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SmallBizU
™
eLearning University
Starting A New Business
Presented By
SmallBizU Online eLearning Classroom
© copyright 2005 SmallBizU
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Objectives of this course…
 To assist in the development of a mission, vision and set of
goals for starting a new venture.
 To present the necessary tasks you must accomplish and
what aspects of risk you need to consider.
 To understand the management trinity: money, marketing,
and management.
 To present the legal aspects of obtaining licenses and
permits and how to hire employees.
 To show how to protect your business ideas.
 To demonstrate how successful entrepreneurs grow their
businesses by adaptation and experimentation.
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Course Outline
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Defining the mission, vision, and goals
Understanding the management trinity
Determining feasibility and risk
Marketing products and services
Managing and operating the business
Handling the money and the finances
Hiring and managing employees
Getting licenses and permits
Protecting your ideas
Growing by adaptation and experimentation
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Defining The Mission,
Vision, And Goals
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Begin at the beginning…
 When starting a business people often express how
overwhelmed they are at the daunting task of starting a
business.
 One way to approach the problem is by stating what is not
the beginning.
 A business plan is not the beginning, nor is money in the
bank, a rented space, or the merchandise inside.
 To find the beginning, reduce your business idea to its
apparent essence. Then reduce it again.
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Finding your best idea…
 Once you have reduced your idea down to its bare essence,
the question usually arises, “How do I know if this is a
good idea?”
 Success entrepreneur Paul Hawken, of Smith & Hawken,
had this advice to share:
– “Your best idea for a business will be something that is deep within
you, something that can’t be stolen because it is uniquely yours,
and anyone else trying to execute it without the thought you have
given the subject will fail. It’s not basically different from writing
a novel. A good business and a good novel are faithful and
uncluttered expressions of yourself.”
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Another caution…
 Don’t start two businesses. One idea is sufficient, and
bringing it into existence is hard enough.
 The person who wants to write novels and print them on
her own letterpress is starting two businesses.
 The person who buys a farm to raise beef and at the same
time opens a butcher shop is starting two businesses.
 He would have a much better chance of survival if he got
the farm on a steady footing before venturing into a retail
business.
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“Being” rather than “doing”…
 Royal Dutch Shell recently undertook a study on business
longevity. Shell wanted to find out why some companies had
endured for centuries, especially when their main business had
changed or yanked out from under them by external events.
 The study concluded that these venerable companies had
“being” goals instead of “doing” goals.
 Said another way, their business was centered on a way of
interacting with the world, not on providing one specific
product or service.
 And this way of interacting is brought about through having a
clearly defined set of mission, vision, and principles.
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The Art of the Start…

In his book, The Art of the Start, entrepreneur, author,
and venture capitalist Guy Kawasaki listed five things
that an entrepreneur must accomplish when starting any
business. They are…
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Make Meaning
Make A Mantra
Get Going
Define Your Business Model
Weave A MAT (Milestones, Assumptions, Tasks)
We’ll take a look at each of these tasks.
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Make meaning…
 The best reason to start an organization is to make meaning—to create
a product or service that makes the world a better place. So your first
task is to decide how you can make meaning.
 Meaning is not about money, power, or prestige. It 's not even about
creating a fun place to work. Among the meanings of “meaning ” are
to
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Make the world a better place.
Increase the quality of life.
Right a terrible wrong.
Prevent the end of something good.
 As Kawasaki recommends, complete this sentence: If your
organization never existed, the world would be worse off because…
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Make a mantra…
 Instead of a mission statement and all the baggage that comes with it,
craft a mantra for your business.
 The beauty of a mantra is that everyone expects it to be short and
sweet. You may never have to write your mantra down, publish it in
your annual report, or print it on posters. Indeed, if you do have to
“enforce” your mantra in these ways, it’s not the right mantra.
 Following are some examples that illustrate the power of a good
mantra:
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Authentic athletic performance (Nike).
Fun family entertainment (Disney).
Rewarding everyday moments (Starbucks).
Better than driving (Southwest Airlines).
Healthy fast food (Subway).
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Get going…
 The third step is not to fire up Word to write a business plan,
launch PowerPoint to craft a pitch, or boot Excel to build a
financial projection. Instead, it’s get going.
 This means building a prototype, writing software, launching a
website, or offering your services. The hardest thing about
getting started is getting started. (This is as true for a writer as it
is for an entrepreneur.) Remember: No one ever achieved
success by “planning” for gold.
 You should always be selling—not strategizing about selling.
Don 't test, test, test —that 's a game for big companies. Don 't
wait to develop the perfect product or service. Good enough is
good enough. There will be plenty of time for refinement later.
It 's not how great you start—it 's how great you end up.
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Define your business model…
 The fourth step is to define a business model. To do this
you need to answer two questions:
– Who has your money in their pockets?
– How are you going to get it into your pocket?
 In defining your business model…
– Be specific. The more precisely you can describe your customer, the
better.
– Keep it simple. If you can't describe your business model in ten words or
less, you don 't have a business model.
– Copy somebody. Commerce has been around a long time,and by now
clever people have pretty much invented every business model that 's
possible. You can innovate in technology, markets,and customers,but
inventing a new business model is a bad bet. Try to relate your business
model to one that 's already successful and understood.
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Weave a MAT…
 MAT stands for milestones, assumptions, and tasks.
 For most people a startup looks as if it must achieve a seemingly
unlimited number of goals. However, out of these goals are some that
stand head and shoulders above the others.
 These are the organization 's milestones —they mark significant
progress along the road to success. According to Kawasaki, there are
seven milestones that every startup must focus on:
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Prove your concept.
Complete design specifications.
Finish a prototype.
Raise capital.
Ship a testable version to customers.
Ship the final version to customers.
Achieve break-even.
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Assumptions…
 Second, create a comprehensive list of the major assumptions that you
are making about the business. These include factors such as:
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product or service performance metrics
market size
gross margin
sales calls per salesperson
conversion rate of prospects to customers
length of sales cycle
technical support calls per unit shipped
payment cycle for receivables and payables
compensation requirements
prices of parts and supplies
 Continuously track these assumptions, and when they prove false,
react to them quickly. Ideally, you can link these assumptions to one
of the seven milestones discussed previously. Thus, as you reach a
milestone, you can test an assumption.
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Tasks…
 Third, create another comprehensive list—this time of the
major tasks that are necessary to design, manufacture, sell,
ship, and support your product or service.
 These are necessary to build an organization, though they
are not as critical as the seven milestones. They include:
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renting office space
finding key vendors
setting up accounting and payroll systems
filing legal documents
purchasing insurance policies
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Forming a mission…
 Successful entrepreneur Bo Peabody, who founded the
internet company Tripod, had this to say about the
importance of mission:
– “Much of what makes a company fundamentally innovative,
morally compelling, and philosophically positive is not what the
company’s business model is, but how the entrepreneur
communicates the mission of the company. A company’s mission,
communicated by the entrepreneur with passion is what creates the
environment that attracts smart people and gets them inspired in
the first place. Which is exactly what gets the luck rolling.”
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Tripod’s mission…
 As Peabody wrote in his book, Lucky or Smart:
– “Tripod made what money it did by selling advertising
to clients such as Ford and Visa. That was our business
model. But Tripod’s mission, as I described it to my
colleagues, was to revolutionize consumer media,
allowing anyone to publish his or her views to the
entire world using the Tripod Homepage Builder.
‘Tripod isn’t here to just make money. We are here to
fight the most important battles on the frontier of the
First Amendment,’ I would tell them.”
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Mezze’s mission…
 Bo Peabody later went on to form a restaurant
called Mezze, of which he stated:
– “Mezze, which I co-founded in the Bershire Hills of
Massachusetts, serves food and drink to locals and
tourist from New York City and Boston. That’s our
business model. But the mission of Mezze is larger: to
set an example quality and service for all the
Berkshires’ retail establishments. I tell our staff that by
working hard to refine Mezze, we raise the bar for
everyone. And that by doing so, we will together
attract more visitors to our small part of the world.”
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Finally, there’s Village Ventures…
 Peabody also co-founded Village Ventures of which he
commented:
– “Village Ventures makes money by taking advantage of the supply
and demand imbalance that results from the concentration of
venture capital in only a few large cities. That’s our business
model. But the mission of Village Ventures is different: to enable
entrepreneurs to start companies in the towns where they want to
live. Rather than having to flee to Boston or San Francisco to find
venture capital, entrepreneurs in Boise, Idaho and Providence,
Rhode Island, can get capital right in their own hometowns and
build their companies in the same place they’d like to raise their
families.”
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Pursuing a greater goal…
 Missions such as those of Tripod, Mezze, and Village
Ventures create an aura of authenticity, which is the elixir
that attracts smart people and inspires them.
 That’s because the primary goal of these companies is not
to make money but “to defend the First Amendment and
create jobs in places where there aren’t many.” And people
love that.
 No matter what anyone may tell you, all but the most
hardened human beings want to believe that they get up in
the morning to pursue a goal greater than simply padding
their pockets.
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Knowing your primary aim…
 Before you start any business, you have to understand what
your primary objective is.
 This decision will affect the formulation of your business
recipe as much as any decision you will make.
 Your primary objective is a very, high-level goal of what
you want to the business to accomplish.
 It’s really quite amazing how many entrepreneurs have
trouble answering this basic question.
 So the first decision you have to make is to ask yourself,
“What is the primary objective of my business?”
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Determining your primary objective…
 While there is obviously no right or wrong answer to the
primary objective question, some possible responses
include:
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To carve out a small, but profitable niche
To create a high-growth company
To create a large, enduring enterprise
To create a lifestyle business for yourself
To turn a profit and sell the venture
 As you continue through with the rest of the decisions in
this course, you should continually come back to the
answer to this question to make sure that your strategy and
organization are in alignment with this goal.
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The purpose of your business…
 Your primary objective should not be confused with the
purpose of your organization.
 While your primary objective is a goal of what you want to
accomplish, your purpose explains why the goal is
important.
 Performance of an organization requires a clear focus and a
narrow concentration. Whenever a business goes beyond a
narrow focus, it ceases to perform.
 Performance therefore requires purpose and this is defined
by your mission.
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What is mission?
 Mission is the purpose or reason for existence of
your business.
 It is a general heading or direction—it is abstract.
 A mission is what you stand for.
 A mission should be timeless. It should rarely, if
ever, change. It should stand the test of time.
 Example: “To increase man’s capability to
explore the heavens.”
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The ground-rules of mission…
 Paradoxically, if an organization’s mission is truly
motivating it is never really achieved.
 Mission provides an orientation, not a checklist of
accomplishments.
 It defines a direction, not a destination.
 It tells the members of an organization why they are
working together and how they intend to contribute to the
world.
 Without a sense of mission, there is no foundation for
establishing why some intended results are more important
than others.
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The missions of enduring companies…
Company
Core Purpose
3M
To solve unsolved problems innovatively
Fannie Mae
To strengthen the social fabric by continually
democratizing home ownership
Hewlett-Packard
To make technical contributions for the advancement
and welfare of humanity
Mary Kay
To give unlimited opportunity to women
McKinsey
To help leading corporations and governments be more
successful
Merck
To preserve and improve human life
Nike
To experience the emotion of competition, winning,
and crushing competitors.
Wal-Mart
To give ordinary people the chance to buy the same
things as rich people.
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Now, write down your mission…
 Right now on a piece of paper, write down your
mission statement.
 Remember, a mission is the reason or purpose for
the business.
 Write it as simply and honestly as you can.
 A worksheet is provided to help you with this
exercise.
 Example: The mission of CEDC is to increase the
entrepreneurial capacity of our clients.
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Deciding upon your vision…
 Mission provides a guiding star, a long-term purpose that allows
you to balance the inevitable pressures between the short-term
and the long-term.
 While mission is foundational, it is also insufficient because, by
its nature, it is extraordinarily difficult to assess how we are
doing by looking only at the mission.
 For this we need to stick our necks out and articulate a vision:
an image of the future we seek to create. Vision translates
mission into truly meaningful intended results—and guides the
allocation of time, energy, and resources.
 Results-oriented leaders, therefore, must have both a mission
and a vision. Results mean little without purpose.
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What is vision?
 A vision is a specific future destination—it is
concrete.
 A vision is a dream with a deadline.
 It should change over time.
 It must say “yes” to some ideas and “no” to others.
 It’s about what the future might be, could be, and
shouldn’t be.
 Example: “To put a man on the moon before the
end of the 1960’s.”
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The ground-rules of vision…
 Vision is a practical tool, not an abstract concept.
 Visions can be long-term or intermediate term.
 While an organization should exist for one, single
purpose, multiple visions can coexist, capturing
complimentary facets of what people seek to
create and encompassing different time frames.
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Now lets define your vision…
 Remember, a vision is a specific, future
destination.
 It’s your dream with a deadline.
 Therefore, the first thing we need to do is establish
a time frame that we want to look ahead.
 You will obviously choose the timeframe(s) that
best fits your specific vision, but for the sake of
this exercise, we are going to look out 5 years into
the future.
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Ask yourself such questions as…
 What big, audacious goal(s) do you want to try to achieve
in five years from now?
 What does success look like in five years?
 In five years time, how should your business be different
than it is now?
 Using your own metrics of success, what must you
accomplish in five years for you to consider yourself
successful?
 Right now, on a sheet of paper, write down your vision.
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The tests of a good vision…
 A good vision describes a very specific future destination.
 It doesn’t sound like, “Our vision is to sell high-quality
products to our customers through excellent service.” This
isn’t even a really good mission or purpose. It just restates
the rules of the game of business.
 Instead, a good vision sounds like, “Our vision is to create
the largest online business college by 2010” or “By 2010,
we have 100 franchises in operation.”
 With a great vision, it’s very easy to tell whether or not its
been achieved. If it’s not a true dream with a deadline,
then it’s not a vision.
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Your goals for this year…
 Goals are your definition of what success looks
like.
 Goals are your vision in miniature—they are your
bridge from the present to your future vision.
 They specify what work of your vision will get
done, by who, and by when.
 In effect, goals pose the question, “What will I
have to accomplish by the end of this year to
consider myself a success?”
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Why create goals and objectives?
 Objectives clarify what it is you are trying to accomplish in
specific, measurable goals.
 For an objective to be effective, it needs to be a welldefined target with quantifiable elements that are
measurable.
 Whereas your vision statement is expansive and idealistic,
and the mission short, powerful, and memorable, your
objectives are designed to focus your resources on
achieving specific results.
 The purpose of well-defined objectives is to cause
meaningful action.
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Developing your goals…
 Think back to your vision statement once again.
 If you recall, your vision statement looked five years into
the future toward a specific destination that you want to
arrive at.
 Now think about the activities you need to accomplish this
year in order to move from your current situation toward
that destination.
 Create 5 to 6 goals that are critical to arriving at your
envisioned future. A worksheet is provided to help you.
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Be SMART when creating your goals…
 The SMART formula is a good framework to help
you when creating your goals and objectives.
 SMART helps to ensure that your goals are:
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Sensible,
Measurable,
Achievable,
Realistic, and
Time Specific.
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Understanding The
Management Trinity
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People not plans…
 The most important thing that you have to learn about starting a
business is that many entrepreneurs fail even though they had
successfully completed well-written business plans.
 The perfect business plan is totally useless if the people who
have to implement it are incapable of doing so.
 In fact, a survey of 220 "INC 500" businesses (relatively small,
but among the fastest growing businesses nationwide) revealed
that 66% did not have formal business plans when they started.
Of the 34% that did have plans, an overwhelming majority
(70%) generated them, for the most part, simply to get external
financing. Furthermore, those businesses without formal plans
tended to be more profitable.
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Management, not money…
 Usually, small business owners want something that they
don’t have, and money is often what they believe they
lack, but 90% of the time, this belief is wrong.
 It’s bad management kills companies, not the lack of
money.
 No matter how much money you place into a badly
managed business, the chances of it succeeding are slim,
whereas if you infuse good management into a financially
troubled company, you can expect it to turn around.
 This is to say that people, not money, run businesses.
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The management trinity…
 No matter how big or small a business is, three
areas of activity need to be taken care of:
– The technical skills necessary to produce the goods or
services one wishes to sell,
– The ability to market one’s goods and services, and
– The ability to financially manage one’s affairs.
 If any one of the above is missing, the business is
not a business, it shouldn’t be called one, and it
will never succeed.
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Find the people, form the team…
 In the beginning, there is one person with an idea.
 Before you can have a business, one has to
become three.
 No body on earth is equally passionate about
producing a product, marketing it, and keeping
good financial records.
 Therefore, your first role in starting a business is
to assemble the team that will help you to manage
the business.
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How to initially use the business plan…
 A great place to begin thinking about your management
trinity is to look at an outline of a business plan and start
thinking about which parts of it you feel excited to
complete.
 Is it the description of the product, the marketing strategy,
or the financial projections that you feel competent about
and ready to put into words or numbers?
 The bottom line is that you should never attempt to
become what you are not. If you hate financial
management, then experience shows that you will be a bad
financial manager no matter how many training manuals
you read.
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How to convince team members…
 At this point, the usual question that arises is, “How do you
convince people into a nonexistent business that is often lacking
resources and funding?”
 Basically, you have to package your dream and sell it. It may
sound too simple to be true, but the following strategies can
work:
– Beg. Ask a friendly accountant or marketing person to help for
free at least for the first few months.
– Promise something you don’t have. Offer to reward them by
sharing future profits.
– Give shares in your worthless company. Form a company and
allocate chares to those who come on board. Remember to keep
enough shares to allocate to future investors.
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Once the team is formed, then plan…
 Once you have considered which roles of the management
trinity you feel passionate about and are capable of doing,
you should then form the team that will perform the other
necessary management tasks.
 It is the team that writes the business plan, not you as the
individual entrepreneur. In fact, if you find yourself
writing a business plan by yourself or find that you are
recommended to do so, know that you are potentially
setting yourself up for failure right from the beginning.
 People only do well what they love, and in business this is
not enough.
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Why form the team first?
 When a team that fulfills the management trinity prepares the
business plan, the document they produce is “bankable,” that is,
it can attract the necessary finances from institutional or private
lenders.
 No large- or medium-size company could operate without the
separation of management roles just described. The fact that
small business and entrepreneurial training still insists on one
individual doing it all is puzzling.
 This false belief in a “team-of-one” could be the cause for the
massive failure rate of small businesses in the first five years.
This fact may explain why business failures do not diminish
even though small business counseling and training increases.
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Team-builders succeed. Period.
 There are many personality tests out there to help you in
determining whether or not you’ll make a good entrepreneur.
 First, know that successful entrepreneurs come from every walk
of life and possess just about every type of personality you can
imagine. In fact, most personality tests only agree on one factor
that entrepreneurs have in common and that is risk-taking.
However, most good entrepreneurs will tell you that they are not
big risk takers so this empirical evidence refutes even these
findings.
 If you want to maximize your chances of success in starting a
business there is probably only one significant factor to
leverage: the person who is most capable of enlisting the
support of others, the team-builder, is the most likely to succeed.
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Getting help and assistance…
 Starting a new venture is often an overwhelming task for most
people. The thing you need to know is that there is a vast array
of assistance out there to help you—and most of it is free or
provided at a minimal cost.
 One of the best places to start is to locate your local Small
Business Development Center or Chapter of SCORE. Both
organizations provide free counseling and start-up assistance to
new business. To find your local SBDC or SCORE Chapter, use
the following internet addresses:
– Find an SBDC
– Find a SCORE Chapter
 Also check out the Tools section of this course for many other
helpful resources and sources of assistance.
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Determining Feasibility and Risk
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Seeing opportunity and not risk…
 Entrepreneurship, it is commonly believed, is enormously risky.
But why should this be so?
 Indeed, nothing could be as risky as optimizing resources in
areas where the proper and profitable path is innovation.
 Of course innovation is risky. But so is stepping into the car to
drive to the supermarket for a loaf of bread. All economic
activity is by definition “high-risk.” And defending yesterday—
that is, not innovating—is far more risky than making tomorrow.
 The fact is successful innovators are conservative. They have to
be. They are not “risk-focused,” they are “opportunityfocused.”
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Determining risk and feasibility…
 Based on the very definition of economics there will
always be inherent risk in an entrepreneurial venture. If
there were no risk, then there could be no reward—there
would be no opportunity.
 The result of conducting a feasibility and risk analysis is
not to eliminate risk, but to give you the ability to take
greater risks.
 There is no “one-size-fits-all” test for feasibility for a new
venture as suggested by most books or consultants. The
feasibility approach you use is dependent on the
entrepreneurial strategy that you will employ.
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Is their a recipe for success already?
 Many people starting small business have, in fact, seen an
existing working model of the business they want to start and
emulate. It’s just a matter of copying and implementing that
recipe.
 If you are not doing anything fundamentally new or different
(which is the case for most new ventures) then proving
feasibility is somewhat simple. Chances are there already is a
successful recipe formulated for the your business.
 Feasibility then gets boiled down to three questions: (1) Have
you identified the recipe and specifically what is it? (2) Do you
have what it takes to execute it? and (3) Is there any proof that
the recipe transfers successfully from one market to another? A
franchise would be a good example of such proof.
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The entrepreneurial strategies…
 If you are doing something fundamentally new or different,
then the feasibility test to apply depends on the
entrepreneurial strategy that you have committed to.
 The available strategies are reasonably clear, and there are
only a few of them. According to management author
Peter Drucker, there are four specifically entrepreneurial
strategies:
–
–
–
–
Being first with the most
Hitting them where they ain’t
Occupying a specialized niche
Changing the economic characteristics of a product, market, or
industry.
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Being first with the most…
 Being “First with the Most” does not necessarily aim at
creating a big business right away, though often this is
indeed the aim. For this entrepreneurial strategy the
entrepreneur aims at leadership, if not at dominance of a
new market or a new industry.
 If you are choosing the “First With The Most” leadership
strategy, then feasibility is often determined by the capital
markets since this strategy requires a massive mobilization
of resources.
 If angels, venture capitalists, or investment bankers don’t
bite at your business plan, then the feasibility is instantly
known.
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Hitting them where they ain’t…
 The second type of entrepreneurial strategy waits until
somebody else has established the new, but only
“approximately.” Then it goes to work. And within a short time
it comes out with what the new really should be to satisfy the
customer. The creative imitator does not invent a product or
service; he perfects and positions it.
 If you are choosing “Creative Imitation” as your chosen strategy
then the concept has already been proven in the market. But in
this case, you need to understand what the innovation represents
better than the people who made it and who innovated.
 In other words, you must be able to answer the question,
“What’s the new value proposition I’m offering to the
customer?”
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Occupying a niche…
 If you are choosing to “Occupy a Niche” in the
marketplace, then there is the opportunity to prove
feasibility by conducting small, low-cost experiments.
 These might include running small newspaper or classified
ads, small-scale market tests, selling a prototype on eBay
to gauge interest, or attending regional trade shows and
talking with potential industry buyers and customers.
 Since the niche is small, the investment in it can be small
as well to determine market interest.
 Think about and write down any small experiments you
could conduct to test for basic feasibility of your idea.
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Change the economic characteristics…
 If you are choosing to “Change the Economic
Characteristics” by offering new uses for a product, or
changing its pricing, or distribution model, then the
customer must be able to tell that economically there is
something different and new.
 Do you know what this is and does the potential customer
recognize it as new and different as well?
 That is the fundamental test. While physically there is no
change, economically there is something different and new
valued by your customer.
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Assessing the personal risks…
 While so far we have examined the risk factors concerning
the business itself, you have to also consider the personal
risks as well.
 Any new business is intimately entwined with the life of its
founder. For this very reason, a personal risk assessment is
as important as the business risk assessment.
 Being an entrepreneur is not for everyone and price it can
place on your personal life is immense.
 The following questions help you to gauge your personal
orientation toward risk.
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Considering personal finances…
 Ask yourself:
– Can you handle not knowing where your next paycheck is coming
from? Is Job Security important to you?
– How much are you willing to risk financially? Most entrepreneurs
put it all on the line (savings, credit, home) and many will lose it
all. What can you lose? Are you willing to lose it?
– Do you have the cash reserves to pay your (personal) bills for the
next 2 years without any salary taken from your business?
– In 5 years, how much do you want to be making a year from your
business (personal salary)?
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Concerning your lifestyle…
 Ask yourself:
– What type of personal lifestyle do you want?
– Will your business allow for the hours and personal rewards that
are important to you?
– How does your age affect your business decision? The younger
you are the better you may be able to handle risk, but how will a
business failure or success affect the rest of your life plans?
– Do you have the physical stamina to handle the stress and demands
that a business venture will place on you? Business owners tend to
need a lot of energy, do you have the reserves?
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Concerning your strengths and goals…
 Ask yourself:
– Have you been in the "power position" before? Are you a better
leader or follower?
– Do you love (or at least like) your current physical location? As a
business owner, you will become part of the community for years
to come. Is this where you want to be?
– List the top 5 reasons why you want to start this business. Then
take a look at your personal life goals. What conflicts do you see?
Can you make changes so that your personal and professional
goals are closer to each other?
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Marketing Products and Services
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Finding your niche…
 Most small businesses cannot afford to market to the
general, mass-market customer—resources are just too
limited.
 Instead, it must focus it efforts, communications, and
resources on those segments of the market that offer the
most promise for the business and that have been neglected
by larger competitors.
 The niche strategy aims at making its successful
practitioners immune to competition and unlikely to be
challenged. Successful practitioners of market segmenting
take the cash and let the credit go. They wallow in their
anonymity.
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What is market segmentation?
 The division of a market into different homogeneous
groups of consumers is known as market segmentation.
 Rather than offer the same marketing mix (product, price,
place, and promotion) to vastly different customers, market
segmentation makes it possible for firms to tailor the
marketing mix for specific target markets, thus better
satisfying customer needs.
 Not all elements of the marketing mix are necessarily
changed from one segment to the next. For example, in
some cases only the promotional campaigns would differ.
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Who are they?
 Think about your customer and answer this question:
– Who is your targeted customer and how were they selected? Or
said another way:
– The customers we serve can be described as…what?
 An example: The targeted customer for Audio BizBooks is
executives and sales professionals who have a need to keep
up with current management practice yet travel many
weeks within a year and must multitask in order to be
effective.
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How many targets do you have?
 It is possible and, in many cases necessary, to have several
target markets that are separate and distinct from one
another.
 For instance, an errand service may target busy
professionals as one market and elderly senior citizens as
another.
 Each of these markets would make good customers for
such a service, but each is unique in response to the
marketing mix you would offer.
 Ask yourself, “Do I have several different target markets
and if so, what are they?”
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What defines a market segment…
 A market segment should be:
–
–
–
–
–
Measurable
Accessible by communication and distribution channels
Different in its response to a marketing mix
Durable and not changing too quickly
Substantial enough to be profitable
 Using the above criteria, ask yourself whether or not each
target market you defined meets the above definition?
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Where are they located?
 Ask yourself, “Where do my customers reside
geographically?”
 Geographic segmentation is based on regional variables
such as:
–
–
–
–
Region (international, national, regional, state, county, city…)
Climate,
Population density (rural, urban, suburban), and
Population growth rates.
 An example: The targeted market segment for Reynold’s
Bakery resides primarily in the suburban neighborhoods of
northern Hamilton county located in Indiana.
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What job is your product hired to do?
 Knowing what job a product gets hired to do (and knowing what
jobs are out there that aren’t getting done very well) can give
entrepreneurs a much clearer road map for improving their
products to beat the competition from the customer’s
perspective.
 When launching a business into the marketplace it’s not a good
idea to assume that just because you show up the market gets
bigger. Most of your business will have to be taken from the
competition—and they won’t give it up easily.
 Ask yourself, “My customers will hire my products to complete
what specific kind of job? What are they trying to get done?
What’s their circumstance?”
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How many customers are there?
 What do you know about the size of the market(s) you are
targeting? Anything? If so what?
 Things to consider include:
– Roughly, how many of them are there?
– Are their numbers growing or shrinking?
– How much do they spend annually on your kind of product and
services?
– Is that amount increasing or decreasing?
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How competitive is the market?
 When thinking about your competition you need
to consider the following questions:
– How easy or hard is it to get into this business?
– How competitive is the business?
– Is your product considered a commodity in the market
or is there a price war going on?
– What substitutes are available for your products or
services?
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In what stage is the market?
 Every strategy is somewhat influenced by the age of the
market and the stage of the life-cycle it’s in.
 Pricing, profits, and even promotions all change as a
product moves through this life-cycle.
 Ask yourself, “Is the market itself new, growing, mature,
or in decline?”
 For instance, the market for nanotechnology is new, for
high-definition televisions it’s growing, for diesel engines
it’s mature, and for VHS tapes and players it in decline.
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Where’s the puck going to be?
 Money is always moving in a market. What was new
yesterday quickly becomes a commodity today as profits
move and shift to areas where the product is not yet good
enough.
 Hockey great Wayne Gretzky was famous for saying “I
don’t skate to where the puck is, I skate to where the puck
is going to be.”
 So how about it? Ask yourself, “Today, the money to be
made in the market is…(where?) But in the near future,
the profits will shift to…(where?)”
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Developing a core marketing message…
 Central to effective marketing is a message that speaks powerfully to
the needs of prospective customers. This message becomes the
foundation of all of your marketing efforts.
 This message is developed by first answering the following questions:
– Target market: What clients do you serve?
– Problem: What problem are your customers facing that would make
them seek assistance?
– Solution: What results do you produce when working with customers?
– Proof: What do you have that can prove you can in fact deliver that
solution? (references, testimonials, case studies)
– Differentiation: What makes you stand apart from your competitors?
What is it about your business that offers a true advantage to your
customers?
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A marketing message example…
 When someone asks, “What do you do?” Here’s how you might
respond…
– Target market—Say who you work with first: “I work with IT
executives in Fortune 1000 companies…”
– Problem—Articulate the problem that is meaningful to them: “…who are
having difficulties getting their top talent to stay around.”
– Problem Stories—Tell them more about the problem of those you have
worked with before: “Many IT managers are losing people because they
are so bad at managing people. For instance, a client we worked with was
losing 30% of their best technical people,every year…”
– Solution/Proof—Tell them your solution and what makes you different:
“We’ve had very good results in turning around the attrition problem for
clients. Typically, we can cut their attrition in half in less than six
months.”
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Getting your message in writing…
 Every business needs some kind of written materials
whether it be in the form of letters, brochures, websites,
and so forth.
 To begin your written materials, begin with your core
solution statement—a simple phrase that communicates the
essence of your solution.
 Example: “We help IT companies retain their best talent.”
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Describe the problem…
 After stating your core solution statement, you should
write down your problem description.
 For this section, discuss the problem, pain, or predicament
as to make it crystal clear that you both understand the
problem and your understand their situation or industry.
 Problem Example: “These days the biggest challenge in
big IT departments is keeping talented staff. In a survey of
the 20 largest IT departments in banking, for instance, the
average attrition rate is 27% per year, costing each
organization over 3.8 million in recruitment costs
annually.”
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State the solution…
 Next, discuss the solution you provide and discuss what’s
possible if you solve the problem.
 Solution Example: “Research also proves that the top
reason for attrition is not poor compensation or lack of
challenging work, but poor management by those directly
above them. The good news is that when management
approaches change, people stay, saving companies
hundreds of thousands, if not millions each year.”
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How come?
 Next, discuss why companies are stuck in the problem and
why they are not performing the solution.
 How Come? Example: “Highly competent technical
people are the ones most often promoted to management
positions, however, they only receive in-depth
management training 16% of the time. This leaves 84% of
those in technical management positions with few skills in
the area of people or project management.”
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What needs to be done…
 Now, discuss the steps necessary to resolve the issue.
 Example: “The best investment IT departments can make
is providing in-depth management training and coaching.
It is the number one defense against attrition, low
productivity, and declining morale. Such training needs to
be seen as an investment, not as an expense as it can show
a return of 500% or more.”
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Finally, tell the customer, “Why us?”
 The final statement should declare why you are qualified to
provide the proposed solution.
 Why us? Example: “Since 1987, IT Management
Solutions has been helping some of the largest IT
departments in America attract and retain top talent by
developing top management and teams through our
guaranteed consulting and training services.”
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Your overall marketing strategy…
 Your overall marketing strategy needs to be rooted in
one of three generic strategies as they are called.
 The best known and most used set of competitive
strategies are those developed by Michael Porter,
author of Competitive Advantage.
 These strategies include:
– Cost Leadership Strategy
– Differentiation Strategy
– Focus Strategy
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Visualizing the different strategies…
Advantage
Marketing Scope
Low Cost
Uniqueness
Broad
(Industry Wide)
Cost Leadership
Strategy
Differentiation
Strategy
Narrow
(Market Segment)
Focus Strategy
(Low Cost)
Focus Strategy
(Differentiation)
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Cost leadership strategy…
 The cost leadership strategy calls for you to
produce and market a good quality product at a
lower cost than your competitors.
 By doing this your company should have higher
profit margins than the industry average.
 A firm may acquire cost advantages through
improving process efficiencies, gaining access to
lower cost materials, utilizing outsourcing options,
or avoiding some costs completely.
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Differentiation strategy…
 Differentiation strategy involves creating a product that is
perceived as unique.
 It selects one or more attributes that many buyers in an
industry perceive as important, and uniquely positions
itself to meet those needs. The unique features or benefits
should provide superior value for the customer if this
strategy is to be successful.
 However there are usually additional costs associated with
the differentiating product features and this could require a
premium pricing strategy.
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Focus strategy…
 The focus strategy, also known as niche strategy, is when a
company focuses its resources and efforts on a narrow,
defined segment of a market.
 Although, it focuses on a narrow market segment, you still
must choose to either compete on the basis of cost
leadership or product differentiation.
 It focuses on serving a particular niche so well that others
cannot compete.
 Because of minimal competition, profit margins can be
very high.
 Customer loyalty is usually also high with this strategy.
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What is a marketing mix?
 After choosing which primary generic strategy your business
will pursue it’s time to set your “marketing mix.”
 A marketing mix is the way in which you go to market.
 Your marketing mix consists of four equal elements:
–
–
–
–
The product,
Its promotion,
Its distribution, and
Its pricing.
 The first three elements, product, promotion, and distribution,
are a company’s attempt to create value.
 The last element—pricing—is the company’s attempt to capture
some of that value in the form of profits.
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Product decisions…
 What product or service will you provide?
– Is there anything new or innovative about the product
itself or the way that it is sold? Specifically, what is
unique, if anything?
– Are there any suppliers? If so, who are they?
– Can the product be protected through intellectual
property?
• Copyrights for creative works
• Trademarks for name and service marks
• Patents for technical inventions
– What future products or services are being planned?
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Promotional decisions…
 Promotion decisions are those related to
communicating and selling to potential consumers.
 Promotion decisions involve:
–
–
–
–
advertising,
public relations,
sales promotions, and
personal selling.
 What marketing weapons will you use in your
advertising and promotional efforts?
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Pricing decisions…
 Pricing is the moment of truth—all of marketing comes to
focus in the pricing decision.
 Many entrepreneurs use a cost-plus system for determining
prices. Others use something known as value-based
pricing. The purpose of value-based pricing is to price
more profitability by capturing more value, not necessarily
by making more sales.
 How will the product or service be priced? If distributors
or retailers will be used, what prices will be extended to
them?
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Place decisions…
 Place (or placement) decisions are those associated with
channels of distribution that serve as the means for getting
the product to the target customers. The distribution system
performs transactional, logistical, and facilitating
functions.
 Distribution decisions include market coverage, channel
member selection, logistics, and levels of service.
 How will the product or service be delivered to the
customer?
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The marketing mix and target market…
 For each target market you define, there should a different
and unique marketing mix. In other words, one or more of
your four Ps should be different.
 If this is not the case, then one of your target markets was
not defined correctly.
 How is your marketing mix different for each target market
that you have?
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Managing The Business
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Learning how to manage…
 The practice of entrepreneurship is based on same principles,
whether the entrepreneur is an existing large institution or an
individual starting his or her new venture single-handed.
 Yet the existing businesses faces different problems,
limitations, and constraints from the solo entrepreneur and
needs to learn different things. The existing business knows
how to manage but needs to learn how to be an entrepreneur
and innovate.
 The new venture needs to learn how to be an entrepreneur
and how to innovate, but above all else, it needs to learn how
to manage.
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The inventor and the manager…
 Unless a new venture develops into a new business and makes sure it is
“managed,” it will not survive no matter how brilliant the entrepreneurial
idea, how much money it attracts, how good it products, or even how
great the demand for them.
 Consider this piece of history:
– Refusal to accept these facts destroyed every single venture started by
inventor Thomas Edison. He should have succeeded for he was a superb
business planner. He knew how to set up an electric power company. He
knew how to get all the money he needed. His products were immediate
successes and demand for them was practically insatiable. But Edison
remained an entrepreneur and thought “managing” meant being the boss. He
refused to build a management team. And so every one of his five
companies collapsed once it got to middle sized, and was saved only by
booting Edison himself out and replacing him with professional
management.
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The requirements of a new venture…
 According to management pioneer, Peter F. Drucker,
entrepreneurial management in the new venture has four
requirements:
– It requires, first, a focus on the market.
– It requires, second, financial foresight, and especially planning for
cash flow and capital needs ahead.
– It requires, third, building a management team long before the
venture actually needs one and long before it can actually afford
one.
– And finally, it requires of the founding entrepreneur a decision in
respect to his or her role, area of work, and relationships.
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The need for market focus…
 When a new venture does succeed, more often than not:
– it is in a market other than the it was originally intended to serve,
– with products and services not quite those with which it had set
out,
– bought in large part by customers it did not even think of when it
started, and
– used for a host of purposes besides the ones for which the products
were first designed.
 If a new venture does not anticipate this, organizing itself to take
advantage of the unexpected and unseen markets—if it is not
totally market-focused, if not market-driven, then it will succeed
only in creating an opportunity for a competitor.
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How to be market-focused…
 Being market focused requires, first, that the venture
systematically hunt out both the unexpected success and
the unexpected failures.
 To be market-driven also requires that the new venture be
willing to experiment.
 It does not require a great deal of money to find out
whether an unexpected interest from an unexpected market
is an indication of genuine potential or a fluke. It requires
sensitivity and a little systematic work.
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The customer defines your product…
 Above all, the people who are running a new venture need
to spend time outside: in the marketplace with customers
looking and listening.
 The new venture needs to build in systematic practices to
remind itself that a “product” or “service” is defined by the
customer, not by the producer.
 The greatest danger for the new venture is to “know better”
than the customer what the product or service should be,
how it should be bought, and what it should be used for.
 Businesses are not paid to reform customers. They are
paid to satisfy them.
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Financial foresight…
 The lack of adequate financial focus and the right financial
policies is, by contrast, the greatest threat to the new venture in
the next stage of its growth.
 Initially, entrepreneurs tend to focus on profit. But this is the
wrong focus for a new venture.
 Cash flow, capital, and controls come much earlier. Without
them, the profit figures are fiction.
 A rule of thumb with a good deal of empirical evidence to
support it says that a new venture outgrows it capital base with
every increase in sales of the order of 40 to 50 percent. After
such growth, a new venture also needs a new and different
capital structure, as a rule.
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Building a management team…
 Just when a new venture appears to be on the threshold of
becoming an “adult”—a successful and going concern, it
gets into trouble nobody seems to understand.
 The reason is always the same: a lack of top management.
The remedy is simple: to build a management team before
the venture reaches the point where it must have one.
 Teams cannot be formed overnight. They require long
periods before they can function. Teams are based on
mutual trust and understanding, and this takes years to
build.
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How to build the team…
 The first task in building a management team requires the will
of the owner to build a team rather than to keep on running
everything themselves.
 The next step is for each member of the group, beginning with
the founder, to ask: “What are the activities that I am doing
well? And what are the activities that each of my key associates
in this business is actually doing well?”
 Then the work on the team can begin. The founder starts to
discipline himself (or herself) not to handle people and their
problems, if this is not the key activity that fits best.
 Finally, goals and objectives for each area are set. Everyone
must be asked, “What can this enterprise expect of you?”
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Your legal structure…
 All businesses have to be structured legally, but there are
various options and choices you have on how to do this.
 Your basic decisions include:
–
–
–
–
–
The Sole Proprietorship
The General Partnership
The C Corporation
The S Corporation
The Limited Liability Corporation
 The following discussion briefly profiles each structure.
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Sole proprietorship…
 A sole proprietorship is a business owned by one
individual.
 It is not considered a legal entity under law, but an
extension of the individual that owns it.
 As a sole proprietorship, you are merely
considered as a self-employed individual carrying
on a trade or practice.
 The owner is directly and personally responsible
for all debts and liabilities of the business.
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The general partnership…
 A partnership is where two or more individuals
join together to run a business venture.
 Each individual has ownership in the company as
well as responsibility for its debts and other
liabilities.
 Authority and the way in which profits and losses
are to be shared is usually controlled by the
partnership agreement.
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‘C’ corporation…
 A corporation is a separate, legal entity which
exists apart from its owners.
 A corporation has all the legal rights of an
individual and is responsible for its own debts.
 Owners are typically protected from the liabilities
of the company.
 This type of protection is known as limited
liability.
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‘S’ corporation…
 An ‘S’ Corporation is very similar to a ‘C’ Corporation in
terms of ownership and liability issues.
 It differs however when determining the number of owners
allowed, who those owners can be, and how the business
will be taxed.
 Usually, this structure provides limited liability to its
owners while the business itself is not taxed itself. Instead,
all earnings “pass-through” to the owners who report such
amounts on their personal income tax returns.
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Limited liability company…
 There are two hybrid-type entities apart from the sole
proprietorship, partnership, and corporation.
 These hybrid entities share some of the attributes of the
above pure entities. They are…
– The Limited Liability Company (LLC) - which is a hybrid entity
that has many characteristics of a partnership and a corporation,
and
– The Limited Liability Partnership (LLP) – which is a general
partnership that offers limited liability to all investors while
preserving certain opportunities that may exist in that general
partnership.
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Choosing a legal structure…
 Choosing a legal structure may seem like a daunting task,
but try not to worry too much.
 An attorney (who checks for issues of liability) and an
accountant (who checks for issues of taxation) can be
extremely helpful when deciding which legal structure is
right for your company.
 Either one of these professionals can usually complete and
submit the required forms for you or at least point you in
the right direction.
 Incorporation service providers, such as BizFilings, can
also complete and submit the required forms for you.
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Ownership and management…
 Apart from the legal structure of the business,
some ownership questions to address include:
– How will the ownership structure of the venture be
designed?
– Who will own what percentage of the company?
– Which owners are responsible for the management of
the company and which might be silent partners?
– Who will make up the management team of the
business?
– What professional service providers will be necessary?
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Insurance and risk management…
 Finally, you’ll want to consider what insurance coverage
will be necessary. Some categories of coverage include:
– Property Insurance: Fire and Theft, Renters Insurance,
Inventory Coverage
– Casualty Insurance: General Liability, Product Liability,
Professional Liability, Errors and Omissions, Surety
Bonding
– Time Element: Business Income Interruption, Extra
Expense Coverage (from interruption), Automobile
Insurance, Commercial Auto Policy, Motor Carriers Policy
– Employee Insurance: Personal Disability, Life Insurance,
Medical Insurance, Worker's Compensation
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Getting insurance for your business…
 In order to get insurance for your business you simply need to
crack open the Yellow Pages.
 Look under insurance paying special attention to agents who
have the word “commercial” in their ads or phone listings.
 Only commercial insurance agents are licensed to sell and
represent types of business insurance. Such a licensed
professional can help you assess what kinds of insurance you
might be required to have by law and other types of
supplemental insurance that you might consider.
 Because each policy needs to created by an insurance
underwriter, the only way to really get a handle on the premium
amounts to just ask for a quotation.
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Handling The Money and
The Finances
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The language of business…
 Money is how your business will keep score—it’s
the language of business.
 While there are many money issues that come into
play when starting a new business, there a few
fundamental decisions, however, that must be
addressed before you start.
 This section examines those decisions and
questions in detail
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How much money it will take…
 When thinking about how much money you should use to start
your business, consider entrepreneur Paul Hawken’s advice:
– “Let your relationship with money determine the amount of money
you use to start your business. I started Erewhon, my first
business, with $500, and Smith & Hawken with $100,000. In 1967
I would have felt uncomfortable with more than $500, but a little
over a decade later I would have been uncomfortable with less than
the $100,000. The difference was not a result of the different
nature of the two businesses, but the nature of my attitude toward
money.”
 You should start a business with just as much capital as makes
you feel comfortable, and you should obtain it from the sources
you are most comfortable with.
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How much money do you need?
 The first question to therefore consider is: “How much
money, in total, do you need to get started?”
 A worksheet is provided to help you calculate this amount.
 The bottom line is that you need enough money to get to
market. And the amount of money needed will determine
who is interested in the deal if you need outside financing
assistance.
 While a bank or private investor may look at a deal of
$100,000 or less, most venture capital firms would
consider this to be too small as even a seed capital deal.
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Too much can be worse than too little…
 For the small business, too much money is worse than too little.
 The major problem affecting businesses, large or small, is lack
of imagination, not capital. A ready supply of too much money
in start-ups tends to replace creativity.
 If money could solve problems, there would be no small
businesses because the big businesses with plenty of money
would run everything.
 Small businesses, at entrepreneurial ones, are formed in order to
address problems that money alone cannot solve. With low
overhead and fragile budgets you can’t buy your way out of
problems. You have to learn your way out.
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What will the money be used for…
 How much of the total money is for fixed assets or property that
usually has some sort of long-term value?
 How much of it is for working capital or money that will be
used to finance the short-term operations of the business?
 Banks like deals where there are a lot of hard assets to secure as
collateral and tend to shy away from pure cash-only deals.
 Investors are the usual option when the money will be used to
pay for the day-to-day operating expenses of the business or in
the case of more risky activities such as new product launches.
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Is outside financing required?
 Once you determine how much money you require and
what type of assets or expenses it be used for, the next
question to address concerns your personal investment.
 Ask yourself, “How much money will I or other owners
put into this business?”
 Therefore, how much outside financing do you require?
This determined simply by taking the total amount of
money you need and subtracting any money placed into the
business by the owner(s).
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The right money…
 The following questions can help you determine
what kind of money may be best for your
business:
– Is the money you are trying to secure patient for
growth, but impatient for profit? This has been proven
to be a good thing in new ventures?
– Are you prepared to give up partial ownership of the
business in order to secure outside investment?
– What is the cost of this outside capital? What are the
terms, rates, and conditions?
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What’s the right kind of money?
 As a business moves through its lifecycle, the type of money it
requires changes. Having the wrong type of money at the wrong
stage of the business can prove to be a fatal management mistake.
 There are basically two kinds of money:
– Debt: a liability or obligation owed to another person or institution and
legally required to be paid by a specific date.
– Equity: money raised from the owners of a business.
 Both of these types of capital operate in completely different ways
and each can have an entirely different effect on a business. Even
the business plan you write needs to be tailored to the appropriate
type of capital you are seeking since each is a unique audience.
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What is debt capital?
 Debt is a liability or obligation owed to another
person or institution and legally required to be
paid by a specific date.
 Examples of debt capital include bank loans,
government guaranteed loans, lines of credit,
credit cards, mortgages, notes payable, bonds,
accounts payable, trade credit, home equity,
leasing contracts, etc.
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Who provides debt capital?
 Banks and other financial lending institutions are
the chief providers of debt capital.
 Also, owners or other outside persons may lend
money to a business in the form of debt.
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The advantages of debt capital…
 Debt can be less costly than equity capital since
most interest rates are less than what an investor
would require as a rate of return.
 Also, with debt capital, you don't have to give up
any ownership in your business.
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The disadvantages of debt capital…
 Debt capital can be rough on the cash flow of your
business since you are usually required to make
constant and periodic principal and interest
payments similar to a home mortgage.
 If your business is cyclical or seasonal or
experiences a sudden downturn in sales, the
inflexibility of debt repayment can cause a sudden
cash crunch.
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When should debt be used?
 Debt capital is best when the money you require will be
used mainly for fixed assets. Banks and other debt-based
lenders require enough collateral to secure the amount of
principal being borrowed so they like loans that involve
equipment, real estate, buildings, etc.
 If you own a house, a home equity loan is a great source of
capital. Home equity loans can be tax-deductible and the
interest rates charged are usually much lower than
traditional commercial loans.
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When should debt be used?
 Also consider debt capital when your business needs a line
of credit.
 A line of credit is similar to a credit card in that it's a shortterm money solution. The main advantage of a line of
credit is that you only pay interest on the balance of money
that you have drawn down.
 Say, for instance, that you have drawn down $10,000 of a
$30,000 line of credit. You only owe interest on the
$10,000 not the total amount of credit available. Most lines
of credit have a limit of available capital and their interest
rates are about the same as most commercial loans.
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Now let’s look at equity capital…
 Equity is money raised from the owners of a
business.
 Examples of equity capital include common stock,
partnership interests, and other ownership-based
interests.
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Who provides equity capital?
 Equity is generally provided by the owners of the
business who may include partners, private
investors, customers, suppliers, angels, investment
bankers, and venture capitalists.
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The advantages of equity…
 Equity capital can be much more flexible than debt. There
are no collateral requirements for equity capital and
repayment terms and conditions can be tailored to the
needs of the business.
 Usually, payments to investors can be put off until the
business exceeds breakeven or reaches a certain level of
profitability. Needless to say, this can really help the cash
flow of an emerging business.
 Also, equity capital can be a great way of raising large
amounts of money for your business.
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The disadvantages of equity…
 Equity can come at a very steep price. While a debt-based
bank loan might run you say 10%, an investor or venture
capitalist seeks much higher rates of return say around
20% to 40%.
 Also, equity investors generally want a share of the
business so you will have to give up some ownership.
 While these investors don't want to run the day-to-day
operations of your business, they usually want a seat on the
board of directors where they can influence the decisions
of the management team.
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When should equity be used?
 Equity capital is well suited for start-up businesses that require
large amounts of working capital or involve a new product
launch.
 Banks are not fond of lending cash and working capital to a
business, especially if they are in the start-up phase. Once a
dollar is spent on payroll or advertising, it is gone forever and
cannot be liquidated by the bank should the borrower default on
the loan.
 This is the domain of the equity investor. The investor is willing
to take on more risk for more reward. They fund high-risk startups, new product launches, new marketing initiatives, and major
growth and expansion phases of a business.
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Creating financial projections…
 Once you have determined your start-up expenses, made the
determination of whether you require any outside financing, and
what the best sources for that financing might be you are not
finished.
 You (or someone on your management team) should construct a
basic set of financial projections looking out about one to two
years into the future. Although the projections are concerned with
the future don’t think of the projections as merely a prediction.
 Instead, the projections should be thought of as goal-setting with
respect to revenues and expenses. We cannot predict the future—
this is precisely why planning is necessary—but we can make
plans, set expectations, and set goals.
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The different kinds of assumptions…
 Financial projections are really just a set of considered
assumptions. These assumptions fall into basic categories
which provide a framework for capturing such important
reference points.
 These categories include:
–
–
–
–
–
–
Start-up cost assumptions (uses of money)
Financing assumptions (sources of money)
Fixed expense assumptions (costs of being in business)
Variable expense assumptions (costs of doing business)
Projected sales assumptions (anticipated income earned)
Cash flow assumptions (anticipated income received)
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Start-up cost assumptions…
 Start-up costs are all of those expenses that you will incur
up to the point before you open for business.
 These assumptions list all of the uses of any money
describing exactly how it will be spent.
 You should break these costs down into two categories:
fixed assets and working capital.
 Fixed assets are property that usually have some sort of
long-term value such as buildings, land, or equipment.
 Working capital is money that will be used to finance the
short-term operations of the business such as deposits,
insurance, advertising, etc.
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Financing assumptions…
 Financing assumptions show from what sources the money
you require will come from.
 Such sources might include:
–
–
–
–
the owner’s injection,
the proceeds from a bank loan,
the debt from an owner or outside creditor, or
the equity capital from an investor.
 Each source of financing should include the amount, the
terms of repayment in months, and the rate of interest or
return expected.
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Fixed expense assumptions…
 Fixed expenses are the costs of being in business.
 They usually do not vary with the sales level of your business.
For instance, whether you decide to open for business or not
today, you still owe rent.
 You normally present your fixed costs in the form of a monthly
operating budget. They usually require the most amount of
research of any part of the projection since they involve
receiving quotes and estimates from a large number of outside
vendors.
 Just make sure that you record the source and amount from each
vendor since these are what your assumptions are based upon.
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Variable expense assumptions…
 Variable expenses are the costs of doing business.
 They usually vary with sales since they are the direct costs
of delivering your product or services.
 The usual components of your variable costs might include
direct labor, materials, and shipping. In other words, they
are those expenses incurred with producing the next unit of
your product or service.
 These expenses are usually expressed as a percent of the
sales price and help you to determine the gross margins for
your business (sales minus variable costs equals your gross
margins).
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Projected sales assumptions…
 All businesses sell units of something. It may be numbers
of products, services, hours, or so forth.
 You cannot just state you plan on selling $400,000 worth
of “stuff” next year.
 A lender or investor will want to know precisely what your
forecasted number of units might be for each major
product category or sales driver.
 The number of units you plan on selling times the average
selling price equals your total sales forecast in dollars.
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Cash flow assumptions…
 Your cash flow assumptions detail when you expect your sales
to actually be collected and in your hand.
 For many retail operations, you would collect the sales at the
time of purchase. For many types of business transactions,
however, you will be expected to extend credit to your
customers for payment at a later date.
 For these assumptions, you must consider what percent of your
sales will be collected every 30 days or so.
 Questions that you need to address include: Does the customer
prepay? If so, when is the remainder of the payment due? What
are the terms of the payment? C.O.D.? Net 30 days? Are there
any payment penalties for late payments?
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Some worksheets to help you…
 The following worksheets have been provided to help you
create your financial assumptions and develop your
projections.
 The first set of worksheets can be printed and used to write
in your assumptions by hand. The second file is for those
who have Microsoft Excel and feel comfortable using
spreadsheets.
– Financial Projection Worksheets (Adobe Acrobat)
– Financial Projection Model (Microsoft Excel)
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Managing your money…
 Once you’ve got money, it needs to be managed.
 Today, many computerized accounting systems such as
QuickBooks and PeachTree allow you to keep your financial
records in a simple, “single entry’ system.
 Not only can you track inventory and prepare payroll using such
software, but the learning curve is fairly short and the costs
associated with purchasing and operating the software are
relatively low.
 Best of all, most accounting firms can use your data “as is” right
off of these systems to prepare all necessary tax reporting
documents and both software titles provide free trial versions for
you to try out.
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Hiring And Managing Employees
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The responsibility of employees…
 Employees are a great asset to any business and, at the same
time, they are a great responsibility for an employer.
 As an employer, you are generally required to withhold federal
and state income tax from the wages of your employees. You
may be subject to social security and Medicare taxes under the
Federal Insurance Contributions Act (FICA), federal and state
unemployment tax, and worker's compensation insurance.
 Known as an agency or trust tax, you as an owner of a business
will be held personally liable for these tax withholdings whether
or not you have the limited liability protection of a corporation
or declare bankruptcy. Please see an accountant for assistance.
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Employee decisions…
 The decisions you need to consider regarding hiring
employees include:
– How many employees do you require and what skill sets must they
have?
– How will they be compensated?
– Will any of the employees be independent contractors?
 There is also an immense amount of taxation and labor
regulations with which you must comply. The following
discussion presents some of these issues.
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Requirements of an employer…
 As an employer…
– You are generally required to withhold federal and state
income taxes.
– You may be subject to social security and Medicare
taxes.
– You may also be subject to federal and state
unemployment tax.
– You may also be required to have a worker’s
compensation insurance policy.
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Initial employer forms…
 You will need to file with the IRS to set up your
account for employment taxes and to receive your
federal tax number.
– SS-4 Application for Employer Identification Number
 The next form you will need to file is a state
business tax application. This form is to set up
your state account for employee withholding
taxes.
– Check with you department of revenue within your
state for this form.
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Be sure to keep these forms on file…
 The Employee’s Withholding form tells you how
many exemptions the employee is claiming when
figuring out the amount of income tax to withhold.
– W-4 Employee’s Withholding Allowance
 The Immigration and Naturalization Service (INS)
requires that you ask each new employee to
complete the employee section of this form. You
will then complete the employer section and file it.
– I-9 Employment Eligibility Verification
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Withholding taxes for employees…
 Federal income, social security, and Medicare
taxes should be sent to the IRS on a monthly or
quarterly basis based on the size of your business.
 This form should be sent to you after you
complete the SS-4.
– 8109 Federal Tax Deposit Coupon
 The quarterly payments made with the coupon
above are calculated and reported using this form.
– 941 Employer’s Quarterly Federal Tax Return
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State withholding taxes forms…
 State taxes that you withhold from your
employees salary are paid with a state quarterly
employment tax form.
 This form should be sent to you by the department
of revenue after you have completed the business
tax application form.
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Unemployment taxes…
 Form 940 should be filed once a year with the IRS. This form is
used to report any federal unemployment payments that you
have made.
– 940 Employer’s Annual Federal Unemployment Tax Return
 Businesses are required by the state to pay unemployment
insurance tax if the company has one or more employees for 20
weeks in a calendar year, or it has paid gross wages of $1,500 or
more in a calendar year.
 The taxes are payable at a rate of 2.7 percent on the first $8,500
in annual wages of an employee. Go to your state home page to
check the figures for your state. Unemployment insurance must
be reported and returns made to the state.
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Worker’s compensation…
 In most states worker’s compensation is
mandatory.
 You can obtain this insurance coverage for
employees from a private insurance carrier.
 To determine if worker’s compensation is
mandatory in your state, contact the state
information center or workforce development
office.
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Managing your employees…
 When dealing with employees, there are many more
complexities than can be covered in just one section that
come into play in your business.
 A great resource to use when walking through this
complex regulatory maze can be found at business.gov.
 This website covers hiring issues, wage laws, hour laws,
minors, taxes, health and safety, discrimination, privacy
issues, required posters, termination, health benefits, and
employee handbooks.
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Getting Licenses and Permits
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Complying with regulations…
 This section provides a checklist of the most common
requirements that affect small businesses, but it is by no means
exhaustive.
 The following licenses and permits are presented by federal and
state requirements.
 Bear in mind that regulations vary by industry. If you're in the
food service business, for example, you will have to deal with
the health department. If you use chemical solvents, you will
have environmental compliance to meet.
 Carefully investigate the regulations that affect your industry.
Being out of compliance could leave you unprotected legally,
lead to expensive penalties, and jeopardize your business.
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Federal: Employer ID Number...
 With the exception of sole proprietors, most
business types must apply for an EIN regardless of
whether they have employees.
 Visit the IRS site to find out if you need an EIN,
and if so, whether you are eligible to apply
through the IRS' online application.
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Federal: Licenses and Permits
 Most businesses do not require a federal license or permit.
 However, if you are engaged in one of the following
activities, you should contact the responsible federal
agency to determine the requirements for doing business:
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Investment advising: http://www.sec.gov/
Drug manufacturing: http://www.fda.gov/
Preparation of meat products: http://www.fda.gov/
Broadcasting: http://www.ftc.gov
Ground transportation: http://www.dot.gov
Selling alcohol, tobacco, or firearms: http://www.atf.treas.gov/
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Federal: Intellectual Property
 Federal registration of intellectual property,
including patents, trademarks, trade names, and
copyrights, provide business owners with
exclusive use of intellectual property in the U.S. as
well as in a large number of foreign countries.
 Visit the US Patent and Trademark Office website
at www.uspto.gov or the Copyright Office website
at www.copyright.gov for more information.
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State: Business Licenses
 A state business license is the main document
required for tax purposes and conducting other
basic business functions.
 Many states have established small business
assistance agencies to help small businesses
comply with state requirements.
 See http://www.business.gov for state specific
information.
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State: Name Registrations...
 If your business will only be operated in your local
community, registering your company name with the state
may be sufficient.
 However, some cities and towns do require “Doing
Business As (DBA)” certificates for business name filings.
 See http://www.business.gov/regions/states for state
specific information.
 You may also use a service such as BizFilings to complete
and submit the required DBA forms.
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State: Occupations and Professions...
 State licenses are frequently required for occupations as
varied as building contractors, physicians, appraisers,
accountants, barbers, real estate agents, auctioneers,
private investigators, private security guards, funeral
directors, bill collectors, and cosmetologists.
 Since you can't always guess which occupations and
professions are licensed by your state, you should always
check with your state licensing authorities.
 See http://www.business.gov/regions/states for state
specific information.
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State: Licenses on Products Sold
 Some state licensing requirements are based on
the product sold.
 For example, most states require special licenses
to sell liquor, lottery tickets, gasoline, or firearms.
 Contact your state licensing authorities to
determine the licensing requirements of your
business.
 See http://www.business.gov for state specific
information.
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State: Tax Registration
 If the state in which you operate has a state
income tax, you'll have to register and obtain an
employer identification number from your state
Department of Revenue or Treasury Department.
 If you're engaging in retail sales, you will need to
obtain a sales tax license.
 See http://www.business.gov for state specific
information.
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State: Employer Registrations
 If you have any employees, you'll probably be
required to make unemployment insurance
contributions.
 For more information, contact your state
Department of Revenue or Department of Labor.
 See http://www.business.gov for state specific
information.
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Protecting Your Ideas
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What is intellectual property?
 Intellectual property is any product of the human intellect
that is unique, novel, and unobvious.
 It has some value in the marketplace.
 Examples include…
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An idea
Invention
Literary work
Unique name
Industrial process
Business Method
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Intellectual property law…
 Intellectual property law aims at safeguarding
creators and other producers of intellectual goods
and services.
 It does so by granting them certain time-limited
rights to control the use of those products or
services.
 These rights do not apply to the physical object
itself, but rather to the intellectual creation or idea
itself.
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Classifying intellectual property…


There are several ways to protect intellectual
property.
The three most common types of intellectual
property protection are:
1. Trademarks
2. Patents
3. Copyrights
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Intellectual property can be confusing…
 Some people confuse trademarks, patents, and
copyrights.
 There are some similarities among these types of
protection.
 However, for the most part they are different from
one another and serve different purposes.
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A trademark is…
 A trademark is any word, combination of words, or
symbol attached to a product or service.
 This can be one of the most valuable forms of intellectual
property.
 Trademarks are used to prevent others from using a
confusingly similar mark, but not to prevent others from
making or selling the same goods or service under a
different mark
 For assistance with trademarks visit www.uspto.gov.
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A patent is…
 A patent for an invention is the grant of a property
right to the inventor issued by the U.S. Patent and
Trademark Office.
 Typically the term of a new patent is 20 years
from the date on which the application is filed.
 There are several types of patents. However, the
most common types are utility patents and design
patents.
 For assistance with patents visit www.uspto.gov.
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A copyright is…
 A copyright is a form of legal protection for “original
works of authorship.”
 With a copyright, the owner is given the exclusive right to
reproduce, distribute, publicly perform and display their
work.
 Examples of copyright eligible works include screenplays,
music, commercial brochures, and literary works.
 For assistance with copyrights visit www.copyright.gov
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A trade secret is…

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
A trade secret is another type of intellectual
property.
A trade secret is information that a company
keeps secret to give them an advantage over their
competitors.
Trade secrets can include formulas, business
plans, designs and procedures.
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International intellectual property…
 Intellectual property laws vary from country to
country.
 However, there are organizations and treaties that
help bridge IP laws from country to country.
 One of these organizations is the World
Intellectual Property Organization (WIPO) found
on the web at www.wipo.int
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Growing By Adaptation and
Experimentation
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The proper way to grow…
 The proper way to grow a business is by releasing growth.
The worst way is to push growth.
 Every business has a natural rate of growth. If that rate is
not reached, a business can shrivel. If it is surpassed, the
business struggles to keep pace.
 One of the most important functions of the owner of any
business is sensing what the “inherent” growth rate should
be, and adhering to it.
 The founder’s job is not to lead the “troops” to new
heights. Rather, it is to draw out and moderate the changes
that will be required of everyone as the business grows.
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Don’t outgrow your employees’ skills…
 There can be two main obstacles to rapid business growth.
 One can be economic, usually a shortage of capital funds. The
second is often overlooked. Businesses that grow too fast or in
the wrong way overwhelm the adaptive capacity of the people
who work there.
 Just as your business can outstrip your ability to raise capital,
you can outstrip your employees’ ability to learn and develop.
 To avoid this sit down with them and explain how you think the
business is going to grow in the next year, and how you believe
this will affect the different jobs or departments.
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Entrepreneurship is a practice…
 At its heart, entrepreneurship is a practice—it’s
not an art and its not a science.
 Of course, every practice rests of theory—even if
the practitioners themselves are unaware of it.
 The theory of entrepreneurship sees change as
normal and indeed as healthy.
 The entrepreneur always searches for change,
responds to it, and exploits it as an opportunity.
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A portfolio of experiments…
 Apparently, instead of committing to technology, customer, product
line, and other such basic choices, entrepreneurs start with a set of
tentative hypotheses.
 Then, as the venture unfolds, they revise their hypotheses rapidly
through a series of experiments and adaptive responses to unforeseen
problems and opportunities.
 Common events that trigger a change of strategy includes the failure to
generate sales, declining profitability, stalled growth, or unexpected
opportunities.
 An entrepreneur’s “experiments” have little in common with scientific
experiments. In contrast, entrepreneurs experiment to solve a problem.
They have little interest in validating general truths or principles.
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How Starbucks experiments…
 Many people are indeed familiar with the successful Starbucks
Coffee chain of Italian-influenced coffee bars.
 But what many people don’t know is that Starbucks started out
only selling roasted coffee by the bag through a small retail–
based business model.
 Howard Schultz, who went on to be the CEO of the coffee
chain, discovered the “third place” concept (it’s not work, it’s
not home) upon visiting Italy and experiencing the country’s
many street-side coffee bars.
 Through a series of small experiments, he tested whether the
idea of the Italian coffee bar could be successfully imported into
the United States.
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The great Starbuck’s experiment…
 Howard Schultz recalled his great experiment in his book, Pour
Your Heart Into It:
– “It took me nearly a year to convince Jerry (my boss) to test the idea
of serving espresso. Finally, Jerry agreed to test an espresso bar when
Starbucks opened its sixth store in April of 1984. I asked for half the
1,500 square-foot space to set up a full Italian-style espresso bar, but I
got only 300 square feet. Although I was forced to realize my dream
on a far smaller scale than I had planned, I was sure that the results
would bear out the soundness of my instincts. We didn’t plan any preopening marketing blitz, and didn’t even put up a sign announcing
Now Serving Espresso. We decided to just open the doors and see
what happened. Customers jammed into that small space on the right
while the retail counter stood empty. If that store had been a ship, it
would have capsized. Within two months, the store was serving 800
customers per day.”
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Meeting flexible and market-driven…
 Although Starbuck’s initial small experiment was indeed
successful, one of the important aspects of their success
was also their ability to be extremely flexible and marketdriven. As Schultz, himself recalled:
– “Our primary vision was to be authentic. We didn’t want to do anything
to dilute the integrity of the espresso and Italian coffee bar experience.
For music, we played only Italian opera. The baristas wore white shirts
and bow ties. All service was stand-up, with no seating. We hung
national and international newspapers on rods on the wall. The menu was
covered with Italian words. We gradually accepted the fact that we had to
adapt the store to our customer’s needs. We quickly fixed a lot of he
mistakes, adding chairs, varying the music. But we were careful, even
early on, not to make so many compromises that we would sacrifice our
style and elegance.”
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Instilling the mission early on…
 Schultz also spoke to the importance of establishing the
mission and values as early as possible:
– “A couple with a newborn child doesn’t usually sit down and think: What
is our mission as parents? What values do we want to give this child?
Most new parents are preoccupied with merely wondering how to get
through the night. Similarly, most entrepreneurs can’t afford to be that
farsighted, either. They’re too absorbed with the problems directly in
front of their noses to have the luxury of pondering values. But as a
parent, or entrepreneur, you begin imprinting your beliefs from Day One,
whether you realize it or not. Once the children, or the people of the
company, have absorbed those values, you can’t suddenly change their
world view with a lecture on ethics. It’s difficult, if not impossible, to
reinvent a company’s culture. If you have made the mistake of doing
business one way for five years, you can’t suddenly impose a layer of
different values upon it.”
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Starbucks continued experiments…
 Even after establishing itself as a successful large
company, Starbucks continued to innovate through a
portfolio of small experiments. After the successful launch
of their popular Frappuccino drink, Schultz commented:
– “Perhaps the most remarkable thing about the Frappuccino story is
that we didn’t do any heavy-duty financial analysis on the product
beforehand. We didn’t hire a blue-chip establishment consultant
who could provide 10,000 pages of support material. We didn’t
even conduct what major companies would consider a thorough
test. It was a totally entrepreneurial project—It was experimental
and adventurous.”
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Creating the discipline to experiment…
 A desire to try many small experiments, coupled with a
market-driven focus, and an early concentration on
mission, culture, and values add up to a wildly successful
entrepreneurial company regardless of size. As Schultz
concluded:
– “However warily, I began to recognize that in building discipline
into a company, it’s possible to not only honor the creative process
but also make it stronger and more dynamic. By strengthening the
foundation and structure of the company, we can stop wasting time
reacting to small problems and instead devote our attention and
resources to new products and new ideas—with clearer strategic
direction, we can focus our creativity on issues that matter.”
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Deliberate and emergent strategy…
 In every venture, there are two simultaneous processes
through which strategy comes to be defined—deliberate and
emergent.
 Few, if any, strategies are purely deliberate or purely
emergent—one means no learning, the other means no
control.
 Deliberate strategy is what you intend to do. It’s conscious
and analytical. It is often based on rigorous analysis of data
on market trends and customer needs. It is usually “topdown” in its design. Deliberate strategy comes from an
improved understanding of what works and what doesn’t.
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Emergent strategy…
 Emergent strategy “bubbles up” from within the organization. It
is the cumulative effect of day-to-day decisions made by an
entrepreneur.
 In fact, entrepreneurs typically do not frame these decisions as
strategic at all at the time they are being made. The concept of
emergent strategy opens the door to strategic learning, because it
acknowledges the organization’s capacity to experiment.
 Entrepreneurs are extremely talented at finding emerging
strategies—they know in many cases the solution just emerges if
you are paying attention to the details. They know that order
doesn’t always require a master plan or grand design.
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Losing memory of the process…
 In the world at large, it’s deliberate strategy that gets all of the
attention. Some see it as the only kind of strategy. Academics
and consultants love to analyze a series of decisions in reverse,
in hindsight, and say, “Isn’t that a beautiful strategy?”
 Entrepreneurs themselves often suffer amnesia and selectively
remember only their success in deliberately implementing the
successful strategy. They lose memory of the emergent process
through which the successful strategy was discovered.
 In their eyes, when they turn around and look, they see a cleanly
cut path. But in many cases, the intuitive thinking that went into
the creation of the path is very different from the logical
thinking that analyzed the path in hindsight.
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Being open to emergent strategy…
 Research suggests that in over 90 percent of all successful
new businesses, the strategy that the founders had
deliberately decided to pursue was not the strategy that
ultimately led to the business’s success.
 Entrepreneurs rarely get their strategies exactly right the
first time.
 Openness to emergent strategy enables the entrepreneur to
act before everything is fully understood—to respond to an
evolving reality rather than having to focus on a stable
fantasy.
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Managing the strategy process…
 Simply seeking to have the right strategy doesn’t go deep
enough. The key is to manage the process by which
strategy is developed.
 Emergent processes should dominate in circumstances in
which the future is hard to read and in which it is not clear
what the right strategy should be.
 Many new venture’s fail because they spend their money
aggressively implementing a deliberate strategy in the
early stages when the right strategy cannot be known.
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Switching to a deliberate strategy…
 There comes a time in successful companies’ start-up
histories when the viable pattern has emerged.
 At this point, an entrepreneur needs to reverse the flow of
strategy-making toward the intended direction.
 Rather than continuing to feel their way into the
marketplace, they need to boldly execute the deliberate
strategy that they have learned will work.
 The entrepreneur needs to stop funding any emerging
opportunities that might divert the company from its focus
on the winning plan.
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