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Business Strategy

As the world changes, entrepreneurs make new fortunes, or lose old ones, in existing or emerging industries. Even if the industries and technologies are new, the old rules nearly always still apply. You still have to satisfy customer needs better than competitors and do so at a price that will give you a reasonable profit and allow growth. These lessons show how entrepreneurs use unique business strategies to find their opportunity, selected the right customer segment to give them a competitive advantage, and maintained their advantage until they dominate their fields.

 

Where to find Growth Opportunities

Business StrategyMany would-be entrepreneurs never get started because they do not find their perfect business opportunity. And many others get into a business and reach a dead-end. So where should you find your opportunity for growth?

How do early-stage venture capitalists (VCs), who invest for a profession, find hot new opportunities? VCs try to develop home-runs (spectacular successes and potential Fortune 500 companies like Google and eBay) by financing ventures with a better technology or a better business model in a high-growth, emerging industry. This means they seek opportunities with a proven (if they can get it) advantage. They seek emerging, high-growth, high-potential industries. Emerging industries usually do not have large, well-established competitors who can destroy the new venture. With high-growth, they get the wind at their back – it is easier to grow rapidly in a fast-growing industry. And high-potential means that the new industry could become large and so could their investment. Even with all these advantages and strict criteria, they succeed in getting home-runs only about 2% of the time and have a reasonable return (for the high risk they are taking) about 20% of the time. Read more

Build More Business with Less

Business StrategyDue to the relentless hype of venture capital funds and the business press, many entrepreneurs believe that getting venture capital is synonymous with a successful venture and great wealth. And they also believe that you cannot build a giant business without venture capital. Both assumptions are not true.

What is true is that venture capital is very, very difficult to get. In fact, they fund so few ventures each year that the only reason why they are so important is that a few of their ventures become glorious successes. Out of an average of about 600,000 new businesses started each year, venture capitalists fund only about 300 startups and about 3,500 to 4,000 total deals. To get VC, you need to be in a hot industry and have the potential to be a dominant company in the hot industry. Read more

New book features iconic MN entrepreneurs

Business StrategyHe’s been in the venture capital business for decades, but University of Minnesotabusiness lecturer Dileep Rao now says people don’t need venture capital to grow a business, and he’s drawn on the stories of some of the Twin Cities’ most successful entrepreneurs to prove his point.

Rao has compiled those stories into a book called Bootstraps to Billions: Proven Rules from Entrepreneurs Who Built Great Companies from Scratch. The 28 profiles in the book are a who’s who of Minnesota success stories. They include Horst Rechelbacher, who started Blaine-based Aveda Corp.; Richard Schulze, chairman and founder of Richfield-based Best Buy Co. Inc.; and Minnesota Timberwolves owner Glen Taylor, who built North Mankato-based Taylor Corp. into what is now a roughly $2 billion business.

Rao, a senior lecturer at the university’s Carlson School of Management and a columnist for Forbes.com, spent two years interviewing the subjects of the book and writing the profiles.

This article originally appeared in the Minneapolis / St. Paul Business Journal.

Raising Capital: Equity vs. Debt

The banks generally still aren’t playing ball, but there are creative solutions allowing small companies to win financing.

Business StrategyIn November 2008, Donn Flipse was forced to close one of his three flower superstores in Florida’s Broward and Palm Beach Counties. Nine months later, Flipse expanded by acquiring the business of a retiring florist in a wealthy section of South Miami. Those two events normally would have led Flipse to lean on his $500,000 line of credit. But that credit line had been personally guaranteed by a family member who, because of a decline in that person’s own finances, was unable to continue the guarantee. Flipse paid off the revolving loan with “the only thing available” — money from two of his grown children, both of whom are shareholders and sit on the company’s board. Now, for the first time in its 19-year history, Field of Flowers, which employs 46 people and expects to bring in $6 million in sales this year, doesn’t have bank financing.

Like thousands of other small business owners with good credit histories, Flipse also found his credit-card companies lowering his limits. He plans to pay back his kids in early 2010, after the Valentine’s Day and Easter rushes bail him out. “There was no choice,” he says. He recently had to lay off two of six headquarters employees, leaving the dispatcher running the computer system. “We’re not thrilled about any of it. But the company’s a part of our lives.

This article originally appeared in BusinessWeek.

You Don’t Need VC to Succeed

Business StrategySmall business finance expert Dileep Rao explains why some of the greatest companies never had a dime of investors’ money to get off the ground and grow — and how hard work, integrity, creativity, and an open mind can make up the difference.

Depending on your point of view, this might be the worst time to start a small business. On the other hand, with creative business and financing strategies, it’s possible to be successful without one dime from Wall Street or Silicon Valley. At least that’s the viewpoint of Dileep Rao, a consultant and small business finance expert who teaches financing courses at the Carlson School of Management (University of Minnesota). To prove the fact that you don’t need VC funds to be successful, in his forthcoming book, Bootstrap to Billions, Rao chronicled the stories of several Minnesota entrepreneurs who started with nothing to build successful companies such as Best Buy, Aveda, Digital River, United Health Group, and Medtronics. He calls the companies in his book a “third category” of business: not small business, and not built through VC financing.

This article originally appeared at OpenForum.com.

The Financial Plan: Your Guide

Business StrategyAs the CEO or founder of a growing small business today, you are likely swamped meeting customer needs, dealing with inventory, shipping or customer service problems, pleasing investors, watching your budget, and looking for the next big opportunity. Wait: did you forget about your financial plan? While you might consider this a time-consuming business school exercise with little value for a hands-on small business owner like yourself, former Wall Streeter Tim Ferguson and others say that financial plans are in essence a roadmap to your future success.

As an example, a client of Ferguson’s, founder of Boston-based merchant bank Next Street, not long ago approached a bank for help financing a real estate deal. The bank declined to provide a loan, in part because it didn’t understand the company’s growth model–even though the client was a profitable business. “It makes a huge difference to have a financial plan,” says Ferguson, whose company provides advisory services and financing assistance for inner-city small businesses generating between $5 million and $100 million in revenues.

According to Ferguson, the business plan is not much different than a financial plan, but it has a much tighter focus on metrics. Ferguson says that his company spends on average three months with a client developing a financial, or “growth” plan, which includes a fact-based analysis of the business–typically covering customers, segments, profitability models and margins, number of employees, and costs. After the plan is developed, it gives the company a roadmap for a monthly budget, and also includes specific growth strategies, according to Ferguson: “You would want to develop list of possibilities such as, expanding from a local region to interstate, or beefing up your business line or making acquisitions, and then you would need to narrow all those ideas down to three or four options.”

This article originally appeared at OpenForum.com.

The Small-Business Balancing Act

Business StrategyIt’s hard to keep an eye on operations while trying to raise capital. Here’s how to strike the right balance.

Are you in business to make money or to raise it?

For aspiring entrepreneurs, the answer is often a little of both. But many fall on tough times because they strike a poor balance between these two critical functions. Mind the store without corralling enough capital, and you could go broke; spend every day wooing investors, and the store falls apart.

All else being equal, it is much easier to raise money for expansion than it is to fund a new venture from scratch. The key question: how to get from the start-up phase to the expansion stage with enough capital to spare?

This article originally appeared on Forbes.com.

Venture capitalists today look far and wide for start-ups

Business StrategyWhile others toiled in the technology mecca of Silicon Valley, Trevor Loy — a former Intel manager and Stanford University-trained engineer — pursued the digital road not taken.

Nearly a decade ago, he moved to the New Mexico desert to co-found a small venture-capital firm called Flywheel Ventures. His aim: to find the next generation of start-ups where few others were looking.

Tapping into the wealth of technology talent and research in the region surrounding the Sandia and Los Alamos federal research labs, Flywheel Ventures has invested $34 million in 19 companies in solar, biofuel and other sectors. Most of the start-ups were “born global,” Loy says, with U.S. and overseas offices, employees and customers.

One promising find off the beaten tech track: Miox, an Albuquerque firm that makes water-disinfectant generators that use salt and electricity, not potentially dangerous chlorine gas. Miox — which just received $19 million in funding from DCM, Sierra Ventures and Flywheel Ventures — has water-treatment installations in 30 countries.

“This is the natural evolution of our industry,” the 37-year-old Loy says. “Venture capital has matured and reached critical mass in some markets, and now we’re seeing explosive growth and opportunities elsewhere.”

This article originally appeared in USA Today.

How Great Is Your Company’s Potential?

Business StrategyWhen last we met, I made the case that financiers tend to eschew companies that don’t fit their investing criteria, specifically with regard to two metrics: “stage” (how developed a company is) and “potential” (opportunity for growth). Understanding where your business fits on those axes determines how you should go about scaring up funding for it. We’ve talked about stage (See: Are You Safe Or Sexy?). Now let’s tackle potential.

Why doesn’t every investor go after projects with the highest potential? In a word: risk. The greater a firm’s potential, the more risk investors may be willing to take–and some investors are willing to take on more risk than others. It’s the same reason some folks flocked to massive hits like Amazon.com (nasdaq: AMZN – news – people ), eBay (nasdaq: EBAY – news – people ) and Google (nasdaq: GOOG – news – people ) in the early years when they were bleeding cash, and others didn’t.

This article originally appeared on Forbes.com.

Are You Safe Or Sexy?

Business StrategyButch Cassidy, the 19th century American philosopher and bank robber once wrote, “I got vision and the rest of the world’s got bifocals.”

Many entrepreneurs feel like Mr. Cassidy–they don’t understand why financiers don’t get as jazzed about their companies as they do.

There are a couple of reasons for this. First, a vast majority of ideas aren’t worth funding–period. Second, and more important, most financiers balk at writing checks to companies that don’t fit their specific investing criteria.

These criteria are best defined by two metrics: stage and potential. Understanding where you fit on those axes will determine how you should go about raising capital.

This article originally appeared on Forbes.com.

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