Start-up as you mean to go on

To paraphrase Matthew 7:24-27…

24 “Therefore everyone who hears these words of mine and puts them into practice is like a wise entrepreneur who built his business on the rock. 25 The depression came along, the costs rose, and the economic winds blew and beat against that company; yet it did not fail, because it had its foundation on the rock. 26 But everyone who hears these words of mine and does not put them into practice is like a foolish entrepreneur who built his business on sand. 27 The depression came along, the costs rose, and the economic winds blew and beat against that company, and it failed with a great crash.”

FoundationsHow well you lay down the original structures in your start-up can have a significant effect on how it weathers future challenges. The founding team needs to put in place financial processes to conserve cash and monitor profits, human resource processes to recruit the best and retain the skills, marketing processes to spread the word and excite customers, sales processes to clinch deals and generate revenues, and research, development and production to deliver on time and on spec.

All of this whilst scaling-up and coping with the pains of growing.

To again paraphrase Matthew, this time 13:3-8…

Then he told them many things in parables, saying: “Entrepreneurs went out to grow their businesses. As they were scattering their seed, some fell along the path, and the debts came and swallowed them up. Some fell on rocky places, where they did not have sufficient capital. They sprang up quickly, because the capital was shallow. But when the sun came up, the businesses were scorched, and they withered because they had no root. Other seed fell among competitors, which grew up and choked the businesses. Still other seed fell on good ground, where they produced a profit—a hundred, sixty or thirty times what was invested.”

SeedlingGet the initial stages of your start-up right, and survival is much more likely.  Your business will be able to react to the changing environment and take full advantage of opportunities as they come along. You want a well oiled machine in the background where all your staff understand the vision and are motivated to pull in the same direction. New staff can jump on board and join in the effort. Internally, information is shared and accessible, so that lessons learnt are quickly passed along to avoid failings next time around.

Systems are in place to keep the business organised, secure, and compliant.

Then, if and when an investor is needed, their due diligence will be quick and un-distracting from the task at hand which is to keeping growing and winning more business.

Finally, when an acquirer circles, they’ll see a strong viable enterprise that they will want to buy and take to the next stage:  “like a merchant seeking beautiful pearls, who, when he had found one pearl of great price, went and sold all that he had and bought it…”

Start to Exit is due to be published in 2017.

Icon images from https://thenounproject.com/lastspark/ and https://thenounproject.com/gsnair88/ (Creative Commons)

Advertisements

Make your way calmly towards the exit

People whom are lucky enough to survive a fire tend to be those positioned near an emergency exit, having clocked the evacuation route ahead of time, and are sufficiently alert and agile to jump to action when the time comes. In short, survival is all about being in the right place at the right time, being prepared for the worse, and being ready to act quickly should the need arise.

Exit Sign.png

Now let’s look at how you run your business and position it for a trade sale or public listing. The exit, after all, is your nod to personal survival in the hectic and stressful world of business; in which you cash in at least some of your chips and possibly lie down afterwards completely exhausted in the recovery position.

Firstly, as the entrepreneur, you need to be continually preparing your business for the exit; it needs to be positioned ready for the opportunity. When the alarm goes off indicating the proximity of a circling acquiring party, you need to have everything organised so that due diligence is swift and there are no skeletons in the closet. Everything and everyone has to be accounted for, and in doing so, the value of your business will be higher and your exit sharper.

Secondly, you need to be on your toes to spot the opportunity. Potential acquirers may look more like customers or collaboration partners. The optimum timing for a stock market listing may be fleeting and pass you by whilst you are busy fighting small fires within your organisation. If you have already considered possible routes to exit and done your homework on potential suitors or bourses, you will be tuned in and ready to break cover when the situation arises.

And finally, small businesses tend to be agile to the point of fidgety; chasing their tails and unable to focus. But in this heightened state of anxiety, you are already constantly adapting and seeking new customers meaning that you are also ready to leap to the exit.  If needed, the adrenaline on which you and your team are already running can be funnelled into racing to the door; negotiating terms, providing data, speed-reading contracts, and being primed to sign the deal.

All good; but in a real emergency those that remain calm also tend to survive. Blind panic can prevent you seeing the risks and obstacles, and could result in you making a life-threatening decision. You may forget to use the fire extinguisher, you may step on glass, or worse still you might leave your friend behind and regret rescuing them for the rest of your life.

So too in business. The exit is marked in gleaming green, puncturing through the smoke and flames. But if you remain calm and walk steadfastly towards it surveying the land around you, you will make fewer mistakes and have fewer regrets. You’ll be able to secure a better future for your team bringing colleagues along with you, you’ll be able to get a better price for the company, you’ll be able to spend less time personally locked into the business afterwards, you’ll avoid tax pitfalls on the way out, and you’ll look back from the outside with not just relief but happiness that the job was well done.

And remember, don’t go back in until you are told it is safe to do so!

Start to Exit is due to be published in 2017.

Creating leverage in your business

Mechanical levers have been used by human civilisation to reduce the effort needed to move objects since the Stone Age and thus helping lasting monuments such as Stonehenge and the Pyramids to be constructed. Archimedes first described their operation in about 260 BC; basically a rigid length of material (like a plank) is rotated about a pivot (such as a tree trunk) so that a heavy object can be moved a short distance with a lower force applied over a larger distance of movement. If the pivot is between the two ends of the lever, then this is like an asymmetric see-saw in which a heavy adult close to the fulcrum can be balanced by the lighter child sat the other side and further away.

Leveraging Marketing

The term leverage has since been applied more abstractly in finance and business to describe taking advantage of a situation to generate returns or improve progress more rapidly.  But what does this really mean to the Chief Executive operating a business in the real world?

In an ideal company, a great workforce generates a highly desirable project or service that marketing tells everyone about so that profitable sales are generated and the business grows. Each of these stages can be leveraged, and the analogy with mechanics serves a useful purpose:

Firstly the great workforce is a team that pulls or pushes together to move the business forward weighed down by its many parts including supply chain, internal bureaucracy, and external compliance. The human resource sets itself up in a well organised manner along the length of one side of the lever to provide a measured force in the same direction that shifts the business in the desired direction at the other end. Each member of the team is being leveraged for their contribution by harnessing their best attributes. If some members pull in the wrong direction, they not only work against the team’s directed effort, but they actually help the business to fall further in the wrong direction.

The highly desirable project or service has a string of features each with different value propositions that when lined up along the length of the lever provide a driving force to move the business through its potential sales in the right direction.  Too few beneficial features, or a number of faults that don’t sit well with the user experience, wont provide enough impetus to propel the enterprise forward.

Marketing must leverage multiple channels to spread the word positively about the business. Putting the right message out through a range of traditional and social media outlets to drive awareness within the target markets is what is required. Not every channel is equally weighted, but a consistent message across the length of the lever forces it down and pulls up the business. One channel is not enough on its own, and as the business grows and the diversity of the customer base expands, so too the need for concerted effort from many quarters to impact business growth properly.

Finally, sales can be leveraged by having lots of customers all wanting the same thing and better still liking what they buy and coming back for more.  Not all customers are equal; some are big and sit far from the pivot with greater influence.  Some are small, sitting tight to pivot, but nevertheless contributing. Sometimes, customer demands are in the wrong direction because the sales process is ill-informed or poorly qualified. That’s when leverage fails and sales are lost.

Occasionally the very fabric of the business is strained and broken by the effort being applied to the lever.  Think of this as one or more of an oversized costly workforce creating excessive cash-burn, an all-singing all-dancing product or service that can’t be sustainably developed or supported, an overzealous marketing team that generates too much of a buzz that can’t be lived up to, or a sales team that over-promises so that the company can’t cope. That’s when the lever snaps and the business can end catastrophically. Too much leverage in business is not always a good thing; it needs to be measured and controllably applied within the framework of a strategy.

Start to Exit is due to be published in 2017.

Does your business lase?

When an army is marching in step, there is a powerful resonance that can instil fear in the heart of the enemy. The regimented advance is focused, controlled and impressive.  So much so that battalions have to break step as they cross bridges for fear of hitting the resonant frequency and destroying the very foundations they are marching on.  The wind did the same thing to the Takoma Narrows Bridge in 1940; it was not the strength of the wind per se but rather the fact it caused the bridge to oscillate at its resonant frequency so that each successive flex was enhanced until the structure collapsed.

In physics, there is a phenomenon called Light Amplification by Stimulated Emission of Radiation. This manifests itself in the form of a device called a laser, a creator of a bright light that almost everyone reading this will own in the form of a CD or DVD player. What is special about laser illumination is that all the electromagnetic waves in the light path are of the same wavelength and in step; they are coherent like a disciplined marching army. This results in a very intense, collimated beam that can be tightly focused and used for precision measurements and targeted applications. The verb to describe a device operating in this manner is ‘to lase’.

When a business is going well there is a buzz and an amplification of energy. The team is singing from the same hymn sheet and pulling in the same direction. Marketing is not only generating sales, but sales themselves are generating more sales, and the resulting customers are in turn evangelising and creating yet more sales. This is a business that is experiencing rapid growth and reaching that all important inflexion in the hockey stick growth curve.  Suddenly the business is resonating; it has started to lase!

But beware, not all bright lights are lasers. And the incandescent lamp that burns twice as bright burns half as long! Your business may appear to be doing well and sales may be accelerating, but is the activity sustainable? Is the team marching in step, efficiently conserving energy like a well trained army corp, or are they racing round the deck extinguishing fires in a frenetic attempt to keep the lid on it all?

A laser device achieves its spectacular light through very careful construction. Precision engineering creates a cavity in which the desired light energy is harnessed and out-of-step errants are discarded. Only the disciplined, aligned photons are allowed to pass and contribute to the emerging laser beam. Moreover, the same in-step photons encourage others to the same; they energise the material in the cavity to create photons with the same energy profile as their own

For your business to lase, your management team needs to create a similar cavity; an ethos and focus that brings everyone together and ensures that all the activity is focused on a singular aim of coherent and efficient business growth. Meandering staff dissipate everyone’s energy and need to be brought into line or discarded. Off-message tasks need to be quashed; mission creep needs to be avoided like the plague.

However, if you succeed in getting your business processes and working environment right in the early stages, everything can fall into place so that one action reinforces the next and scale-up becomes easier. As an entrepreneur, you’ll know when your business is lasing because rapid growth will appear unstoppable and everyone around you will be marching enthusiastically toward the same goal that you outlined in your vision, with an energy that seems unquenchable.

BusinessLase

Start to Exit is due to be published in 2017..

Is there a Moore’s Law for business?

Back in the 1965, Gordon Moore predicted that the number of transistors on a chip would through technological advance double every (two) year(s). He made one prediction based on the period of a year, and adjusted the time period a bit later, although as co-founder of Intel he was in a good position to make such a tweak.

Of course, in the case of silicon chips physics does eventually limit this trend. You can’t go on making things smaller for ever, as you’ll eventually be dealing with sub-atomic particles. However, the prediction has stood the test of time and pretty much defined the IT industry as we know it with faster-cheaper-smaller computers year-on-year for the last five decades.

Nature also likes these kinds of exponential relationships, with simple organisms for example doubling their numbers in fixed (often quite short) periods of time as they reproduce. This is why disease can spread quickly and bread dough rises in just a couple of hours.

Sometimes business growth can be exponential; certainly that could be part of the plan in the first few years. A business that doubles its revenues every one or two years is doing very well, and during the initial startup phase this may be an achievable goal. But to keep this up over say just five years is a real struggle; and for decades is almost unheard of.

Google is probably one of the few companies that has bettered Moore’s Law over its lifetime.  Early data for its revenues are hard to come by, but in 2002 (after 3 years from being founded in September 1998) it was reportedly generating revenues of about USD 0.4 bn. The following years were 1.5 bn (much more than double), 3.2 bn (about double), 6.1 bn (just under double), and 10.6 bn (just under double). Fantastic growth continued year-on-year to nearly 75 bn last year in 2015. If Google’s revenues had followed Moore’s Law by doubling every two years it would have reached about USD 35 bn of revenue in 2015. And Google really is an exception because it has a very scalable business leveraging the growth of the Internet (and therefore the industry to which Moore’s Law applies!). However, I don’t think we should use exceptions like this to prove the Law.

Unfortunately, there might well be a Moore’s Law where costs are concerned. Doubling your headcount every one or two years is not unreasonable in early stages, and investment is often needed to sustain this level of growth in overheads as revenues, never mind profits, don’t tend to keep up.

Where manpower increases, so do overheads in general because in addition to salaries, there is also all the support functions that go with it; more computers, more offices, and more infrastructure in general. This explains how an exponential growth in costs can occur which, if unchecked, will put huge pressures on cash flow and bring a business down. Eventually you hope efficiencies and sales out pace the overheads so as to start repaying the investments and increase the profits; and this can only be achieved if you make sure your costs don’t follow Moore’s Law!

But increasing your staff is actually more closely related to Moore’s Law than just its direct impact on headcount or associated costs. Every new member of staff introduces a new node in the organisation; in effect a new interconnected transistor on the silicon wafer. These connections are where information must flow if the business is to function and grow. So, for example, one new member of staff in sales incurs multiple connections with the production team, the marketing team, the management team and so forth. Anyone who has scaled-up a business knows that the growing pains arise through maintaining effective staff communication to the extent that it can sometimes seem a bit like herding cats. Add just one member of staff and management complexity for the business might easily double!

However, don’t be put off, because the same considerations can help a business accelerate on the outside. Every new member of staff, every new partner, every new happy customer creates many more interconnections and links in the real world. This is the ‘network effect’ that will help spread the word and could result in your product or service ‘going viral’. We’re back at that exponential relationship that Nature likes again; and this is where I believe Moore’s Law may well apply more generally to a business startup scenario and therefore really make a difference. Empower the people in and around your business to make contacts, leverage social networking, and spread good news, and year-on-year your enterprise’s influence could easily grow exponentially and outpace Moore’s Law.

MooresLaw

Start to Exit is due to be published in 2017.

Shedding light on the startup spectrum

Not all businesses are created equal. When an entrepreneur or group of would-be co-founders set out to start a new venture, their business idea and mindset will often define where on the enterprise spectrum their startup will sit.

At one end, we have the lifestyle business. Using the analogy of the visible light spectrum, this will sit at the low energy red/infrared end. The lifestyle business is, after all, supposed to be relatively easy-going; generating income by doing something that is enjoyable and not over-demanding on time.

Next along, in the relatively low energy orange region, is the consultancy / professional services business. I know accountants, solicitors, management consultants, and so on will be up in arms with this verdict, but frankly these businesses are fairly simple. They may demand plenty of continuous professional development on a personal level to stay up-to-date with legislation and sector developments, but from a business perspective things are relatively straight forward.

The UK is often referred to as a nation of shopkeepers, but these type of businesses are a little more complex. Although effectively a reseller, this business needs product knowledge as well as the ability to efficiently monitor stock, deal with logistics, process returns and even offer on-line e-commerce options.  We’ll place the shop business in the yellow region of the spectrum.

Middle of the road, in the green region, is the systems integrator; offering specialist knowledge to create and install systems of products that work well together. All the skills and attributes of the aforementioned businesses apply along with some technical competence to effectively source, deliver and support bespoke options.

Once a business starts to manufacture products, so the complexity really goes up. Sitting squarely in the relatively high energy blue region are, I believe, software companies. Their virtual products don’t require much capital equipment to create, but they do need stage gates to specify, code, support and deliver. This applies equally to web applications, mobile applications, and software as a service (or indeed the older approach of software in a box). This type of business is also highly scaleable and can grow across the globe relatively quickly. Doing so adds complication in customer support, language support, and dealing in different jurisdictions.

Manufacturing physical products (even traditional products like furniture and food) are in the high energy part of the spectrum; shades of blue and indigo. Why? Because the business needs to deal with the bill of materials, a supply chain, the production process, all the associated quality control, warehousing and delivery logistics.  As the enterprise grows, along come warranty returns, export controls and worldwide distribution networks. This is all tricky and demanding stuff requiring diverse skills, fantastic management, facilities of equipment, and plenty of resources.

So, what can possibly be worse and command the violet / ultraviolet end of the spectrum? Well that would be the high technology start-up.  It’s all of the above, with specialist knowledge, R&D unknowns, patents, and early-stage venture capital thrown in for sure.

Before you start your business, look at your plan through a prism and see what colours come through. Understand the nature of what you might be letting yourself in for, and hopefully the pot of gold will be there for the taking at the end of the rainbow!

Startup Spectrum

Start to Exit is due to be published in 2017.

Data data everywhere, time to stop and think

As your startup business grows, you’ll be generating all kinds of data. Probably not Big Data like the big boys, but still enough to swamp you with information such that you can no longer see the wood for the trees.

Firstly you’ll probably be collating statistics about your website, using for example Google Analytics. This service has grown over the years to include a myriad of historical and realtime analysis tools including information about where people are located who visit your site, what kind of device they are using, what search terms brought them to you, and which pages caught their eye for the longest time on your site.

Then, if you have a Facebook page or Twitter account, you can receive information about the number of visits, number of retweets, who’s following, who’s stopped following, how many people you’ve reached, and so forth.

And yet, important (and fascinating) all this data might be, it is rather detached from the nub of the matter; how much money is your business making and how are the sales doing? This financial data is often the bit that is overlooked by the eager entrepreneur, and in many ways the recent years of dotcom web 2.o phenomena have fuelled this trend. Many high profile Internet and technology startups have generated value from eyeballs rather than dollar bills, and so social media data becomes more important than financial data.

But, as a small business owner with limited time and resource, you will need to decide what data to collect, what data to analyse, and most importantly what data to act on. Without care, this task can either be wholeheartedly ignored during the day-to-day firefighting, or an action that occurs sporadically when you happen to log into one of your accounts and stumble across the analytics page.

My advice is to include key data analysis as part of a monthly exercise alongside the review of your management accounts. To some, the suggestion of a monthly review of management accounts might come as a shock, but many entrepreneurs do this almost unconsciously.  You will probably have a fair idea of your bank balance each month, but now is the time to structure this appraisal a bit more methodically.

So, on reviewing a monthly profit and loss, balance sheet, sales forecast and debtors aging list, that is also the time to look at some other key data; how many website visits, where are the visitors from, are the important (sales generating) pages being visited, and what is the conversion (from visit to closure of a sale) rate like.

By making a specific effort like this, on a regular basis, you are (to paraphrase Cliff Stoll) turning data into information, information into knowledge, knowledge into understanding, and maybe in some cases understanding into wisdom. More importantly, you are also being selective about the data you analyse with a goal in mind so that you can drill down into something useful for your business. By doing this regularly, an important aspect is to look back at the earlier data and see if things are improving each month, each quarter or each year, and most significantly try to understand why.

Each business will benefit from studying different kinds of data beyond the financial data. If you make widgets, you’ll want to look at the inventory, order book, manufacturing process data and quality control.  If you run an e-commerce site, you’ll want to focus on your web analytics and conversion rate.  If you run a marketing agency, your social media footprint will be important. And so on.

Finally, it is also beneficial to encourage your colleagues to do the same. As a business owner, you can’t be analysing all the data yourself into the future. Once you have decided what is informative, delegate the analysis to someone appropriate fro example in finance, production or marketing.  This will then free you up to move on to the advanced level of data analysis which is to spot trends across these reports: did the increased marketing effort that led to more Twitter followers result in more website conversions and higher sales, and did that rush cause the mid-month quality control issue because you started a night shift?

In this day and age, your business activities will be generating a lot of data. Some aspects you will be choosing to measure, others will be being collated in the background by default. The key is to step back and think through what you want to do better understand from all that data and put a bit of focused quality time into to studying it. You’ll learn a lot more that way than trying to just amass data or gleefully ignore it.

Start to Exit is due to be published in 2017.