Wednesday, August 29, 2012

6 Keys to Moving Startup Leaders From Good to Great

I’ve often said that creating and building a business is not a one-man show, even though it usually springs from the mind and determination of one person – committees don’t start successful businesses. But taking an idea to a business success requires many people to work together effectively, and that requires entrepreneurial leadership.

Leadership is not a skill one is born with, but it can be learned and honed from experience and failures. We all start with what researchers term the “knowing-doing gap.” We know what should be done, but we don’t know how to get it done. Many people assume the solution is to find the recipe, or leader’s checklist, and follow it methodically.

I think it takes a few more steps to “activate” the checklist and fruitfully engage in the activities that lead to leadership success. Michael Useem of Wharton, in his book, “The Leader’s Checklist,” outlines 15 mission-critical leadership principles, and also includes six avenues of learning for new entrepreneurs to activate their leadership skills:

  1. Study leadership moments. A first step is to become a self-directed student of leadership. This study can take many forms: reading leaders’ biographies, witnessing leaders in action, and joining leadership development programs. What’s critical is witnessing how others have worked with a full checklist or fallen short, often a powerful reminder to examine whether you yourself are employing all the necessary principles.

  2. Solicit coaching and mentoring. Solicit personal feedback from individuals who can provide informed, fine-grained advice on not only the leadership capacities that you already exhibit but those that require better display. It is hard to correct what you do not know you are not doing.

  3. Accept stretch experiences. Ask for and accept new responsibilities outside your comfort zone. By testing fresh territories and experiencing the setbacks they can bring, you can grow to appreciate the shortfalls in your own leadership style even as you learn to more consistently apply it.

  4. Conduct after-action reviews of personal leadership moments. Look back on leadership actions just taken, asking what worked, what was not invoked, and even what was missing from the original checklist. Through such efforts, entrepreneurs who actively pursue feedback from their team and their customers are on the road to success.

  5. Endure extremely stressful leadership moments. Transform a chilling experience into a learning opportunity. We often learn as much from setbacks as successes—sometimes we learn even more from setbacks than successes—and with unflinching study of the stumbles, you have a greater readiness to apply real leadership the next time.

  6. Experience the leadership moments of others. The final step is to vicariously or directly experience a leadership moment of a mentor or peer. When you walk in another’s shoes during a critical test of leadership, you will build a better appreciation for when and how to invoke your own leadership elements.

The core principles of leadership for every entrepreneur include articulating a vision, think and act strategically, act decisively, communicate persuasively, motivate the troops, build relationships, and building leadership in others. Of course, these need to be customized for every culture and every business environment.

In every environment, there is a final and most vital leadership principle – common purpose comes first and personal self-interest comes last. In business, it appears in Jim Collin’s appraisal as one of the defining qualities of those who lead their companies from “good to great.”

Entrepreneurial leadership has its greatest impact in times of uncertainty and change, like the present. How wide is your knowing-doing gap, and how actively are you working to close it?

Marty Zwilling


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Monday, August 27, 2012

Adding Slides Does Not Enhance Your Investor Pitch

As a member of the local Angel group selection committee, I’ve seen a lot of startup presentations to investors, and I’ve never seen one that was too short - maybe short on content, but not short on pages! A perfect round number is ten slides, with the right content, that can be covered in ten minutes. Even if you have an hour booked, the advice is the same.

I’ve published these points before, but based on interest, it’s time for an update. Remember the goal is an overview presentation that will pique investor interest enough to ask for the business plan and a follow-on meeting, not close the deal on the spot. If you can’t get the message across in ten minutes, more time and more charts won’t help.

Every startup needs both a business plan and an investor presentation, completed before you formally approach any investors. The approach I recommend is to build the investor presentation first, by iterating on the bullets with your team, and then fleshing out the points into a full-blown text-based business plan document. Here are the ten slides you need:

  1. Problem and market need. Give the “elevator pitch” for your startup. Explain in analogies your mother could understand, and quantify the “cost-of-pain” in dollars or time. Fuzzy terms like “not user-oriented” or “too expensive” are not helpful.

  2. Solution product & technology. Here is how and why it works, including a customer-centric quantification of the benefits. Make sure to communicate the relevance of your product / services to market needs. Describe your technology patents and “secret sauce”.

  3. Opportunity sizing. Define the characteristics of the overall industry, market forces, market dynamics, and customer landscape. Investors like $1B markets with double-digit growth rates. You need data from industry experts like Forrester or Gartner for credibility.

  4. Business model. Explain how you will make money and who pays you (real customer). In this section, you need to be passionate about recurring revenue, profit margin, and volume growth. Implicit in this is the go-to-market strategy.

  5. Competition and sustainable advantage. List and position your competition, or alternatives available to the customer. Highlight your sustainable competitive advantages, and barriers to entry.

  6. Marketing, sales, and partners. Describe marketing strategy, sales plan, licensing, and partnership plans. Here is also a good place for a rollout timeline with key milestones. Make sure your marketing budget matches the scope of your plan.

  7. Executive team. Qualifications and roles of the top three executives and top three on your Board of Advisors. They need domain knowledge and startup experience. Highlight their level of involvement, and quantify their skin in the game.

  8. Financial projections. Project both revenues and expense totals for next five years, and past three years. What is the current valuation of the company? Show breakeven point, burn rate, and growth assumptions.

  9. Funding requirements and use of funds. What is the level of capital funding sought during this stage? What equity is the company willing to give in return for the investment? Show a breakdown of the intended uses of these funds.

  10. Exit strategy. What is the timeframe of return on investment? What is the planned exit strategy (IPO, merger, sale, including likely candidates)? What is the timeframe for the exit? What is the rate of return expected for the investor?

Hand out copies of the slides before the presentation for note taking, with proper cover sheet, with brochures, product samples, or other marketing material you may have. Offer to do a demo later, but don’t try to squeeze it in the presentation.

My last recommendation is practice, practice, practice. The CEO should give the pitch, and prepare by playing “presidential debates” - asking your team to be the opponents, and check you on timing. Investors hate long rambling presentations. Show some energy and enthusiasm, and remember if you lose their attention, you have lost the deal. Have fun!

Marty Zwilling


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Thursday, August 23, 2012

8 Ways Entrepreneurs Often Destroy Team Motivation

Assuming no one would demotivate their team intentionally, then why do we see it happen so often? I believe it’s because too many entrepreneurs and leaders are so self-centered that they really don’t see what impact their actions have on others. What these leaders need to do is spend more time eliminating their own demotivating habits, rather than delivering more motivation.

Maybe it because there are plenty of tips, seminars, and books on the motivation side of the equation, starting with the basic Motivating Employees for Dummies, and so few resources on elements of demotivation. To learn about ways that your team is demotivated, most leaders would need to look no further than feedback from their own team, indicating you do the following:

  1. Be sure your team doesn’t know what is important to you. You do this by changing your mind on an issue several times a day. Or by making sure your answers to employee direction requests run counter to ones given previously. Keeping your team guessing may keep them alert, but it is highly demotivating.

  2. Never explain your actions. Just because you are the boss, that doesn’t mean you don’t have to explain your actions. They are watching you carefully, but they can’t see what’s going on in your mind. Non-specific directions like “make it better” or “get it right next time” are not helpful or motivational.

  3. Hire team members who will follow your instructions. Then you have to make sure they are punished for taking any initiative that you personally did not authorize. These people may appreciate having a job in these tough economic times, but they won’t be motivated to take any risk, or lead your company through the competitive minefield.

  4. Keep people on their toes with a threat of consequences. This may be as simple as withholding opportunities and rewards, but people need to understand that you are serious about punishment for mistakes. Even implied threats are demotivating, yet most employees say their supervisors do hold threats over them on a routine basis.

  5. Team meetings are for delivering the latest decisions. Bring your team members along to all the meetings, but make sure they listen carefully rather than speak or provide input. You may ask them to bring you up to date on what they’ve been emailing you, but you’ve been too busy to read.

  6. Agree to milestones and then accelerate them. After you hear the latest sales projections, you can’t resist adding a “stretch” objective, just to keep people challenged. For development projects, you prefer milestones just after major holidays, so people have the option of working through the holiday for extra credit.

  7. Thank your employees for the little extras. You recognize the need for positive feedback, but it’s less risky to apply it to potential problem items, like “Thank you for doing the job manually, rather than waiting for your computer to show up,” or “Thanks for coming to my house to fix my kid’s home computer.”

  8. Be careful not to get too involved in your employees own goals. If you help them too much, they will just leave you for a bigger opportunity. They need to understand the commitment of meeting your goals first, so you send reminder emails to them at midnight on Saturday, marked urgent.

If you recognize yourself in any of the points above, or find this article on your desk chair one morning, it’s never too late to change. Rethink your own behavior in order to ferret out any unintentional or intentional demotivational acts.

It’s time to move to the positive side of the motivation curve, from the team’s perspective. Motivation is one of the most powerful driving forces toward entrepreneurial success. In these tough competitive times, you need all the help you can get. Don’t try it with a demotivated team.

Marty Zwilling


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Wednesday, August 22, 2012

Startups Must Balance Social Media Costs vs Value

If you are an entrepreneur today, and not using social media to promote your business, you are missing out on a huge opportunity. But, contrary to what most people preach, it isn’t entirely free. Most social media outlets don’t require a subscription charge, but they certainly require an investment – in people, in technology, your reputation, and your time.

There are hundreds of consultants out there who will take your money for guidance in this area, but I recommend that you start with some free resources on the Internet, or one of the many recent books on this topic. One I read a while back, “How to Make Money with Social Media” by Jamie Turner and Reshma Shah, Ph.D., hits all the right points from my perspective:

  • There are risks as well as benefits. As with many startup activities, you only have one chance for a great first impression. You can jump into social media with a poor brand definition, poorly focused content, unrealistic expectations of customer service, or be killed by malware or viruses.
  • Assess social media relevance to your product or service. If your business is industrial B2B products, social media should be low on your list. Spend your time and money on other platforms. If you are selling to consumers, especially younger ones, your business won’t survive without an effective social media presence.
  • Attracting key stakeholders requires sensitivity. For some customers and many investors, a heavy focus on social networks and viral marketing may be a negative, rather than a positive. A balance of conventional and social communication and marketing is always advised.
  • Pick the right platform for your business. Within each of the platform categories defined above, there is a right one and a wrong one for your audience. For example, LinkedIn is attuned to business professionals, Facebook is dominated by the social and upwardly mobile crowd, and the fading MySpace is for tweens and creative types.
  • Communication and writing skills are required. Heavy texting experience is not a qualification for communicating via social media. In additional to strong journalistic writing and storytelling, you need business acumen, strategic thinking and planning, and the ability to do the right research. These days, video production is also a useful skill.
  • Make social media an integrated part of an overall strategy. An integrated marketing strategy starts with an overall brand management strategy, delivered through online and offline communications, promotions, and customer engagement vehicles. Your Twitter and YouTube messages better match your print advertising message.
  • Find the right tools to analyze the ROI. Return-On-Investment metrics are not new, but the tools are different. Get familiar with current social media tools, such as Google Analytics, Omniture, and HootSuite analytics. Over time, put together the data you need to measure your progress on a weekly/monthly/yearly basis.

The key social media platforms today include communications (Wordpress blogs, Twitter), collaboration (Wikipedia, StumbleUpon), and multimedia (YouTube, Flickr). In looking ahead, don’t forget the mobile platforms (iPhone, Android), and location-based services (Foursquare, Facebook Glancee).

As with any resource or tool, you need to optimize your social media costs against a targeted return. That means first setting a strategy and plan for what you want to achieve, then executing the plan efficiently, and measuring results. It’s not free, but it’s an investment that you can’t afford not to make.

Marty Zwilling


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Monday, August 20, 2012

Investors Know A Product Doesn’t Make a Business

Why is it that most of the business plans I see are really product plans? I define a product plan as a detailed description of your product or service, with a bit of business thrown in at the end. A business plan is a detailed description of your business, with a bit of product description thrown in near the front.

Don’t get me wrong. It’s definitely positive to have a product plan. A simple differentiation is that a product plan is designed for internal use, to get the product out. A business plan is an “outward facing” document for external investors, or for C-level executives within your own company.

The product plan tells your developers what to build, and the marketing team what to market. Because it addresses an internal audience, it can use technical jargon and assume the reader understands the technology. Here are the key components of a good product plan:

  • Detailed features. For software, websites, and high-tech products, this is the “meat” of what you intend to build. Enough detail is required so that someone else can build it without you (outsourcing). Equally important, marketing and sales people should be able to identify benefits and marketing strategies, set prices, and validate a business model.
  • Market research. This section defines the market, sizes the opportunity, and discusses the needs and requirements that will be addressed by your product and service. Establishing credibility is key, so this data should come primarily from industry experts, with footnotes to the source, rather than your passion that everyone needs one.
  • Competition analysis. There are always competitors, or alternative ways to get the job done. Here is where you pick a few of these, characterize what they do, and position your own product to show your competitive advantage.
  • Development and rollout. Show the timeline, milestones, costs, and people required to produce the product or service. Address proof of concept, performance considerations, quality certification, and support ramping.

Concurrently, or later, it’s necessary to build a separate business plan. Because this document is “outward facing” the tone and level has to change to be understandable by customers and investors. Here are some key components:

  • Problem statement and solution. Skip the acronyms, write at an eighth-grade level, and talk in terms of “benefits” rather than “features.” Assume readers don’t know or share your vision, knowledge, and passion, so you have to sell them on your plan at all levels.
  • Market research and competition. Reuse the two comparable sections above, making sure you refocus the words for an external audience, and remove the technical jargon. These are the only sections that these two plans have in common.

Actually, it’s most disconcerting when people approach me with neither – just a verbal description of their “idea,” looking for a business assessment of its potential. In frustration, I usually comment to them that ideas are worthless outside the context of a realistic business plan.

I realize that many of you entrepreneurs are technical types, and you feel certain that an exciting product plan will highlight an exciting business opportunity. Instead most investors will see it as a “solution looking for a problem.” That’s a big red flag, and will usually get your plan a quick toss to the circular file.

Marty Zwilling


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Tuesday, August 14, 2012

6 Key Drivers To a Long-Term Competitive Advantage

One of the toughest and yet most important questions you will be asked by savvy potential startup investors is “What is your sustainable competitive advantage?” Yet many entrepreneurs, maybe in their passion for their new product, gloss over this one, or even announce that they have no competition.

Think about each of the three words for the full meaning of the phrase. “Sustainable” means over the longer term – not just today. First to market, for example, is not sustainable. It may buy you a few months, but if you show traction, competitors with deep pockets will catch up and bypass you quickly, jeopardizing all your investments.

“Competitive” should be taken broadly to include alternative ways that people might solve the problem you are addressing. Don’t define your scope so narrowly that you would not consider airplanes to be competitive with your new train, or you will suffer their fate. The competition is transportation, not slow machines on tracks.

“Advantage” needs to be measurable and significant. Many entrepreneurs lead with fuzzy terms like “improved usability” and “lower cost.” Experienced business people realize that unless you are dealing with a commodity, or customers are extremely unhappy, they won’t switch to a new alternative unless the savings are well above 20%.

So what are the business elements that investors look for to conclude that you may indeed have a sustainable competitive advantage? Here are the key ones:

  1. Real intellectual property. We can all argue the shortcomings and non-defensibility of patents, but these are still your best competitive protection, sustainable for twenty years. Others of lesser value include trademarks, trade secrets, unique domain names, long-term contracts, and copyrights.

  2. A dynamic product line, rather than a single product. If your product or service looks like one-of-a-kind, with no planned follow-up, you have a weak position. The best position is some innovative technology, with a great initial product, and a big list of follow-on products that can be commercialized to keep ahead of competitors.

  3. Dramatic cost improvement for cause. What we are looking for here is a breakthrough in technology (patented), manufacturing process, or new revenue model, that results in an order-of-magnitude cost reduction. Saying that you will work harder and more efficiently than competitors to keep costs down is not convincing.

  4. Proven team with inside relationships. Great people are always a real competitive advantage. Many markets, like government contracts, are especially costly and time consuming to penetrate, but if your team already has these connections, you have an immediate head start, and past leadership success suggests you can sustain the lead.

  5. Lock on the market or customer base. If you already have a brand with a large customer base that is relevant to this new business, that’s a tremendous advantage, and it’s sustainable if you can maintain the momentum through complementary products. Investors will look at turnover rates, cost of acquisition, and revenue streams.

  6. Strong focus and differentiation. A new social networking product that proclaims to combine the best of Facebook, YouTube, LinkedIn, and Twitter has too broad a focus and will likely not compete in the long run with existing offerings. Combining functions is not a good differentiator.

Overall, a sustainable competitive advantage requires value-creating products, processes, and services that cannot be matched by competitors now, and plan content to maintain that position as you scale. Of course all of this assumes you are in a big growing market, with adequate resources, marketing, and great people to deliver. No one said it would be easy!

Marty Zwilling


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Monday, August 13, 2012

These 10 Key Elements Make a Business Plan Fundable

People ask me if they really need ANY business plan, unless they are looking for an outside investor. In fact, a business plan is needed more by you than investors, as the blueprint for your company, team communication, and progress metrics. Things that make it investment-grade for outside investors will also benefit you, since you are the ultimate investor.

First of all, any good business plan should demonstrate that you have done the homework to be an expert in your industry, and in what it takes to build a successful business from your idea. I’ll skip the basics here, and highlight only key elements that investors focus on:

  1. Define the problem. Every plan must start with the problem you are solving, not a description of your company and product. Explain in terms your mother could understand, and quantify the “cost-of-pain” in dollars or time. Terms like “every customer needs this” and “next generation platform” are far too soft, and should be avoided.

    Many entrepreneurs scare away potential investors by claiming that their technology represents “truly disruptive technology.” What that may mean is that you haven’t figured out yet what problem it solves, or it may take many years for people to get it. No investor wants to wait that long for his payback, or fund the years of waiting.

  2. Solution and benefits. This is not the place for a detailed product specification, but an explanation of how and why it works, including a customer-centric quantification of the benefits. Skip the technical jargon and hyperbole. Do describe your intellectual property and “secret sauce”.

    Focus is the keyword here. Pick a specific solution that you have built or prototyped, rather than rambling about all the possible things that could be done with your idea. Clearly define the customer, channel, and revenue model associated with this solution.

  3. Industry & market sizing. Start with the evolution of the overall industry, market segmentation, market dynamics, and customer landscape. Remember that investors like industries that have a billion dollar opportunity, and a double-digit growth rate. Data from accredited market research groups like Forrester or Gartner is required for credibility.

    It always amazes me how an entrepreneur can define his market opportunity so broadly, and then assess his competition so narrowly in the next breath. You won’t impress investors by claiming that everyone in China needs one, and nobody else has exactly the right features to compete with you.

  4. Explain the business model. This is how you will make money, who pays you, and gross margins. In this section, you need to be passionate about revenue, profit, and volume growth. Many people seem to use the social network advertising model for revenue, but forget it assumes at least 100M users and $50M investment.

    Avoid any statements like “All we have to do is get 1% of the market.” There are two problems with this assertion. First, no investor is interested in a company that is only looking to get 1% of a market. Second, that first 1% is the toughest of any market, so you look naïve implying it's easy to get.

  5. Competition and sustainable advantage. List and describe your competition, direct and indirect, including customer alternatives. Asserting you have no competition is not credible. Then detail your sustainable competitive advantage, and highlight barriers to entry which will keep your competitors at bay.

    Often I see statements like “Microsoft is too big/slow to be a threat.” Usually the reason the big companies are no threat is because the market is too small. But investors know that sleeping giants do wake up, the moment your company shows some traction. Competing with IBM, Microsoft, and other large companies should never be minimized.

  6. Marketing, sales, and partners. Describe your market penetration strategy, sales channels, pricing, and strategic partnerships. Here is also a good place for a rollout timeline with key milestones. Convince investors that you have lined up sales channels, strategic partners, and a viable marketing strategy.

    Be careful with assertions like “We have strong interest from a major customer.” The mention of unsigned contracts normally takes away more credibility than it adds. You can bolster this position by including a Letter of Intent (LOI), contract summaries, or even testimonials.

  7. Executive team. Investors invest in people - not just ideas. Convince investors that your team is experienced in starting a new business, and have great expertise in the selected business domain. Include Advisory Board members and key industry people connections.

    Sometimes I see statements like “A world-class CEO will be joining us after funding.” Rest assured that potential investors will ask for names, and place some calls. Soft responses from your candidates will definitely kill your credibility.

  8. Funding requirements. Explain how you calculated the funding requirements, and show details on planned use of funds. Quantify existing skin-in-the-game, by insiders and outsiders, including sweat equity and capital. Include a current valuation estimate.

    The most credible sizing approach is to do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K the first year, add a 25% buffer, and ask for $500K funding.

  9. Financial forecast and metrics. Project both revenues and expense totals for next five years, and past three years, if relevant. Show breakeven and growth assumptions. Details should be available in a separate financial model, but not included here.

    Remember that investors are looking for large, scalable, high-growth opportunities. Attractive deals show double-digit positive growth per year, and revenues that are projected to $20M or more within five years.

  10. Exit strategy. This section is only required when you expect outside investors. These investors want to know that you are thinking about a liquidity event – when and how they will get their money out, with ROI. For a family business, don’t project an exit.

Otherwise, identify your preferred exit strategy, including specific candidates for merger or sale, and timeframe. “Going public” (IPO) is another alternative, but not common. Show how your rate of return would be attractive to investors.

An investment-grade business plan is a professionally prepared document, preferably about 20 pages, to satisfy both angel investors and venture capitalists. In preparing it, try to look at your project through the investors eyes. If your plan is missing one or more of the above elements, it will likely be deemed not “fundable”, and rejected.

The best plans are not usually the fanciest or the longest. They are not measured by the quantity of impressive graphics or the size of the revenue projections. Investment-grade ones attempt to answer every question an investor could possibly ask, except maybe “where do I sign”?

Marty Zwilling


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Tuesday, August 7, 2012

In-House Business Innovation Requires a New Mantra

It seems to be an accepted fact these days that big companies normally innovate by buying a startup with innovative products, rather than focusing on in-house innovations. This is a good thing for entrepreneurs and investors, who can win big, but it’s not a given. I see many startups who seem satisfied with a “me too” approach, building yet another social network or e-commerce site, rather than being truly innovative.

Much has been published on this subject, including a recent book “Look at More: A Proven Approach to Innovation, Growth, and Change ” by Andy Stefanovich, which is really a guide to established companies for unleashing creativity within their organizations. He asserts that the problem is lack of inspiration, and he supports this with twenty years of real case studies from his own experience.

The good news is that most entrepreneurs and startups have more inspiration than almost anything else, and it sometimes leads to success despite their lack of resources and business skills. Yet even entrepreneurs need to focus on the most effective way to unleash innovation, and maximize their chances for success.

Andy offers a simple mantra for innovation, expressed as “Look at more stuff; think about it harder.” This mantra is complemented by a framework known as the five M’s, which are five key principles for unleashing creativity in any environment:

  1. Mood. Inspiration and creativity requires the right context of attitudes, feelings, and emotions. Every business leader who wants innovation must constantly monitor and set the proper mood for the environment. You can set the right mood by purposefully disrupting the status quo, initiating change, asking provocative questions, and listening.

  2. Mindset. This is the intellectual foundation of creativity, the baseline capacity each of us has for getting inspired, staying inspired, and thinking differently. Four thinking disciplines which produce a creative, inspired mindset include changing your perspective, taking risks, finding your passion, and challenging assumptions to embrace ambiguity.

  3. Mechanisms. These are the tools and processes of creativity that help you engineer inspiration into the way you work and empower your organization to embrace the kind of behavior that fosters innovation. Four key steps include building a context, generating ideas, filtering ideas, and building a blueprint for implementing the best ideas.

  4. Measurement. Even creativity needs guidance and critical feedback on the qualitative and quantitative performance of individuals and organizations. Measurements send a strong signal of what is important and where people should focus their passion and energy. In addition to measuring results, you need to measure mood, mindset, and the mechanisms above.

  5. Momentum. This is accomplished by the active championing and celebrating of inspiration and creativity that foster a self-reinforcing cycle for increasing innovation. Momentum is an organizational priority for inspired leaders who have a clear understanding of the other four M’s.

Not everyone has to be a leader for innovation to work. Research has indicated that followers are just as important to consider as leaders when thinking about creating the mood and momentum for creativity, inspiration, and innovation. Likewise, the right mindset alone isn’t enough. You have to be able to convince others and sell your ideas.

Thus, even entrepreneurs must not assume that their efforts and their team will be creative and innovative. “Me too” startups don’t get funded, and they certainly don’t get bought for a premium by the sleeping giants who are looking for outside innovation to kick-start their growth again. Thus I suggest that every entrepreneur and every startup review their own environments for the five M’s, to avoid getting tagged as a “has been” before they even “have been.”

Marty Zwilling


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Monday, August 6, 2012

How to Reduce Your Budget and Reduce Startup Risk

One of the biggest myths I still see in the community of new entrepreneurs is the assumption that “All I need is a good idea, and some investor will give me the big money I need to build the business.” In reality, investors fund good business plans, not big dreams. It’s all in the execution.

A related myth is that it takes a lot of money to start a business. Investment requests of $500K and $1M seem to be the most popular. In reality, most business today can be built and reach breakeven for much less than these amounts, maybe $10K-$50K, with the exception of some medical related ones, and high technology content solutions.

Starting your business with a very low investment is called “bootstrapping,” and these entrepreneurs usually have the most fun. They retain full control of their business, they don’t have an investor “boss” second-guessing their every move, and they don’t have to spend months begging for money. According to experts, up to 99% of businesses are started this way.

Here are some fundamental principles for starting and growing your business with a limited budget, as outlined in a book a while back by Patrick Snow, “Creating Your Own Destiny”:

  • Run your business from the comfort of your home. Even though the cost of commercial office space is down, you still need to sign long-term contracts, make payments up front, outfit the space, and staff it. With a good website built in your basement, your business can look big, and be small.
  • Match your business to your passion. You can’t be successful doing something you don’t enjoy. Passion isn’t really a substitute for money, but if you love something enough, you will find a way to get it done without paying much cash up front.
  • Don’t hire any employees. Managing employees is a whole separate discipline, and most true entrepreneurs aren’t very good at it anyway. Running a business is not rocket science, so you can learn how if you have enough passion. Make sure any employees needed are a function of your “bandwidth,” not your confidence or interests.
  • Build a low-budget plan. This is the opposite of starting without any plan. Operating without a plan is a sure way to spend lots of money. Low-budget also means avoiding businesses that are capital intensive, or even a franchise, which often requires a big up-front investment.
  • Make money whether you are working or sleeping. E-commerce on the Internet is a good example of this. There you can sell your products and services 24 hours per day, seven days a week, on a global basis. Other examples are recurring revenue streams, like subscription fees, or referral fees, or subcontracting where you take a percentage.
  • Minimize inventory, or let the manufacturer carry it. Have you ever wondered who owns all the new cars in dealer lots? It’s not the car dealers. Another example is the Amazon.com model, where they order your product for direct shipment, only after they get your payment. Consultants don’t need any inventory
  • Barter your skills or equity for services you need. An example would be getting free office space by agreeing to be the property manager for the owner. Exchanging equity for services is worth negotiating with legal counsel, accountants, engineers, and even sales people.

Most experienced investors are convinced that too much money is a bigger risk than too little money. Good entrepreneurs can often find a substitute for money, but there is no substitute for time and determination. So keep your eyes and your heart focused on the business vision and the tips given here, and you won’t need a big budget to achieve your biggest dreams.

Marty Zwilling


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