Copyright 2001 Simply Media, Inc. Lincoln, MA 01773-0481 www.simplymedia.com Deaver Brown, Author Brown co-founded the Umbroller stroller company, American Power (APCC), and Simply Media. He published The Entrepreneurs Guide with Macmillan in hardcover and Ballantine in mass market paperback. He published a business series of CD-ROM’s with Macmillan and another series with Simply Media. Brown graduated from Harvard College and Harvard Business School. He has published numerous articles in trade journals and business magazines. Business Startup Checklist Keep copies of your paperwork in a home safe and a backup set offsite. Copy of Your Incorporation Papers. Copy of Your SS-4 (Fed ID#). Copy of your Annual Payroll Summary. Copies of Your Bank Statements. Backup diskette of your financial program. 2 Business Startup Survival Kit www.simplymedia.com www.simplymedia.com 3 Legal Survival Kit About the Survival Kit Series Our Survival Kits are designed to be quick, concise, and much easier to read than most reference books. As in true wilderness survival kits, the key to success is limiting your materials to the least amount necessary. This provides users with fast, light, yet complete packs, and ensures easy travel without excess baggage. At Simply Media our hardest task is eliminating materials that are not absolutely necessary for traversing the subject’s territory. We take the time to make each of our Survival Kits as short and concise as possible so you can learn the most important facts with a fast cover-to-cover read. About the Business Startup Survival Kit  The Business Startup Survival Kit pares down the huge amount of business startup information available, and provides you with the essentials to start and run your business. In the Survival Kit spirit of “less is more,” the contents are con- cise and divided into small individual categories for faster read- ing and better comprehension. www.simplymedia.com 4 Entrepreneurship as a career choice is it for You? Business startups appeal to their founders for three reasons: Freedom – Freedom is the right to choose. In your own business you get the right to choose who you deal with and reap the rewards of your work. Job Security – You get to keep your job unless you go out of business. You have no fear of downsizing, irrational bosses, or the elimina- tion of your entire job function. Wealth – You have the possibility of creating substantial wealth for yourself and your family. If the business works, you can usually receive a long term stream of earnings and cashflow. Most business startups begin because the founder wants to make something happen and earn a living for his or her family. Even the great companies such as McDonald’s, Microsoft, and Walmart usually started as very small firms and remained that way for a number of years. Most of the founders of these companies had little idea about how big their firms could become some day. They succeeded by sticking to their knitting, getting stuff done, and making sure their little companies were built on a solid foun- dation. The exceptions to these rules were heavily fund- ed venture capital startups such as Compaq and Staples that were, in fact, big company organiza- tions from their first day in business. This book does not focus on these kinds of companies that are big companies from their birth. Why Avoid Business Startups. Most people avoid business startups for three reasons: Business Startup Survival Kit Getting Started Chapter one Video 1: Getting Started in Your Own Business www.simplymedia.com 5 Economic Risk – 3 out of 5 startups go out of business in less than five years. Often the owner winds up with personal liabilities associ- ated with these failures. Career Risk People with good career prospects can have their reputations tarnished by a small company failure. Even if the firm is moderately successful, their opportunities to rejoin the large company world later are limited. Temperament Many people do not have the temperament to withstand the uncertainties, ambiguities, and problems associated with busi- ness startups and small companies in general. When deciding about starting and running a new enterprise, remember that it is far easier begun than ended. Once you start most people wind up involved in small businesses for the rest of their work careers. This is due both to their choice and large companies distrust of former entrepreneurs as potential employees. Therefore, keeping your current day job is the best career choice for most people. Think long and hard before making a jump to entrepre- neurial life. The Entrepreneurial Profile Successful entrepreneurs tend to have nine per- sonal characteristics. As Peter Drucker has said, a good executive can become an effective entre- preneur. But, would that individual live the very different life of an entrepreneur happily and suc- cessfully? Usually not. Executives must manage a large sprawling estab- lished organization. This requires a cool, mea- sured, analytical style and approach. The entre- preneur must build an organization where none existed before. They have to drag their less than perfect company along until it beings to function as a self-sufficient enterprise. The tempera- ments required to do these different tasks vary widely. The following are the nine characteristics exhib- ited by successful entrepreneurs. If you have them, fine; if not, consider keeping the day job! Enthusiasm & Endurance Enthusiasm and endurance are suspect in the corporate world. The effective executive is supposed to be measured in approach and focus a substantial amount of their energies outside of the business in community and leisure activities. The entre- preneur must plunge forward with often self- deluded optimism to urge his or her team for- ward again and again, often against formidable odds. An individual must have a thick skin to endure the constant barrage of problems and criticisms. Few things are as good as they should be in a business startup, from facilities, to products or services, to people, and cashflow. Through all of this the entrepreneur needs enthusiasm and endurance to prevail personally and corporately. Conclusiveness Entrepreneurs must be able to conclude and move on without looking backwards. This is not the same as decisiveness. Business Startup Survival Kit Business Startups 1996-2001 1996 ‘97 ‘98 ‘99 ‘00 ‘01 Chart in millions. Business startups are expected to keep growing rapidly. Incorporated & unincorporated businesses 4.00 3.00 2.50 2.00 1.50 1.00 .50 www.simplymedia.com 6 One does not need to come out strongly one way or the other for the simple reason that in the fluid business startup environment the very same decisions must often be revisited several times based on new information and circumstances. One needs to be able to conclude and move on without recriminations about this, that, and the other thing. To wait or linger in decision making is to court disaster in a business startup whereas in large corporations it is viewed as cool, measured, and appropriate to wait and gather more and more data before concluding. In business startups, deals have to be struck quickly. People need to be hired; facilities secured; prod- ucts sold and shipped; and the cycle repeats itself until the company emerges as a going concern or disappears. If the leader is not conclusive, the company loses its fluidity, stuff gets backed up, and the company chokes to death. Leadership & Independence Entrepre- neurs must lead from in front. This involves get- ting in front of tough problems as well as cheer- leading the troops on to better results. Eccentricity is often present. It usually works out as long as leadership skills are present. Most successful entrepreneurs have a low need for support and are loners by nature. They tend to work well independently without the comforts of large organizations or family support systems. Product Pride Entrepreneurs have to care passionately about making their products or ser- vices good. They can not always start from this position. It usually takes time, especially when doing anything new for the first time. But the goal must be the perfect hamburger for Dave Thomas of Wendy’s, the right PC for Michael Dell, or a great retail store for Sam Walton. Marketing Skills Effective entrepreneurs are always trying to figure out what works, what sells, and changing stuff frequently to make this happen. Thomas, Dell, and Walton spent years tinkering with their products and services to perfect them. It is a never ending process for successful entrepreneurs. Nerve & Shrewdness You need nerve to navigate through the pitfalls of business startups. This is not about being brassy or pushy. It is about sticking it out, having guts, and working your way through sticky problems. Shrewdness is an important skill since business startups need to make things happen with less: less money, lesser people, and less cash. How Do You Measure Up? Without a strong dose of these nine qualities your venture will flounder like a wounded duck as you try to manage your business startup. Test yourself against this nine point grid. Check out your findings with a few friends. Your friends can often give you a quick read about where you stand on this stuff. If you identify one or two shortcomings, get a partner or strong senior manager who possesses Did You Know? Of all the companies in the Dow Jones Industrial average in 1900, only one is still in business: General Electric. Business Startup Survival Kit www.simplymedia.com 7 the missing characteristics. The original CEO at American Power recognized his marketing shortcomings and hired me to fill this gap. Do the same yourself. However, if you have several shortcomings, save yourself the trouble and keep the day job. Small Companies as a Career Choice Why Work in a Small Company? Far more people work in small companies than large ones. Similarly, far more people work in small companies than have an ownership posi- tion in one. Small companies have been the engine for growth in the US economy for over 20 years. Fortune 500 companies are steadily cutting back on their absolute employment numbers even as their sales grow. Large compa- nies are focusing on leveraging their assets, reducing their employment, and cutting back on their dependence on employees as they out- source more and more of their own work. As a result, working in small companies is usual- ly a safer career route than the old fashioned approach of working for a corporate giant, rely- ing on their benefits and stability, counting on retirement with a nice dinner, gold watch, and substantial pension. These days smaller compa- nies provide much steadier and more reliable employment opportunities as long as they stay in business! Small company people point to five reasons why they like to work in this kind of environment: Social. A smaller group that tends to band together and help each other as well as being more responsive to individual needs. Less impersonal. More personally involved. A major source of socialization on and off the job. Stability. No one gets laid off unless the com- pany suffers severe problems. Tendency to pull together and protect employees in tough times. Personal Freedom. Not as much personal free- dom as a founder gets. But a lot more than available in a large corporation. Less Politics. As long as you do your job, there is less political pressure or need to ally with the right power structures within the firm. Personal Recognition. People know what you do and don’t do well. You are missed if absent. Why Not Work in a Small Company? The following are considered the three major risks of working in a small company: More Work. You simply must work harder since simple things need to get done and there are fewer places to hide than in a big company. More Performance Pressure. More real work must be done per employee. Fewer supervisors and more doers. Fewer meetings and confer- ences to “get through” the day. Less Pay. Pay levels are usually lower than in large companies. This is especially true for the actual hours worked. Fewer pay increases are given just for time and grade. Business Startup Survival Kit Y o u D o n’t S a y We stayed up with our competition during the week. We beat ‘em working weekends. ” Curt Carlson, Radisson Hotels “ www.simplymedia.com 8 Small Company Employee Profile Effective small company people must be good at what they do. There is simply no place to hide. Many people prefer to work in the quieter less political environment of the small company. However, they must pass a more demanding skills test since simply possessing the political skills that can get you by in a large company won’t work here. Get Stuff Done. Tip: This is the over- arching requirement for a successful small company career. Small companies are for you if you can get stuff done. If not, find a big organization to work in. Independent & Low Maintenance. Don’t need a lot of direction or supervision. Most people think this is true of themselves. It is not. Low maintenance means not needing a lot of social chit chat, support, and help to get work done. Quiet & Not Quarrelsome. Small offices and facilities do not have enough space for disruptive or argumentative people who always have “something going on.” Large companies often thrive on these characters. Small ones don’t. Nerve & Shrewdness. Small company people need to get lots of things done which often takes shortcuts and ingenuity. A certain amount of nerve helps people blast through walls and shrewdness assists in getting what the company needs done by outsiders. How Do You Measure Up? If you fit this profile, small companies will wel- come you with open arms. Sell them on the fact you have these exact characteristics. Very few people have ever told me in an interview, “I can get stuff done, am independent, not quarrel- some, and have the shrewdness not to get bam- boozled.” This is what your new small company boss is looking for. Perhaps more importantly, if this profile fits you, you will enjoy working in small companies. This will further enhance and support your self- esteem and your work product. Without a strong dose of these qualities, small company work will be unsatisfying for you. Test yourself for these qualities. Get a second opin- ion from your friends and associates. If your skills do not match up, don’t force a fit. As the founder of the Fairmont Hotels said, “My best decisions are the ones I passed on.” Knowing what you can not do is often more important than knowing what you can do. Market Selection The first step in a business startup is choosing a suitable market. Avoiding the wrong market is far more important than selecting the right one. One unforeseen rock can sink your fragile start- up. This need for caution is one reason why so many successful entrepreneurs are bedrock con- servatives and not real risk takers. They may have missed innumerable chances to be even more successful, but they pride themselves on having avoided high risk projects that could have killed their firms. This cautious tendency is especially helpful in selecting a suitable market for your firm to enter. As Howard Stevenson has said, the market must have a cashflow positive curve almost immedi- ately unless your firm is underwritten by a ven- ture capitalist. The market also must be large enough to be worthwhile entering but not too Business Startup Survival Kit Venture Professional investment firms that specialize in investing Capitalist in early stage companies. Minimum investments generally exceed $1 million to $2 million. www.simplymedia.com 9 large or it will attract predatory competition. Appropriate Markets For You Appropriate markets have five general charac- teristics: Small (but not to small) markets. Big markets are for big companies and small ones for small companies. Walmart and many other retailers got around this problem in their early days by starting in small retail market trading areas. Microsoft, Compaq, and Dell got around it by starting when all PC based software and hard- ware companies were small other than IBM. These companies grew up with their markets. Not Capital Intensive. Capital intensive mar- kets are the domain of large companies. Only they have the financial resources to compete effectively here. Your market selection should permit at least a 10 to 1 ratio for sales to equity ($1 million sales can be supported by $100,000 of equity). Many services and consulting com- panies fit this requirement. Some consumer product companies do if they can outsource most of their production and fulfillment. A Market You Understand. Above all you must hit the ground running in your business startup. Successful entrepreneurs usually had a long standing knowledge of their general markets before launching their first company. Bill Gates had been working with computers for 10 years before launching Microsoft; Michael Dell had been selling stuff directly to consumers for 3 years prior to starting Dell. Sam Walton had been a successful independent retailer for 20 years prior to launching his Walmart concept. Substantial Customers dominate the market. Although you may be small, you need customers that are large so you can finance your business off of their financial strength. Cash paying cus- tomers can be considered “substantial” for these purposes. Long Product Lifecycles. Fashion forward businesses get a lot of attention because the media loves huge successes followed by big crashes! Most of these companies are on the ash heap after a few years because short lifecycle products are so treacherous to build a business upon. Long product lifecycle products and services generally appeal to a large segment of the con- sumer or business community. They tend to be low to moderate priced. Examples are value priced retailers and restaurants, moderately priced consulting and services firms, and moder- ately priced outsource firms. Check Your Concept Out Against this Market Profile. Be sure your market selection meets this criteria. If not, you should recognize that you are betting against long odds by deciding to go forward any way. The number one reason for business startup failure is a lack of sufficient sales to support the enterprise. This sales problem often arises through the choice of an inappropri- ate market. Market Opportunities & Avoiding Danger Tip: Most opportunities are found in small stable markets with substantial upside. If the upside is too great too soon, you can find yourself with a ton of tough competition such as Netscape got from Business Startup Survival Kit Video 2: Market Selection www.simplymedia.com 10 Microsoft and Amazon.com received from Barnes & Noble. Some of these upstarts make it. Most lose a ton of red ink along the way and wind up being bought, as Netscape was, or liqui- dated as many PC companies were that entered after the market was growing quickly. It is a risky matter to challenge for leadership in a large market unless you have a ton of venture capital behind you. Compaq did this and sur- vived. Netscape had a ton of VC money behind it and still wound up selling out. Most markets have opportunities within them for those experienced enough to mine them. You need to select one market and one suitable product or service to launch a business upon. Most business startups get into a market and then change their initial products or services quickly to conform to changing industry trends. The trick most successful entrepreneurs think is in the execution not the initial idea. After screening your concept to be sure it fits in an appropriate market, take your selection process to the next level and be sure it is in one of the following three attractive market niches. Market Leaders are Complacent. Without the Big 3 being complacent, the Japanese car com- panies would never have established a beachhead in the US and Canada. Similarly Walmart found that big retailers in the 1960’s and 1970’s were complacent and showed little interest in small towns for their stores. Tip: Complacent market leaders provide opportunities for entrepreneurs. Twenty three industry competitors turned down the patent for the Umbroller before my partner and I launched the product that quickly became the number one seller in the category. Warning: This criterion clearly puts up warning signs about entering hot market businesses such as Internet enterprises where no one is complacent. Primary Market less than $500 million Most of the companies discussed earlier were in these relatively small sized markets when they were business startups. Microsoft and Dell started when the PC business was in its infancy. McDonald’s virtually started the fast food indus- try. Walmart competed in small trading areas until very recently. This approach is supported by Peter Lynch of Fidelity who is so positive about regional restau- rant and retailer opportunities because they can grow in smaller trading areas. If they prosper, they can roll out nationally and internationally to attain large size. Therefore, you can compete with a large com- petitor as long as it is in a small primary market. The large competitor only becomes truly threat- ening when you take them on in a large market where they can bring all of their resources to bear upon your enterprise. This is a major risk to consumer product com- panies since they compete primarily on a nation- al basis. Therefore, they have little time to build their businesses without competitive attack unless they are in small markets as Umbroller was in strollers and American Power was with small UPS’s before PC’s became popular to run business applications. Business Startup Survival Kit Y o u D o n’t S a y Control the alternative and you will prosper. ” George Eastman, Founder of Kodak “ [...]... companies 22 www.simplymedia.com Business Startup Survival Kit Buying a Business Video 4: Purchasing An Established Business Most successful business startups are founded on a good deal It may involve identifying a promising market niche, finding an appropriate product or service to exploit, acquiring advantageous intellectual property rights, or simply buying an established business on good terms Some... your business startup with a chance to grow before they sufficiently annoy competitors enough to draw a competitive response The Business Plan Itself! The business plan is an expanded form of the executive summary The simplest way to write Microsoft had this situation initially as a business startup They did small software projects for years, without bothering any competitor, 35 www.simplymedia.com Business. .. personal lives 32 www.simplymedia.com Business Startup Survival Kit Making the business plan Writing Down Your Dream! Business plans are developed to attract capital They are used primarily to solicit equity investments Occasionally they are employed to gain loans from lenders or increased credit lines from suppliers The one size fits all approach does not work for business plans Equity investors seek... www.simplymedia.com Business Startup Survival Kit physical assets (such as a defective boiler that explodes), and products or services (such as product defects) This limits the liabilities of the founders, employees, and stockholders or owners of the business In an age of frequent lawsuits, incorporation provides a substantial amount of personal protection for you and the people involved with your business startup. .. let them hire these people so they are not grandfathered in and they can manage the hiring, motivating, and evaluation process This 19 www.simplymedia.com Business Startup Survival Kit Incorporation Making It Official The next step in your business startup is to incorporate your company You will find a clickable button on the main screen to do so just consider the success of Yahoo or For Dummies But... page of good performance Diversification in terms of portability and transferability gives a business startup much more flexibility to grow and prosper George Eastman, founder of Kodak, told young business people, “Control the alternative and you will always prosper.” One reason for the upsurge in business startup activities is that new ventures are much less subject these days to being pinned down... enter a market or business than to leave one The first business startup choice of selecting a market often determines what market you will work in for the rest of your career When I entered the juvenile furniture market in 1970 with the Umbroller in 1970, I did not leave it entirely for 22 more years! I entered the semi-tech business with American Power in 1982 and am still in that business 20 years... least $50,000 Negative net 23 www.simplymedia.com Business Startup Survival Kit worth is simply too hard to finance and deal with in a new business venture You can do better Look harder Breakeven income statement The company must be making money And this includes the owner’s salary and perks If this is not the case, you must work on two flanks saving the old business as well as starting the new one This... should be fun Enjoy the ride and the entrepreneurial high along the way All too many entrepreneurs don’t and regret it later! Capital or investment funds that fund the business startup initially 29 www.simplymedia.com Business Startup Survival Kit Chapter Two Planning companies for people who want to do “same old, same old.” 3 Outsource rush and peak load projects If you do this you won’t have people... measure of the value of a business Much of Dell’s strength related to its cashflow Virtually instant cash for its products; tight inventories on the fulfillment side Both things allowed Dell to grow explosively on its own without needing much outside debt or equity financing After a business startup opportunity passes these tests, as a Survivalist you should review your competing business ideas against . companies from their birth. Why Avoid Business Startups. Most people avoid business startups for three reasons: Business Startup Survival Kit Getting Started Chapter. same as decisiveness. Business Startup Survival Kit Business Startups 1996-2001 1996 ‘97 ‘98 ‘99 ‘00 ‘01 Chart in millions. Business startups are expected