Yes it IS Your Problem

As an entrepreneur you will find, as I mentioned in a previous blog entry, that you are operating within a flawed world. This means that people and organizations that you deal with- vendors, customers, partners, employees, investors- often do not do what they say they will do or achieve the goals that you expect them to achieve.

Of course there are many reasons that others do not perform. Very often it is because the issue lacks sufficient importance to them. They therefore do not go to the considerable effort to figure out exactly what is wrong, then develop a plan, acquire the resources, and carry out the activities to fix it, then finally monitor the situation to be sure no backsliding occurs.

If you are dealing with a well-established organization, such as a vendor company or strategic partner, you should realize that their priorities are probably not the same as yours. Their personnel have many other issues to deal with in their day regarding their own key suppliers, customers, employees, etc.

As a start-up, you simply may not be that important to them, no matter what they tell you. This can cause a lack of commitment to and effort in solving problems that they are creating for you. In short, they do not have that much to lose, although you may have everything to lose.

Other times they do not have the ability to solve the problem for one reason or another, one key reason being that they are average or below-average performers in general.

You must not let the mediocrity of others stand in the way of your excellence!

This means that you must solve problems for others. Problem solving is the number one defining activity of an entrepreneur.

If they won't figure it out, then you figure it out. Define exactly what the problem is, what is causing the problem, what resources are necessary to solve it, how to acquire the resources, how best to deploy those resources, and then bird-dog it to make it happen.

Again, realize that if the problem affecting you goes unsolved, you may go out of business, but that is a very unlikely consequence to your well-established vendor, customer, strategic partner, etc..

Who has the most to lose? That's the key question here.

How? How Long? How Much?

Many entrepreneurs, when they write their business plan, do a great job of elaborating what they want to do. They have a dream. Some of their business plans have a vision statement nearly as long as the marketing section. (This is not due to an overly long vision statement!)

If you've ever heard someone call someone else a "dreamer," you know that this is usually not a compliment.

If you want to succeed, you must have a plan. The difference between a dream and a plan hangs on determining the answer to one question: How?

For everything you say you want to accomplish, you must lay out, in great detail, how you will do it.

Then you must execute that plan. The difference between planning and execution hangs on determining the answers two questions: How long? and How much?

How long will it take? How much will it cost? How much revenue will it bring in?

Often the problem is not that entrepreneurs ignore these critical questions. It is that they answer them literally on a whim.

You surely know that being an entrepreneur will be hard work. But you should realize that the hard work starts with properly determing the actual answers to these questions by conducting proper research. This research must go beyond the typical "market research." It must be far more all-encompassing "business research."

More on this later...

Venture Capital Feedback

You never know what you'll hear back after you give your pitch to a venture capitalist. VCs have a much deeper and more expansive view of the business landscape than most entrepreneurs. Sometimes, what the entrepreneur perceives as a strength, the VC perceives as a weakness.

I recently hosted a venture capital forum, during which a panel of three venture capitalists received investment pitches from three entrepreneurs. One young company had achieved annual revenues of $500,000. In his pitch, this entrepreneur stated that he was seeking $2 million in funding. He pointed out how efficient his company had been to date, getting to its current stage with only $1.25 million in capital. Continuing this efficiency, he projected the need for an additional $2 million going forward.

In contrast, the entrepreneur pointed out, a California-based competitor had raised $40 million in VC funding and still had not achieved the technological or market success of his own company.

This fact was presented as a strong point for the entrepreneur and his company.

However, one VC in particular did not see it that way. This VC saw the $40 million as a "war chest" that the competitor could tap to overcome its current weak position. As this was an unexpected response from the VC, the entrepreneur was not prepared with an adequate answer to this concern. This entrepreneur had heard through the grapevine that the bulk of the $40 million had been wasted and the competitor did not have much of a "war chest" remaining. But at the time of his presentation to the VCs, he did not have strong enough support of this rumor to state this in response to the VC's concern.

Of course, after the event, the entrepreneur is working to verify those rumors so that he will be able to adequately address such concerns in the future.

The lesson learned is that it is always good to look at your presentation and plans from all angles... could something that you perceive as a strong point be perceived by others as a weak point, and vice versa. If you do this analysis before approaching investors and have your responses prepared for either perception, you will not only make a better presentation, but you will have a more complete view of your business opportunity.

In defense of the entrepreneur, I must admit that I assisted him in preparing his presentation and the VC's perception caught me off guard as well! After the fact it seems so obvious. This is one reason that it is good to get feedback from as many people as possible when preparing such presentations. Usually, one person cannot think of everything.

It's a Flawed World After All

As an entrepreneur, you are forced to create success within a flawed world. The fact is that most entities and people that you will deal with are only average or are below average (this is by definition of the mathematical concept of "average.")

Success comes from realizing this fact and getting up each morning expecting it. You can help others that you deal with to rise above their limitations.

I have seen entrepreneurs grow frustrated by the flawed system they have to deal with and then become self-limited by that frustration. Don't let this happen to you. Dealing with a flawed system is what you signed up for when you became an entrepreneur.

Why You Need More Money Than You Think

It is very difficult for you, as an entrepreneur, to predict how much money you will need to start a company and fund it until it generates enough cash to be self-sustaining (cash-flow positive). The obvious problem is that you are predicting the future, which is basically impossible. When weather forecasters predict the future, they look at certain indicators. The key is knowing which indicators matter and to what degree.

Inexperienced entrepreneurs usually look at the wrong indicators when attempting to predict how long it will take them to sell enough product to sustain their company. In particular, they look at the market need for their product in making this judgment and little else.

The market's need for your new product-- or lack thereof-- will almost certainly not be the primary factor in determining when you will achieve self-sustaining status and be able to stop raising capital. This is extremely crucial to understand, because if you do not achieve positive cash flow as planned and then have to go out for more capital, you will be doing so as "damaged goods."

I guarantee you that this will put you in a very tough situation.

So, you ask, what are the indicators that I should look at. The answer is: I don't know, and neither does anybody else. Again, this is because it is predicting the future.

However, I can impart some wisdom that helps you deal with this enigma and succeed in spite of it. This wisdom comes from personal experience, reading many case studies, and watching many entrepreneurs go through the process.

Here's the gist of it: Nothing ever goes according to plan.

You lay out these nice plans for when things will happen: first prototype delivered; patents issued; capital infusions received; quality commercial product produced, and you attach projected dates for each to occur. Each event directly affects time to cash-flow-positive, but these interdependent events never fall neatly like a row of lined-up dominoes.

There is a problem, and it's name is "Murphy." Murphy's law, that is.

Most entrepreneurs never get the chance to test the market demand for their product within the expected time frame because something goes wrong that gums up the process before they get there.

For one person it will be that his vendor missed delivery dates; for another person it will be that the vendor delivered on time, but the product was poor. For another, a capital infusion does not come in in the amount expected or at the promised time. Perhaps-- heaven forbid-- the entrepreneur or another key employee becomes ill or has an accident. Maybe that salesperson or rep group that you hired, in whom you had great confidence, turns out to be inept or ineffective.

Perhaps an employee embezzles money. Perhaps...

The list of possibilities goes on and on and on, and that is crux of the problem. You can't possibly avoid every single one of them.

The key, then, is to know this and plan for it. The way to survive these events is to have a cash cushion to take you through them to your (delayed) cash-flow-positive position.

One way you do this by finding initial investors with "deep pockets" and being up-front with them that you will be coming back to them for further funding. Another way is to put your sales projections much farther out into the future than your tidy little everything-will-be-just-peachy plans predict.

Funding Follow-up

A commentor on my previous posting asked where he/she might find information on how to raise capital for their business. There are a number of books and online resources available. A Google search will turn up many references. Most of these focus on the "how-to" aspects of the process. Of couse this is important to know. However, with this blog I want to focus more on insights and strategies.

One useful reference is a publication that I wrote on the process of product commercialization. It has a section on financing your business. You can access it on the Web at http://www.pasbdc.org/what/consulting/dev/02.asp Select "Technology Commercialization Resources, then "New Product Commercialization Guide."

Funding is Like Fishing

If you ever want to develop your invention into a profitable business, you will probably need to seek funding from outside investors. Most banks simply will not loan for purposes of trying to develop and market an invention.

When you seek outside investment, you need to have the right frame of mind and approach the process with the realization that you are basically "fishing" for investments.

Those who have ever gone fly-fishing (or watched the movie A River Runs Through It) understand that fishing works like this:

You try to find the best fishing hole and the best fly to use there. The fly should "match the hatch," which means it should imitate the items that the fish in that hole are currently feeding on. Of course, this means you must first determine what the fish in that hole are feeding on!

Next, you cast your fly to a likely looking spot. As your fly drifts downstream, you need to make constant adjustments so that it moves along with the current as naturally as possible (referred to in fly-fishing circles as the "presentation"), thus increasing the likelihood that a fish will bite.

The large majority of the time the fly floats to the end of its drift without any fish taking the bait. Occasionally a fish swims up to take a look. But often it sees something suspicious in your presentation and darts immediately away.

Sometimes a fish strikes at the fly but does not get hooked. Usually, when this happens, you make another drift past that fish. Sometimes a fish gets hooked, and it feels like a big one, but it gets off within seconds. Sometimes you hook one and bring it into your net, but it's a small one.

Sometimes you get very excited because you have obviously hooked a very big fish. You play it for a seeming eternity with great skill so that it does not break off and get away. You're completely exhausted from the epic battle. But when you get it into your net and examine it, it turns out to be a carp, not that lunker brown trout that would be so delectable in your frying pan.

But occasionally-- very occasionally-- you hook that big fish, bring it in, take it home, fry it up, and it tastes absolutely delicious!

Of course, in this example, the fish is the funding.

If you don't know how to fish, you will probably be ineffective. If you don't have the equipment or the patience of a good fisherman, you will probably be ineffective. Especially, you must have the perseverance and the fortitude to go out there, rain or shine, and flail away at that fishing hole!