the idea. As I was going on and on about the difference between the two types of entrepreneurs, the professor interrupted me and asked, “So how much is an idea worth?” and it caught me off guard. I had to think about it for a minute because as an execution entrepreneur, I clearly have a bias towards execution. In the end, I suggested that an idea is worth about 10% of the business and the professor answered back, “That’s generous.”

The O’Reilly blog post that I linked to above uses this formula:

AWFUL IDEA = -1
WEAK IDEA = 1
SO-SO IDEA = 5
GOOD IDEA = 10
GREAT IDEA = 15
BRILLIANT IDEA = 20

NO EXECUTION = $1
WEAK EXECUTION = $1000
SO-SO- EXECUTION = $10,000
GOOD EXECUTION = $100,000
GREAT EXECUTION = $1,000,000
BRILLIANT EXECUTION = $10,000,000

To make a business, you need to multiply the two.
The most brilliant idea, with no execution, is worth $20.
The most brilliant idea takes great execution to be worth $20,000,000.

And Mann (from the 43 Folders post above) writes:

An idea is no more useful than a coupon for a bag of sugar; show me the finished cake, then we’ll talk.
The bottom line is that if you don’t have an amazing, passionate idea and the means to make it superb, you’re probably just a douchebag with an expensive phone. And a stack of NDAs.

I wasn’t nearly so harsh when I was in front of that class, but I do think that in the end I was generous to give 10% to the idea because an idea has no real value unless it is paired with execution. But before all of you idea people get on my case, remember that there’s nothing for guys like me to execute without your ideas.

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