Building the Business

There comes a time when your business will emerge from the feasibility madness and you’ll have to start building the business.  This happens when you stumble upon a successful business model, and you actually start making money.  Often, you’ve been searching for the right product-market fit for so long that it doesn’t feel natural to pursue only one business model, even if it’s working.  Consequently, you have to be very careful – if you keep searching when you should be building, you’ll run out of cash.

What makes this transition even harder is that building the business calls for a completely different skill set as a manager.  Just as your products have to cross the chasm with customers, your focus as a manager has to cross the chasm with internal operations.

In this chapter, you’ll learn what new skills are required as a leader, how meetings kill startups, and why it’s sometimes important to fire clients.

Play to WIN

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You can’t play not to lose. You have to play to win.  When you play not to lose, you won’t have a winning mindset and strategic approach. You hedge your bets, and don’t go all in on a strategy or business model. If you want to build a world-class company and dominate the industry, you absolutely have to have a winners attitude. For example, you are hedging when you refuse to pick just one customer segment and instead try to serve all customers in a market. If you try to serve both large and small customers, you’ll split your forces and divide your focus. By not focusing on one segment, you are destined to be mediocre at best. Your sales teams, product managers, and customer service will all be split between many different types of customers with different requirements.  If instead you play to WIN a certain type of customer, it’s possible to WOW that customer beyond all expectations and dominate that segment. After WINNING the first segment, you can proceed to other market segments.  This is just one way you have to play to WIN.  This WINNING mindset should cascade throughout the entire organization and impact every aspect of the business.  The stakes are big, so play to WIN!!

Focus on the Key Points of Leverage

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“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” –Archimedes

Any company trying to achieve massive scale needs to find their “lever.”  Think about your leverage as your unfair advantage, or something that only your company can wield to its advantage. Your job is to identify the leverage, protect that leverage as much as possible (e.g., patents, trade secrets, etc.), then exploit it to achieve sustainable, explosive growth.

As a resource-constrained startup, you can’t tackle everything at once. You can’t vertically integrate 100% if your product, and even if you could it wouldn’t make sense to try. Instead, identify the key points of leverage in your business where you can get an damn-near-impossible-to-copy competitive advantage. Then, make sure you OWN that advantage. Focus ALL of your efforts and resources on achieving and maintaining that advantage. This is the essence of a sustainable competitive advantage, and if you can do this it will be very difficult (if not impossible) to compete with you.

Without some kind of leverage in your business, fending off the competition will be impossible. The moment another talented team of entrepreneurs and engineers sees the potential of your innovation, they will be quick to steal it.

There are many kinds of leverage that you can exploit in the world of startups.  Most of the time, the leverage comes from a significant technical advancement. Any technology that’s significantly better/faster/cheaper gives you leverage. By definition, a cutting edge technology-based startup will have leverage over the competition.  This technology might allow you to profitably price your products below competitors’ costs. Another way leverage can come into the picture is through your business model. Any aspect of your business model, from distribution to revenue model can reveal significant points of leverage. Tesla’s core competitive advantage comes from its highly differentiated centralized OS architecture is so counter to conventional car manufacturing that it would be impossible for incumbents copy.

Know When to Fold ‘Em

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Without a doubt, perseverance is a core characteristic of every successful entrepreneur.  You’ll never make it in the startup racket if you can’t push through some adversity.  But there’s a difference between intelligent and insane perseverance.  Not every business is long for this world.  If you’ve got a loser on your hands, there’s no point in dying a slow, painful death.  If you find yourself in a hole, stop digging!  Cut it loose and move on.

How do you know when to fold ‘em?  There’s no easy answer to this question.  The only practical advice, that you probably won’t follow because it’s the hardest thing for a passionate entrepreneur to do, is to make sure that you don’t dig yourself into such a deep hole that you can’t get out.  In other words, don’t invest all of your retirement savings and home equity into your business.  Make sure that you have a safety net.  It’s intelligent to be financially committed, but insane to have your entire net worth on the line.  It’s better to lose the battle and still have a shot at winning the war.

Another important piece of advice – if you do have to shut down, realize that there’s no shame in it.  Serial entrepreneurs invariably say they learned a lot more from their failures than their successes.  Take the lessons you learned and use them to make your next company even better.

When the S#!t Hits the Fan (and it will)

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When building your company, you will inevitably have a number of “it’s over” moments.  A moment like this happens when things have become so dire and hopeless that closing up shop seems like it’s your only viable option.  Every entrepreneur goes through this.  In startups, WIFOs are so commonplace that surviving one is a rite of passage.  After a while, you will become hardened to these kinds of shocks.  People you work with will wonder how you hold it together when the world seems to be crumbling around you.  There’s only one thing that matters, and that’s not what happens to you.  All that matters is how you respond.  So get mad for a few minutes if you want to.  Then, after the initial shock of the third “catastrophe” this week wears off, regroup and figure out next steps. You’ve got work to do.

Be Frugal, Not Cheap

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Cash is always tight in a startup, so you have to watch every penny that goes out the door. But there comes a point when frugal turns into cheap, and you end up doing more harm than good. By skimping on certain expenses you could seriously hinder your business’s ability to perform or to expand.

Entrepreneurs are notorious for trying to do everything themselves.  Taxes are a great example of being too cheap.  Rather than paying a bookkeeper $50 a month, founders often try to do their taxes themselves.  Not only does it take them forever to learn Quickbooks and add the necessary entries, but they’re usually wrong.

There are two things you should do to be frugal and not cheap. First, make a monthly or quarterly budget of projected expenses. By doing this in advance, as part of a larger strategy session, you take the out of the decisions, and do what’s best for the business. Second, especially when it comes to larger capital investments, do a back of the envelope payback period calculation.  Figure out how long it will take to “earn back” your initial investment.  This payback period should give you an idea as to whether the proposed expense will be worthwhile.

Be careful not to be too cheap.  Otherwise, as Henry Ford said, “If you need a machine then don’t buy it, you’ll eventually find you paid for but don’t own it.”

Build it Like You’re Going to Sell It

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Even if you have no intention of selling your business down the line, it is always smart to begin with the end and build it as if you are going to sell it.  On the winding road of life, you never know what lies around the next curve.  Your situation could change drastically in the future, so it’s always better to have the option to sell.  What does “build it like you’re going to sell it” mean?  First and foremost, this means taking yourself out of the picture. The less dependent the business is on you, the more valuable will be to someone else.  Businesses that depend on the founder are usually not sellable.  You may be the rainmaker now, but reduce your burden by hiring other rainmakers. Get yourself out of the picture and build an organization that can sustain itself. This way, even if you never end up selling the business, it can provide the lifestyle you hoped for when you first started out.

Your Reputation Precedes You

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Your reputation is one of the few things that will stick with you forever.  It’s a small world, even in big cities like Los Angeles or New York City.  You will end up working with and running into the same people over and over again.  How you handle yourself and your business will quickly solidify your reputation in the business community.  Your reputation is very sticky, and once set, it’s hard to unstick.  As Warren Buffett said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”  It only takes one or two events for your reputation to be set. As a result, make it a top priority to protect your reputation and that of your company.  Protect and nurture it with the business community in the same way you handle it with your customers.  Be transparent, direct, and honest.  There is little adversity in the good times, so you will be judged most by how you handle yourself in the bad times.  Therefore, when times get tough, dig deep and do the right thing.  When in doubt, take the moral high ground.  It’s longer and harder, but worth the extra effort. Even if the right decision means you have to shut down your business, an untarnished reputation will allow you to bounce back quickly.

*Core Values

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Coming up with your core values may sound like a luxury reserved for Fortune 500 companies that have time and money to burn.  Don’t be fooled – they also have a role to play in your startup.  Think of your core values as your purpose personified.  Transcending your activities and strategies, they give life to “Why” by making your company’s reason for existence tangible and real.  They tell the world why you’re here, what you stand for, and what you believe in.  They offer guidance as you try to navigate the tempestuous startup sea to find safer waters.  Choose values that reflect the founders’ attitudes, the company culture, and – most importantly – what the company aspires to become.

Every branch in the U.S. Military has its core values etched in stone. But their core values have to do with much more than fancy plaques on walls.  The military lives and dies by them.  Do the same for your startup. Hire and fire based on your values.  Live them from the beginning, and they will become self-fulfilling.  Use them to define your raison d’être and to inspire a brighter future.

What Functions Should Be Outsourced?

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A dilemma most entrepreneurs face is what business functions should be outsourced, and what should be kept in-house.  It’s a trade-off, and sacrifices are made either way.  Outsourcing can be more expensive, but it’s also possible to get extremely talented and specialized people this way.  It can also keep your costs variable, making it a good way to get started and test your concept.  In-house employees will be a lot more committed, but top-notch people are also a lot harder for startups to hire and retain.

In most situations, the right answer is to hire employees for your core capabilities, and outsource the other functions.  For instance, if your company is a website, your programmers should be in-house employees.  If you’re running a bakery, you shouldn’t outsource the recipes or the baking.  The core functions of your business keep the wheels turning.  Outsourcing might create too much risk.  Your core functions are also your competitive advantage and secret sauce.  They’re the reasons customers prefer you to your competition.  It’s hard to outsource your competitive advantage.

Who’s the Bad Guy?

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Startups are at war.  You have to outwork and outsmart the competition if you expect to win.  You and your team will put in 12 hour days, week after week, year after year. It gets tiring and trying, to say the least.  To deal with all the perspiration, you and your team will need a lot of inspiration. What inspires you and your team to work so hard, and refuse to quit against all odds? What motivates you to go the extra mile when your brain is fried and your body begging for rest?

A surprisingly easy and effective way to get your team fired up is to identify a “bad guy.”  Set your sights on a direct competitor or evil empire that you and your team want to beat.  This competition makes your struggle very real, because now you have a tangible enemy to aim at.  You can track their activities, and use that as fodder to get your team fired up.  Everybody loves the underdog story, and no one more than the underdog. Pump your team up with little competition and get them excited about crushing the bad guy.