Template:Formatting Getting Started as an Entrepreneur is a brief introduction to the basics of starting your own technology-driven business. Written in concise, simple language, the book is a quick read that you can absorb in a couple of hours.
The book emphasizes both traditional and social entrepreneurship as exciting paths for start-up entrepreneurs. With inspiring profiles of entrepreneurs whose work provides models of creative thinking and ideas that make a difference in the world, this book will help you follow your entrepreneurial passion!
- Finding the Money
- Debt and Equity
- Your Equity Circle
- Pieces of the Pie
- Social Money
- Profile: Waiting a While
- Profile: Student-Run, Their Way
You might have already heard about something called "the entrepreneurial mindset." You know it has something to do with entrepreneurs and starting your own business, but what is it, really? What does it mean to be entrepreneurial? What are entrepreneurs like, and what do they do?
The entrepreneurial mindset is marked by imagination, initiative, and a readiness to undertake new projects. It is perseverance and determination, risk-taking and daring, integrity and honesty. Entrepreneurs change the world in concrete ways through their inventions, their businesses, their social and economic impacts. The term "entrepreneurial" can apply to individuals, teams, or entire organizations.
What are entrepreneurs like?
While entrepreneurs have widely varying personalities and don't fall into a cookie-cutter mold, most successful entrepreneurs share a set of common characteristics. These include:
- A participatory management style—they're willing to share power
- A high need for achievement
- Supervisory and/or sales experience or skills
- Persistence—they're not easily discouraged
- Willingness to live with uncertainty, particularly financial uncertainty
- Open-minded—willing to listen to constructive criticism
- Flexibility—they have the ability to change when data shows they're going down the wrong path
Of course, another thing entrepreneurs have in common is the ability to bounce back from failure. Since it is entrepreneurs who are out there pushing the boundaries and changing the world, it's inevitable they will make mistakes. An important characteristic of entrepreneurs is that they are good at failure: the entrepreneur sees failure as a temporary setback, an investment in education, an opportunity to learn and to do better next time. Winston Churchill summed this up best when he said, "Success is the ability to go from failure to failure with no loss of enthusiasm."
What do they do?
Here's a standard definition of what entrepreneurs do:
There's a lot to those fourteen words; let's take apart the definition and investigate each term.
- Habitually— they cannot stop being entrepreneurial
- Create— they start from scratch and bring into being something that was not there before
- Innovate— they're able to overcome obstacles that would stop most people, turn problems and risks into opportunities, deliver, and see ideas through to final application
- Build something— the output of the innovation process
- Of recognized value— encompasses economic, commercial, social, or aesthetic value
- Market opportunities— to exploit a recognized market need
It's all about opportunity
Note the one word we keep harping on: opportunity. Entrepreneurs are opportunity-driven. Opportunity comes from changes in the environment, and one central characteristic of entrepreneurs is that they excel at seeing patterns of change. Also, entrepreneurs are not resource-driven; while the manager asks, "Given the resources under my control, what can I achieve?" the entrepreneur asks "Given what I want to achieve, what resources do I need to acquire?"
It is the entrepreneur's drive to acquire resources in order to exploit opportunities that creates the high correlation between entrepreneurship and economic growth.
More than one kind of entrepreneur
Let's be honest: not everyone reading this book will go on to form their own company. Up to this point we've defined an entrepreneur in just that manner-as someone who starts his or her own business-but in today's rapidly changing world the concept of entrepreneurship has been broadened to include a very important, new kind of entrepreneur: the corporate entrepreneur. Corporate entrepreneurship, also called intrapreneurship, is entrepreneurship practiced by people within established organizations. It is the process that goes on inside companies that leads to new business ventures; the development of new products, services or processes; and the renewal of strategies, leading to increased competitiveness. As such, it can be seen as the sum of a company's innovation, venturing and renewal efforts.
Read this book with the understanding that you can think and act like an entrepreneur whether you start your own business or contribute your skills to an existing business. Being entrepreneurial is the centerpiece.
The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.
—George Bernard Shaw
Develop success from failures. Discouragement and failure are two of the surest stepping stones to success. No other element can do so much for a man if he is willing to study them and make capital out of them.
As competition intensifies, the need for creative thinking increases. It is no longer enough to do the same thing better... no longer enough to be efficient and solve problems. Far more is needed. Now business has to keep up with changes... And that requires creativity. That means creativity both at a strategic level and also on the front line, to accompany the shift that competitive business demands... from administration to true entrepreneurship.
—Edward de Bono
One corporate entrepreneur’s story
Chris Consorte had no intention of taking the job. But after launching his own marketing agency a year earlier, he met with a mortgage banking firm to get a foot in the door and, he hoped, to snag a new client. Then, as they say, they made him an offer he couldn’t refuse. “They were willing to pay me my asking price, [which was] more than I was making at my own company,” says Consorte.
But soon enough, the surprise job gave Consorte even more than he ever expected. The boss, “an intuitive guy,” saw that his new hire wanted more out of his job and work life than the average employee and started bouncing ideas off of him for new products and divisions. “Giving people opportunities was a big thing for him,” says Consorte. “They were embracing my salesmanship and entrepreneurial ways.” The best part? His boss made it clear that he wasn’t just giving Consorte the chance to learn a new thing or two (and take on hours and hours more work); he was going to share the wealth if all went well.
Eventually, among other responsibilities, Consorte was made head of the firm’s internal advertising agency, where he was free to take on outside clients so long as they weren’t competitors of the firm and it didn’t interfere with his full-time job. “I’m the type of person that if I have unlimited potential in front of me, I’m going to put in extra hours,” he says. “I’m all in—especially if I can see the results.”
Innovate or else
While corporate entrepreneurship can be good for the employee’s bottom line, it’s become a must-do for companies that don’t want to get left behind. “I don’t think there are any companies right now who can afford to rest on their laurels,” says Rita Gunther McGrath, associate professor at the Columbia Business School and author of The Entrepreneurial Mindset (Harvard Business School Press). “As the pace of competition gets faster and faster, yesterday’s winner can very easily become tomorrow’s roadkill.”
Defining the Opportunity
Finding the intersection of technology and market
So where is the next million-dollar idea hiding, just waiting to be discovered? The answer: within you. Truly. In fact, you might believe you've got a million-dollar idea in your head already. But a great idea alone doesn't guarantee success: you also need to be able to recognize when a concept has the potential to become something tangible and hit it big. It all comes down to opportunity recognition (there's that word again).
How do you recognize an opportunity? What exactly does one look like? It has to do with analyzing both the product and the market and seeing if they intersect. What you're looking for is a product that fulfills (or creates) a need at just the right time, in just the right place. Opportunities are built using a combination of your ideas and entrepreneurial creativity mixed with market need and good situational timing.
Think about your idea as you read the rest of this chapter—or, if you don't have an idea yet (which is perfectly fine), let it inform your idea generation process—and ask yourself these questions:
- Is my idea realistic? Is it technically and financially feasible?
- Is there a strong need for my potential product?
- Is this a need I passionately want to address?
- Does pursuing this opportunity meet my goals as an entrepreneur?
Where's the pain?
There's an old metaphor about meeting customer needs:.Come up with a product that scratches a customer's itch, and maybe they'll buy it. Come up with a product that relieves a customer's pain, and you've got a winner. "Pain," of course, is a relative term and could describe just about anything-a toothache, a slow computer, a boring job-but the idea behind the metaphor is that it's the entrepreneur's responsibility to find out what the customer needs most, then fulfill that need. It goes without saying that if your product isn't grounded in reality and serves no need at all-doesn't even scratch an itch-it has no chance. No one buys useless products.
On the cutting edge
Quite a few products and services out there simply fulfill a pre-existing need. Returning to the previous example, if you have a toothache, you go to the dentist and she fulfills your (painful, immediate) need. Simple. But when you're talking about high-tech products, things get a lot more complex. You may very well come up with an idea so new and innovative that it addresses a need that doesn't even exist yet. This is a difficult spot to be in as your product may have a hard time gaining traction.
When you're on the cutting edge:
- Get into your customers' heads as much as possible
- Develop cheap, easy-to-test prototypes
- Put the prototypes into people's hands and listen to what they say
- Be open to your product perhaps being useful in a market you never originally imagined
The last point is particularly instructive. When 3-M chemist Spence Silver invented a new adhesive that would not dry or permanently bond to things, he had no idea what to do with it. When another 3-M chemist, Arthur Fry, needed a bookmark for his choir book the idea for applying the glue to small pieces of paper emerged, and Post-It Notes were born.
What you know
Understandably, the majority of entrepreneurs found businesses based on ideas gathered from jobs and activities and lifestyles they're familiar with. For one thing, the entrepreneur understands what target customers want because she's part of the group. Two, because the entrepreneur is familiar with the products currently on the market, she can usually introduce a product that trumps the competition. And finally, when selling the product to customers, the entrepreneur appears not as a salesperson, but rather as "one of us." It's a powerful situation that doesn't guarantee success, but definitely gives you a good chance.
Levels of need
But now let's reverse the situation and talk about what you don't know, what you aren't familiar with. It can be a very good thing to actually go beyond what you know-to keep an open mind about opportunity and think broadly about the needs of the world beyond your comfort zone. Undoubtedly a new mp3 player or a new snowboard boot addresses the needs of a certain population and has a chance at success. But UV water purification systems for villages in the developing world address the needs of an entirely different population, and have just as good a chance at success, whether measured in terms of profits or lives saved, or both. What we're talking about are levels of need. If you haven't already, what you need to do is figure out your priorities as an entrepreneur. Whose needs to do you want meet? Those of the US market, or the basic human needs of the developing world, people with disabilities, the elderly? How about products designed with the environment in mind? Your answers to these questions will shape your business from the very beginning. Weigh them carefully.
When is an idea an opportunity?
An idea is an opportunity when it is attractive, durable and timely and is anchored in a product or service that creates or adds value for its end buyer or user. The most successful entrepreneurs are opportunity-focused; that is, they start with what customers and the marketplace want and do not lose sight of this.
You have a chance
Don't think you can't possibly compete with large, multibillion dollar players. The high-tech industry welcomes small business like no other. The performance of smaller firms in technological innovation is remarkable: 95% of the radical innovations since WWII have come from new small firms. A National Science Foundation study found that smaller firms generated 24 times more innovations per research and development dollar than firms with 10,000 or more employees.
New venture realities
- Success is highly situational
- Starting a company is a lot harder than it looks, or you think it will be.
- Most new ventures are works in process.
- Speed, adroitness of reflex, and adaptability are crucial.
- The key to succeeding is failing quickly and recouping quickly.
- The best entrepreneurs specialize in making "new mistakes" only.
Quotes from "New Venture Creation," 2004, by Timmons and Spinelli
Newton’s recipe for failure: Ignoring customer needs
For a high-tech product to succeed it must be polished and refined until its technological capabilities and features meet the needs of the market. Two examples from the dawn of the Personal Digital Assistant (PDA) era in the late 90s illus-trate how—and how not—to bring a high-tech product to market.
Apple’s Newton belongs in the “how not” category. Despite a high-quality handwriting recognition system, the Newton was large and cumbersome, expensive, and prone to problems. Larry Tesler, a former member of the Newton develop-ment group, says that although Apple had learned about key customer needs during market research, it ignored these needs when it came to developing the product, opting instead to push ahead and beat its competitors to launch. Tesler says, “In the end, we cut corners and ignored problems to try to meet a price range and a ship date that we had prema-turely announced to gain an edge in a reckless public relations battle.” (from “Why the Apple Newton Failed,” by Larry Tesler, CEO and chief scientist, Stagecast Software) With promotional materials boasting that “Newton can read your handwriting,” Apple launched its product on a plat-form of unsubstantiated claims and inflated expectations, dooming the product to consumer disappointment, ridicule, and elimination from the Apple product line in 1998.
The other side of the story is the PalmPilot. Introduced in 1996, the PalmPilot 1000 won PC Computing’s MVP Usabil-ity Achievement of the Year Award and led to a revolution in handheld computing. Jeff Hawkins, one of the original creators of the PalmPilot, suggests that the device’s commercial success has a lot to do with responding to consumers’ needs, since the major market for handhelds was and is the individual purchase. He maintains that it’s important to make tradeoffs on “what to put in and what not to put in,” so that the product maintains the correct balance of techno-logical features, usability, and affordability.
Making a difference through business
If you’re one of those entrepreneurs who wants to help solve some of the world’s problems, this section is for you. And you’re making a wise choice: more and more entrepreneurs are finding that business ventures can make money and improve the world at the same time.
As discussed in the previous section, a traditional entrepreneur sees an opportunity to make money by fulfilling a consumer or business need, usually in an area they’re familiar with. A social entrepreneur sees an additional opportunity to improve quality of life by fulfilling a social need.
What does it mean?
The term “social entrepreneur” is used in many different ways. Ashoka’s and The Schwab Foundation’s definitions (see below) aim high. Others define social entrepreneurs as leaders of non-profit organizations that use best business practices to create social change. In for-profit social ventures, a social entrepreneur typically garners the title by simultaneously seeking financial and social returns.
According to J. Gregory Dees, adjunct professor of social entrepreneurship and nonprofit management in Duke University’s Fuqua School of Business, what distinguishes social entrepreneurs is their “explicit and central” mission. They are driven not only by the bottom line, but by a distinct social goal. To quote Dees, “Social entrepreneurs play the role of change agents by:
- Adopting a mission to create and sustain social value (not just private, financial value),
- Recognizing and relentlessly pursuing new opportunities to serve that mission,
- Engaging in a process of continuous innovation, adaptation, and learning,
- Acting boldly without being limited by resources currently in hand, and
- Exhibiting a heightened sense of accountability to the constituencies served and for the outcomes created.”1
Simply put, social entrepreneurs find innovative ways to create better outcomes for society.
Focus on impact
Success in a social venture is achieved by maximizing financial returns and impact to the cause, known as Social Return on Investment (SROI). SROI can come in the form of improving people’s lives or reducing environmental harm. Just as any competitive business must create a product to best satisfy its customer’s needs, a social venture must focus on superior quality for both its customers and its cause (and these may be the same). A worthwhile social venture opportunity should include a marketable idea that also provides non-financial returns to the community you intend to serve. Idealism will help you construct a vision of what you want to achieve, but to create social value you must find viable ways to produce results. This involves a mix of passion and practicality. As an entrepreneur, you need to shape your plan around what’s realistically possible, even if you continually redefine what is possible. Entrepreneurship is challenging. Adding social aims increases the complexity, but also increases the rewards.
No matter what your goals are for your business—to accomplish social change, earn high profits, improve the environment, or all three—it’s useful to think about how you will reach them. To that end, corporate social responsibility (CSR) practices can be integrated throughout your business’ operations. The Business for Social Responsibility defines CSR as, “achieving commercial success in ways that honor ethical values and respect people, communities, and the natural environment.”2
This is what’s called the triple bottom line: expanding the spectrum of values and criteria for measuring organizational success to include not only economic, but also environmental and social concerns. For some, a commitment to CSR brings with it a need to institute triple bottom line reporting.
A good beginning
It can be helpful to incorporate your values from the start. Evidence shows that CSR can help maximize bottom line financial and social benefits. Incorporating your values into the process during the product development stage of your business will help you think of better ideas and evaluate your options more carefully. A philosophy that incorporates respecting people and the environment can be useful in guiding your venture’s growth. Good corporate citizenship will not only give you personal satisfaction, but can resound with employees, funders, customers, suppliers, and your community.
Seth Goldman founded Honest Tea to fill the gap between the too sweet and the tasteless bottled drinks on the market. He also sought to improve society. Goldman designed a business that completely integrated his philosophy of social responsibility, from the product he sells to the ways it's produced.
Goldman believes that Honest Tea has many social benefits. "Every time someone picks up our product instead of one of the sweet teas out there, they are cutting back on the sugar and calories they put into their bodies. Plus, almost all of our line is organic. Every time a tea state or garden switches to organic production from conventional it means there are less toxins being put into the water, land and consumer's bodies. We are also creating relationships with our supplier and partners that enable us to create wealth with them. Tea is one of the few products enjoyed in some of the wealthiest nations but produced by some of the poorest. The disparity really enables you to create wealth through this business."
"Define why your venture is important to you and what is important about it," Goldman recommends. "Once you get out there it's kind of easy to lose your way or lose your purpose. I think that's something we have always been very clear about and it's helped us stay disciplined in our approach."
Ashoka and the Schwab Foundation, organizations committed to supporting major social change around the world, see social entrepreneurs as revolutionaries.
Ashoka’s definition: The job of a social entrepreneur is to recognize when a part of society is stuck and to provide new ways to get it unstuck. He or she finds what is not working and solves the problem by changing the system, spreading the solution and persuading entire societies to take new leaps. Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry.
Identifying and solving large-scale social problems requires social entrepreneurs because only they have the committed vision and inexhaustible determination to persist until they have transformed an entire system. The scholar comes to rest when he expresses an idea. The professional succeeds when she solves a client’s problem. The manager calls it quits when he has enabled his organization to succeed. Social entrepreneurs go beyond the immediate problem to fundamentally change communities, societies, the world.
The Schwab Foundation’s definition: A social entrepreneur is a different kind of social leader who identifies and ap-plies practical solutions to social problems by combining innovation, resourcefulness and opportunity; innovates by finding a new product, a new service, or a new approach to a social problem; focuses first and foremost on social value creation and in that spirit, is willing to share openly the innovations and insights of the initiative with a view to its wider replication; doesn’t wait to secure the resources before undertaking the catalytic innovation; is fully accountable to the constituencies s/he serves; resists being trapped by the constraints of ideology or discipline; continuously refines and adapts approaches in response to feedback; has a vision, but also a well-thought out roadmap as to how to attain the goal.
Why Be a Social Entrepreneur?
What might drive you to social entrepreneurship? While there's no question you can create positive social results simply by participating in the market and being your entrepreneurial self, you need to look inside and see if you want to go further than that. Do you feel a fundamental desire to help people? Do you want to improve the lives of others-give them better chances? Do you want to change the human condition? If so, today's global environment puts you in a unique position to do just that.
Now more than ever, the world needs your help. Through pollution, overpopulation and abuse of natural resources we're threatening to undercut our own survival. While a small percentage of the world's population lives better than ever before, the majority of people struggle to live through the day. As a student living in America you have an unprecedented opportunity to end the inequity. You can apply your skills -design, technical, business, entrepreneurial-to any number of areas in need: the developing world, the environment, the disabled, the poor, etc. Now is your time.
The developing world
It has been estimated that 80% (five billion people) of the world's population live in poverty. Statistics show that we're living off our support systems in an unhealthy, degrading, inequitable, and unsustainable manner. Examples of worldwide problems include:
- 20% of the world's population lack clean water
- 40% lack adequate sanitation
- 20% lack adequate housing
- 70% unable to read
- 20% earn less than one dollar a day
- 20% underfed and 20% overfed
- 20% suffer from malnutrition (35% under age five)
- 35,000 people die every day from hunger-related causes
- 250,000 children die each week of malnutrition and preventable diseases
- 40% of population are at risk of malaria
- Deaths from AIDS increased more than six times over the 1990s
Communities facing these challenges include developing countries, indigenous groups, the handicapped and the elderly. Stakeholders and non-governmental organizations can articulate these community needs but often lack the technical expertise and facilities to solve them. Local entrepreneurs with innovative solutions often lack the expertise to implement solutions and commercialize them on a large scale.
This is where you come in. You are a member of a privileged community of thousands of students-a group with the skills and ability to make a difference, but who often aren't aware of their capacity to create change in underserved communities. Be aware!
As documented in Al Gore's film, "An Inconvenient Truth," human activity is contributing to a steady increase in the average temperature of the Earth's atmosphere through the buildup of heat-trapping greenhouse gases. Over time, this increase may be sufficient to cause climatic change. According to the National Academy of Sciences, the Earth's surface temperature has risen by about one degree Fahrenheit in the past century, with accelerated warming during the past two decades.
Rising global temperatures are expected to raise sea level, change precipitation, and other local climate conditions. Changing regional climate could alter forests, crop yields, and water supplies. It could also affect human health, animals, and many types of ecosystems.
What can you do to stop this phenomenon with potentially disastrous effects? You can become a social entrepreneur specializing in sustainable development. Sustainable development is meeting the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable development implies economic growth together with the protection of environmental quality, each reinforcing the other. The essence of this form of development is a stable relationship between human activities and the natural world, which does not diminish the prospects for future generations to enjoy a quality of life at least as good as our own.
What role can you play as a technological innovator in this struggle? You may have ideas for new technologies that can meet basic needs. You may pursue technology for developing countries (water purification, sanitation, power production, shelter, site planning, infrastructure, food production and distribution, communication), assistive technology for the disabled/elderly (improved wheelchairs, crutches, prosthetics, pharmaceuticals), or technology for the environment (alternative energy and quite a lot more). There are many opportunities to make a difference and make a good living doing it.
How big is your footprint?
A person's "ecological footprint" is a measurement of their impact on nature. The average American uses thirty acres to support his or her current lifestyle-that's thirty football fields put together. In comparison, the average Canadian lives on a footprint one-third smaller, and the average Italian on 55% less.
How much can nature provide? With a global population of over six billion, nature provides an average of five acres of bioproductive space for every person in the world. When the population grows to ten billion, the available space will be reduced to three acres. This should also give room for at least twenty-five million other species. Already, humanity's footprint may be over 30% larger than our fair share.
What can we do? We can become part of the sustainability movement and make it possible for everybody to secure their quality of life within the means of nature.
Muhammad Yunus is the world's best-known social entrepreneur. Thirty-some years ago, he was a young professor of economics in his native Bangladesh. He was driven to find a way to convince banks to give loans to the poorest people in his country. He was thought to be mad. The poor have no collateral, he was told. Loaning them money is folly. They will never be able to pay you back. So Yunus decided to start a bank for the poor. The first loan was for about 30 US dollars. Today millions, women in particular, have been able to pull themselves out of poverty thanks to the Grameen Bank. The Grameen Bank was the first micro-lending institution in the world. Today, microcredit is mainstreamed even into the most conservative institutions. Yunus changed forever the myth that being poor was synonymous with being a high-risk investment. Grameen's repayment rate over the years has been between 95 and 98%. Other micro-finance institutions across the world that emulated Grameen report the same returns.
Roy Prosterman had a rising career with one of the oldest and most prestigious law firms in New York City. Initially, he found the work fascinating. But, increasingly disheartened by the expenditure of vast sums of money by corporations on legal fees to defend their interests against consumers, he left the firm, and at the invitation of the University of Washington, started teaching. Soon thereafter, Prosterman came upon a law review article about land reform in Latin America that changed his life forever. Inspired by a new life mission, Prosterman founded the Rural Development Institute (RDI) on a shoestring. Its objective was to reform the rural land policies of the world's poorest countries so that farmers could gain land ownership.
Today, Prosterman, a true social entrepreneur, is 65 years old. He has been working in land reform for 35 years, focused on building legal capacity in the 35 countries that have sought his help. Because of RDI, 70 million farmers have received land ownership to about 62 million acres, close to 2% of the world's arable land.
The Idea Factory
The starting point of any entrepreneurial venture, social or otherwise, is the idea. In many ways, the quality of your idea determines the success of your venture. So how do you come up with a good one? One way to jumpstart your mind and get thinking creatively is by brainstorming.
Brainstorming is probably the best-known creative tool. When you brainstorm, you focus on a particular problem and try to come up with many solutions, pushing the outer limits of what is possible. When brainstorming, it's essential for the critics in your group (or in your head) to keep quiet. They can speak up later.
Rules for group brainstorming
Assuming that you're working as part of a team, we start you off here with a how-to guide on brainstorming together. Sit down with your group, follow these rules and see if you come up with a couple of ideas worth pursuing.
- Choose a leader who defines the problem and keeps the session on course, discouraging evaluation of the ideas and limiting the time used.
- Make sure the participants are diverse.
- Make the session fun, welcoming wildly impractical ideas along with practical ones.
- Spark off one another's ideas with new ideas.
- Keep some record of the session.
Brainstorming has its limitations: it should only be used for generating new ideas and solutions, not for decision-making. It should be targeted to a specific "probortunity" (problem/opportunity). Don't bother brainstorming if you already have several solutions to the problem and are just trying to choose between them.
Creating the right environment for brainstorming
Most of us have hundreds of good ideas waiting to come out. The challenge is creating an environment where those ideas can come out without fear of making mistakes. This requires the group to actively decide not to judge what anyone puts forward. Here, making "mistakes" and putting forward ideas that don't work is not only acceptable but encouraged. Your ideas are never criticized because they can be used either as a solution or a stimulus for other ideas.
Brainstorming should remove, or at least reduce, the fear of making mistakes. The professionalism and attitude of the participants is the key to how much inhibitions are reduced. Sticking to the rules is vital to the success of the session.
Brainstorming isn't the only way to get those juices flowing. Creative thinking guru Edward de Bono offers a myriad of creative "attention-directing tools." A few of them include:
The PMI Working intensely for two or three minutes, examine the Pluses (good points), Minuses (bad points) and Interesting points of a given option. Don't evaluate the options, but scan them objectively, challenging your initial reactions.
The CAF For this exercise, Consider All the Factors in a given situation, without evaluating them. For example, when buying a used car, consider price, previous history, previous owner, condition of the car, mileage, resale value, gas consumption, serviceability, etc.
Mind-mapping This is a technique in which you begin with a central word or concept. Write it on a piece of paper, and around it draw the five to ten main ideas that relate. From each of those, again draw five to ten ideas that relate.
Don't fall for the first good-lookin' idea that comes along
The success or failure of your project does not depend on your team generating the perfect solution on the first try. On the contrary, falling in love with your first idea can get you into big trouble and cause you to miss out on the seemingly dumb idea that might follow immediately in its path.
Edward de Bono writes that it's important to explore alternatives, because alternatives prevent the mind from settling too quickly on a solution. Working with alternatives certainly doesn't simplify the creative process. Rather, having a lot of alternatives creates confusion and opens the door for brilliant things to happen.
Techniques for idea generation
The "Classical Invention" approach helps you discover connections by asking questions about your idea. Ask yourself questions about:
- A physical object: what are its physical characteristics? What sort of structure does it have?
- Events: exactly what happened? What was the cause? The consequences?
- Abstract concepts: how do others define the concept or term? How do you define the term?
- Propositions: what must be established before people believe the proposition? What counter-arguments must be refuted?
Even more techniques
- The journalistic six (who, what, when, where, why, how?)
- Historical examination
- Block busting
- Uses for
- Improvements to
- Analogy and metaphor
- Trigger concepts
and many more!
For explanations, visit http://www.virtualsalt.com/crebook2.htm
Brainstorming tips from Ideo
Silicon Valley-based Ideo has sparked some of the most innovative products of the past decade - the Apple mouse, the Polaroid I-Zone Pocket Camera, and the Palm V, among others. But Ideo staffers don't just sit around waiting for good ideas to pop into their heads. The company has institutionalized a process whereby ideas are coaxed to the surface through regular, structured brainstorming sessions. At Ideo, idea-generation exercises are "practically a religion," product development manager Tom Kelley says. Here's a short list of tips from the pros:
1. Sharpen the focus
Start with a well-honed statement of the problem at hand. The best topic statements focus outward on a specific customer need or service enhancement rather than inward on some organizational goal.
2. Write playful rules
Ideo's primary brainstorming rules are simple: "Defer judgment" and "One conversation at a time." The firm believes in its rules so strongly that they're stenciled in eight-inch letters on conference-room walls. "If I'm the facilitator and somebody starts a critique or people start talking, I can enforce the rules without making it feel personal," Kelley says. Other rules include, "Go for quantity," "Be visual," and "Encourage wild ideas."
3. Build and jump
Most brainstorming sessions follow a power curve: they start out slowly, build to a crescendo, and then start to plateau. The best facilitators nurture the conversation in its early stages, step out of the way as the ideas start to flow, and then jump in again when energy starts to peter out.
4. Get physical
At Ideo, brainstorming sessions are often occasions for show-and-tell. Participants bring examples of competitors' products, objects that relate to the problem, or elegant solutions from other fields as springboards for ideas. Ideo also keeps materials on hand—blocks, foam core, tubing—to build crude models of a concept.
Evaluating Your Idea
Who's gonna buy this?
In the business world, good ideas must pass one test: can they generate a profit? No idea is good, ultimately, if it can't pass this test. This means that someone, somewhere has to pay you more money for your product or service than it costs to produce it. Really, it's that simple-and that challenging. Perhaps the most important part of any business plan is an articulation of the customer. Why will they buy it? When? Where? For how much?
Of course other characteristics are important too: does the idea have a social good or at least do no harm? How challenging is it to make? Is it within the capabilities of the team? Sometimes student teams have great ideas but no way in the world of executing them. You may want to save your great idea until you've had a little more experience with something that's more manageable. Can you raise enough money to finance your idea? Often great ideas fail this test: simply put, they require too much capital to prove themselves.
You're not the only genius out there
So you've got a great, and maybe realistic, idea. You know what? Somebody else is probably working on a solution to the same problem. That's not necessarily a bad thing. A problem is only worth solving if it's a real problem that affects a real population. And you're probably not the only one who's noticed this problem. If you are, your product might be ahead of its time and have a hard time gaining acceptance in the marketplace. The best ideas don't happen in isolation; they're the result of a shared need. The need is what creates the market for your idea. The fact that others may have worked on addressing the same need heightens the importance of finding your own unique slant on the idea.
Talk about it
Talk about your idea with a lot of people, especially people with varied perspectives. But talk with people you trust. (And if you have any concerns about protecting your idea, talk to an intellectual property attorney-see the section "Your Intellectual Property.") It's good to surround yourself with positive people who will give you a lot of encouragement, but don't limit your conversations to people already on your side: talk with people who will challenge your ideas and give you creative suggestions. Talk with people with very different backgrounds from yours. Investigate companies that are doing work similar to yours, and visit some who are doing things that are totally different, and doing them well. See what you can learn from them. Listen to everyone responding to your idea. You may not agree with them, and you definitely don't have to take their advice, but there may be a gem hidden in even the most mundane or unpleasant piece of feedback.
Try it out
Experiment with your ideas while they're still in the raw stage. Don't wait until you've come up with a perfect plan. Depending on the nature of your enterprise, your experimentation can take the form of actually making the product over and over until it comes out the way you want it, or running your ideas by a test audience to gauge its reaction.
Take advantage of all the tools and resources available to you. Spend time in your school's library or entrepreneurial research center. Read books and magazines, watch videos (visit eclips.cornell.edu for a wealth of entrepreneurship-related video clips), and find out what experienced entrepreneurs have to say. Subscribe to an entrepreneurship magazine (Entrepreneur, Fast Company, Inc.), and spend time reading online articles. Find out what other resources they recommend, and if your school library doesn't have them, try inter-library loan. Join an entrepreneurship club or a similar community-based organization. Most importantly, get to know experienced entrepreneurs face-to-face, and listen to their stories.
Check in with yourself
Now why are you doing this again? Review your purpose in this project-what you hope to achieve, and what problem you hope to solve. It's okay if your purpose has changed since the project's outset. It will probably change many more times before you're through.
The validation phase
Once you've tested your idea with constituents, colleagues and mentors, and adjusted the idea to the point where you feel ready to take it to the public, seek external validation to get the funding and other support necessary to move ahead. Validation is the main purpose of a business plan. A business plan lays out your idea in a holistic manner so that prospective funders can enter into a partnership with confidence. See section 4, The Plan, for much more information on business plans.
Trial and error
From "Hidden Asset," by Bill Breen, Fast Company, March 2004 http://www.fastcompany.com/magazine/80/davenport.html
They moved their flight testing from Kitty Hawk to their home town of Dayton, Ohio, and flew their new aircraft at Huffman's Field on the edge of town. With new, more powerful aircraft, they were able to stay aloft for up to a half hour, fly figure eights, and even take passengers up for a ride. The age of the airplane had arrived.
Your Intellectual Property
Intellectual property defined
Once you and your team have a great, well-evaluated idea, you need to make sure no one steals it before you can get it to market. Unfortunately, the only way to keep your idea totally safe is to keep it locked up inside your brain. Probably the best approach is somewhere between total secrecy and publicly broadcasting your idea. As ex-Apple evangelist Guy Kawasaki puts it, if it's really a good idea, lots of people have probably already thought of it. To turn your idea into a commercially viable product, you'll need to judiciously share it with others.
A note on lawyers
Intellectual property lawyers are specialists. If you're serious about patenting an idea, you probably need one. They're generally not cheap, but they do focus on particular scientific disciplines, making it worth your while to find a good one. You also need a general business lawyer or corporate counsel who can advise you on everything from incorporation to sales contracts
Knowledge is power
Naturally, you want to take whatever steps you can to protect your ideas. The following definitions will help you understand the differences between various types of intellectual property protection.
When you patent a product or an idea in the US, the government prohibits others from making your invention for up to twenty years. To get a patent, you have to file an application that describes your invention thoroughly, and explains why it should be considered novel. If the patent is granted, your invention is made public, so only the law prevents others from copying it. Patents can only be granted to inventors (not companies), so companies usually require their employees to sign over patent rights when they take up employment.
Patenting isn't the ideal solution for every product-it can be complicated and expensive. Sometimes it's a better decision just to keep your idea or formula as secret as possible. An intellectual property attorney can advise you on whether filing for a patent is the best approach for protecting your idea.
Copyrights protect written materials of all kinds, including software. They don't protect trade secrets. For example, if you publish information about your product, and the information that you publish is copyrighted, only the expression of the information, or the particular phrasing you choose, is protected-not the information itself. Once again, seek the advice of an intellectual property attorney regarding the correct procedure for copyrighting your work under federal law.
Trademarks are words or design elements, registered with the US Patent and Trademark Office, that represent a company or product. They must be registered to be protected. Usually before you can register a trademark, you need to conduct a search-both through the USPTO and among unregistered usage-to see if any other company is already using it. Talk to your intellectual property attorney!
Coca-Cola is an example of a company that uses trade secrets rather than a patent to protect its secret formula. If the Coke formula had been patented, the information would have been made public, and the patent would have protected the product for only twenty years. A company that uses trade secret protection has to make efforts to prevent disclosure of its important ideas-once ideas have leaked, nothing will prevent other companies from using them. Companies keeping trade secrets require employees and investors to sign confidentiality agreements. Trade secret laws and protections vary from state to state. You need to know the limits of trade secret law within your state-again, an intellectual property lawyer can help.
Keep a journal
The major patent systems in use worldwide include those of the US, the EU, and now China and India. Although the systems are getting closer, there is still one key difference between the US system and the others: the US awards a patent to the "first to invent" while the others award it to the "first to file." "First to invent" means that even if someone files with the USPTO before you do, you can still be granted the patent if you can prove that you came up with the idea first. Thus, in the US you need to keep bound notebooks recording the substance and date/time of your daily work, and make sure the pages are signed and kept in a safe place. A number of other things to remember: don't publish a paper and forget to file a patent application within a year; don't talk about the specifics of your invention in a meeting without having the attendees sign confidential disclosure agreements; don't show the embodiment of the invention (e.g., a prototype) at a trade show before filing a patent application. A discussion with an IP attorney, a mentor or faculty member, or with the technology transfer office at your university can provide additional details.
Our source for these and many other useful definitions is http://www.growco.com.
Adventures in IP
Then the meeting was cancelled. Wilson went through a major management shakeup, and when things settled down, Shomo got back in touch with his only contact left. "Yes, Wilson's still interested. Yes, they still have his data and his rackets."
After several months of trying to prod Wilson into action, they said, "Well, our patent attorney thinks you have a weak patent-we're going to go ahead and do our own version." That version came on the market as the Wilson Air-Shell. Wilson's design was identical, except that they used one piece for the handle, whereas Shomo's racket used two pieces. Technically, they weren't infringing his patent.
From "Inventor Paranoia," by Ed Zimmer, TEN Magazine, 1994. http://TENonline.org/art/9405.html
Patent only what is important. If patent office examiners or competing individuals or companies challenge your patent, the legal fees can soar. You must conclude first that you need the protection, and second that you will recover much more than your expenditure in additional long-term sales.
Get the best trademark protection as early as possible. Registering a trademark is a much simpler procedure than getting a patent. A trademark search can usually be done for a few hundred dollars.
Choose the right form of protection. Don't assume that because copyright protection is cheaper to obtain than patent protection you should automatically go the less expensive route. Spend the $200 or $300 it might cost to get sound legal advice.
Warn potential violators that you are serious. You should warn everyone who has access to important information that the nondisclosure and other agreements they sign are not just a formality. If someone does violate your IP, be prepared to take legal action to set an example that will become known to others.
Plan for information protection. In the start-up phase, be prepared to make various disclosures of important information. That information may be contained in a business plan, lists of prospects, supplier names, production specifications, and various other data essential to starting your business.
From "How to Really Start Your Own Business," by David E. Gumpert, Inc. Magazine, 1999. http://www.inc.com/articles/1999/11/15345.html
A sense of success: John Osher
What do Hasbro, Gerber, and Proctor & Gamble have in common? They all bought businesses started by John Osher. Toys, baby products, and the bestselling SpinBrush toothbrush are only some of the concepts that Osher has launched into successful ventures. He's been starting businesses since the age of eight, and believes he possesses a unique worldview-just as a comedian sees humor in the everyday, Osher sees opportunity.
People have caught on, and now Osher is surrounded by great ideas-aspiring inventors send him their plans and he mentors student teams. However, Osher is quick to point out that it's the opportunity that matters, not the idea. There are tons of good ideas, Osher says, that shouldn't be pursued.
Osher has developed a long list of criteria to distinguish a worthwhile opportunity, but the essence is captured in three points: (1) there must be a need which will be satisfied; (2) there must be a way to satisfy the need; and (3) there must be a way to communicate the product's value.
These three criteria guided him in the development of the SpinBrush.
According to Osher, the electronic toothbrush was a superior innovation, but one that only rich people could afford; he realized there was a need for an inexpensive version for ordinary consumers. But such an innovation would only be accepted if it could sell for just a few dollars more than a manual brush, and there had to be an easy way to connect the product with customers. After his design team came up with a model that could retail for five dollars or less, they developed "try me" packaging, enabling shoppers to observe the spinning action in the store. The product took off, and the two separate elements were crucial in that success: if the cost had been higher, or expensive advertising was needed to promote it, Osher is convinced that the opportunity would have been lost.
Along with an idea, an entrepreneur must have guts and skills (and a skilled team) to execute it. According to Osher, people driven to start new ventures are born with a personality that makes them inclined to say, "I'm going to do it, and lead, and find a way." They are natural leaders who organize others and garner the resources to make things happen. However, it's ultimately not drive that matters the most. Osher believes that a flawed product, rather than poor execution, is the demise of most failed businesses. Paradoxically, one can make mistakes only if the idea is truly feasible.
This notion of viability is the pinnacle of Osher's product development philosophy. Too often, inventors rush to commercialize an idea. More time and energy should be focused on understanding the market and adapting the product until it is a perfect fit. This process involves examining current products and testing the atmosphere in the industry and the retail environment. The inventor must be open to criticism and be willing to continually shift and make changes in response to better information.
Although Osher has sold many of his businesses, he doesn't focus on creating good acquisition targets. His advice is to build value. "Don't build a one-shot wonder product. A valuable business will have a good product, a proprietary position, and will be profitable, with staying products. Once this is achieved, the owner can choose how to proceed." If the choice is to sell, Osher advises to "do your homework to find the right match." In the case of SpinBrush, Osher examined the industry and discovered that Crest, one of Proctor & Gamble's most prominent brands, had fallen behind its competitor, Colgate. This made SpinBrush a good strategic fit for P&G, who paid handsomely for the opportunity to revive its brand with the popular product.
The SpinBrush journey was unique for Osher because it was almost flawless. His experience makes him an expert in business creation; but he expects future ventures will run less smoothly. Despite that reality, you can look for Osher's next product on the shelf soon...when the opportunity is just right.
Ideals on wheels: Ross Evans and Xtracycle
As a college student, Ross Evans was a reluctant to become an entrepreneur because he believed idealism and business didn't mix. Years later his innovations haven't made him rich, but they have promoted his ideals by creating economic prosperity in the developing world and changing attitudes in the US.
As an undergraduate with a passion for bicycles and their potential role in economic development, Evans went to Nicaragua after his freshman year at Stanford to teach local people how to build cargo bikes. His experience there as well as his prior research convinced him there were better alternatives to the cargo bike designs used in the developing world.
Evans noted that cargo bikes, with two front wheels and big baskets, were not ideal for the average user. He compares the cargo bike to a UHaul truck in the US: most people don't drive them on a regular basis and instead opt for SUVs, station wagons, and minivans to carry things on a daily basis. In the same way, Evans determined that an intermediate form of bicycle was missing from the developing world. He began designing prototypes of a bike extension kit that would enable users to modify their existing two-wheel bikes to carry cargo. "The idea was to look at the available resources, adapt them to make this concept of a longer bike that could carry cargo, and make it as cheap as possible, really maneuverable, easy to load, and able to carry the loads that people needed to carry." Evans began with a welded-on attachment and developed it into a bolt-on design during a Hampshire College entrepreneurship fellowship.
It was the faculty mentors at Hampshire College that first pushed Evans to turn his product into a company. Evans says that one advisor "opened my mind to the possibility of business as a mechanism or tool, and using the market to figure my ideas out. Up until this time I was really an idealist about how I wanted to get this out there. I was more into the non-profit mentality and thought that the bad guys were out there in business and we were trying to find ways to get around that."
Evans was also tired of applying for grants. He decided to create a business that would sell the bike attachments to those who could afford them in developing countries and use the proceeds to fund his developing world distribution.
The venture has been a success. Over time, the business split into two arms-Xtracycle is the for-profit company selling to US customers, and Worldbike is the nonprofit selling in the developing world. Evans is involved in the day-to-day management of Xtracycle, and is a board member of Worldbike. The product concept for each company is similar, although the developing world product costs $25 while the US counterpart, with a more sophisticated design, costs around $300. The for-profit side has not reached the point of financially supporting the other, but it has helped by leveraging contacts.
In the US, sales are strong for a niche product, but Evans isn't satisfied with that status. "Our whole intention is to go big," he says. Just as Worldbike has a mission to improve transportation options in poor countries, Xtracycle has a mission to improve transportation options in the US. However, this requires fundamentally changing American culture to embrace more sustainable ways of getting around. It's a formidable task, as most Americans don't even consider a bicycle as an alternative to a car.
Xtracycle is trying to accomplish the task not by selling a better bicycle, but selling a better lifestyle. Evans and his team believe that "most people would like to get back to a simpler life. They would like to be healthier. They would like to interact with people more, look thinner, be more adventurous. These are intangible but real values that people have lost." Evans admits it would have been much easier to start a business with a product people know they need. The process of educating potential customers and convincing them of the product's life-changing impact is challenging.
With limited resources, Xtracycle relies on a core of volunteers who "believe deeply in the vision and want to see it happen." They are continually thinking of innovative ways to create awareness. Evans believes the acceptance of his product may one day exceed that of the mountain bike, which seemed novel when most bikes had skinny tires. "It took about ten years to catch on, but now most people have mountain bikes. Mountain bikes aren't even inherently useful."
Identifying Your Customers
Know who you’re selling to
Every entrepreneur has, in the back of her mind, a mental picture of the prototypical customer. The question is whether this image is based in reality. Does this ideal customer exist? What if she does, but it turns out that she doesn’t want to buy your product?
As you learn more about your market,you may need to be flexible and willing to change your image of both the customer and the product itself. Professor Kathleen Siders of Babson College says, “Entrepreneurs think they have divine intuition, which is fine if you’re part of the audience you are trying to reach. But when you move outside that market, your gut instinct can let you down.”
Basic market identification
Identifying your customer begins with formulating a value proposition. It’s from here that the most important work starts. You have to be able to answer the question “To whom is this proposition of value?” The end user might be consumers, operations, or development. The proposition might be valuable to industry, education, or government. Companies intending to make a profit need to ask themselves,
- Will the proposition reduce costs?
- Will it improve efficiency?
- Will it add value to what’s already out there?
- Will it eliminate waste?
- Will it serve as a replacement technology, or eliminate the need for something?
- What is the potential market value of the proposition to investors?
This line of questioning also has to address the scale of the market. Will it be a family-owned business or a lifestyle business with limited growth? Or does the team have an appetite to think bigger—regional, national or global?
Make it simple
Your value proposition should be easy to understand. If you have a hard time describing the benefits of your product to potential users, they probably won’t figure it out for themselves.
When trying to answer the question “To whom is this proposition of value?” it helps to simplify things by breaking the market down into components. There are three broad categories of customers who could buy your product: individuals, channels (covered later), and organizations. Each of these categories can be further broken down into smaller segments. This is called market segmentation—picking out the particular groups of people/organizations that benefit from your product, and selling to them. Individuals can be segmented by:
Whereas organizations can be segmented by:
- Level and type of individuals within the organization
Many segmentation schemes are combinations of the above lists. For example, let’s say a venture developing an innovative digital storage product decides to sell only to organizations, not individuals. It segments its potential market by size of organization, size of data storage requirements, and need for speed of retrieval. That leads to a focus on large financial institutions and large medical centers. Within those targeted organizations, the importance and cost of the purchase dictates that the venture focuses on selling only to “C-level” executives: the CIO, CFO, etc. Finally, as the technology is very new, the venture team chooses to target the executives that are technology enthusiasts—people who love new technology for its own sake, and are often willing to look at it in preliminary form.
Inexperienced teams often neglect the question of distribution: How will the product get to the end user? We cover this in more detail in section 2.3, but for now, in order to develop a complete marketing plan your team must determine what the revenue scale and cost structure will be over a five-year period.
The second part of distribution is secondary expenses, or selling costs. What will it cost you to get the product to the end user? Relevant questions include: What distribution channels will you use? What threats or opportunities does this proposition offer to the industry? Will the product use a technology similar to one already in existence, or will it replace current technologies?
Awareness of the market is crucial to new businesses that want to convince investors that they have an opportunity worth funding. The only way to gather this information is through thorough market research.
Failure to research customers can be costly
“In 1990, I was a director of product marketing at Verity, Inc., which made sophisticated software for document search and retrieval. We made the assumption that our product would be managed by high-caliber technicians at the companies that used it, but because of our software’s complexity, it was difficult to set up and maintain. We thought the product was important enough to our customers for them to justify using highly-skilled personnel to run it, but actually our customers felt they had scarce resources and that it was difficult to get people with the skills needed to use it. In fact, we had only one customer that successfully installed the software on their own: NASA’s Jet Propulsion Labs. A clear sign to us that maybe you did have to be a rocket scientist to use it.
Our solution was to reengineer the software to make it simpler to install and use. We did that, and the product was very successful, but the delay cost us a year and we lost significant repeat sales early on because we didn’t do our homework. Had we simply started by asking ourselves and our customers the questions we should have, we wouldn’t have wasted all that time and money.”
Here are some key points:
—Create an enticing Product (the outcome of the program);
Evaluating the Market
It only sounds scary
Market research sounds like something reserved for the Coca-Colas of the world—corporate giants trying to learn whether a new product will make them millions overnight. In fact, good market research is not only accessible to you, but critical to your product’s success. So what is it? Market research takes on many different forms, but a standard, broad definition is the following: market research is the systematic collection, analysis, and reporting of data about the market and its preferences, opinions, trends, and plans.
There are a wide variety of affordable market research techniques for you to choose from.
Although the name might lead you to think otherwise, most people begin with secondary research. Secondary research involves consulting published reports to find out:
- Who makes up your target market
- The needs of your market
- The size of the potential market
The information needed to perform secondary research is easily available, and it’s often free. The most accessible sources include:
- Web-based directories and resources
- Nonprofit agencies
- Government agencies
- Back issues of magazines and newspapers
Secondary research can sometimes lead you to contradictory or inaccurate conclusions. It can be helpful, however, in forming a preliminary research strategy.
Primary research is more expensive than secondary research, but the results are more accurate and conclusive. Primary research helps you get up close with your customers, finding out who they are and what they want. There are two broad categories of primary research: qualitative and quantitative.
Using small groups of people, qualitative research helps answer a specific question about your product or your customers, and may include one-on-one interviews or focus groups. Focus groups typically gather about ten people together to discuss or react to a product. The session may be moderated by a professional facilitator who can ask probing questions and help stimulate rich data. Holding more than one session is useful; focus group participants are usually paid.
While qualitative research isn’t particularly useful for predicting sales, it is a very effective tool in getting to know your customer.
Quantitative research involves surveys of large numbers of people, and can be statistically validated. It makes a better tool than qualitative research for predicting sales.
A survey targets customers or potential customers, and can be administered via phone, mail, e-mail, or the Web. Surveys get the best response when there is some kind of reward for participating. It may be worthwhile to hire a professional firm to both administer the survey and analyze the data. Phone and mail surveys are expensive and are not cost-effective unless a significant number of people are motivated to respond. E-mail and online surveys are much cheaper, but they limit the target population to computer users (which may or may not be problematic, depending on the nature of your product).
Sometimes traditional market research doesn’t meet the mark. Some of the most successful companies opt for creative market research methods that bring them face-to-face with consumers on their own turf. Focus groups and surveys create a laboratory-like environment where people may have trouble expressing their true feelings (for example, says Growing Healthy baby food founder Julia Knight, “What mother, especially in front of other mothers, would really tell you that she spent more on cat food than on baby food?”); using newer methods, companies watch customers in stores and in their homes to observe how they purchase and use products.
Data and more data
No matter how you go about it, performing market research is not a one-time activity. There will be a back-and-forth between modes of research: you’ll do a bit of secondary research so you can talk to people, then do primary, then go back to secondary. The primary helps orient you and allows you to pick up key concepts and words for searching.
Above all, you need to keep a steady flow of data coming in to help you make decisions about next steps. The type of data you collect depends on exactly what you need to learn about the market. Market research is a worthwhile investment which, if you do it right, will enable you to avoid fatal missteps.
I can’t afford formal market research
When Karen Scott got started in the mail-order baby products business, she put together her own focus group -- using the local newspaper. After clipping 250 birth announcements, Scott contacted the new moms. She sent them surveys and conducted phone interviews, asking what products they would find interesting or useful. Based on the responses, Scott added more travel products at her company, Chelsea & Scott, in Lake Bluff, Ill. Ten years later, travel products are top sellers at the $28 million business.
Also, try http://www.fedstats.gov for a catalog of sites with government research statistics.
No babies in frozen foods
The truth about toys
Creating a native habitat
From “The New Market Research,” by Joshua D. Macht, Inc. Magazine, July 1, 1998.
Reaching the Customer
Where to sell
You may have figured out who your customers are and what they like, but now you have to figure out how your product will get into their hands. That means determining where your customers buy items like yours, or how they would buy them if they could. Some of the options are:
- On the shelf of a store
- Through a distributor
- In a catalog
- Directly from a salesperson
In deciding among your options, consider how your customers will recognize the value of your product, whether the conditions will be favorable for purchasing, and what it will cost you. Direct sales methods enable you (or a salesperson working for you) to tailor the message to the individual customer and allow you to answer questions and get feedback during the sales process. But be aware: using one-on-one techniques are expensive. Catalogs and websites might be cheaper options, but they make connecting with individual customers more difficult. Your sales methods should be appropriate for the complexity of the product and the message you are trying to convey.
Products are easier to sell when consumers clearly recognize their benefits. Buyers may resist buying your product if you try to make them alter their habits. Greater convenience, lower cost, or higher quality can convince customers to change their buying behavior. In fact, some businesses are successful simply because they sell something in a different way (like Amazon.com and eBay). You should weigh the tradeoffs when you consider any distribution choice that requires the customer to think differently or take a risk.
Links in the chain
There might be many links between you and the ultimate customer. This means you will have more than one type of customer—such as a distributor or salesperson—that you have to think about. Your product has to create value for them, too.
Examples of these links in the chain include distributors, Value Added Resellers (VARs) and Value Added Distributors (VADs), Systems Integrators (SIs), Manufacturer’s representatives, Original Equipment Manufacturers (OEMs), and strategic partners. See the glossary at the back of the book for more information on each of these middle men.
Every one of the above will want its own profits, so consider the benefits your products will gain from intermediaries. Understanding their incentives is the key to building the right relationships. You don’t want the layers to make it harder to connect with your customer. Offer intermediaries a compelling value so they will be as aggressive selling your product as you would be. Find out how you can benefit from their customer relationships and market knowledge in return.
What to charge
The price of your product is, of course, extremely important. Price too high and few will buy, price too low and you lose money. Pricing is also a form of communication between you and your customer; price it wrong, and the customer might come away with a bad impression of you and your product. Consider the following factors in pricing your product:
Willingness to pay Think about how many customers you will gain if you lower the price, or how many you will lose if you raise the price. Be careful about the distinction between “worth” and “willingness to pay.” Just because people tell you that they think the product is worth $50 doesn’t mean they’ll actually buy it at that price.
Cost To make a profit, you must charge the customer more than it costs you to make the product. That’s obvious. But also consider all of the mark-ups through the chain before the product gets to your customer. Salespeople, distributors, retail outlets, and all the other links in the chain need to make a profit too.
Competing products Consider what alternatives the customer has and how your price will influence his buying decision.
Sticker shock This is when someone looks at the price of a product and says, “No way I’d buy at that price!” Different markets have different sticker shock points (writing utensils vs. cars, for instance). Know your market’s sticker shock point.
Perfect for you or the customer?
The product is supposed to satisfy the customer. That means if the cost of making the product exceeds the price that your customers will pay for it, you must rework it. You may have to find alternative solutions to the problems you solved in the design phase. If that doesn’t work, consider what features are least important to the customer and cut costs by weakening or eliminating them. This process may be frustrating, but for a product to be viable in the market, the design and the price have to be desirable to the customer.
A low-risk distribution model for a start-up
Fluent president Chad Sorenson says that in the product’s first season, a handful of fertilizer dealers were offered exclusive regional distributorship of the NH3 Monitor. In exchange, these distributors were required to purchase a minimum inventory of monitors. Sorenson says, “We had the luxury of selling a product not available anywhere else. If you create a product of value and you’re convinced that distributors will make money, you have some bargaining power, even though you’re a small producer. We wanted our distributors to have a vested interest in moving the product like we did. If we had distributed the units on a consignment basis, our distributors wouldn’t have had any stake, and we would have had to finance our own inventory.
Diversification = survival
“EZiba was one of the first e-commerce businesses to recognize it needed to go multi-channel. We had to find ways to generate traffic, and the portal sites just weren’t doing the job. So we experimented with a catalog that would arouse people’s interest in eZiba and bring them to the website; the catalog worked well and became increasingly cost-effective. Then the opportunity to expand into brick and mortar stores presented itself, and we jumped on it. So we now view ourselves as a multi-channel retailer. There is an online side to the business, but there’s also the catalog—millions of copies of which are distributed every year to households all over the country. The catalog is the biggest driver of eyeballs to the website and the biggest driver of business overall, so we’re very much a multi-channel retailer.”
Having a company with social goals also went a long way in ensuring eZiba’s durability. “Our customers are very aware that not only are they are buying beautiful products at good prices, but when they buy one of these products they’re also having a positive impact on a low-income community,” says Sabot. “One of the reasons eZiba has been so successful is because it’s offering a positive and potentially quite large social rate of return on investment.”
Sabot says the future is bright for other companies with social aims. “I believe that as the buying public becomes more sophisticated, social responsibility will increase profitability because the public will vote with its dollars for products they view as socially responsible. So in terms of generating demand and a marketing message, I think being socially responsible as we move ahead is going to be a big plus.”
Start Spreading the News
Advertising and promotions
It’s very simple: for people to buy your product, they have to know it exists. There are a number of ways to go about getting the word out, but most of them can be classified either as an advertising strategy or promotional technique.
Advertising is bringing a product to the attention of potential and current customers. This is typically done through signs, brochures, commercials, direct mailings or e-mail messages, personal contact, etc.
Promotions keep the product in the customer’s mind and help stimulate demand for the product. This involves publicity (free mention in the press), rewards programs, community involvement and public relations.
Marketing on the cheap
In all likelihood you won’t have a huge marketing budget right at the start. So here’s a list of things you can do to sell your product without breaking the bank.
Your website is the easiest and most widely accessed form of marketing. It’s where people come to find out who you are, what you’re about, and what you sell. Websites can range from extremely cheap to very expensive; all you need, though, is a clear, clean, professional site that gets across the right message.
Fliers and brochures are not only affordable, they offer you more budget flexibility and greater selectivity in choosing prospects than most other kinds of advertising. Make sure the flier or brochure starts with straightforward, no-nonsense copy. Be specific and accurate. A clever, catchy phrase can help customers remember your business, but a clumsy slogan will deter them quickly.
Direct marketing is a cost-effective way to attract customers. It involves sending hand-picked individuals mail containing, for example, a brochure and letter.
Business cards are one of the most effective (and cheapest) ways of promoting your business. It tells customers a great deal. You are only limited by your imagination when it comes to creating business cards: more and more businesses are straying from the traditional small rectangle-style card and are shooting instead for something a little more individual.
Testimonials from satisfied customers show how you can do a better job than your competitor. Testimonials are powerful. Show the person’s photo if you can. Use the most important sentence or phrase (i.e., the one most flattering to your business), plus the customer’s name. Use multiple testimonials if you can.
Trade shows and conferences are great places to make contacts and advertise your product—that’s what they’re all about. Keep in mind, your first foray into a trade show is your introduction to the business community. During the show, project a professional image and demeanor. And remember, while you’re there to sell your invention, trade shows are essentially about making human connections. Ask questions, collect quality information, and find out as much as possible about your prospects.
Networking is a powerful and indispensable tool for marketing your business. In fact, it’s so essential we dedicated a separate chapter to it. See “Networking” (3.5).
Word-of-mouth is an extremely important promotional tool. Customers talking about you with friends, family, and acquaintances have much more influence and credibility than any other kind of advertisement.
Bad word-of-mouth travels at least four times faster than good word-of-mouth, so make sure your customer service is spot-on right from the start. Many small businesses have survived without a huge advertising budget due to good word-of-mouth.
Promotional teasers such as freebies or give-aways are a great way to catch the attention of a potential customer. Use this tool to attract customers through coupons, vouchers, frequency rewards, competitions, and samples.
Set clear goals and objectives
No matter which of the above tactics you use, make sure you set goals and expectations for what you want to accomplish before you get started. For example, do you want to drive qualified traffic to your site, increase sales by 5%, sign up X-number of new customers, or just generate awareness? You can think big, but with a small budget you have to be realistic. Setting goals from the onset will help you determine what and how much you need to do.
“I believe that most business professionals are cave dwellers. They get up each morning in a large cave with a big-screen TV called their home. They go out to their garage and get into a little cave with four wheels called their car. They go to another cave with plenty of computers called their office. At the end of the day, they get back into their little cave with four wheels and drive back to the large cave with the big-screen TV, and they can’t figure out why no one is referring them. If you want to build your business through word-of-mouth, you have to be visible and active in the community by participating in various networking groups and/or professional associations."
From “Word of Mouth: The World’s Best-Known Marketing Secret”
“I have a young mechanic friend who specializes in older model BMW automobiles. In his glove box are several dozen five-by-seven flyers that say “I specialize in fixing BMWs just like this one. Is it running like it should?” Whenever work is slow, he drives through big parking lots where there are hundreds of cars and looks for older BMWs. When he finds one, he slips the flier under the windshield wiper after scribbling a personalized note to the owner, such as “Arctic blue has always been my favorite color on this model. You should be proud of it.” He usually gets calls on his cell phone while he’s still out distributing fliers. Another friend specializes in replacing old picture windows with fancy bay windows. Guess where he puts his fliers? You guessed it: on the front doors of old houses with big picture windows. Works like a charm.”
“A few years ago, I began working with a client in the frozen custard business who said he’d be happy to invest $10,000 in advertising if he were guaranteed 500 new customers. When I pointed out that this was twenty dollars per new customer, he reminded me that anytime a new customer tried his product, they were usually hooked for life and he would soon make back his investment. It was the middle of winter, and his two custard stands had no inside dining. I told him to prepare all the custard mix he could use if he kept his machines running nonstop from nine a.m. until midnight and to get a good night’s sleep. The next day, I began airing a sixty-second radio ad twice every hour on a midsized station in his town. I offered a free, full-sized cone to everyone in town—all they had to do was get there before midnight. We gave away more than 11,000 cones that day at a total cost of $1,900 for custard mix and $1,200 for advertising. His business literally exploded after that, and now he’s franchising nationally.”
Show Me the Numbers
It’s time for a reality check
Once you’ve identified your market, figured out the range of possible customers you might pursue, how to reach them and how to sell to them, it’s time to find out if your plans match up with reality. As we’ve already discussed, you can discover this, at least to a certain extent, via market research. Consider hiring a market research expert to help you through this important validation phase. Or get someone with market research experience to serve as a mentor or adviser to your team.
Establishing market size
If you’re counting on venture capitalists to finance your business, be aware that some potential funders won’t be interested until you reach a certain market scale. Sometimes the total market is impossible to guess (IBM first predicted it would sell about two computers), but once again good market research will help you get a realistic idea of the actual size of the market you’re hoping to reach.
According to marketing expert Jeff Dobkin, you can’t establish the market size simply by quoting the total revenue of the industry. “To me,” says Dobkin, “establishing market size isn’t the amount of money spent. For example, to say the motorcycle industry is a four billion dollar industry doesn’t tell me very much. This figure is meaningless to small businesses—and it’s especially harmful to say, ‘This market does four billion a year, if we can just get a 1% share…’ As far as I know, no effective marketing plan correctly takes the industry figure and figures a percentage of what they will receive in revenue. When I look at a market I need to know how easy or difficult it is to introduce a product or service to that industry. I need to see how entrenched the competition is, what the entrance barriers are, etc.”1
Market research on the cheap
Dobkin reveals an inexpensive way to effectively gauge market size: visit your local library. “When trying to figure out market size,” says Dobkin, “the first place I check is the magazine directories such as Bacon’s Magazine Directory, Burrelle’s Media Directory, Oxbridge Communications Directory of Periodicals, and SRDS Magazine Media Source, to name a few. You can find out in a few minutes just how many different magazines serve this market. The number of magazines is a good indication of market size. Remember, the advertising revenue supports the magazines and the industry buyers support the advertisers.”
“Note how expensive the ad space is in the magazines. A good way to see the comparative figures for magazines is to look in Oxbridge Communications Magazine Directory—they give you a CPM or Cost Per Thousand for each magazine. This shows you the cost to reach a thousand people with a full-page black and white ad in that magazine. It makes comparing magazine advertising costs much easier. Hmm…thanks, Oxbridge!”
“Next check the circulation of each magazine: how large is their circulation? This is probably the single best method of assessing market size. There will be some pretty consistent figures showing how many copies are distributed to industry personnel. If you really want to see just where all those magazines are being sent, call the publisher and ask for a ‘media kit.’ This free package is how the publishers themselves market their own magazines to advertisers. In the package will be a copy of an independent audit showing who qualifies to receive the magazine, how they are qualified, and shows the circulation breakdown of exactly where all the copies are sent.”2
What does it cost you to get a customer?
Knowing precisely how much it costs you to get a customer in comparison to how much you expect that customer to spend is crucial to your company’s survival. If you spend $40 to get a customer who goes on to spend $15, you’re in trouble. How, then, can you know with certainty how much your customers spend? And how much, therefore, you should spend to get them? As usual, market research.
Tom Bergman, an associate professor of management at the University of Central Oklahoma, suggests: “What you need to know is how many [repeat customers] you have among all the anonymous customers who bought from you in the past twelve months. Here is how you can find out: ask them. No, you do not have to ask all of your customers. You can ask just a few, and you get a surprisingly good idea of the makeup of your customer base. You can ask as many questions as you like, but I suggest that you ask at least the following two:
- During the past year, approximately how many purchases have you or any members of your family made from this company?
- On average, what did you spend on each purchase you or your family members made from this company?
When you have this information about customer behavior, you can develop a promotional plan that recognizes these limits. Every promotional tactic you adopt that is designed to bring in new customers ought to be analyzed carefully to determine what that tactic will cost you for each new customer it brought in.”3
Refining dot.com metrics
From New Venture Creation, 2004, by Timmons and Spinelli, page 91.
Tapping a new market
The company is Silver Lake Research, a fifteen-person biotech firm based in Monrovia, California. They developed Watersafe, an at-home tap water testing kit sold in 3,000 retail stores nationwide. The science behind the product was brand new, but even more revolutionary than the product itself was how the company took a specialty store product and transformed it into a lowest-common-denominator supermarket product.
The technical challenges that Silver Lake had to tackle to bring about the identity shift bordered on the existential. For starters, US geography dictates that a mass-market product be multi-functional. “A person in Manhattan might worry about lead in their water, while a person in Omaha worries about agricultural pesticides,” explains Tom Round, Silver Lake’s vice-president. “We designed our product so it would have equal appeal in urban and rural areas.” At the same time, Watersafe had to be fast-acting, because consumers demand quick results. It had to be compact enough to fit in the tight shelf space reserved for impulse buys at the supermarket. And it had to be simple and easy to use.
Watersafe met all those requirements. It can detect seven types of contaminants, from chlorine to traces of bacteria like E. coli. Yet the box it comes in is unintimidatingly small—about the size of a DVD. All the tests can be conducted in ten minutes, and all render their results in an obvious, color-coded way reminiscent of a standard at-home pregnancy test.
Silver Lake plans to take advantage of the growing mainstream acceptance of what was once a niche trend: consumer interest in the purity of consumables.
Competition is a good thing. It forces you to perform at a high level, and sometimes it can even legitimize your product or technology, like when IBM entered the PC market and made computers specifically for individual use. But you still want to beat the competition, and that becomes much easier when your product is significantly better along an important performance characteristic—and you can demonstrate it—or if you can solve a problem that the competition cannot. When you’re clearly the best, you make it harder for the naysayers not to choose you, and easier for supporters to promote your product. The challenge is to be clearly the best.
Who are your competitors?
For some types of products, this question is relatively easy to answer. Maybe you’re planning to do what someone else is already doing, but you’re going to do it better. In some cases, however, it can be harder to name the competition, or to figure out what, specifically, will differentiate your business.
The danger of complacency
Never believe that you have no competitors. Even if your product is one of a kind, you have competition. Your competition (not to be taken lightly) is the status quo, or the belief that your product is not especially necessary to people’s lives.
Keeping tabs on the competition: Lessons from a retail giant
Tom Stemberg, founder of office supply superstore Staples, made weekly, unannounced visits to his own stores, competitors’ stores, and others to get ideas of ways to improve what Staples does. Some of the lessons can be transferred to any new product or venture.
Says Stemberg: “I’ve never visited a store where I didn’t learn something.” When Stemberg visited a store, he looked for what the store was doing right. “You’ve got to see what they do better and learn from them. You must never take your competition for granted, because that can come back and hurt you.” In 1987, Office Depot was for sale. After visiting numerous stores, two Staples representatives declared that the business was on its way out and not worth buying. “Well,” Stemberg says, “Office Depot went on to become the biggest company in the industry, and we were still playing catch-up with them ten years later.”
Seeing through a customer’s eyes
When visiting a store, Stemberg says, “You try to see exactly what the customer sees. I carried a little pad and I wrote notes. Then I e-mailed them around to our management team.”
Know the competition, focus on the consumer
Stemberg maintains that you have to pay attention to the competition’s successes without forgetting that it’s the customer you’re aiming to please. “One of my great fears always was that our people would try to rationalize why we did things better, smarter, whatever, and stop the learning experience. One of the things you can do is lose sight of the customer. Lots of times I find companies overly focused on one another and ignoring what the customer wants, and therefore losing the market to some new entrant who truly focuses on the customer. Barnes & Noble spent all its time looking at Borders and Borders spent all its time looking at Barnes and Noble, when both of them should have paid attention to Amazon.com.”
Some ethical guidelines
When you’re sizing up the competition, act with integrity. It might be tempting to get a leg up by doing something unethical, but the truth will come out sooner or later. Fuld & Company offers the following Ten Commandments of Legal and Ethical Intelligence Gathering.
- Thou shalt not lie when representing thyself.
- Thou shalt observe thy company’s legal guidelines as set forth by the legal department.
- Thou shalt not tape record a conversation.
- Thou shalt not bribe.
- Thou shalt not plant eavesdropping devices.
- Thou shalt not deliberately mislead anyone into an interview.
- Thou shalt neither obtain from nor give price information to thy competitor.
- Thou shalt not swap misinformation.
- Thou shalt not steal a trade secret (or steal employees away in hopes of learning a trade secret).
- Thou shalt not knowingly press someone for information if it may jeopardize that person’s job or reputation.
Hopefully most of these “thou shalt nots” are far from your consideration. If you have any legal or ethical questions about your methods of gathering competitive intelligence, however, consult with your lawyer.
Know thy competition
In its Competitive Intelligence Guide, Fuld & Company states that “wherever money is exchanged, so is information.” Any company that deals with the outside world “inadvertently throws down informational bridges over the moat, allowing outsiders to peek into its operations…The world’s mightiest multinationals hire and fire, open facilities, deal with suppliers, negotiate with national, state and local governments, attend scientific conferences and present papers.” Electronic databases, CD-roms and other new information vehicles give everyone virtually equal access to corporate intelligence.
Full text at http://www.fuld.com
The point is, if there is no need, there is no market and the product doesn’t stand a chance. If there is a need, people are usually try to address it, and you just have to hope they are doing so poorly. Then people are open to change.
Cleaning up: Sun & Earth
Art Rogers is trying to make the supermarket cleaning aisle a little cleaner. According to Rogers, most of the household products we use contain “elements that you would not want to have in your personal environment or the environment in general.” After assuming the CEO position at Sun & Earth, a natural cleaning products company, his objective was to convince retailers to move the company’s detergents and spray bottles out of the organic section and into the cleaning aisle.
To do this, Rogers tailored his pitch to his audience, and didn’t try to stand on a soapbox (no pun intended). “The product worked,” said Rogers, “and I sold it to retailers based on that. The other things are in the background. Most consumers are concerned only with products that work.”
He admits that people are skeptical about Sun & Earth products’ performance because environmentally friendly cleaners introduced in the 1980s didn’t work very well and were more expensive. Sun & Earth is different: all products are 3-5% better to 97% as good as the name brands on the market, and cost only 10% more.
Sun & Earth began in a Pennsylvania garage where its founders developed cleaners without harmful chemicals as alternatives to existing products. They convinced local stores to carry their products, then bigger stores in New York, Boston, and Washington DC. This strategy allowed them to successfully grab “highly enlightened” consumers who were strongly environmentally and health conscious. As the company grew and was partially acquired by Ben Cohen’s Barred Rock investment fund (his first investment after the sale of Ben & Jerry’s), it strove to gain a wider consumer base.
Rogers believes that the key to reaching this objective was understanding the “ripple effect.” A pebble thrown into a pond creates a splash—this splash represents core customers who understand the product’s value and currently buy it (the “highly enlightened”). But the pebble also creates ripples. The ripples closest to the splash represent customers who are predisposed to buy the product (such as those with chemical sensitivities in the case of Sun & Earth). The further the ripple from the splash, the further the customer group is from understanding and relating to the product’s message.
Sun & Earth tries to reach the ripples closest to the splash and continue moving out to spread its message. While grocery store coupons and promotions yield higher sales, they do not necessarily create repeat customers because they entice bargain hunters rather than groups that identify with the Sun & Earth’s values. Rogers tries to focus on marketing at events, like Race for the Cure, a breast cancer research fundraiser, that draw people who are more likely to be health conscious or environmentally concerned.
Although his objective is to mainstream Sun & Earth’s products, the company itself is anything but mainstream. Their sense of social good extends far beyond the ingredients in their products. Located in a transformed argyle sock factory, the company employs workers from the surrounding low-income community and promotes community building through volunteer projects. Consistent with the company’s environmental focus, its plant is the first in Pennsylvania to be run completely on wind power.
Rogers notes that while 99.8% of for-profit companies measure themselves with one P (profit) Sun & Earth uses 3 P’s: profit, people, planet. His investors, all social venture funds, demand returns in each of the three areas. Besides sharing similar values, an advantage of being funded this way is the network that Sun & Earth has built. The company has used its connections to reach important players and gain accounts from companies that are also committed to sustainable and socially responsible business, such as Starbucks.
With his experience boosting sales at major companies like Saucony and Proctor & Gamble as well as Sun & Earth, Rogers has simple advice for aspiring entrepreneurs. “Make sure your product has a unique selling proposition. And make sure it works.”
Marketing to the poor: International Development Enterprises (IDE)
Paul Polak didn’t have to do any of this. At age forty-seven, Polak was a successful Colorado psychiatrist with a wife, three daughters and $3 million in real estate. But in his extensive world travels Polak witnessed more and more the debilitating effects of extreme poverty on the world’s rural poor—who often make less than one dollar a day—and became curious about ways to help. Gradually it became clear to Polak that in order to improve the lives of hundreds of millions of subsistence farmers, there was only one place to start: water.
“You could see how essential water was to alleviating poverty,” says Polak. “If you wanted to do anything, you had to start with these small farmers and irrigation. The power to control water is absolutely crucial to them. That fact should shape all development policy.”
Inspired to help however he could, in 1981 Polak formed International Development Enterprises (IDE), a nonprofit that develops and facilitates the sale of affordable, simple, income-enhancing products to the poor, with a special expertise in water technologies for small-scale irrigation and safe drinking water. Over the years IDE has helped millions of rural farmers in the world’s poorest countries increase their agricultural productivity, providing them with a basis for food security, income generation, integration with markets, and the beginnings of an upward spiral out of poverty.
Needless to say, IDE would be nowhere if they couldn’t sell their products. But how do you sell to the world’s poorest people? How do you design products for them, and then get them to buy them? As with any business, marketing is essential to IDE’s success and at the same time comes fraught with challenges.
The first challenge, according to Polak, is molding IDE’s products around customer need—that is, making them so cheap that the world’s poorest people can afford them. Says Polak, “We focus on people who make less than one dollar a day. If things aren’t extremely cheap, they can’t afford them. Affordability is the key issue; it’s the absolute bottom line. In just about every product we sell to the poor there seems to be a threshold point of about one-fifth the conventional price; when we reach that threshold, sales take off.”
To reach that threshold, IDE develops products that can be made inexpensively by using locally available materials. An example is the IDE treadle pump, two million of which have been installed worldwide since its introduction in 1985. The pump consists of two metal cylinders with pistons operated by a natural walking motion on two treadles, like a stairmaster; the individual walks up and down on the treadles and in the process brings water up to the surface. The pump is manufactured locally in simple metalworking shops, and the treadles and support structure are made of bamboo or other inexpensive, locally available material. The unit sells for $25-50, and enables farmers to generate more than $100 a year in extra income.
A second challenge has to do with the attitudes and inclinations of the poor themselves. Many poor people aren’t willing to cough up what is to them a large sum of money for devices they’re not sure will work. Says Polak, “We feel that the best way for poor farmers to prosper is by growing labor-intensive, high-cash crops. But if the farmers grow rice like they usually do, they’ll have enough to eat; they’re averse to risk because they want to avoid going hungry. Poor farmers are very risk averse. So we have to lower the risk—find ways to show them that moving to a high-income crop is a good thing.”
IDE goes about this in a variety of ways. “First, we don’t ask them to give up rice and move straight to high-value crops right away. We start off by helping them improve their yield on staple crops through procedures like the use of urea granules planted in the ground between rice plants, which give them bigger yields and cost less than fertilizer because they don’t wash away. Once they’ve seen that we can help them grow enough rice to feed their family, they’re much more open to growing higher-value crops.”
Another IDE risk-mitigation strategy involves the marketplace itself. Because a poor farmer can never predict the market price of any crop she grows, IDE doesn’t promote just one high-value crop, instead promoting packages of four or five. “That way,” says Polak, “even though you can’t predict the final value at market, farmers can play the odds. Maybe on one crop they’ll make out like bandits, three will do OK, and one they’ll feed to the pigs.”
And what about getting the word out? How do you make poor rural farmers aware of your product? When it comes to promotional techniques and advertising, IDE takes the only route available to them: they get out in the village streets and push the product. “Let’s say that we want to sell treadle pumps,” says Polak. “We’ll put on a demonstration in a village fair that draws a lot of people. We’ll have a three-rickshaw procession: I’ll be on the first rickshaw, and I’ll have a microphone and will shout, ‘Come see this demonstration!’ The second rickshaw will have someone demonstrating how to work a treadle pump, and a third rickshaw has somebody handing out leaflets.”
“In Bangladesh we sometimes use a troubadour group. It’s a little three-person orchestra that plays a song about a treadle pump. And also in Bangladesh, because there’s a very big market there, we made a ninety-minute movie with the treadle pump as the main part of the story. We played that movie to an audience of over one million in a year.”
Indeed, numbers in the millions frequently come up when talking about Polak and IDE. IDE’s efforts around the world are estimated to create more than $200 million of additional income each year for the rural poor, and the number of lives touched reaches the tens of millions.
Teams Make It Happen
First, some context
Let’s start by explaining why we think teamwork is essential—especially when it comes to technology entrepreneurship. It has to do with adopting what works in the corporate world, all with the notion of preparing you to do as well as possible.
Within the last ten to fifteen years, teamwork has become an omnipresent phenomenon in corporate America. Companies have transitioned to teamwork as a vehicle to increase effectiveness, competitiveness, and productivity (read: working in teams improves performance). The Center for the Study of Work Teams reports that in the year 2000, 80% of all Fortune 500 companies are expected to have fully half of their employees working in teams.
This increased need for employees to function in teams has forced engineering colleges and universities to change the way they teach. In a study conducted by the American Society of Mechanical Engineers (ASME), teamwork was ranked as the single most important skill for undergraduate engineering students. Schools now need to provide their graduates not only with intellectual development and superb technical capabilities, but also the ability to work as part of teams, communicate well, and understand the economic, social, environmental and international context of their professional activity.1Promoting and developing teamwork is a big reason why the NCIIA exists; whether you start a company or go work for one, it’s important for you to get experience working in teams.
Where it all starts
Your team is the lifeblood of your venture. The strength of your team determines how thoroughly you analyze the problem, how many different angles you see, and how complete and competent your solution will be. As a student, you may not have a lot of background in building teams; college tends to be a solo experience. While some of your professors may have given you group assignments, you may still feel like a team-building beginner. With student entrepreneurial projects, determining who’s responsible for can be a big challenge. Sit down early with your team make sure everyone is fairly clear about her or his role(s).
Be strong. Be diverse.
An excellent team is diverse. If you’re an idea person with an eye on the big picture, fill out your team with detail-oriented people. If you’re an expert on the technical aspects of your idea, find teammates with business experience. If you know a lot about the business end, but aren’t sure how machines work, look for teammates with technical training. A creative guru, a numbers-cruncher, a people-person with loads of natural charm…all of these personalities add strength and dimension to your team, and enhance your chances for success. And working with people who are different from you, in terms of gender, race, ethnicity, background and personal traits, will broaden your scope and help your team prepare for the real world.
Are you a team of one? Your situation may not be ideal, but it may also not be impossible. Maybe the nature of your project lends itself better to working alone in the initial planning and production stages. Just don’t limit yourself. Build a network of mentors and advisors, keeping in mind the skills and knowledge that they, and possibly future team members, might bring to your new venture. Get to know faculty members who might be interested in your work. Contact your college’s innovation incubator, technology development office, or entrepreneurship club. Reach out beyond your college and find out who else is working on the same type of project as you. Beat the streets for people whose interests are similar, or complementary, to yours.
Your team may come together in a very democratic way, and for some teams relationships necessitate keeping that democratic feeling intact. But leadership is also critical—someone has to make sure that the team keeps its momentum going and that the work stays on track. Figure out whether you’re the best person for that role, or whether someone else needs to take charge.
Clarify your purpose
Know why you’re creating a team and begin with a vision of how you want the team to work. Jon Katzenberg, Senior Partner in Katzenberg Partners, LCC says, “Teams work when they are created for the right reasons, and when they are created in the right way…The critical decision for any manager or leader who wants to get higher performance from a small group of people is determining whether the group should try to work as a team, or whether they should be satisfied with what I call ‘single-leader unit’ discipline…Most organizations proliferate with groups that call themselves teams but aren’t…it’s disturbing how many managers and leaders assume that being a team is what a group effort is all about. If a group tries to become a team when the performance challenge requires a single-leader approach, performance and morale suffer. The opposite is equally true.”
On diverse teams
From “Mighty is the Mongrel,” by Gregg Pascal Zachary. Fast Company, July 2000.
“Ideally, your team should have seven to nine people. If you have more than fifteen or twenty, you’re dead: the connections are too hard to make.”
From “What Makes Teams Work,” by Regina Fazio, Maruca, Fast Company, November 2000.
We must turn to great groups if we hope to begin to understand how that rarest of precious resources—genius—can be successfully combined with great effort to achieve results that enhance all our lives. It is in such groups that we may also discover why some organizations seem to breed greatness, freeing members to be better than anyone imagined they could be.”
From “The Secrets of Creative Collaboration,” by Warren Bennis and Patricia Ward Biederman, Inc. Magazine, December 1, 1996.
The Layers of a Team
Teams, though they may not be hierarchical in structure, have a natural layering of levels of involvement among their various players. You can think of a team as a series of concentric circles, with the most central players at the core, and those with more fleeting or peripheral involvement in the outer layers. As needs and roles shift through the life of a venture, so do individuals’ location in the concentric layers of the team.
The core: you and other major stakeholders
The core of the team might consist of you alone, or you and several other people who have been central to the project from its outset. You are the ones with the most at stake. You’ve invested a lot in this venture, and your investment is not necessarily financial. In fact, you’re more likely earning sweat equity: the energy and hours you invest in a venture that give you a personal stake in its success. You are the ones who care most whether or not this venture succeeds.
The outer layers
These are the people who have less of a stake in the project’s success but will contribute to make it work. They might include advisors, mentors, and people who will perform concrete tasks for you along the way without taking a central role in the planning. As your project progresses, you may want to draw some of the more peripheral people closer to the project’s core. It may become more important for them to be stakeholders and to benefit directly from the project’s success. Likewise, some of the original stakeholders may draw away from the project’s core, and take more peripheral roles. A team is dynamic, constantly in flux.
To be effective, team members need clear roles and responsibilities. It is important to hash out the details of what needs to be done and who is responsible for each task. Early in your team’s formation, discuss how individual team members’ talents will best be put to use and the kinds of people you want to bring in to fill leadership roles. This discussion is an important part of clarifying your shared organizational vision. Here are a few typical roles in a company, briefly defined.1 (See section 5, The Company, for a more detailed discussion of company structures.)
The Board of Directors is a group elected by a company’s shareholders to oversee management of the corporation. Directors may work voluntarily, or they may be paid in cash and/or stock. They assume legal responsibility for the corporation.
The Board of Advisors is a less formal working alternative to a board of directors, often used by smaller companies that want to bring in senior people but aren’t yet ready to ask them for a commitment. The board of advisors usually has 3-7 members and meets periodically, but doesn’t have legal responsibility for the company. Legally, a board of directors is still required.
The CEO (Chief Executive Officer) is the highest level executive, other than the board Chair. Typically, a company brings in a CEO after it has achieved financing or some other level of success. At this point, the CEO lends experience to the management team, and helps provide broad strategic direction.
The President runs the company day-to-day, and understands both the details and the big picture. The President is often the company’s founder, and sometimes also serves as the CEO, particularly in smaller companies.
The VP Sales and the VP Marketing fill critical roles in any company, but particularly in early stage companies. Well-connected people dedicated to sales and marketing make all the difference, especially if they can influence the product people.
The CFO (Chief Financial Officer) is responsible for the company’s financial planning and record-keeping. Many CFOs supervise people like the controller and bookkeeper, and set the company’s strategic financial direction.
The COO (Chief Operating Officer) is responsible for the day-to-day management of a company.
The CTO (Chief Technical Officer), in a technology company, is usually a founder, in charge of the core product. The CTO and COO develop the company’s product offering.
Whose company is this, anyway?
It’s never too early to begin talking about ownership. The issue of who owns the venture and how much of it each person owns can lead you to disastrous conflict when things change (e.g., someone leaves the company). Work together to devise a model of ownership that everyone is comfortable with.
You can choose from several possible models, including vested ownership, where people gain a certain percentage of financial interest with each passing year, and milestone-driven ownership, where milestones in the company’s development dictate who owns what percentage of the company’s shares. When you devise your ownership plan, allow for changes in the company structure. Set up a system for treatment of new people at different levels. When you bring someone new on board, will she have ownership? How will you transfer shares from one person to another, should the need arise?
From “Total Teamwork—Imagination, Ltd.” by Charles Fishman. Fast Company, April 2000.
—Joseph Weintraub, Professor, Babson College and President, Organizational Dimensions
Tom Stemberg, founder, chairman, and CEO of Staples, a $5.2 billion chain of office supply superstores
Lynn Frydryk, founder of $1-million-plus J&L Peaberry’s Coffee & Tea Co., in Oakland, Calif.
Steve Leveen, cofounder and president of Levenger, a catalog business in Delray Beach, Fla.
From “Mentees on Mentors,” by Various Inc. Staff, Inc. Magazine, June 1998.
Building a Healthy Team
Embrace those differences
As we’ve mentioned, a healthy team is a diverse team. And in a diverse team, not everyone thinks alike. This is a good thing, and the whole reason for having a diverse team in the first place. You really want the varied points of view brought in by people with different backgrounds and talents. The flip side of this, of course, is that diversity brings its own set of challenges. Don’t expect, or even hope, for your team to work together smoothly all the time. Instead, establish a set of norms for communication and team operations that will equip your team well for managing conflict when it arises.
Setting team goals
Early in your team’s formation, discuss the following issues: What is your vision for this project? What are your most important goals? Making a lot of money? Learning new skills? Helping people? Building your résumés? Do any individual goals conflict with team goals? How will you deal with that?
In addition, you should decide how (and how often) you’ll interact:
- How often will you hold regularly scheduled meetings?
- Who will lead the meetings?
- What will the agenda look like, and how will team members control meeting topics?
- How will the team make decisions on controversial issues—by consensus, hierarchically, or using some method in-between?
- What procedures will team members follow for disseminating information from the meetings?
- Who will get the information?
Be sure that your team has all the people it needs to make decisions and take action quickly once the decisions are made. Ray Oglethorpe, President of AOL Technologies, recommends that teams have “no delegates. You don’t want people who have to take the team’s ideas back to someone else to get authorization. You want the decision makers.”
A team can only function in an atmosphere of trust and respect. Build it from the start, by working toward common ground and a shared vision. Look for honest and enthusiastic people who are assertive, yet humble—people with both a sense of humor and a driving work ethic. Balance Type A and Type B personalities—people who want to get the job done, and people who value the process.
When conflict erupts
What will you do when team members start to have problems with each other? (this is inevitable—it happens to everyone!) Will you talk about it in a group meeting, or talk individually among the people concerned? Will you go so far as to ask someone to leave the group? How will the team decide issues like that?
When someone new comes on board
You’ve balanced work styles and communication styles to perfection, and everyone is getting along fabulously, and moving the project ahead. Then the team realizes that it needs someone new with a particular skill set. How will team members cope with this shift in the balance? Will you be taken off guard when everything changes in your perfect world?
Tony DiCicco, coach of the gold medal-winning US Women’s Olympic Soccer Team says, “The natural inclination is to protect what you have and not allow a new star to rise to the top. Team members have to fight against that. The bottom line is that new talent can force everyone to play at a higher level.”
And common corporate wisdom dictates that a good leader always hires people who are smarter than herself.
Support is never far away. Human resource units at some schools will facilitate team building workshops. You may also be able to hire an outside team-building facilitator for a minimal cost through a local chamber of commerce. Your college may have a mediation team to assist with conflict resolution. Another alternative is to invite a wise, neutral, mentor-type person with experience in team dynamics to sit in on a meeting and help assess what is going wrong in team communications.
Every team encounters unexpected conflicts or dysfunction. Catch it and do something about it before it disrupts the achievement of your goals.
Key ingredients for building a successful team
—H. David Aycock, former Chairman of Nucor
—Jonathan Roberts, Managing Director and Partner, Ignition Corp.
From “What Makes Teams Work? Unit of One,” by Regina Maruca, Fast Company, November 2000.
Forming—Team members are introduced. They state why they’re a part of the team and what they hope to accomplish within it. Members cautiously explore the boundaries of acceptable group behavior. This is a stage of transition from individual to member status, and of testing the leader’s guidance both formally and informally.
Storming—Storming is the most difficult stage for the team. Members begin to have their own ideas as to how the process should look; personal agendas are rampant. They begin to realize the tasks ahead are more difficult than they imagined. Impatient about the lack of progress, members argue about what actions the team should take. They try to rely solely on their personal and professional experience, and resist collaborating with most of the other team members.
Norming—Members reconcile competing loyalties and responsibilities and find a focus. Everyone wants to share the newly found focus. Enthusiasm is high, and the team is tempted to go beyond the original scope of the process. They accept the team, team ground rules, their roles in the team, and the individuality of fellow members. Emotional conflict is reduced as previously competitive relationships become cooperative.
Performing—The team settles its relationships and expectations. They begin performing by diagnosing, solving problems, and choosing and implementing changes.
From “Forming, Norming, Storming, Performing,” by Ingrid Bergner.
Now let’s move on to talk about an activity that’s absolutely central to your team’s commercial success: networking. Networking consists of exchanging information and establishing personal connections. People network in many different settings: on the telephone, in hallways, in company lunchrooms, at professional conferences, at trade shows, company meetings, classrooms, lounges, hallways, elevators, airplanes, trains, buses, hotel lobbies, and waiting rooms. Some networking is carefully planned and some just happens. Networking is friendly, low-key—and essential.
Get out there
You may be wondering, “Where do I start?” It’s OK if you don’t personally know any CEOs, lawyers, or business executives. Chances are someone close to you does, or perhaps someone close to someone close to you. “Every person has a network they can hook into,” says Gillman. “We’re all born with networks, a set of contacts.” She recommends first delving into your F & R (Friends and Relatives) network to connect with people who can help you.
Opportunities to network exist outside of friends and family as well. Your college or university keeps detailed alumni information. Feel free to get in touch with these invaluable contacts by writing letters and making telephone calls. Many alumni are more than happy to help out students of their alma mater. Also, seek out trade organizations and conventions that link people in your field of interest. Your competitors are likely to participate in these associations; by networking with them, you can gain priceless information.
When you are ready to network for business do not underestimate what you have to offer as a new, ambitious entrepreneur. More experienced individuals may even take you under their wing. The closer you are to your mentor, the more that person will want to see you succeed. Your best asset is your freshness; by confidently and sincerely approaching people you will make contacts with ease.
As a budding entrepreneur, you’re also offering others the unique opportunity to share in your vision at the beginning. Everyone is interested in new and innovative ideas. Even if you’re reaching out to friends and family, talk about your vision with conviction and explain why it’s important. Buzz spreads quickly, and if the people you speak with aren’t interested in becoming involved in your business, perhaps they know people who would be.
Keep in touch
Use your network
Why bother incubating? Why can’t young businesses just go at it alone, like they used to (and for the most part, in fact, still do)? The answer has three parts.
Making the local scene vibrant Stimulating the local economy is a prime reason for the existence of most incubators. These programs want to produce mature, successful businesses—“graduates” of the program—that will go on to create jobs and offer products and services that enhance the local economy.
The “new” economy The world is changing in terms of how business is conducted. In the past, traditional economic transactions consisted of an exchange of money for goods, materials, or services, but more and more often the important economic transactions of today involve knowledge. Incubators—particularly technology business incubators—facilitate these academic, government and business collaborations that produce leading-edge, next-generation systems and in the process get a leg-up in a hypercompetitive, knowledge-based marketplace.
High-tech help While there has been a rapid and spontaneous burgeoning of technology-based start-up companies in recent years, quite a few of the entrepreneurs behind them have negligible experience in managing and growing a small enterprise. Assisting emerging high-tech entrepreneurs with this process is a fundamental motivation driving incubators.
What incubators look like
Finding the right match
Does the incubator offer the services and contacts you need?
Do you meet the incubator’s criteria?
Is the fee structure right for you?
Ups and downs
Choosing team players over superstars: SolemteX
As Owen Boyd grew his business, he picked the most impressive résumés from the pile to build his management team.
This, he says, was his biggest mistake.
“I wish I had known at the time how important building a team was rather than building a company,” said Boyd. “I hired everyone based on their resume rather than how they would fit together.”
Boyd’s hiring strategy gave him a very intelligent group of people, each with their own big ego. The ability to work well together is critical for a small start-up team, and Boyd found that all the egotism stifled collaboration, prompted managers to exaggerate their progress, and caused them to make the same mistakes again and again.
Boyd now knows that mutual respect, honesty, and the ability to learn from mistakes are crucial traits for a team. It took five years and a complete staff turnover for Boyd to find the right people, but the current staff has been in place for three years and the company has doubled revenues each year.
Boyd thought of the idea for SolmeteX, which develops and manufactures specialized technology for the safe and economic removal of heavy metal contaminants, while he was working with his father in power plant development. He noticed that industrial water treatment systems, like those in power plants, used 100 year old technology. He had recently read an article about a new technology for drug separations and believed that its principles could be applied to modernize water purification.
Beginning with money from family and friends, Boyd rented a basement and began to test chemical separation techniques. He warned his funders that they had little chance of getting their money back. After the early stage, he wrote a business plan and secured venture capital money to continue. Although using venture capital meant ceding some power (as Boyd explains, no matter how much stock share they have, “they have the cash, which means they have control”) he became more comfortable with them over time, realizing that they were also relying on him.
His initial strategy was to market the chemical separation technology for large projects. Holding lunches at engineering firms brought in sales, but not profits. Boyd notes that to succeed in unprofitable times, “you have to have the idea that you will be successful and understand why you are not making money.”
Boyd responded by shifting his focus to smaller applications in markets with dominant distributors, including a device he developed to trap mercury during dental procedures. The large dental supply distributors pushed SolmeteX products to dentists. Demand was mostly driven by regulatory standards for pollutants, so SolmeteX concentrates on educating regulators about the need for and availability of better technology. In regulated markets, SolmeteX has achieved 50-70% of the market share.
This will be the first profitable year for SolmeteX, a feat that can be enjoyed by the current management of the company. Now that the egos are gone, SolmeteX has a team that feels like a family and demonstrates mutual respect. Boyd says “people really have to enjoy what they are doing. It’s like sports: they want to be on a winning team.”
The right team at the right time: Keen Mobility
Often, the best teams don’t form as a result of careful planning: good teams synthesize when the right people work on the right project at the right time. Such is the story of Vail Horton and the Keen Mobility E-Team.
Born without legs, Horton learned determination and perseverance at a young age. At four he pleaded with his parents for prosthetic legs, and got his wish when a team of biomedical engineers at the Rusk Institute of New York University designed a pair of custom titanium legs for use with ordinary wooden crutches.
While glad to be free of a wheelchair, over the years the jolting of the crutches caused tremendous discomfort in Horton’s back, shoulders, and arms. In college he was diagnosed with osteoarthritis in his shoulders, and when the incessant pain became severe his doctors prescribed a wheelchair. Horton refused; he had experienced an independent lifestyle, and for him, going back to a wheelchair wasn’t an option.
One day, Horton, then a business student at the University of Portland, walked into the engineering department and asked if someone could build him a crutch with a shock absorber. A professor who happened to be in her office at the time spoke with him about it. “A few days later,” said Horton, “three engineering students called me and said, ‘We’ve been assigned to build your crutch for our senior year project.’ I said, ‘Oh, cool’.”
Just like that, the team was formed.
The group was soon accepted into UP’s E-Scholar program, in which students form teams and pursue a business venture funded partly by the university and partly by themselves. Horton and his team began a venture based around a new, improved crutch—one that wouldn’t be detrimental to long-term users.
But the team wasn’t complete. Horton soon realized they needed more information about how the crutch would affect the human body, and took steps to add a life sciences major to the ranks. Horton, the three engineers and the life sciences major met once a week over the course of their senior year and, aided by NCIIA Advanced E-Team funding, eventually came up with a product: the Keen Krutch. The improved crutch featured underarm cushioning that conformed to the curvature of the body; a contour shape to redistribute pressure; adjustable, mobile handgrips to prevent carpal tunnel; shock absorbers, and a pivoting ankle joint for increased mobility. The crutch was awarded a US Patent, and was on its way to being sold on the marketplace.
Then everyone graduated. Horton decided to try and commercialize the Keen Krutch, but the engineers didn’t join him. Says Horton, “They didn’t see entrepreneurship in the same light as myself. I gave them every opportunity to stay and form part of the company, but I didn’t have the resources to offer and they weren’t willing to accept the risk associated with running a startup.”
Horton decided to call on an old friend and former roommate, Jerry Carleton. Carleton had already accepted a job in northern California, but jumped at the chance to join Horton. Says Carleton, “Just knowing Vail, I was already caught up in the vision and I knew he was going to take the company as far as it could go. I knew he was the kind of guy that would never say die—that he was putting his mind to this company and was going to make it a huge success. So when the moment came and I was sitting there at lunch and he offered me the job, I didn’t hesitate.”
August 2002, with a US Patent for his revolutionary set of Crutches in hand, Vail hired Jerry, and he became the first employee for Keen Mobility, now officially a small startup company. After a grueling, exhausting, and ultimately rewarding startup process, today, now called Keen Healthcare, is a leading national manufacturer and provider of medical equipment and supplies. Alongside their first innovative product Keen 'Navigator' Shock Absorbing Crutches and Aventure Pivoting tips, , the company manufactures over 52 lines of technologically advanced, innovative, medical equipment, ambulatory aids and other progressive products selling direct to long term care and acute facilities nationwide passionate to ensure that the elderly and disabled are provided greater mobility, safety, independence and healing options. For more information on Keen Healthcare visit www.keenhealthcare.com, and to learn more about their founder and CEO Vail Horton visit www.vailhorton.com.
Business Plans and Why You Need One
What is a business plan?
A business plan forces you to think things through early; it ensures you have well-defined venture goals. Clear goals help generate a clear path for you and your team to follow as you begin to implement your venture.
The elements of a business plan
The executive summary is a 2- to 5-page section that summarizes the plan’s main points. In a few pages, the executive summary conveys the essence of the venture. It should contain only the key points from the important sections of the full plan.
The problem you’re solving or the need you’re filling is stated in an introductory section. Don’t shy away from aggressive terms and phrases in this section—you want to grab the reader’s attention.
Your solution, or how you will alleviate the pain, is stated in general terms.
Your technology and IP are described in more detail in the next section. Explain specifically how the technology works, but don’t overdo it; the explanation should be comprehensible to an intelligent layperson with some knowledge of the field. State whether the technology is yours or licensed, and, if so, from whom and under what conditions. Describe the status of your IP protection. What patents have been granted, applied for, will be applied for? Supply the patent numbers or the application numbers if you have them. State if you’re protected by other forms of IP.
Size of opportunity/market If you’re creating a new market it can be difficult to gauge its potential size, whereas if you’re introducing a better technology into an existing market, the estimate can be more accurate. Regardless, you and your potential investors need to feel comfortable that the potential market is large enough to sustain a profitable business.
Customers and how you will reach them Points to discuss include who your target customers are, your strategy for selling to them, what channels you will use, and when. Demonstrate an understanding of your target customers.
Competition Demonstrate knowledge of your competitors. Who are they? Are they selling the same or different technology? Who are the likely new entrants? Are they both domestic and foreign? What are their strengths and weaknesses?
Business model is a general outline of the way your company will make a profit. We go into more detail on business models later in this section.
Team This section should convince potential investors that they can trust your team with their money. Does your team:
Although important, this section of the plan is only the first step in the convincing process. Personal interactions with investors and the due diligence process also play an important role.
Financial needs including the amount of money the venture is seeking and over what time frame; how the money will be used; the major assumptions involved; and when you will achieve cash flow break-even and profitability.
Exit strategy details how investors will get their money back (hopefully with a healthy return) and exit your company. Some exit strategies are Initial Public Offering (IPO), merger/acquisition, and buyout by a strategic partner
A business model is a general outline of the transactions needed for your idea to make a profit. The most basic business model involves simply producing a product or service and selling it directly to customers. The company makes a profit if revenues are greater than production and business costs.
Business models are goal-driven
First, identify your venture type. Is it a product, a service, or a business? If it’s a business, is it a service business or a product business? Is it a lifestyle business or a high growth business? A lifestyle business prioritizes lifestyle issues such as independence, location, and hours. A high-growth business gives priority to growth, expansion, and money back to investors.
If you have an idea for a product, do you have the means to produce and sell this product or do you plan to license it to another company? Ask yourself if your team is capable of getting the product or service to market. If not, who will help you, and how will you make money using their help?
Some model models
Subscription-based and advertisement-based models are examples of business models found both on- and off-line. Many companies combine two or more business models or create their own unique model.
In a subscription-based business model, the provider charges a fee for access to the service. An example of this is Consumer Reports magazine. Consumer Reports relies solely on its subscription sales. It can do this because it carries a well-known brand name, and provides high quality print and online content, for which people are willing to pay.
An exclusively advertisement-based model provides free content to attract users, and is financially supported by advertisers. Network television is the most obvious model. The more successful a show is at attracting eyes, the more advertisers are willing to pay. Another example of an advertising-based business model, Yahoo!, provides free access to useful online resources. Users accept the presence of advertisements throughout the Yahoo! site. (Note: Yahoo! is gradually incorporating more subscription-based services.)
A licensing model is used by most software companies and some specialty product companies to create products, then license them to other companies. The Bagel Biter in Northampton, MA manufactures a bagel-slicing machine, and gets others to sell it in their catalogs and stores. This model works for companies that have a narrow product line and can sell a limited number of units.
What happened to the dotcoms?
Paul A. Greenberg writes, “Many of the young dot-commers rejected traditional business models in favor of rampant spending, over-extension of debt and high-risk ventures backed by adventurous investors.”1 Colin Duguid and Caroline Tresman add, “A solid business is not maintained just by its shop front or by its product, but by basic business skills through its management and staff. If the management has little or no skills but ‘a great idea,’ how long would it last and could they see what would otherwise be simple business problems?”
To survive, plan your venture and evaluate your team’s financial capabilities as well as your business management experience. Also, analyze the market to determine if your model can make a profit. Lastly make sure that you are aware of your competitors and your possible risks (more on these issues in the section 2, “The Market”).
Measuring Your Success
When is this going to make money?
Cash is king
In operating your company, keep close track of your cash position. While you’re working to make your venture viable, you should probably estimate your cash flow on a daily basis. The term burn rate refers to how quickly a company is using up its available cash. If you don’t have a perfect picture of how you are using money, estimate your burn rate to determine how many days you have until you need more funding or have to cease operations.
Your original business plan might include a rough cash flow estimation. Your financiers will use it to determine when they will begin getting a return on their investment, and how high the return will be.
The balance sheet reports the position of the company at a point in time. It is divided into three parts: assets, liabilities, and owner’s equity. Assets represent everything of value in the firm, such as property, inventory, cash, and payments owed by customers. Typically the assets are listed in order of decreasing liquidity, meaning that the ones easiest to convert cash are first. Liabilities represent debts owed to customers, employees, and banks. These are listed roughly in order of when they come due. Owner’s equity is what’s left over when liabilities are subtracted from assets. It’s the value of the owner’s (or stockholder’s) share of the company if it were to cease operations. The actual value of the company is based on its future potential (and should be higher than owner’s equity on the balance sheet).
The income statement reports the revenues and expenses of the company over a specified time period, culminating in a profit or loss. Income is reported based on accounting rules and often does not reflect cash changing hands. Revenues can be reported when a product is sold and delivered to the buyer even if they have not paid (but will pay in the future). The income statement also follows the “matching principle,” which requires expenses to be matched to revenues and reported at the same time. This means that expenses incurred to produce a product are not reported in the income statement until that product is sold.
The cash flow statement documents the sources and uses of cash over a specified time period. Each activity where cash is gained or lost is listed, along with the amount. The activities are typically divided into operations, investment, and financing. Positive cash flow from operations is a sign that the business is making money from the goods and services it’s selling. The investment section documents cash used to purchase assets or gained in the sale of assets. The financing section represents cash borrowed from banks or gained through the sale of stock, and cash used to pay back loans or repurchase stock.
More than one bottom line
The National Social Venture Competition recommends two different options for quantifying social impact in dollar terms. One, based on project valuation techniques at the International Finance Corporation, involves thinking of the best alternative solution that exists to meeting the social need you are tackling. To find the monetary benefit of your method, subtract your expenses to meet this need from the expenses that would be incurred if the alternative solution was used instead. The second is based on the approach used by Roberts Enterprise Development Fund to value its social venture returns. The monetary return is calculated by adding the savings to society (in governmental program costs that do not have to be spent) and the gains to society (in tax revenues) from your work, and subtracting your business expenses that are related to implementing the social purpose (and would not be otherwise incurred).
Presenting Your Plan
If everything goes right, at some point you’ll find yourself presenting your plan to potential investors. This can be nerve-wracking for anyone, especially first-timers, but you can do a number of things to ensure your presentation comes off well.
Your objective: inspiration and distillation
Think about your audience
And, although you may be formally presenting your plan to venture capitalists, don’t overlook the opportunity to present your ideas to the people you meet every day. In both cases it’s important to be socially astute and to recognize the needs and interests of the people with whom you are speaking.
Brevity is key
Rules of public speaking
Main points of a presentation
Summary—a modified version of your elevator pitch. Tell your audience your mission, quickly describe the product and, if appropriate, tell them how much funding you need.
End with action
Licensing as Part of the Plan
Sometimes it makes more sense to license a product to a company that already makes similar products. Let’s say, for example, you’ve perfected the design for a dusting apparatus that can reach into tight spaces without knocking things over. If you can market your idea to a well-known company that already makes small household cleaning devices, you might do better than if you launch a whole new enterprise revolving around your duster. If the invention succeeds in the marketplace, and if you have a well-structured licensing agreement, licensing can be very profitable.
If you think licensing is right for you, include your licensing strategy in your business plan.
Advantages of licensing
What a license looks like
Aside from deciding the exclusivity of the license, you can also spell out the specific activities the licensee may engage in. They may only be licensed to manufacture or sell the product, or both; perhaps the licensee may only conduct additional product development. Also, you can construct the license for specific circumstances; for example, the licensee may only distribute the product in three distinct geographic regions, may only use it for medical purposes, may only use it in certain industries or in certain products, etc. The license agreement should spell out whether or not the licensee has the right to sub-license the technology to others, and if so, under what circumstances.
Negotiate the terms of your license carefully. Don’t “give away the store” by granting an exclusive worldwide license for all uses with low minimum payments, rather than a number of non-exclusive licenses for individual uses at reasonable minimums for each. At the same time, don’t place undue limits on the licensee, as it could become impossible for your product to be profitable.
Finding the right company or companies
Now figure out which companies would be most interested in your product and can produce and sell it most efficiently. Check the company’s position on the Fortune 500 list of the most successful businesses in the United States and check its ranking on the Standard and Poors listing. This type of research is essential for finding reputable companies that have the technology to both produce and sell your product.
Defining your property
Innovation in the bag: Bob DeMatteis
Whether you know it or not, you’re connected to Bob DeMatteis. This leading packaging systems innovator holds the patent and license on the self-opening plastic bags used in supermarkets and national giants like Wal-Mart, Sears, and Kroger. Nearly everyone has likely used his product.
We spoke with DeMatteis about inventing, the reasons for his success, and the advice he has for inventors looking to license their technology.
When inventing, look to increase productivity
I got to thinking about it, and one day when I was driving down the highway it struck me: a self-opening bag. You mount the bags on a hook and swipe your finger across the bag and it automatically opens. It’s faster and cheaper than paper—more efficient, more productive. That’s why plastic has replaced paper, by and large, as the bag of choice.
Make it “people friendly”
But the key thing is that there were already a lot of plastic bag systems being used in the concrete industry, and many of them tried to emulate paper, which made them expensive to use. And, more importantly, many of the employees in the actual concrete filling plants had difficulty using the bags. So using Exxon’s resin we designed a bag that’s very easy for employees to use, and we’re now licensing the technology all across North America. And that’s what I mean by “people friendly”: develop the technology with the user in mind; make it simple, easy, intuitive.
Licensing is a team effort
You have four partners on your team: the inventor, the lawyer, the manufacturing partner, and the marketing expert. The most important member of the team is your marketing expert. And almost invariably your marketing expert is your licensee. You really want your licensee to embrace your product. As long as that licensee embraces your invention, you know that you’ve got something—that you’re a team.
Two things to look for in licensees
The second thing to look at is the quality of product the company puts out. Your licensee has to be a company that sells and markets the same level of quality that you’re offering. In other words, if your licensee makes Timex watches, and your invention is a Rolex, they won’t understand how to reap benefit from the value you add. And most innovations are added quality, added value, making something more workable. That’s the essence of innovation—these small layers of improvements. Make sure your licensee can appreciate that.
Knowing when your invention is licensable
Open to learn: Evan Edwards and EpiCard
You can do it
It’s gonna change—a lot
You’ll learn more than you think
Act on the feedback you get
As you’re developing your business plan, and you start presenting it to these certain groups, you realize the areas of your business you need to focus on the most.
Lean on others
And that brings me to the real piece of advice I want to give: you have to interact with people. Talk with local businesses, join a venture group, join an on-campus entrepreneurship club. By going to their meetings and attending their seminars you’ll gain an understanding of how to write a business plan, or how to valuate your company, or how to do the financials. Whatever you need. You’ll make your strengths even stronger and you’ll shore up your weaknesses. By being in the company of businesspeople at Darden, by being around entrepreneurs, I was able to feed off them and really learned a lot about how to run a business.
Getting Started in the US of A
So you’ve got a great new idea and want to put it into action? Here’s some good news to get you started: a combination of unique characteristics make the United States an ideal place for innovators and entrepreneurs to launch their ventures. The advantages reach a spectrum of business models, so no matter what your ambitions, you’re starting out in a great place.
Risk is rewarded
For example, legal structures in the US provide a range of options for different sizes and types of businesses, allowing their owners to take on varying levels of liability. This flexibility also creates a distinction between the individual and the corporation, further encouraging you to take business risks without fear of getting into too much serious trouble. Unless you do something illegal, or fail to make payroll taxes, you as an individual will not be held personally liable for the failure of a business.
And it’s not just US laws that reward you for taking risks. Our culture and society also reward the adventurous entrepreneur. We see it as acceptable, even courageous, to give a new venture your best shot and make lots of beginner’s mistakes, even if your business fails because of it.
The entrepreneur-friendly culture of the US tells us that making mistakes is just part of the process, and that success is all about taking the risk, and learning from your mistakes.
It’s who you know
Calculated debt is OK...mostly
Of course, we hear a lot less about the failures in this approach, which are proportionally much, much greater. Be very careful about personally guaranteeing any kind of loan. You could be personally obligated for a long time to come. And remember: use full disclosure when you get any kind of financing. You don’t want to get money based on false pretenses, no matter how desperate you or your company are at the time.
Your team is ultimately responsible for the business decisions you make, for borrowing wisely, and for doing what it takes to help your company succeed. Every decision you make along the way has risks and consequences. It’s up to you to educate yourself thoroughly and decide whether they are smart and worthy risks.
A rich history of failure
The philosophy behind this tolerant regulatory structure is to encourage people to create businesses, with the hope that they will succeed, hire employees, pay taxes, and improve the economy as a whole. These ideas are not new. As a society, Americans have always encouraged economic activity through the extensive use of credit. As early as the 1700s, when the US economy was competing with much more developed European economies, it grew faster than anyone could have imagined, partly through extensive use of credit, with some people being paid for goods and supplies months and even years after the credit was granted. This allowed people to start businesses without much money in their pockets. The availability of credit caused economic activity to soar, and a strong credit-based economy was born.1
What Makes It a Company?
Building a company is an experience that varies widely, depending on the nature of the product or service. If you’re a student, your company may share some of the challenges encountered by other student organizations. This section describes some coming-together experiences of companies, both student and non-student.
These teams each originated in a class or program at their universities. Once the initial framework for the product was set for the class exercises, the teams began to evolve into serious, revenue-seeking ventures.
Being a student
Transition can be tough
Lonely at the top
The best leader may just need strong business experience. Or she may need to both reflect and complement the skills of the rest of the team. It’s crucial for the team to carefully determine what it needs in a leader.
Advisors and mentors
Nuts and Bolts of Company Formation
Keeping your company lean is one of the hardest, but wisest, things you can do. Plan for long-term success. Stay focused on your initial product or service. Almost anyone who has made the mistake of growing a company too fast will tell you that it can be an expensive lesson to learn.
When hiring anyone who will hold a position of leadership in your company, analyze how well they know the culture of your business, their connections to funding, and whether they have the personal chemistry to attract other employees to work with them. It’s also important to find someone with the entrepreneurial passion that will keep them loyal from a bare-bones startup to a successful company.
Another thing to realize is that, as an entrepreneur, you are essentially a jack of all trades: you take part in every aspect of the business, but are the master of no single aspect of the business. As your company grows, you want to professionalize and enhance company expertise by finding people who are better at certain tasks than you are: a marketing expert, perhaps, or a financial manager, office manager, etc.
Hiring your boss can be a great experience. How often do you get to be responsible for hand-selecting who you’re going to work for? You get to decide what qualities make a great officer, and better yet, who has those qualities. Consider a person’s attitude, their experience in a related field or market, what kind of business philosophy they have, and any other special skills or qualities they can bring to the table.
Frank Hertz, VP of Operations at Massachusetts-based Newmediary, Inc., talks about hiring your own boss:
“First things first, you have to recognize that you do indeed need a boss. Many entrepreneurs think they can be a CEO right away, and, while some can, others need to realize the combination of honed and practiced skill and years of experience in a CEO goes a long way. Whether it’s raising funding, making tough staffing and strategic decisions, or dealing with a Board of Directors, an experienced CEO is an extraordinarily huge factor in a successful business venture. Your product could be best-of-breed, but if you don’t have someone who knows how to grow and run a business, you could fail, and fail quickly.”
For Profit or Not?
As you learned earlier, a social entrepreneur is an innovator seeking social benefits. But the story doesn’t end there. Social entrepreneurs can be found in the for-profit and non-profit sectors. Non-profits have traditionally been tasked, along with government, with providing public benefit. But an increasing number of for-profit companies are also tackling social and environmental issues. If your innovative spirit, business skills and social values align, you may wonder whether you should run a non-profit or for-profit organization.
Non-profit doesn’t mean “no profit”
Money to the mission
The most common type of charitable organization is a “501(c)3,” as identified by the IRS. Companies that meet this classification are exempt from state and federal income, sales, and property taxes. However, they must have a clearly defined mission from which they operate. All income must be generated in a way that relates to the mission, and after expenses, must be devoted to that mission. This prevents charities from using their tax-free status to compete with other merchants who have higher expenses due to taxes. 501(c)3 organizations cannot support political causes as part of their operation.
A non-profit must have a board of directors. As with for-profit companies, which maintain boards to insure that management acts according to shareholder interests, non-profit boards insure that management works in the best interest of the targeted community.
Profit and mission
The non-profit sector has a reputation for being mission-oriented—having this status makes the organizational focus more believable to the public. Their inability to reward owners, employees, and financiers with financial returns tied to performance may restrict sources of money and people, but removes the temptation to sacrifice the cause for higher profits.
Economists believe that a well-functioning market is the best way to determine the value of an entity. For-profit companies issue stocks that are publicly traded, which enables their worth to be determined by the stock price. The stock price represents the investors’ appraisal of the future value of the company’s profits. Fluctuations send a signal to managers that the market thinks they’re making good or bad decisions. This feedback is termed market discipline. Arguably because investments in for-profit entities can be publicly traded, they must be more attentive to their owners and the signals in the market. Some see a disadvantage in the fact that non-profits cannot get these signals as efficiently from the stakeholders that “own” them.
Know your options
Finding a good lawyer
Why do I need a lawyer, anyway?
Types of corporation
Limited Partnership works like General Partnership except that some members become limited partners. Unless you’re in real estate or another limited lifespan business, this model probably won’t apply to you. An example of a limited partnership is a venture capital fund, which typically has a seven to ten year lifespan.
C Corporation is the model used by nearly all big companies. A C corp exists separately from its owners. While the shareholders are the primary financial contributors, they are not liable for the corporation’s debts. The corporation, rather than the shareholders, is taxed. The shareholders elect a board of directors to manage the company, and officers to oversee day-to-day decisions. A C corps’ profits are taxed twice—to the company and to the individual shareholders.
Limited Liability Companies
The LLC model is complex and relatively costly. It’s often used for consulting companies, and is increasingly used by entrepreneurial companies. Angel investors may prefer an LLC. More sophisticated and institutional investors are likely to favor a C Corp, because of its straightforward, transparent structure.
A Failure Success Story: John Fabel
The story of John Fabel teaches us that when it comes to entrepreneurial endeavors, failure isn’t always a bad thing: new opportunities arise, lessons are learned, people move forward. In this profile we take you through John’s story, from invention to incorporation to bankruptcy to eventual success, and find out what he learned along the way.
Suspension bridges and backpacks
While marveling at the suspension bridges on a trip to New York City, he found the answer.
“When I used a hip belt to transfer the backpack’s weight to my hips, I still got sore shoulders. So the problem wasn’t the shoulder straps. The problem was how the weight wanted to fall back, away from your body. So I started thinking, ‘What if I could design a backpack that would get the weight to pull toward your back rather than away from it?’”
“After I saw the Brooklyn Bridge, I started thinking about how to build a hip pack that would distribute the weight evenly, like a suspension bridge.”
In a suspension bridge, huge main cables extending from one end to the other hold up the roadway. The cables rest on top of towers and are secured at each end by anchorages. Instead of relying on shoulder straps to carry the load, Fabel designed a backpack that transfers much of the weight to the hips. When wearing it, your hips act like a tower on a suspension bridge, the backpack is similar to the roadway, and the triangular flap between the backpack and the hip belt—like the cables on the bridge—distributes the weight evenly.
Fabel called the invention BioSpan, patented it, and in 1993 began work in earnest on a company built around the technology, EcoTrek.
I don’t care if it’s made from uranium, I want one
Fabel received plenty of positive feedback. EcoTrek was featured in several prominent publications, environmentalists were happy there was a green alternative in outdoor equipment, and people truly enjoyed wearing the BioSpan backpack. Once, when Fabel was hiking with Everest IMAX film creator David Breashears, he asked David how he liked the backpack and if he appreciated that it was made from 85% recycled materials. “I don’t care if it’s made from uranium,” Breashears said. “I want one.”
Because Fabel put the green aspect of EcoTrek first, he decided to go forward with an unusual marketing strategy for outdoor equipment: direct marketing. “It’s very difficult to market green products in that, in the retail environment where most outdoor equipment is sold, it’s very hard to communicate the green attributes,” said Fabel. “More customer education than usual needs to take place, and the retail environment doesn’t lend itself very well to that. So we made the decision to concentrate on direct marketing because we thought we would be able to much more powerfully communicate our green values to our target customers.”
“But unless you hit your target, it’s very expensive.”
The team shifted to a retail strategy and immediately started gaining traction, going through three rounds of manufacturing with still more orders to fill. “We couldn’t make them fast enough,” said Fabel. But by that time they were out of money. “We had so much debt load, we didn’t have the resources to adequately pull off the retail marketing strategy even though we were getting signs that everything was turning around. We were constantly scrabbling behind. Combined with insufficient startup capital, our failed initial marketing strategy cost us the company. The initial marketing strategy was fundamentally flawed because when you put on the BioSpan backpack, you ‘get it’ in a very visceral way: people almost inevitably smile when they put it on. Yet we initially had a marketing strategy that took that experience totally out of the loop.”
“When we closed the company down we had orders we couldn’t fill because we didn’t have the money to manufacture them.”
The quick rebound
So EcoTrek certainly wasn’t a total loss. “A lot of the value of the BioSpan product concept was developed through the work of EcoTrek,” said Fabel. “Even though EcoTrek itself wasn’t successful, the idea was. It had some very successful outcomes.”
Chemical Attraction: Griffin Analytical
With the market for chemical detection instrumentation estimated at $1-1.5 billion—and growing, due to homeland security concerns—Patterson knew there was an opportunity. To take advantage of it, he and a colleague, Dennis Barket, enrolled in Purdue’s Innovation Realization Lab, whose main task, according to Patterson, is “linking technology students with MBAs to affect a hands-on learning experience for both sides.” Two graduate MBAs joined Patterson and Barket, and then two advisors from analytical chemistry and business came on board—and suddenly the E-Team was formed.
Success followed. The team won NCIIA Advanced E-Team funding to continue developing a prototype, wrote a business plan, and won three of the four major business plan competitions they entered, earning $35,000 in funding. The team was successful in the competitions because, Patterson said, “Firstly, our product and our business idea were robust. Secondly, the plan itself was thorough and thoughtful. Everyone intends to be thoughtful, but we put a lot of effort into backing up our claims and putting as much legitimate research into it as we could get.”
More money came in: the team was awarded funding from the Purdue Research Foundation’s Trask Fund; they completed one Phase I SBIR contract with the Army and started an EPA Phase I SBIR contract; they acquired private funding, and negotiated an exclusive license from Purdue for the mass spectrometry technology.
In November 2001, Patterson and Barket defended their PhDs, and later that month they incorporated, calling the company Griffin Analytical Technologies. Their work had just begun.
Making the company work
Patterson and Barket decided to hire two chemists from Purdue, people they knew and got along with. But then the company was too “chemist-heavy,” and they still needed technical work done before they could have a sellable product. “We needed to get past the remaining technical hurdles,” said Patterson, “so the next thing we decided to do was concentrate our efforts on the technology, and put together a product development team: electrical engineers, software developers, mechanical engineers, manufacturing specialists, etc. The instrument we were developing is relatively complex; we knew we needed people who had insight into all those aspects of design.”
Then there was the matter of deciding who would be president. In the case of Griffin, this wasn’t a hard decision: it would be Dennis Barket, with Patterson taking on the title of VP of Research and Development. Why Barket and not Patterson? Back when they were students, the two enrolled in an intensive, two-week mini-MBA for science and technology PhDs, called Applied Management Principles (AMP), at Purdue’s business school. According to Patterson, “Coming out of the program Dennis had a pretty good understanding of the vocabulary involved in business and leadership: he gravitated toward it. And I certainly had an understanding of the technology because it’s based on my PhD research, so making Dennis president and myself vice president of R&D came about naturally.”
Steps toward success
What’s the key to Griffin’s future? According to Patterson, communication. “There’s more work than could possibly be done. What we’re doing is working as a group, communicating effectively, identifying what to work on, what’s most important. It’s absolutely necessary to be on the same page with everyone so that we can divide and conquer, focus on the goals, simply so that we can get through the sheer mass of work and end up producing quality work, a quality product. That’s our aim.”
What is it?
By definition, bootstrapping involves running your start-up as cheaply and efficiently as possible, constantly finding ways to minimize your expenditures and squeezing the most out of what you have. Bootstrapping is hard work, but it’s good for your business. It teaches you valuable lessons about how to run the business on a shoestring budget, preparing you to make good financial decisions in the future.
Bootstrapping tips that work
Find a mentor
That’s just what happened to Luke Pinkerton and his Advanced E-Team, Polytorx. Pinkerton was looking to commercialize his product—a twisted fiber that, when mixed with concrete, creates extraordinarily strong, shock-resistant blocks—and attended an event hosted by a local non-profit organization supporting entrepreneurship. There he met veteran businessman Bill Orabone, who would not only become his angel investor and primary source of funding, but also an invaluable mentor. “Bill has been absolutely instrumental in showing me how to run a business,” says Pinkerton. He cites Orabone’s guidance in creating a focused business plan, ordering machinery for a low-cost manufacturing line, and securing raw materials for a sound supply strategy as essential to Polytorx’ success.
Finding the Money
Where do I find money?
Business plan competitions
Search the Internet for more venture forums, or call your local Chamber of Commerce to find out what’s happening in your area.
Venues for pitching to investors at venture fairs include social receptions, display booths, meals where tables are clearly marked as “owned” by entrepreneurs (investors get to choose who they sit with), and formal presentations.
Talk to your professors
Talk with alumni
Your friends, your parents, your friends’ parents
A Cooperative Research & Development Agreement (CRADA) is a grant in which a government lab works with a company to develop or test a particular technology/product. The government doesn’t provide any money to the company, but CRADAs can be an excellent way to obtain skills and equipment, and to test a product. For more information on CRADAs, see their website.
And then of course there is the world of private grants. There are numerous foundations and other organizations around the country (including the NCIIA) that provide funds to technology entrepreneurs. Several websites are devoted to this topic—The Foundation Center is a good starting place. Also, see below to start learning about what an NCIIA grant can do for you.
Debt and Equity
What’s the difference?
Equity financing is the purchase of shares of stock in a company in return for money invested in the company. A company typically has no formal obligation to repay equity. You give your investor a piece of paper called a stock certificate. They give you money. Of course there’s a catch: the investor expects that at some point there will be a liquidation event. This means that at some point your company will be sold or go public. The investors will sell their stock, either to the new owners, or on the public stock exchanges—hopefully at a big profit either way.
So, not only do you need to understand your company’s appetite for financing and the type of financing you need to get where you’re going, you also need to understand that the type of financing you secure will determine your business’ growth direction.
Because equity investors are taking such a risk with no specific obligation of repayment, they are also going to expect—or perhaps demand—that the company take a route that will lead it to fast growth and a significant increase in its value over a relatively short period of time. Debt-holders on the other hand, be they banks or individuals, will pretty much stay out of the affairs of your business, as long as you’re making your loan payments and your periodic financial reports seem to be on target.
Which does your company need?
Another rule: It’s when you don’t need the money that banks are happy to lend it to you. If your need is great, your ability to pay back probably isn’t so good, and then they’re less likely to lend to you. Technology growth companies typically have a different appetite. They’re hungry for equity.
Some debt and equity pros and cons
Your Equity Circle
The fabulous Fs
Building your credibility
Typically, a group of angel investors contribute less than $1 million. Often that amount is significantly less with an unproven team and an early stage concept. Your task is to make that money work. You need to hit such significant milestones with that capital that you can use your accomplishments to secure the next round of money.
That said, VCs are also hungry. Once you’re in the door, your presentation will stand or fall on its own merits. Alternative VC sources and investor networks are a good resource if you don’t fit the above profile. A source for venture capital for women is www.springboard2000.org. Entrepreneurs from the Indian-American community should investigate www.indianceo.com. If you’re affiliated with a college or university, visit www.universityangels.com.
Here’s a general framework for thinking about your business, the type of capital that is appropriate, and some of the key criteria that may help secure the jet fuel of a high growth business. (Of course you have to do something productive with the money and provide a return to your investor.) Here are some basic questions that an investor asks to assess a business.
Is the management team proven? Does its experience reflect its competence? If it’s not proven, what are its attributes? How can the missing elements be filled with additional seasoned managers? How committed is this team to the business?
How big is the market for this product or service? Typically, an equity investor wants to see a market for a technology product that is, in total, greater than $1 billion. A good market is one in which customers feel real pain, where they will readily adopt your product because of an immediate and urgent need.
What does the competition look like? Is this company the first to market? Is it defining the market? Will it be able to quickly gain market share?
Is the product/technology difficult to replicate? Does it have some proprietary position (meaning patents or other intellectual property protection)? Will it take the competition a long time to replicate what the company does?
Does the business plan present a credible story that suggests that the company can forecast results? The financial plan is a financial expression of your business strategy. It shows the interrelation of timelines, functions, and hires, and reflects a detailed understanding of the business.
Capital intensity. Is the business appropriately scaled to the money that might be available? Your business can’t require too much money to be successful.
Pieces of the Pie
The company pie
Let’s assume you’re ready to get started. Your attorney helps you file the paperwork to incorporate your company. In this process, maybe you authorize 200,000 shares. This means that the company has the authority to issue up to 200,000 shares (you can always go back and re-authorize additional shares). But you don’t issue all of those shares. Instead, you issue, say, 50,000, dividing them up equally among the four founders. The founders all get stock certificates saying they each hold 12,500 shares in the company. At the beginning therefore, these founders own 100% of the company, as defined by the 50,000 shares issued. Got it so far?
Now, you want to raise some money. You find an investor who wants a third of your company and is willing to pay you $250,000 for that stake—seed money. You issue that investor a stock certificate for 25,000 shares. Now your total pool of issued shares is 75,000. Your company is valued at $750,000, since $250,000 will buy one-third of the company. This is what’s called a post-money valuation, meaning that it’s calculated after the investment. Your pre-money valuation would be $500,000. So far so good.
You slog along, building your company. You don’t sleep for weeks, months. You make progress. Oops—you need more money. You’ve done well with the first investor’s money. You’ve reached critical milestones. You have a working demo of your product. Now you want some big money to really take this to the moon.
You do the circuit with the venture capitalists. After some heart-wrenching meetings, you’ve found one willing to put in first round money. You’ve hit the big time. You celebrate. And then they fax you a term sheet. Can you believe it? They want fifty percent of your company! Damn. But you need the $3 million they’re offering. So, after some quick consultation with your seed investors and the four founders you decide to take the deal.
Let’s assume that they’re talking common stock (they’re not, but we’ll get to that in a minute). If they’re buying fifty percent of your company for $3 million, that means that you’ll give them a stock certificate for 75,000 shares. Now you’ve issued 150,000 shares. The founders have 50,000 shares, so their stake, in the seed round, got diluted from 100% to 66% and in the first round, from 66% to 33%. Ah, but now (at least on paper) the company is worth $6 million, since $3 million bought 50%. Therefore, the founders’ share, which at 100% wasn’t worth much of anything, is now (at 33%) worth $2 million. In this case, a smaller piece of a bigger pie is better than a bigger piece of nothing.
If your first round investors have preferred stock, they’ll take $3 million (what they originally paid) of that $3.1 million, even though they only own 50% of the company. The remaining $100,000 will be split among the common stockholders. In this case, your seed round investor, who put in $250,000, will only get back $33,000, as represented by that investor’s 33% of common stock.
On the other hand, if your company does well, common and preferred stock investors will benefit on an equal basis…assuming you didn’t accept participating preferred stock. But that’s enough for now.
It’s out there
Investing for the cause
One serious growth industry
Assets under professional management involved in social screening, shareholder advocacy, and community investing have grown nearly 40% faster than all professionally managed investment assets in the US. Between 1995 and 2003, SRI experienced 240% growth versus 174% general market growth.
The growth of socially screened portfolios is even more dramatic: from $165 billion in 1995 to over $2 trillion in 2003. In 2003, socially responsible portfolios accounted for 11.3% of the investment assets under professional management in the US.
Fellows programs, venture philanthropy
Acumen Fund is a non-profit enterprise focused on improving the lives of the poor around the world. They operate like a venture capital firm—investing philanthropic resources in innovative social entrepreneurs with a goal of social change rather than financial return.
Investors’ Circle (IC) is a non-profit national network of angel and institutional investors, foundation officers and entrepreneurs who seek to achieve financial, social and environmental returns.
Ashoka is a global organization that searches the world for social entrepreneurs—extraordinary individuals with unprecedented ideas for change in their communities.
Echoing Green’s mission is to spark social change by identifying, investing in and supporting the world’s most exceptional emerging leaders and the organizations they launch. Through a two-year fellowship program, they help develop new solutions to society’s most difficult problems.
Waiting a While for the Payoff: Insitutec
Shane, a University of North Carolina at Charlotte mechanical engineering PhD candidate, first started working on industrial measuring systems to meet a need articulated by Boeing. Shane studies and works at the Center for Precision Metrology at UNCC, which brings in corporations that have specific needs they want addressed by university researchers. Boeing’s military and commercial aircraft have millions of small rivet holes; at the time they contacted Shane they measured the holes by transferring samples to a metrology laboratory: a slow, expensive, and time-consuming process. Boeing needed a faster, cheaper way to measure the size and form of the holes in real time. Shane met the challenge, designing a prototype of a vector-based probe that would allow the measuring to take place within the manufacturing process itself, with comparable accuracy and at a lower cost. Timing was bad, however, as the economy went on a downswing—Boeing pulled out.
But the technology was too promising to leave behind. In 2001 Shane won Advanced E-Team funding from the NCIIA to optimize the probe and move toward commercialization, and the team officially incorporated as InsituTec, Inc. Bootstrapping began.
How have they done it? According to Shane, the most important factor in InsituTec’s high-tech bootstrapping success has been their incubator. The Office of Technology Transfer at UNCC provides high-tech startups with office space and access to laboratory equipment based on a fixed-fee agreement in which they pay based on what facilities and office space they use. Since both Bethany and Shane are graduate students they receive free office space; they’re charged only for InsituTec-related use of university equipment. And that equipment is extremely expensive.
“One of the instruments we use to test our devices costs about sixty to eighty thousand dollars,” says Shane. “That’s why without the incubator InsituTec wouldn’t really be possible.”
“If it wasn’t for the university incubator program we would have no hope of even having this company right now,” adds Bethany. “That we pay for the equipment on an hourly basis instead of having to buy it is absolutely invaluable.”
The second major factor in their bootstrapping success is salary. That is, the big salaries they don’t pay themselves. Shane pays himself far less than what the typical engineering graduate makes. “I make a tiny fraction of what I could be paying myself,” he says. “But we just have to do that right now.”
Bethany works for no pay. She has a second job that pays the bills and offers her services to InsituTec at no cost. “My time is free to the company,” she says. “I get paid at my regular job and then I spend my afternoons, evenings, and weekends working on InsituTec. We’re in this to build the company and be successful, so a little sacrifice now for success later is worth it to us.”
Another source of savings comes in the form of materials used in making the devices themselves. Says Bethany, “We spend every penny wisely. When we put together systems and devices we pinch every penny and do it cheaper and leaner than bigger companies. We watch everything we order. We look for the best deals. If we can get something two dollars cheaper elsewhere, we take it.”
If all goes well, they’ll be out of bootstrapping mode in a year. “Four months ago we received a Phase I SBIR grant,” says Shane. “We’re writing several proposals for other grants. We’re working on a development contract with a large industrial equipment company. We’re getting there.”
In the meantime Bethany offers some advice to young student inventors who may be facing years of tough bootstrapping: “If you have a company and you have a stake in it you should be willing to sacrifice early on. Don’t expect to pay yourself top dollar and succeed. If everything works out, you’ll get a big payoff later.”
Student-run, their way: EcoTech Marine
Amid all the talk in this section about elevator pitches and equity, burn rate and liquidation, preferred stock and venture fairs, we present to you one simple and reassuring fact: you don’t have to get fancy angel or VC funding to succeed. In fact, in certain situations you might be better off without it. Such is the story of EcoTech Marine: a team of students with enough entrepreneurial spirit and drive to take a product all the way to market themselves, with a minimum of private investment. This profile follows EcoTech’s story from idea to prototype to successful company, detailing exactly how they got the money at each step along the way.
Fast-forward to his senior year in high school, when, thanks in part to the Internet, Marks caught fish fever again. He was mentored online by Rick Dickens, webmaster of reefs.org, a popular online resource for reef keepers. The following year, as a freshman at Lehigh University, Marks met Justin Lawyer, a physics student at Oklahoma State University, in a chat room for reef enthusiasts. The two students realized they shared a vision of equipment that would automate the difficult task of reef aquarium maintenance, and they traded ideas and 3-D models of potential products. Before Marks finished his freshman year, using nothing but small amounts of their own personal funding he and Lawyer launched a full-fledged company, calling it EcoTech Marine.2 Their goal? Become a provider of innovative, high-end, automated equipment for serious aqua hobbyists.
Hard work and grant writing
The team decided to submit the reactor in the Invitation to Innovate contest sponsored by the Integrated Product Development (IPD) program at Lehigh. IPD is a comprehensive entrepreneurship training program in which teams of engineering, arts, and business students collaborate for one year to make and market products. EcoTech won the contest, getting $2,000 and the chance to work with business and engineering students for two semesters, all in preparation to submit an NCIIA Advanced E-Team grant proposal.
They did submit, and received $8,380 in NCIIA funding, mostly for prototyping. By the end of his sophomore year at Lehigh, Marks and his team had sold twenty reactors and seemed well on their way. But at the same time Marks knew that EcoTech needed more than just one product to be a viable business. “As it turned out,” says Marks, “the reactor project didn’t go as far as we hoped. But it did get our foot in the door in terms of business, manufacturing, and design experience. And, most importantly, it was the stepping-stone in terms of the next product we developed, which has been very successful.”
VorTech™ to the fore
More news came in on the money front: EcoTech received another Advanced E-Team grant from the NCIIA, this time for $18,738; through Lehigh they won a $9,000 “Agile Manufacturing” grant to help with tooling and production; they won $15,000 from the State of Pennsylvania as part of the Keystone Innovation Zone (KIZ) program, designed to prevent brain-drain and keep Pennsylvania-based ideas within state boundaries; and lastly, they secured a line of credit from a local bank. The line of credit, Marks says, is especially nice as a fall-back plan. “Because of the line of credit, we’re assured that if we need more money, we can get it. If we need to increase production quantities, or if things slow down, the line of credit gives us that insurance. It’s a good thing to have.”
And while not every team at Lehigh receives free office space and lab equipment, EcoTech did. According to Marks, EcoTech secured the space and equipment “just based on the fact that we had been doing this so long and were so dedicated.”
And EcoTech isn’t stopping at the VorTech. “We’re developing a remote control for the VorTech right now,” says Marks, “and we have a number of other products in mind. Eventually we want to launch a complete line of products for advanced aquarists, a line of products that will completely automate the reef-keeping experience.”
Using a mish-mash of funding sources—NCIIA grants, personal money, Lehigh prize money, State of Pennsylvania money, bank money, and finally corporate partner money—EcoTech grew their venture from the ground up, their way.