New entrepreneurs are usually desperate for sales and don’t want to turn anyone down. They often don’t see how the new business could add complexity to their operations and increases their overhead and their break-even levels. They don’t understand that doing too many things may cause them to be the best at nothing.
They may have an MBA and taken finance classes where they learned that diversification is good. However, they may not have realized that diversification is good for passive portfolios where the investor has no control over the venture. It is not that great for new entrepreneurs who have limited resources. Read more
There is a company called Segway. It was started by an inventor who is considered to be a genius because of the wide variety of successful products he has developed. The investors in Segway were considered to be the premier firms in the venture capital industry. They invested, and lost, about $160 million in the deal (MercuryNews.com, Jan 16, 2010). Why? From what I have read, the investors thought that the world would adopt the Segway as the way to travel in urban areas. Cities were even considering changing zoning laws to give greater access to all the Segway users who never materialized. The hype during the launch was tremendous. But the world did not change its habits. It did what it has always done. When the perceived benefits of a switch did not outweigh the huge costs of buying, they did not buy. There have been comments about how some of the insiders thought that the rest of us were not smart because we did not buy the Segway and change our cities. Maybe we are not. But they are the ones who lost $160 million. Read more
Many 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
In my new book Bootstrap to Billions: Proven Rules from Entrepreneurs who Built Great Businesses from Scratch, I have profiled 28 entrepreneurs who built great companies from scratch, including the world’s largest medical device company (Earl Bakken of Medtronic), the world’s largest consumer electronics retailer (Dick Schulze of Best Buy), and the world’s largest private healthcare management company (Richard Burke of UnitedHealth Group). The 522 lessons in the book answer five key questions that each entrepreneur should consider. These include how to find the right opportunity with your unique competitive advantage, how to implement a capital-efficient sales and operations strategy in order to do more with less, how to finance to create wealth and keep it, how to build a dedicated and effective organization even without the resources, and how to be a better leader than your competitors. This column is a partial answer to the finance question. Read more
Due 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
He’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.
The banks generally still aren’t playing ball, but there are creative solutions allowing small companies to win financing.
In 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.
Small 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.
You are starting a new company and need to find customers. An ad agency just presented you with a slick new campaign promising to do just that. Cost: $250,000. Good investment or bad?
Millions of small-business owners find themselves in similar situations every day when trying to decide how to invest (and re-invest) in their companies. There are myriad nuances to making these decisions, but there is a fundamental principle that guides all of them: getting a reasonable, risk-adjusted return on each dollar invested.
This article originally appeared on Forbes.com.
As 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.