Thriving in a Down Economy
Click here learn how to compete and triumph in any economy.
The Second Ninety Percent
Click here to understand what is required to complete your business plan.
12 Tips for a Successful Business Plan
Click here to learn how to improve your chances of getting your business startup or expansion funded.
Determining the Perfect Selling Price
Click here to learn what criteria to consider for establishing the perfect price for your product or service.
Get into the mind of your prospects
Click here to learn how prospective customers make a choice between a competitor's product or service an yours. Once you understand their decision process, you can choose the proper marketing and sales strategy to convert prospects into customers.
The Phantom Competitor
Click here to learn how to identify and compete with the "Phantoms" that threaten your business.
Predict Your Success
Click here to learn how to determine the value of investing in a new product or service idea.
Bootstrapping Your Company's Growth
Click here to learn about the difference between investor funding and bootstrapping.
Thriving in a Down Economy
Are you tired of all the whining and woes of the current economic conditions? So am I!
It's time to stop worrying about what is, or might be, happening and start doing something to strengthen our business models in order to compete and triumph in any economy.
What do all the experts say?"Review and revise your marketing plan and business plan."
That's all good and well, but what does that mean?
Keep reading for some meaningful ideas...
The first thing you must do is re-assess your market.What has changed about their spending habits, their priorities and their needs?
What can you do to further differentiate yourself in order to stand out amongst the competition?
Are there niche markets you can go after that have fewer competitors who would welcome your customized solution to their problem?
What can you do to leverage the economic conditions in regard to your suppliers?Southwest Airlines, for example, locked in the price of their fuel cost at $51 a barrel while their competitors are paying 150% to 200% more.
Many suppliers would love a contract at any price that they can leverage with the banks or investors.
Weather the storm and when it's over, you may have fewer competitors.By maintaining superior customer support and innovating, you are declaring your commitment to the industry and creating customer loyalty.
While your competitors are cutting their marketing budget, increase yours; you will have a better chance to stand out as the market leader and improve your image.
What can you do to lower your costs?Some businesses turn to outsourcing while others benefit from the economies of scale that come from internalizing their production.
You may have product lines that have marginal impact on revenue but distract from your efforts to improve and market your primary products. It may be time for those distractions [marginal products] to go.
If you can lower your costs and lower the industry price, you could shake-out some of your competitors.
When was the last time, if ever, you reviewed your sales plan?Do you even have a sales plan?
Be sure that your sales team understands your strategy and is focusing on the right prospects with the right message; this will be critical to achieving your marketing goals.
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The Second Ninety Percent (TM)
As a software engineer I have learned over the years that when we tell someone that we have the software development 90 percent complete, it is far from being completed. This is not a result of mis-direction, "fudging" the numbers or intentional falsification of the facts. We actually believe that we are 90 percent complete. However, that is not taking into consideration what I like to call, "The Second Ninety Percent." This includes the "tweaks" to get those little bugs out, the testing that will reveal more bugs, the user interface changes that will create even more bugs, and the Help instructions and user manual.
Why is this relevant to you?
Because this Second Ninety Percent principle applies to any project, especially the project of developing a business plan or marketing strategy. For the sake of simplicity, we will focus on the business planning process. I will share a recent experience where I have been intimately involved in the first 90 percent and the second 90 percent.
I have been writing business plans for clients for several years now, but until recently that is where my client involvement has ended. I began working with a new client last May to help them develop their business plan. Like many consultants, I used our Plan Write Expert Edition software to ensure a well-thought-out and comprehensive business plan. After the plan was completed we maintained contact; I was intrigued by their product and wanted to keep apprised of their progress. I do this with many of my clients but this one was different. In November they asked me to become more involved in their business. My specific responsibilities had not been determined, but they knew they needed assistance outside their area of technical expertise.
They had been developing this software for two years and had completed their business plan (The First Ninety Percent). But now it was time for The Second Ninety Percent. Just as much effort that went into the software and plan development would be required to get this "idea" off the ground so they could start getting customers and making money. They were so focused on "the product" that they neglected "the business model." This is not a criticism; it all seemed simple enough and I probably would have done the same thing.
Because their revenue model was based on targeted Internet advertising, it was necessary to understand the logistics of getting the ads delivered and maximizing revenue from these ads. Unless you are simply using Google's AdSense to insert ads on a website, there are numerous complexities to getting targeted ads delivered to your site, or in their case, to a desktop application. I won't go into the details here because this is just one piece of the second ninety percent; there are contract considerations, growth requirements, personnel needs, and the list goes on and on. Additionally, during my due diligence process, I discovered that the advertising revenue assumptions were way off - we had to reduce the first two years assumptions and incorporate a sales staff to achieve the desired ad rates.
With the program completed and the business model tuned to realistic expectations, they have progressed from 90 / 90 to 110 / 70; still a long way to go. What's left, you might ask? They still need funding and they must implement the plan.
It's not my intent to discourage you if you thought you were 90 percent complete. But I want to encourage you to not give up fulfilling your dream. You're not alone - we all have to complete The Second Ninety Percent.
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12 Tips to Build a Successful Business
Improve Your Capital Funding Opportunities
Everywhere you turn there are gurus, middlemen and business development specialist who have their own "To-Do" lists readily offered up to anybody seeking capital for the start-up or expansion of a business venture. In most every case, a business plan is as important as a loan application in the process of seeking that money. What follows is a list of 12 topics you want to address when preparing your presentation for solicitation of funding:
1. Be Prepared: Write a business plan
By going through the process of writing your business plan you will have thought through all of the issues that an investor considers when judging the viability of your business. Even if they don't look at your entire business plan on the first pass you'll be prepared to respond to important issues and concerns of the potential investor or lender.
The Executive Summary should contain the following:
- The primary objectives of your company.
- Your key personnel.
- The market you address, its needs, how those needs are currently met, and how you address its shortcomings.
- Detailed description of your product or service, including how it addresses customer needs and desires.
- Financial projections for five years, profit point, break-even point, and ROI for investors.
2. Be Flexible to Change in Your Business Model
As you begin to implement the business plan the real world may not embrace your business model. Determine what works and doesn't work. Be willing to alter your plans accordingly. You may even find greater market potential that requires re-thinking the entire business plan.
3. Consider Alternatives to Product Distribution
Failing to understand how your product should be distributed is a sure way to turn away investors. Do your homework on the various distribution channels. Know their expectations and working models. Find the channel that works with your pricing model and facilitates your growth requirements. If possible, develop partners with brand names that can provide credibility and growth potential.
4. Be Flexible with Investors on Issues of Control
Don't focus on retaining control of your company. Focus on what makes the company profitable. Investors need to see that you are willing to assume some level of risk and are not intent on hoarding stock. Great businesses have been built by entrepreneurs that understood their limitations and hired executives who knew more than they did. Focusing on profits creates capital opportunities. Focusing on control creates potential barriers to investors.
5. Develop a Strong Management Team
A business plan is only as good as the people responsible for making the business succeed. Identify who will run the business, their achievements and ability to make the business a success. Get commitments from qualified personnel for operations, financial management, development, marketing and sales. If not yet identified, make note of those key positions for which you must identify and recruit the appropriate individual who retains the necessary education and experience. Don't hide your weaknesses or shortcomings. Identify them and how you intend to overcome.
6. Give Customers a Reason to Buy from You
There must be a need and desire for your product. No longer will a clever idea, by itself, bring in the money. You need customers willing to test your product. Paying customers validate your pricing strategy.
7. Be Reasonable & Conservative on Near-term Revenues & Profit Projections
The biggest red flag to an investor is revenue projections that increase by the same percent each year. You should anticipate various increase levels as your business progresses through different stages of growth. Your engineering, sales and marketing expenses will also change with these growth stages. Conduct the research of your industry to determine expected ratios for expenses and revenue per employee. Investors will take you seriously when they see that you have a clear understanding of the financial implications.
8. Give Investors Alternative Exit Strategies
Understand what motivates an investor, their expectations, exit strategy, and their minimally acceptable return on investment (ROI). The investor has many alternative investment opportunities. If the investor is going to take a risk on your concept he or she has to "BELIEVE". Demonstrate your potential for profitability with thorough descriptions of the market, your personnel and your product concept.
9. Don’t Ignore the Competition
Customers always have a choice. They can either choose to do things the way they have always done them, find alternative solutions, or purchase your product. Identify your competitors, their strengths, and weaknesses and emerging technologies. Without this knowledge you will not be able to plan on how to respond to their retaliation.
10. Accurately & Honestly Define Your Market
Do your market research. Investors can easily discern between substantive and superficial data. Define and locate your market niche then determine its TAM (Total Available Market) and SAM (Served Available Market). Through the use of surveys (primary data) and secondary data you can calculate the approximate percentage of the SAM your company can penetrate, and how much to increase the SAM. Stating that you will capture the entire TAM is a clear indicator you don't understand the market and your potential in that market.
11. Don't Ignore Requirements of Incorporation, Patents, Trademarks & Copyrights
In some industries (i.e. pharmaceuticals) it is critical that competition be dissuaded through the use of patents, which protect your research and development investments and provide a window of opportunity to realize a share of revenues before competitive offerings arrive in the marketplace. Trademarks, copyrights, non-disclosure agreements, employee agreements, etc. are a necessary part of the protection of a company's intellectual assets and branding. Incorporation will help to protect the investors and company assets in the event of legal proceedings against your company.
12. Identify the Methods & Costs of Getting Your Message to the Marketplace
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Investors want to know what methods will be employed to gain customer attention, customer acquisition costs, average and target per-customer revenues, customer breakeven milestones and product life cycles. They also want to see your future plans for retaining existing customers. In most every business sector the returning customer represents the most reliable source of near and long-term revenues and profits.
Determining the Perfect Selling Price
I regularly hear from my clients that they find it difficult to determine how to price their product or service. I'll try to de-mystify the pricing process and provide some criteria for establishing the perfect price for your product or service.
Factors to Consider
The perfect price is first determined by the priority you place on capturing market share or obtaining a short-term increase in profits. Making this determination can be affected by the market life cycle or other internal factors revolving around the overall corporate strategy. Since the corporate strategy factor varies with every company, we will focus on the more global issue of market conditions.
Let's consider a declining market where sales are dropping and competitors are dropping out of the market. If you were selling a technically sophisticated product that required considerable customer support, it would be very costly to sell this product for a low price. At the lower price you would be attracting a customer base with greater support needs, thereby reducing profits. The declining market is also working against you with a decreasing customer base making it impossible to "make it up in volume." However, it is also difficult to price high in a declining market unless several other factors are in your favor, such as:Prospects consider factors other than price in their purchase decision
You provide one of the few choices for prospects
Your competitors are in a weak position
Your sales potential, controlled by numerous internal and external factors, is strong
This is obviously a tough position but can be managed with the right objectives.
Now let's talk about a good position, one that allows for flexibility in your pricing model. If you are in the early stages of the market's life cycle, using leading edge technology and are one of the few providers available, then you are in a great position to price high. Of course, you need to have a strong sales potential and it's always easier if the prospects are not price sensitive when considering your type of product.
Even under the best circumstances there are factors that can restrict your pricing flexibility. Government controls, your pricing history, the portion of the prospects budget you require and many other factors play an integral role.
Price and value are two of the critical elements of the positioning of your product or service in the market. This chart illustrates the relationship between them and the implications of your position to the success of your business.
In this example you provide a significant value and are priced just below your competition. This price position is ideal for market penetration. If you are in the early market stages, this strategy is most appropriate. In the long-term, the profits go to the companies with the market share leadership, so your pricing is consistent with achieving that position.
There are literally hundreds of factors to consider when pricing your product or service, too many to mention here and too difficult to portray all potential scenarios in a newsletter. If you are struggling with pricing you may want to consider our strategic planning services. We provide an interview process asking the pertinent questions then evaluate your situation to help you determine the optimal price.
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Get into the mind of your prospects
How do prospective customers make a choice between a competitor's product or service and yours? Is it a simple decision that will result in a quick purchase or will they extend the process, as they weigh all the options?
Many believe that their product is so unique and provides so many benefits over the competitive options, that prospects will purchase with little hesitation and minimal comparison effort.
Understanding your prospects' decision process will help you choose the right marketing message, marketing strategy, sales process and sales strategy. Shown here is a chart that, when plotted correctly, will help you identify your sales and marketing direction.
Importance of Purchase
The horizontal axis on this chart is fairly straightforward. If the product or service you are providing to your customer fails, what is the impact on the customer? If you are selling pencils and one breaks, the impact is zero; they can pick up another one and continue their work. However, if you are selling a new propulsion system to an airline manufacturer, the impact of failure of your product would be catastrophic. Therefore, you would rate the Importance of Purchase for your prospect as High.
Perceived Brand Differences
This issue is not so straightforward and requires an unbiased assessment. There is more to this issue than more, or better, features. An assessment of the following four factors should allow you to properly plot the vertical axis on the chart.
- Excellence of Service Organization - Does the prospect perceive your service organization to have many unique characteristics when compared to others in your industry? Customer service in the software industry usually means a call routed to India with a "specialist" using a Q&A form to address only the most common issues. In contrast, when customers call us (BRS) for software support, they are amazed at the high level of service they receive. They get to talk to a business planning and strategy expert that understands their needs and can help them receive the full benefit of the software they purchased.
- Highly Unique Performance - An automobile that gets 90 m.p.g., has a top speed of 180 m.p.h., and doesn't require a maintenance checkup until it has reached 100,000 miles would rate very well on its unique performance. Some products or services may not be unique and may not have a lot of bells and whistles, but performance may be a significant factor in the buying decision.
- New or Unique Technology - Apple's new iPhone has taken the touch screen capabilities to a whole new level. Apple is utilizing the latest technology, providing themselves a unique advantage over competitor phones and mobile devices. In this industry, technology is a major factor.
- Most Unique Features - Using the automobile example again, some cars are marketed to the younger crowd and showcase the ability to customize the car's appearance. Service, performance, and technology are completely ignored in their ads with the emphasis entirely on the available features.
Don't make the mistake of assessing your perceived brand differences based on only one factor; an average of all four ratings is required.
The example on the chart shown above indicates an extended decision process. The following scenarios explain what you can expect from each quadrant of the chart.
Significant Differences / Important Purchase
||The decision making process will be extended in this quadrant. The prospect perceives the purchase decision to be important and since there are many significant differences in the brands offered, the prospect will spend lots of time researching and comparing various features and benefits, thus delaying the process.
Significant Differences / Purchase not Important
||Even though there may be significant differences in the brands being offered, the prospect does not perceive the purchase decision as important. Therefore, little effort will be spent in comparing brands and the decision process will be relatively rapid.
Minor Differences / Important Purchase
||Although the purchase decision is important to the prospect, there are few differences among the competing brands. The prospect needs to be assured that, whatever they choose, they are making the correct choice.
Minor Differences / Purchase not Important
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||Both the importance of the purchase decision and the differences among the competing brands are minor. These factors lead to a rapid purchase decision based predominately upon previous experience. Impulse buying may be encouraged with a suitable eye-catching display.
The Phantom Competitor: What's lurking in your industry's back-alley?
Many business owners fear the global economy and labor market, but is that the only danger on your horizon? There are other forces (phantom competitors) that can impact your long-term success and this newsletter will help you to discover them for your industry.
This newsletter is a summary of what Michael Porter, a professor at Harvard Business School, calls Industry Attractiveness, or the Five Forces Model. I will attempt to present his model in a way that can be easily understood and applied to your specific business situation. I hope you find this helpful to identify and compete with the "Phantoms" that threaten your business.
One of the biggest mistakes made by smaller, entrepreneurial businesses is to assume they do not need to think about strategy. All businesses should be concerned about strategy and how to position themselves in their competitive environment.
Whether you're starting a business or trying to compete in an existing business, the first issue to address is the attractiveness of your industry. Analyzing your industry attractiveness (IA) will help you decide if you should get into a new industry, get out of the one you're in or redefine it.
Porter identified five basic forces of competition. I have referred to them as "Phantoms" because most businesses do not understand that these forces are the phantom competitors that impact them every day.
The first task is to understand your position in the industry and either hold onto a good position or improve a bad position. Even a poor performing industry can offer opportunities for a business that establishes the proper niche by applying strategic thinking.
The IA chart shown above plots the five forces for any industry. The ideal position would be the outer edge of each axis.
Starting at the lower-left of our IA chart you see Rivalry Among Existing Firms. This is what most businesses consider their "competition." When competitors in your industry are threatened, does it turn into a blood-bath or do all firms follow acceptable practices? Our IA example chart reflects an aggressive rivalry, which indicates a problem for new businesses entering the market, attempts at cutting prices or anyone attempting to "shake-up" the industry.
Moving clockwise on our IA example chart is Threat of Substitute Products or Services. Many are caught by surprise when they learn that there is nearly always another way for your customers to satisfy their needs. It could entail the use of plastic instead of metal, software to replace paper or web-meetings to replace travel. Alternatives are always emerging and can impact your profitability. Prospects may even choose to do nothing by simply "living with" their problem.
The Threat of New Entrants indicates how easy it is for others to get into the same business. New entrants can increase the output of the industry's goods or services, which can lower prices and reduce profits. By creating barriers that inhibit these new entrants, all the current companies in the industry will benefit. If you are considering the entry in an industry, you are the phantom competitor. As the new entrant, you must consider how difficult it will be for you to overcome the existing barriers.
The Bargaining Power of Suppliers is not usually seen as a competitive force, but should be. Suppliers can impact your costs as much or more than a new entrant. Some suppliers may identify a greater business opportunity by becoming one of your direct competitors. If you are dependent on a single supplier and have no means to switch suppliers, your position on the IA chart is lowered, reducing the attractiveness of the industry. If you can eliminate a supplier by producing their product or service in-house, you can improve the industry attractiveness.
The Bargaining Power of Buyers determines the flexibility you have in your pricing strategy. If you're selling to Wal-Mart, or other big box retailers, you are at the mercy of their pricing, inventory maintenance, returns, and in-store advertising policies. If you are selling a unique product or service into an underserved market you have greater flexibility and a more attractive industry.
Characteristics of an Attractive Industry
You sell a highly-desired product or service.
It is very difficult for new companies to enter the market.
There is no reasonable substitute for your product or service.
Your product or service is produced from easily found resources and there are numerous suppliers.
Customers seldom attempt to bargain over price and are willing to pay top dollar to solve their problem.
Your competitors don't compete on price.
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Predicting the Success of Your Product or Service
In previous document I discussed the benefits of benchmarking the attractiveness of your industry (Industry Attractiveness chart). These were the "Phantom Competitors" or the external forces that impact your decision to pursue a given market or industry. Here I will demonstrate an expanded use of the Industry Attractiveness chart when combined with an analysis of your Enterprise Strength.
The General Electric Company, with the aid of the Boston Consulting Group and McKinsey and Company, pioneered the nine cell strategic business screen illustrated below. Plotting the position of your product or service (offering) on this chart can help you determine the value of investing in that offering.
The vertical axis represents the Industry Attractiveness rating from last month's newsletter. The horizontal axis represents your company's strength, or ability to compete in the industry. Factors to consider when scoring your enterprise strength are detailed below.
Enterprise Strength Factors:
Management Strengths and Capabilities
The strength of the enterprise's management team is evaluated by examining the skills and capabilities of each team member. Score both the experience and the suitability of each person for their position. For each position there are specific concerns, but there are qualities that each strategic manager should possess, some include:
- Leadership ability
- Conflict resolution skills
- Communication skills
- Vested interest in the business' success
Ability to Sustain a Competitive Advantage
For companies seeking venture capital, this is a critical issue, but existing businesses should also be concerned about sustaining a competitive advantage. Here are some questions to help you judge your ability.
- Can you keep competitors from imitating you?
- If your price is higher than the competitors, can you easily justify it and do your customers appreciate the added value?
- Is your offering years away from becoming obsolete?
- Can you focus your promotion and development efforts to an underserved market?
Potential to Differentiate your Product or Service
Some products or services are inherently unique by technical or patent designs, others achieve uniqueness from marketing or by combining products and services as a package.
- Your first rating criteria should be the inherent uniqueness.
- You also must have excellent marketing abilities.
- For a technical product, you must possess significant internal engineering skills.
- There are other factors to consider that have less impact on your score, like tenure, reputation, research skills, internal coordination and distribution.
Barriers to Competitive Entry
One of the factors in last month's Industry Attractiveness chart was the Threat of New Entrants, or Barriers to Competitive Entry. This also factors into your overall business strength. Some factors to measure include:
- Is it expensive/difficult for customers to switch away from your offering?
- Do you have proprietary and protected technology?
- Do you have all the distribution channels locked-up?
- Can you significantly benefit from economies of scale?
Prominence of Your Company
Small or startup businesses often fail to consider the impact of larger companies currently selling or soon entering the same market. A new company can win, but it is an uphill battle.
- Do you have an established presence in the market?
- Does your company's founder have a positive reputation in the market?
- Do you have brand recognition or other intangible assets?
- Can you attain product endorsements from high-profile people?
Interpreting your Results
Identify your position on the chart:
- based on your industry attractiveness using last month's newsletter
- based on your enterprise strength
The chart is grouped into three zones:
The Green Zone consists of the three cells in the upper left corner. If your enterprise falls in this zone you are in a favorable position with relatively attractive growth opportunities. This indicates a "green light" to invest in this offering.
High Attractiveness / Strong Enterprise
- provide maximum investment
- consolidate your position to focus your resources
- accept moderate near-term profits to build market share
High Attractiveness / Average Enterprise
- build selectively on strength
- define the implications of challenging for market leadership
- fill weaknesses to avoid vulnerability
Medium Attractiveness / Strong Enterprise
- invest heavily in selected segments
- establish a ceiling for the market share you wish to achieve
- seek attractive new segments to apply strengths
The Yellow Zone consists of the three diagonal cells from the lower left to the upper right. A position in the yellow zone is viewed as having medium attractiveness. You must therefore exercise caution when making additional investments in this offering. The suggested strategy is to seek to maintain share rather than growing or reducing share.
Low Attractiveness / Strong Enterprise
- defend strengths
- shift resources to attractive segments
- examine ways to revitalize the industry
- time your exit by monitoring for harvest or divestment opportunities
Medium Attractiveness / Average Enterprise
- segment the market to find a more attractive position
- make contingency plans to protect your vulnerable position
High Attractiveness / Weak Enterprise
- ride with the market growth
- seek niches or specialization
- seek an opportunity to increase strength through acquisition
The Red Zone consists of the three cells in the lower right corner. A position in the red zone is not attractive. The suggested strategy is that you should begin to make plans to exit the industry.
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Medium Attractiveness / Weak Enterprise
- act to preserve or boost cash flow as you exit the business
- seek an opportunistic sale
- seek a way to increase your strengths
Low Attractiveness / Average Enterprise
- make only essential commitments
- prepare to divest
- shift resources to a more attractive segment
Low Attractiveness / Weak Enterprise
- exit the market or prune the product line
Bootstrapping Your Company's Growth
Many people dream of having a great idea that attracts funding from investors and rapidly creates or dominates an industry. Reports of such success feed our expectations, but in reality this scenario is rare. Most companies grow step-by-step and evolve into their market, funded by loans, personal risks, and their own cash flow.
I interviewed Bert Brown, one of my partners in a software venture, regarding the startup funding process. The following is the result of the interview.
The differences between these approaches [investment funds vs. bootstrapping] are time and ownership. Investors enable large scale development, saturation of distribution channels, aggressive marketing penetration, and flexible pricing. Their capital transforms your company into a real player real quick. If used wisely, it can establish your pre-eminence and lock others out of your market. For those benefits, you give up significant ownership early. Seeking capital also forces you to clarify your assumptions and justify your projections. Investors want realistic foundations for your claims of vast returns. For most entrepreneurs, this is an iterative process of presentation of an evolving concept, serial rejection, and adaptation. The ideas that survive this funding filter are more viable and better focused, but they are few in number. Many innovators become discouraged and drop out along the way.
Going It Alone
Bootstrapping is a more nuanced approach to growing your company. You survive not by your dazzling brilliance, but because of your persistence and effective use of limited resources. Getting started is easy. The purchase of business cards and letterhead creates your identity. The filing of a Partnership Agreement or Articles of Incorporation establishes a legal entity for opening a bank account and qualifying for processing credit cards. A simple government form registers your company as an employer. So far, anyone could do it any number of times. The real trick is the cost of sustaining it.
Mr. Brown started his first software company with one other partner. Both were experienced business professionals and technically qualified to create innovative software. Both contributed cash to cover incidental operating costs and worked their first year without income. They borrowed nothing and owed nothing if the venture should fail. When their first product was ready for market, they split the cost of the first ad in a national magazine. They became the first customer of a start-up ad agency that gave them beneficial rates. Their first ad generated sufficient cash to fund two more ads, and the flame ignited. No outside cash infusion was required throughout the next 26 years of growth.
The cash to grow must come from somewhere, either outside or in. The partners were willing to reinvest all income toward growth. That means mundane things like office space and salaries as well as marketing, promotion, and sales. After five years of steady growth, they wanted to expand both their product line and their market. So they took on another partner who brought the additional technical skills they required and the business experience strategic to their objectives. All the partners took home only a fraction of what they could be earning if employed by an established corporation. But the revenue from early products was used to cover the operating costs of the new products until they were self sustaining.
Hiring the Best
They frequently receive applications from professionals who respect their expertise and see the vast potential of their market. But these professionals come with a high price tag. They have encountered several that would have made major contributions to their team, but they have chosen not to pay high salaries for potential future benefits; the partners themselves brought a cumulative 60 years of prior business experience. They chose to leverage that by hiring potential talent that they could train and guide. They funded their employee’s budgets and let them grow into their responsibilities. This has created close knit working relationships, high employee retention, and strong skill sets. One of them eventually became a partner, too.
Banks require assets as collateral for loans. Software companies have no assets that qualify, so loan opportunities are limited. After several years of consistent growth, they challenged themselves to think on a grander scale. They projected what the next quarter would produce if they continued their normal operations. Then they established a line of credit with a local bank and borrowed the limit, investing all of it in a major incremental marketing campaign. This can boost profits and speed up growth rate, but they have repeatedly found that steady growth is sustainable while attempts to leapfrog are costly.
Distribution Channel is Critical
Most entrepreneurs overly focus on their product. The real point of vulnerability is your relationship to the distribution channel. The right product and the right quality of product is a necessary, but not sufficient component of success. You must also have direct means of delivering promotional materials and product to your prospective audience. It is difficult for a small company to compete, even if they offer a superior product, in an industry dominated by a large company with sufficient investment capital to lock up the distribution channels. If you are bootstrapping, you have limited resources that must be allocated creatively.
The End Game
When you approach an investor for funding, you will be asked for your end of game plan [exit strategy]. After you have spent their capital and achieved your projected growth, how does the investor gain the return? Your growing revenue stream is not their end goal, but only a means of attracting buyout options. When you accept their capital, you agree to a scheme for distribution of the going concern to everyone's benefit. But bootstrapping keeps your options open. Your goal may be to sell out and reap early rewards. But you may also choose to ride the growth curve to even greater rewards. Bootstrapping takes longer, but allows you to enjoy the fruits of your labor at the pace you choose.
So where do you go from here?
Bootstrapping, loans, or outside investor money all require you to have a business plan and marketing strategy to improve your chances for success. Our services are designed to assist you in the strategy development process and planning phases of your business.
Startups and existing business can both benefit from better planning.
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