Starting a business

I have a passion for startups.  It happens frequently to me that I’m in a conversation with someone and they say, “Someday I’d like to start a business doing …”.  I immediately say why don’t you do it.  I almost always get some excuse in response with fear in their eyes about why they couldn’t start a company: “I don’t have the time”, “I don’t have the money”, “I don’t have the experience”.  I then respond with some examples from my experience of starting companies to explain to them that they can actually do it no matter what kind of obstacles they are facing in life.  The process of starting a company doesn’t have to involve years or even months of preparation and doesn’t need millions or even thousands of dollars.  It just takes a little confidence and some simple tools to get started.  The two books I’d recommend are Business Model Generation and $100 startup .  These two books are quick reads and will give you enough knowledge to overcome your fears and get started on creating a business.

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.

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