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.

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.

“Trust is the New Competitive Advantage”

I just read this article at HarvardBusiness.org and loved it. This is my favorite quote:

Small is the new big. Sustainable is the new growth. Trust is the new competitive advantage.

Small businesses do have a great competitive advantage over big businesses right now because it is easier for a small company to know their customers, be responsive, and provide great customer service.

Failure is not an option. It’s a requirement.

I just found this video on WorkHappy.net and I really liked it:

I like the way everyone in the video talks about failure. I think that every crappy company must fail in order to succeed. The fact is that if you are in a startup, there is about a 99.999% chance that what you are doing now isn’t what you will be doing in a year. In fact, for your sake, I hope it isn’t. That’s not to say that I think your entire business will fail, but some aspect of it will fail and you will, you should emerge from that knowing a lot more about how to become a good company than you knew before you failed.

Fail fast but not often. Understand that you will have to reinvent yourselves a couple of times before you get it right. If you have this mindset, you’ll be a lot more careful about spending your money. Trust me that you are going to fail and make that happen as fast as possible and with as little cash out the door as possible so that you can get on to making your crappy company a good one.