stepping stones

Diagram ©2004 The Caring Enterprise Coach

Today, the average North American entrepreneurial business lasts just four years, the average sole proprietorship even less. Yet entrepreneurship is not rocket science; it’s nothing more (or less) than making a living for yourself with your business partners, instead of depending on some indifferent corporation to provide you with a living wage. Running a business is certainly no more difficult than raising a family, or landing a job and building a career with a big company. The essentials of entrepreneurship could easily be taught in every school, and there’d still be plenty of time left for the rest of the school curriculum. But, perhaps because big corporations and the governments they control want the ‘labour force’ to be meek, subservient, fearful and insecure, most people have come to perceive entrepreneurship as a complex and difficult art, fraught with danger, unprofitable, emotionally scarring, and demanding of enormous courage and energy. “It’s certainly not for everyone”, I keep hearing.

Entrepreneurship requires self-knowledge of what you’re happy doing, what you’re especially good at, how much you’re willing to put into your enterprise and what you expect to get out of it. Without this self-knowledge, you’re likely to be as miserable in your own business as working for some unappreciative boss, and that unhappiness will bear directly on its success. Beyond that, all you need are common sense, self-confidence, and a modicum of four key, learnable skills:

  • creativity (the ability to discover and apply new ideas),
  • communication (written and oral),
  • information processing (the ability to distil, analyze and interpret it), and
  • interpersonal (listening, appreciation, connecting, persuading).

Then it’s simply a matter of learning and following the process that every entrepreneur has learned by trial and error, to set up and operate your own business successfully, on your own terms, and actually have fun doing it.

One of the 15 steps in the process of establishing and running an enterprise is avoiding the landmines. In MBA school they now call this Risk Management. This article identifies ten of the major landmines for entrepreneurs, using some real-life examples. I don’t believe any of the enterprises described below is still in business (though some of the entrepreneurs have moved on, learned their lesson, and succeeded in other businesses):

  1. Copycat businesses: Thirty years ago I did some financial consulting for a small start-up cruise ship operation. They acquired and completely renovated a ship, which was lovely, got the licenses, hired the appropriate staff, set up the business systems, and then waited for the customers to roll in. After all, the competing operations on the same run were all fully booked. But this operation was an unknown quantity, and before they realized that just being similar to a successful and busy business wasn’t enough to succeed, they sailed off into the sunset, empty. Franchisees beware.
  2. Over-estimating the market: Consultants love to sell you spreadsheets that will ‘forecast’ your income and cash flow. An inventor friend of mine used one of these to persuade himself to produce and sell a new organic nutritional supplement he had developed. His research showed that the annual sales of this type of product North America-wide was $X billion. The spreadsheet encouraged him to plug this number in, along with his estimate of what share of this market he could capture over three years. Needless to say, he never sold anywhere close to this amount of product, because that’s not how you go about forecasting sales.
  3. Being too far ahead of or behind the market: A client of mine bought the North American rights to a new technology that would extrude a rugged, colour-fast plastic that could be used in decking, fencing, and other outdoor applications. He spent a fortune setting up the manufacturing plant. Problem is, he did this in the 1980s, when plastics were distrusted as ‘cheap’, wood was cheap, and creosote in pressure-treated lumber was not yet known to be a carcinogen. Being 10-15 years ahead of the market cost him his life savings.
  4. Biting off too much: A company that I was brought in to help liquidate had been doubling its sales and employee headcount every nine months. They were providing turnkey computer networking equipment and installations to mid-size companies, and had recently moved upscale to large corporations, school boards and government departments. As its receivables and inventories soared, it started paying more money for qualified talent, and its suppliers and bank both put it on short leash. Finally, despite record monthly sales, it simply ran out of cash. The owner turned down two very opportunistic ‘investors’, who wanted control of the business in return for working capital, and the bank pulled the plug.
  5. Not listening to the customer, or offering a solution in search of a problem: A lot of entrepreneurs are inventors, scientists, artists, artisans, administrators, teachers or managers. Sales is not their forte, and they’re more comfortable working with ideas, materials, plans or systems than with those pesky people called customers. If you’re not at home spending a lot of face time with customers, better partner with someone who is. If you want to see what happens if you don’t, just browse any of the free software sites on the Web and see how many downloads most of them have. Some of them are quite intriguing, but because they don’t meet a customer need, they’ll never be more than that. Great prescription for a hobby, deadly for a business.
  6. Not consulting with or listening to the right advisors: A client of our firm in the early 1990s, a company which had been in the commercial printing business for 80 years, brought us in for some technology and corporate finance consulting. As we learned about the business it became obvious, first, that they could not afford the new equipment they proposed to buy, and secondly, that their profit margins were going through the floor. They had built their reputation on high quality printing work, but the market was no longer willing to pay for it. The new equipment would allow them to automate and eliminate some labour costs (and keep up with newer competitors with no sunk costs), but the cost of the new equipment would exceed the savings. We advised the company they needed to find some new markets, new higher-margin products, and new customers who would pay more for their quality work, or else drastically cut costs. They were convinced their customers would stay loyal, and the market for quality printing would rebound. They didn’t, and the company shut its doors two years later.
  7. Blowing the budget: As most women will tell you (but many men seem unable to fathom), budgeting is simply a matter of ensuring that the cash going out doesn’t exceed the cash coming in. The problem is, every start up costs more — sometimes two or three times more — than initially expected. It takes enormous self-discipline, patience, pacing, and sometimes financial creativity, to mete out dollars at a rate that will ensure there is enough cash to launch the business under the worst case scenario. I know of a dozen businesses that closed before they opened because they failed to do so, and others that lost control of their business unwillingly because that was the price for a late cash infusion. ‘Risk Capital’ might be more accurately called ‘Heartbreak Capital’ — it is obscenely expensive.
  8. Groupthink: Back in the 1970s I was appointed Deputy Receiver for a computer and peripherals distributor. They had been put on ‘close watch’ by the bank, and I had to get authorization for, and sign, every cheque. While I was there I attended and took notes at management meetings. I was assailed at each meeting when I presented my factual reports on profit and cash flow. I was nicknamed The Undertaker for my ‘relentless pessimism’, and almost physically ejected when I questioned the validity of some unsupported fees that had been paid by the much-loved CFO, who was on leave of absence looking after a very sick relative. The six-man management team, intact since the start of the company and each heavily personally invested in the company, used to come out of their meetings with cheers and high fives, confident, contrary to all logic, that the company was poised for turnaround and sales ‘in the pipeline’ would soon bring a return to happy days. They would feed off each others’ boundless optimism. They just needed to work harder. Happier days never came, and the CFO, it turns out, had defrauded the company to pay for his relative’s substantial medical bills.
  9. Litigation: A small biotech company whose CEO I met at a conference a few years ago was bemoaning the huge cost of registering and defending patents. He said they had been forced to sell off one promising product to a competitor in order to pay their legal bills to defend their other intellectual capital. That had slowed them down to the point they now feared that another competitor would beat them to market, rendering the results of the litigation largely moot. Big companies can afford armies of expensive lawyers. For small companies, significant litigation can spell disaster. The competitive advantage of the entrepreneur is agility — when products get mired in legal wrangles, it may be better to cut bait and move on to other ventures than to fight adversaries with much deeper pockets in court.
  10. Buying the MBA hype: Graduates of business school are taught how to be middle managers of large enterprises. Unfortunately, that knowledge often don’t translate well to entrepreneurial businesses. A client of mine brought in a young, very successful MBA grad (he had his own daily spot on one of the local radio stations), who had, it appeared, no experience at all with entrepreneurial business. The company, which was modestly profitable, bought the young man’s well-delivered ‘grow or die’ message and decided to ‘go upscale’. They spent a small fortune on advertising, and set up a sales office and warehouse in another country. Unfortunately, the media in which the ads appeared were not the ones used by the company’s customers, and there was not enough money to properly penetrate the foreign market. The expenses produced almost no growth and almost sank the company. They salvaged the situation, and their business, by finding an enterprising competitor in the foreign country who took over the hemorrhaging ‘branch plant’, and then striking a reciprocal marketing alliance with them.

Many entrepreneurs I know feel very lonely, exposed, and helpless. The big consulting firms aren’t interested in them until they grow bigger or go public. The smaller firms are selling one or two specific products, and rarely have entrepreneurial skills to share. And these suppliers are expensive. The government is cheaper, but with a few notable exceptions they aren’t very helpful either. As a result, many entrepreneurs have formed their own ‘support groups’, helping each other to avoid the landmines, and learning from each other’s experiences and failures. Retired entrepreneurs are another good source of advice, and a quarterly business breakfast with a trusted entrepreneur or advisor with some experience in the trenches can be an excellent investment. These breakfasts don’t need an agenda — they’re run as an informal ‘interview’, with the advisor asking pertinent, open-ended questions and listening and offering counsel and options and ideas. They are a critical element of what my new business, The Caring Enterprise Coach, offers.

Another technique entrepreneurs can employ to alert themselves to potential landmines is establishing an Advisory Board made up of people who have well-rounded business experience, knowledge of markets, and skills the entrepreneur and his partners lack. Such Advisory Boards are often reciprocal, offering mutual support and advice in lieu of fees. I am constantly surprised how few entrepreneurs use such ‘support groups’, relying instead on their own instincts, the counsel of inexperienced and costly ‘professional advisors’, and others (bankers, customers, franchisors, and various ‘agencies’) who have only a nominal, and purely financial, interest in the entrepreneur’s success. Some ‘support groups’ and networks have been set up as money-making ventures, but these tend to be unwieldy and their members terribly needy — ten people looking for advice and new customers for every one capable of offering useful information or counsel in return. It’s best to create your own.

The problem, of course, is that most entrepreneurs are paradoxically too busy fighting fires and avoiding landmines, to be able to invest time finding and networking with support groups and other valuable advisors who can help them avoid the next round of fires and landmines. But, despite the failings of the first generation Social Networking tools, such tools hold enormous promise. Although Shoshana Zuboff coined the term The Support Economy to refer to federations of businesses working together to support their shared customers, the first true Support Economy may well be entrepreneurs supporting each other.

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  1. Denny says:

    A lot of good, on-target information here.

  2. Geat comments Dave, i would like to share some advices and experience with other entrepreneurs.We manage our own Research and development firm, we work most of the time for medical groups so we have some experience (2 years) working giving some advice and trying to survive in a very chaotic environment (called emergent economies, Latin America).When you were talking about OVER ESTIMATING THE MARKET topic, its very common for entrepreneurs to hesitate about their calculations about real market size, everytime i have done some launching program have the same problem, this part its ALWAYS the weakest part of any business program, launching program, etc… but the most important think its to know your sales force and the incentive you give them, because sometimes it doesnt matter how accurate your calculatiosn are, but the strength of your sales force; here i recommend to calculate your brake point and define the strategy to get it, its easier than measuring the market size.When you talked about cash flow problems i would recommend to make it vary detailed for the first to years, something like a weekly cash flow calculation in your 3 escenarios (optimistic, realistic and pessimist), because if you do it monthly or yearly you dont realize about cash flow problems, you can get a positive balance at the end of the month but a negative cash flow in the 3 week.About customers, the most important think (even sounds funny its very common) its to know WHO YOUR CLIENTS ARE, ill gice you an example: if you produce computer parts, your real client its not who buy it, but who goes to make the tech support, he/she is who really use its, who has the problem, etc… so ask to the right persons.I think that you Dave forget a couple of things that are very important: PHILOSOPHY explain to your co workers and partners what you expect from the company and what do you want to get with it, its sound dumb, but many problems (financial, opperations, hhrr, etc..) are becausesome some directors wants A, others B but they didnt express in the right moment or took desicions that crush the opinions and the last think NETWORKING ITS THE KEY for small business specially, make ono to one marketing, talk to your friends what you are doing, your ex co workers etc… you never know what you are going to get.I woul be very happy to help some other entrepreneurs in their adventure, feel free to contact me please.patadeperro@lycos.com.I will be an honour to help others to free them selfs

  3. Dave Pollard says:

    Miguel: When it comes to overestimating sales, the problem is more often not understanding the customer (because of inadequate research) than anything involving the sales force. Your points on the need for the partners to level with each other, and develop a deep trust in each other, is very valid, as is your point on networking.

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