RICH OR LUCKY

It is easy for us to look at wealthy business owners and think they were given success, either through having money to start with or by being extremely lucky.  This line of thinking in my life only leads to jealousy.  Since there is really nothing I can do to effect my inheritance or my luck, I start to look at a higher power (government or God) to give me what I deserve.  This line of thinking is futile and won’t lead to results.  At some point we grow up and realize that we have a role to play in our future destiny and waiting to win the lottery or inheriting a sum of money is not a winning formula for success.  The good news is that in reality many businesses are started with no luck and little money.  Just read the $100 startup.  The author details 1,500 individuals who have built businesses earning $50,000 or more from a modest investment (in many cases, $100 or less).  In the Census Bureau’s 2007 Survey of Business Owners, a full 20% said they required no capital to start their business.  So, you can start your business without being rich OR lucky!  Good news for those of us who don’t have any money and haven’t won anything significant in our lives.

In actuality having limited resources is a blessing when starting up.  When I started my second company, we had just sold our house, and we had some capital to start the business.  This cash cushion gave me way too much room to try things without objectively looking at the results.  We built a piece of software that was way too large and much too complicated.  We weren’t forced to start small and get immediate feedback from customers and the business eventually failed.  Limited time and money forces you to be very specific in the problem you are trying to solve and provides a filter for your activities and decisions.  It takes very complicated theoretical ideas and boils them down to a simple question: “Will the customer pay for this activity”.

SERVICE AND SUSTAINABILITY

Whether our activity is building a piece of software or cleaning a bathroom there is no way to know if the customer will pay for the service or product in a theoretical sense.  We don’t know they will pay until they actually pay.  The key is getting this question answered as soon as possible.  The good news is that we usually don’t have to setup elaborate systems or spend a lot of money to find the answer.  All you need is to know is how to serve.  If I was going to serve someone, I had better start by understanding their needs, only then can I actually do something to serve that need.

Our modern commercial culture makes this process much too confusing.  Specialized labor is one of the greatest inventions of all time.  I can get really good at a skill or trade, which increases my effectiveness and sense of well being.  For instance if I am a metal worker, I can build a plow that is used by a farmer to grow grain that is used by a baker to bake bread.  I don’t have to know how to plow or bake, but I can still eat, if I do good work.  While this system of trade is good, it is even better with money.  Now there is some sort of objective measure that allows for trade.  Money is the certificate of approval that says I do good work. I can then take this certificate and go directly to the baker to buy food.  I didn’t serve the baker directly, but I was still able to by his food in order to eat and continue to make my plows.

After I learn to serve, I need to know sustainability.  I can’t continue to make my plows for very long if I am spending more money on materials and time than what I can sell them for.  If I want to continue in my craft, I have to earn enough certificates of approval (money) to be able to sustain a living.  Ideally, I’m aware of the sustainability of all stakeholders involved.  I can’t very well make my plow for years if I’m using a chemical to treat my metals that is harmful to those around me or even to myself.  Sustainable service creates a system of adding value that lasts for the long term.  Our current get rich quick mentality in America doesn’t lend itself well to real service and real sustainability, and taints our view of how to actually start a thriving enterprise.

STARTUPS SEARCH FOR BUSINESS MODELS

This process of learning to serve, and serving in a sustainable way is the process of business model design. In order to create a business, I don’t have to be an expert in a field or have an MBA from a prestigious business school.  I just have to be good at serving and then think through how to do this sustainably.   Unfortunately for most of us, we don’t know how to serve or even who to serve.  We must get out of our confort zone and start asking questions to gain understanding.  This process of gaining understanding is like an inventor tinkering with combinations of ideas to get to a working prototype.   If you think about Thomas Edison working to invent the lightbulb, it would have been ridiculous to have him build a factory to start production of lightbulbs before even having a single working prototype.  As an entrepreneur, you are the inventor working in his shop, trying out various ideas and testing them to see if they work.  The famous quote from Thomas Edison is, “I have not failed. I’ve just found 10,000 ways that won’t work”.  The name of the game for the inventor is iterative learning.  The faster you can try out an idea and learn something from that idea, the faster you will be able to use this learning to improve the idea and find something that works.

This journey of iteration is the process of searching for a working business model.  Just like the inventor, we are blind to what works and are searching in the dark trying, testing, failing — until something hits us in the face.  Sometimes what hits us is an obstacle, one more nugget of learning that we can use as a post or marker to remember what doesn’t work.  But sometimes we get hit by success, something that works and leads us forward.  This exercise can’t be done in the confines of a comfortable space, we need to get out in the dark and be ready to be smacked on the head before we can see the light.  This is why we aren’t moving too fast at first (the faster you run, the harder you hit an obstacle you can’t see).  We are taking this one step at a time, learning who the customer is that we want to serve and learning how to meet their needs.

We don’t pretend to think that we really know what our potential customer wants.  We may have a faint sense of their problem, but many times the customer doesn’t even know what their problem is.  We must get into their business and understand their needs and then test out solutions to those needs in a laser like focus.  This process takes the combination of various skills that don’t come easily for most of us. On one side, you must have people skills and creativity.  You need to ask questions and draw people out to understand their problem.  Once you know the problem, you must use immense creativity in idea generation to figure out a solution to the problem.  On the other side you need an incredible amount of discipline to empirically test the results of your ideas.  For most of us this combination of creative analytics does not come naturally.  We need help and guidance as we meander through the dark in search of a business model.  Enter the Business Model Canvas created by Alexander Osterwalder and Yves Pigneur.

THE BUSINESS MODEL MODEL CANVAS

Before we can start testing our ideas, we need to get our ideas written down on paper.  We need to document our ideas and assumptions, and then test those assumptions in order to iterate in the process of searching for a working business model.  Once the business model is proven to work, then we can expand the scope of our activities to operate and grow the business.  For years startups were counseled to develop elaborate and detailed business plans filled with pages and pages of research.  The problem with these plans is that they are chalk full of assumptions that are untestable and most likely false.  My own first business plan was something like 50 pages and took months to create.  After starting the business, I referenced it very little.  There was value in organizing my thoughts on paper, but it didn’t need to take months and months of work.   Work that would have been better spent testing a few simple assumptions I was making in our business plan.  What I needed was a simple methodology to think through various aspects of business to get clarity of thought about who my customer was, what their need was and how I was going to serve that need in a sustainable way.

The Business Model Canvas contains the building blocks of a successful business. Each of the blocks have questions to prompt ideas to document the business model.  The left side of the canvas roughly maps out the costs associated with the product or service you are providing.  The right side defines the revenue generating activities that allows you to reach and service customers.  The middle “value proposition” box is how you are bridging your activities to the needs of customers.  Focusing on the value proposition ensures that what you are doing is actually solving a problem and is something the customer will actually pay for.

As an example, if you were starting a door hanger business.  The first thing we’d do is write down what we think the value proposition is for the business.  You would write something like “Simply priced door to door marketing services” in the value proposition box.  This box also includes your pricing strategy.  You would write something like “We will charge $250 to hang 1,000 door hangers”.  Maybe the next quadrant is looking at getting revenue.  So, you might write down “Setup a contract with X company for X dollars” in Revenue Streams.  Complete this exercise for each of the building blocks.  You are writing simple, actionable statements.  The key is getting the assumptions about your business as specific, small and measurable as possible.

TESTING OUR ASSUMPTIONS

As we’ve already mentioned, in order to create a business model, it has to be sustainable.  In other words, it has to make money responsibly.  We can’t just take, contrary to the view of Hollywood movies where the bad guy is some rich corporate executive who operates above the law and does what ever he wants to make more money. But at this point in the process, we just don’t know if our idea will make money because we have so many untested assumptions.  Everything makes so much sense in our heads, but the ideas are actually untried in the real world.  We need to get ideas into reality.  Once you have filled out the boxes on your business model canvas, then you need to try it and learn from doing it.  The process is:  Learn, Build, Measure.  First we want to choose the most important assumption and figure out what we can do to test it (learn).  Next we actually do that (build).  Finally, we identify the results of our activity (measure) .

In completing the canvas, you wrote simple, actionable statements about your business design.  Now you want to start to test some of the ideas you have.   To use the door hanger business as an example,  In your Revenue Streams, you may have written, “Setup contract for $2,000/month with Little Caesars”.  This is a massive assumption and one that makes or breaks the business.  So, now we need to test this assumption and get the contract signed.  Another example would be under the cost structure building block and might say, “Hand out 50 door hangers in 1 hour”.  Even before creating a contract, you would have spent some time testing this cost assumption yourself.  You could find a company that would be willing to let you do 1,000 hangers for them.  There are a couple sites online that would do 1,000 hangers for under $50.  Get a simple hanger made for the company (some of the online companies even have templates to choose from) and pick a neighborhood and hand them out in hour increments to see how long it takes. Can you really hand out 50 door hangers in an hour?   If so, then you can verify your pricing model. In this example, your base cost of paying a person to hand out 1,000 door hangers at $10/hour would be $200.  Obviously to have a sustainable business, you would need to charge more than $200.

MAKING THE JUMP

The wonderful thing about these two simple steps is that it allows you to create a sustainable business with very little money invested up front.  This process can even be done while still earning income from another job.  I always recommend starting your business while working another job.  This time constraint forces you to focus your activities to do the most important tasks first, which leads to quick turn around in the Learn, Measure, Build loop.  When you have your assumptions stated clearly on paper, it becomes painfully obvious about which of them needs to be tested in order to prove that this business will actually sustain the income you need before quitting your current job.  You are heading into a business that is already meeting the needs of customers and already generating enough capital to enable you to make the jump into the wonderful world of owning your own business.

The Rise of Mobile Apps

In 2010 Wired Magazine published a controversial article called “The Web Is Dead, Long Live the Internet“. The article shows a graph of the trend of Internet traffic moving away from the web to mechanisms like peer to peer. About the same time as the article was written, it seemed like the Apple and Google App Stores had reached a critical mass of apps and people buying them. These apps get loaded locally on the user’s device and transfer data via Internet protocol (IP) and most do not technically use the web.  While the article was written for shock factor mostly, there is something very true the author touched on, that the way we access information is increasingly happening on non-PC devices.

Just two years ago, we spent more time consuming information through a web browser than on a mobile device.  Venture Beat reports that as of December 2012, we now spend more time per day on our mobile device at 127 minutes on average versus 70 minutes on the web.  This spike in usage has caused many companies to rethink how they present information to their users leading to a new strategy called “mobile first”.

Mobile First Design

Mobile first design is simply starting with the design of how mobile users will interact with information.  This is not the traditional approach to web design, but the benefits of these are many.  Primarily it forces designers to focus on what the most important tasks of users are.  You just can’t fit everything on a small screen, so you have to prioritize.  The benefit of this strategy is substantial in usability because of simplicity, ease of use and speed.

A number of years ago, I started realizing that I would grab for my phone first for certain tasks like news consumption, looking up flights or making hotel reservations.  I even have apps like Things that I use on my phone or pad that don’t even have a web version of their app.   These apps are fast and easy to use, and I just love the interface.  There is something so freeing to not be making so many decisions about what to look at.

I’m not recommending only building mobile websites or even apps.  Companies that have adopted this strategy have done so at their peril.  Even the mobile app Instagram that was bought by Facebook for over $1 billion now has a web app .  Clearly though, we can’t ignore mobile, and your website or webapp may benefit from the exercise of designing for mobile first.  Even now as I write this article on my iPad, I’m enjoying the simplicity of a mobile app.

Success <> Busy

Life is just so busy.  We have inputs from every place imaginable, and the trend is only getting worse. We allow phone calls, emails, and social media to distract us from the things that will really add value.  We convince ourselves that we don’t have time to take a break from doing the seemingly important things in front of us.  It is the classic Stephen Covey quadrant of urgent, but not important.

We have such a hard time giving up our addiction to this quadrant because we fall into the trap of wanting to look busy.  If we don’t look busy, than it looks like we aren’t working hard.  So, we cram our day with all sorts of activities.  If our schedule if full, our task list long, and our desk a mess, than it looks like we worked hard.  And if we work hard, then we will be successful.  Many times a 1 hour task can get crammed into four hours.  This isn’t always a conscious choice, it is all in the name of looking busy to ourselves or for those around us.

The problem is that for plenty of us, including myself, I’ve had plenty of times where hard work did not equal success.  In fact, I’ve had times in my life where the harder I worked, the worse things got.  I was going in the wrong direction, beating my head against the wall and didn’t have the intelligence to step back and assess the situation to figure out the best way to solve the problem.  Or better, evaluating if I’ve even correctly identified the problem.  Programmers are the worst at this.  We equate more lines of code to more productivity.  I’ve heard horror stories of larger technology companies actually documenting the lines of code per employee, as if this measure had some sort of connection with the success of the project.

Getting out of the rut of believing success equals busyness is harder than it seems.  40, 50, 60 hour work weeks become the norm, and we get so tired that the cycle of urgency becomes worse and worse.  In my 20s, I had the privilege of running a manufacturing plant.  In our busy season, our employee count would many times go over one hundred people, and things would get hectic.  Product that was defective or needed repair would get lost on the production line.  Our warehouse would get so crowded, we couldn’t even find the items that where supposed to be picked for shipping.  I would be working 80 hour weeks and still felt like I could work more.  If you asked me what I spent my time on, I really couldn’t tell you, but if you watched me, it looked like I was very busy.  It felt good because I was the man of the hour and everyone came to me for answers.  I had a sense of importance.  When I was gone, I knew things would fall apart, so I felt valuable.  Soon however, I began to loose energy.  I was getting burned out, and my family was suffering.

Overcoming Fear

Breaking the cycle of chaos at the plant was a scary proposition.  It meant making a lot of changes, and these changes were not guaranteed to work.  It meant possibly making people angry because I had to create systems, make clear objectives and then hold people accountable to those goals.  Luckily the owner of the company was on board and helped me think through system and backed me as we implemented changes.  The biggest obstacle in getting started was overcoming fear.

Fear is an emotion and hence does not originate from the logical part of our brain.  We don’t consciously know this, so we submit to it on an emotional level.  We fear what people will think.  Maybe they won’t like us because we have to hold them accountable, or maybe they will think less of me if I’m working less hours.  We also fear the unknown.  Staying on the same course seems to be the best option because it is familiar.

Overcoming fear does not mean acting rashly or without the feedback of others.  It allows us to take an honest look at the current situation and to not lie to ourselves about what the potential outcomes might be.  This honest assessment alone will cause us to step back an reevaluate, because we will realize the current track might not lead to the outcomes we desire.

As we move forward, the important thing to remember is that most of the time fear is not based in reality and it usually isn’t based on truth.  This revelation alone can give the courage to step back and evaluate the current situation.  Then define the goal and the steps to get there.  And finally to act boldly and without the fear of failure or fear of what people will think.

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What metrics do is get us knowledge instead of information.  This knowledge gives us visibility into the “improvement” activities we are doing in our organization to see if they are actually working.  We call these metrics economic engines from Jim Collin’s book Good to Great.  There are two engines that give us visibility into improving the economic health of our organization— growth engines and profit engines.  It is important to separate growth engines from profit engines because we have all heard of stories of companies that grow like crazy, but end up growing out of business because they didn’t understand the economic realities of the cost structure needed to support their sales.  On the flip side we’ve heard of companies that have an incredibly profitable and well tuned machine, but seam to have troubles growing.  Let’s look into each engine more.

Graph from The Lean Startup by Eric Reis. Click on the image to buy from amazon and support the book.

Growth Engines

Growth Engine metrics are tied to how you get new business in the door.  One of the great tools for this metrics is looking at funnel graphs.  This type of graph shows the process with which you a lead into a sale.  For a company that focuses on direct sales, the steps in their funnel might be: lead -> appointment -> presentation -> sale.  For an online web application, this process might be: visitor -> trial sign-up -> first login -> paid account.   The first step is to identify the process our organization goes through to increase business.  The next step is to implement some sort of tracking plan that looks at the sales process within segments of time.  Time is important because numbers are only useful when they are compared to other numbers.  When evaluating numbers in the context of time, you can see if the changes you make in your growth engine are actually improving results.  The graph to the right shows a funnel graph taken from Eric Reis’ book “The Lean Startup“.  It shows the % of people that moved through each step of the growth engine for a company called IMVU.  Their process was Registered -> Logged in -> Had one conversation -> Had five conversations -> Paid.  In his book, Eric makes the point that IMVU was making an incredible amount of improvements in their product, but as they analyzed the funnel graph, they realized these changes were not translating into more paid customers.    IMVU started to realize that their activities were not actually creating value for the product.  This knowledge forced them to make some hard decisions about what they thought their product should be and why customers were interested in it.  What an incredible example making better decisions with just ONE simple graph.

In my last article, I told the story of when I worked in a marketing department if a computer training company and my job was to track marketing expenditures and compare them with the results of sales.  I created a report for management with just a couple simple metrics.  One of them was the cost per lead and cost per sale of each marketing medium (eg yellow pages, direct sales, television, newspaper).  One of the things we realized from the reports was that our ads in yellow pages and newspapers where becoming less effective.  It was the mid-90s and the economy had really started to take off and was nearing full employment.  The mass amount of people were not looking for new skills because they already had a job.  So, we changed to more “intrusive” ad mediums placing more ads on TV with a different message focused on the idea that computer skills could provide a better job.  We changed one thing at a time and then measured the effect.  From the cost per lead and cost per sale metrics we found that the new TV ads were much more effective than other types of ads.

Profit Engines

Jim Collins says in Good to Great, “If you could pick one and only one ratio – profit per x ( or in the social sector, cash flow per x) -to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine. ”  He goes on to show that each company in their study had created value by focusing on a simple and singular metric that gave them key understanding of what the economic drivers where of their organization.  Jim Collins provides many examples of an economic engine: profit per employee for Wells Fargo, profit per customer visit for Walgreens or profit per ton of finished steel for Nucor.

I experienced the value of profit metrics first hand when I took a break from technology for three years and managed the plant of a vinyl window manufacturer.  The owner was great at establishing simple metrics for evaluating the performance of the plant.  Like any business if you wait to view information at the end of the month or at the end of a quarter, it is too late.  So, at the end of each day the owner wanted to see two metrics from me: completed product and shop wages.  These metrics gave him a picture of the value of the product that went through the shop and also gave him a picture of what the cost of wages were for that product.  While material goods was the biggest cost of manufacturing, we had optimization software in place that made this cost fairly easy to predict and fairly consistent over time.  This metric wasn’t something the shop had an incredible amount of control over.  But wages were the next highest expense and we had incredible control over this metric.  And in a low margin business like most of the manufacturing sector a metric like wages could mean the difference between sustainable profits and going out of business.

Again, any metric we create must be simple and it must give us data in some sort of context.  This gives us better decision making ability so we can see if we are improving or not.    When we create our metrics correctly, even my eight year old son can understand them.  But don’t let simplicity fool you, because it does not mean easy.   It takes hard work, discipline and vision to implement systems that give us valuable metrics.  So start to push for these metrics now in your organization.  Test your processes by making small changes and then measuring them with metrics.  As you start, don’t worry if you don’t have things automated right away.  Once you have metric creation systems put in place, and you are sure you have chosen metrics that measure things that actually effect one of your economic engines, then you can start to think about automating the process.  The light these metrics shine on your ability to make decisions may seem as magical as the first light bulb would have seemed to the people of Thomas Edison’s day.