So you want to launch a business...

Who owns your website?

This could happen to you!

After several years of increasing activity on his website, Dave decided to move it from a local hosting company to the "cloud."  He didn't want to take a chance on downtime disrupting the lucrative online arm of his import business.

He made all the necessary arrangements with one of the big cloud hosts and then instructed his local host to transfer everything.  Then the hammer fell.  "No problem," they said, "as long as you pay us $100,000 for the copyrights to the site."  "Wait," replied Dave.  "I paid you to develop that site.  It's mine."  "Yes, you paid for the development, but not for the copyright."

Mad scrambling followed to no avail, and very shortly Dave heard his lawyer say these fateful words.  "The work you paid for does not fall under any of the "work for hire" provisions that automatically transfer copyright.  Your contract with the developer/hosting company does not contain any transfer of ownership language.  They are correct.  Since there is no separate licensing agreement that signs the work over to you, they own the copyright."

Dave had to pay up.

How might your business be damaged if somebody else "owned" your website?

If your contract with your web developer is missing one short, but very important, paragraph, you probably do not own the copyright.  I checked this out with The Creekmore Law Firm PC.  They confirmed this hidden business risk.

You might want to check with your attorney, too.  And you might want to read your web development deal document.

And never forget - everybody is your friend until there is real money involved.

Bet the jockey, not the horse. Or not.

Way back in 1999, the Fast Company Consultant Debunking Unit did a MythBusters job on the old saying, "bet the jockey, not the horse."  Here's an excerpt...

"At the 1998 Fall Meet -- 24 days of races at Churchill Downs -- Hall of Fame jockey Pat Day raced 163 horses and won 43 times, winning 26.3% of his races. Jockey Calvin Borel raced 184 horses, and won 35 times, posting a 19% winning percentage. If you were betting on the jockey, you'd bet on Day. But, says Asher, if you had placed $2 to win on every horse that Day rode, you would have lost money -- $40.80, to be exact. And if you had placed $2 to win on every horse that Borel rode, you would have come out ahead -- by $58.80. That's because the odds reflect the quality of the horses. So much for betting on the jockey."

What does that mean with regard to early stage investing today?  Should investors really bet on the management team rather than the business proposition?  In practice, do they really follow the "bet the jockey" rule of thumb?

Studies of angel investing behaviors generally indicate that the entrepreneur and the management team are dominant factors in decisions to invest, or not.  A Richard Sudek study, published in the Journal of Small Business Strategy, names as the number one consideration "the passion and commitment of the entrepreneur."  Omigosh, that's MOXIE.  Second comes trustworthiness of the founder.  Third comes the remainder of the management team.

So, if you're going to the race track, bet the horse.  But if you're involved in startup businesses, either as an entrepreneur or as an investor, the common wisdom remains "bet the jockey."

Why?

My own opinion is that investors bet the jockey because they are well aware that nothing goes according to plan.  More often than not, the business proposition must be altered to respond to fresh knowledge coming from the marketplace.  The horse itself must be changed.  Yes, the entrepreneurial jockeys have to change horses in midstream.  This understanding of the startup world argues in favor of passionate, fully committed leadership, surrounded by a competent, experienced team.  A group like that can catch, train, and ride whichever horse best suits the racing conditions.

Start with MOXIE!

Angel funding - a stairway to heaven, or someplace else?

A few months ago, as a bootstrapping entrepreneur, Jeffrey was his own boss; and his first and only daily priority was to delight and amaze his clients - at a profit.  Now, as an angel-funded business manager, Jeffrey reports to his brand-new Board of Directors; and his first and only daily priority is to prepare his company for near-term acquisition by some unknown set of new bosses. 

If his company is acquired, Jeffrey will, indeed, enjoy a very nice monetary payday.  He will also enter contractual involuntary servitude for three years or more, because the new owners always want to lock up the key talent as part of the deal.

Jeffrey is satisfied with his situation.  The trade-offs are acceptable.  But not all stories end this way.

 

If you want to fly with the angels, you have to fulfill all the entry requirements for heaven.

Financial angels do not dispense charity.  They invest in early stage, risky businesses with the clear expectation of extraordinary returns.  They mitigate their risk by considering many, many alternatives, selecting only a few.  And they often attempt to limit their risk further by actively participating in the management of their portfolio companies, almost always at the Board level and sometimes beyond.

Do you need angel investment, or just want it?  Are you just trying to reduce your risk by transferring it to others?  Or is there a clear strategic need for a cash infusion?

Once you are sure you need outside funding, be ready for a long grind.  It wasn't easy for Jeffrey to secure his investment.  Locating, attracting, and convincing a double digit number of angels is a grueling process.  And if you succeed in raising the money, your life changes forever - just like Jeffrey.

Once you take a single dollar of somebody else's money, your job is to sell your company, quickly and at a high multiple.  If that quest goes well, and stays on the timeline, you may have a nice ride.  If it does not, ouch!

Startup heaven can be transformed into a much less appealing place almost overnight.

Angel investment arrangements always include covenants that give the investors more and more control in case of missed milestones.  These covenants may all be quite reasonable and equitable, but they are nonetheless painful if they are invoked.  Some good friends of mine were squeezed all the way out of their company by disappointed angels.  That doesn't happen often; but it's not a pleasant experience if you are on the receiving end.

So - angel investment should be strategically important and acceptably risky, not only to the angels, but to you, the bootstrapping entrepreneur.  They might lose their money.  You might lose your company.

Five words that define leadership

Volumes have been written on the topic of leadership, mostly by people with far more impressive credentials than mine.  So I am going out on a very shaky limb when I assert that five words are sufficient to define leadership in a useful manner.  But, what the heck, entrepreneurship is all about risk.  I'll take one.  Here are my five words:

Vision.  Commitment.  Execution.  Focus.  Principles.

Of course, it really takes a few more words to make clear what deeper message is embedded in those five; but not many. 

Vision...

A clearly expressed vision of a more desirable future state of affairs is paramount, whether you are leading a nation, a company, a club, a family, or just yourself.  Leaders enable change.  Their vision defines it.  A journey begun without a particular destination is not a journey at all.  At best, it is a sightseeing tour.  At worst, it is a waste of precious time and energy.

"Imagination is the beginning of creation. You imagine what you desire, you will what you imagine and at last you create what you will."

George Bernard Shaw

"Management by objectives works if you first think through your objectives. Ninety percent of the time you haven't."

Peter Drucker

Commitment...

A leader's firm and unwavering commitment to relevant action, rather than to specific measurable objectives, demonstrates his understanding of human behaviors and limitations.  I can control and take responsibility for my actions.  I cannot control the response of the marketplace to my actions.  I can commit to make 25 sales calls.  I cannot guarantee that any of my targets will actually buy. 

So, I must firmly commit to act in what I presume to be the most relevant manner, given my vision for the future and my circumstances at any particular moment.  And I have written before about why commitments are far more useful than goals.

"If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours."

Henry David Thoreau

"Inherent in every goal is permission to stop trying."

Jim Flowers

Oh, and, by the way, along with commitment comes that fearsome beast, accountability.  If I say I'm going to do whatever, I have to do it.  No ifs, ands, or buts.

Execution...

Actually, with regard to all those relevant actions, execution alone is far from sufficient.  What is required is impeccable execution.  Clearly, my best effort must be good enough to complete my selected action; but it absolutely must be my best effort.  Otherwise, my competitors and the complexity of the market will generally defeat me.

“We are going to relentlessly chase perfection, knowing full well we will not catch it, because nothing is perfect.  But we are going to relentlessly chase it, because in the process we will catch excellence.”

Vince Lombardi

Focus...

Focus.  Focus.  Focus.  This word appears to be the mantram of great leaders. 

I first told this story back in about 2005.  It still works.  At least, I think so. 

Picture this.  You want to penetrate an office wall.  You run at it, arms and legs flailing.  What happens?  A broken nose, perhaps.  In animated cartoons characters pass through walls, leaving an opening precisely the shape of their bodies.  That doesn’t work in real life.

You have a chance to penetrate that wall, however, with a well-directed and fully committed fist.  The martial arts people will tell you that they strike a target that is beyond the barrier.  To break a board, they strike beyond the board.  That makes the board only an incidental nuisance along the way.

And people with true focus are never distracted by the fleeting sparkle of meaningless shiny objects.

"The secret of success is constancy of purpose."

Benjamin Disraeli

"The ability to focus attention on important things is a defining characteristic of intelligence."

Robert J. Shiller

Principles...

"Back of every noble life there are principles that have fashioned it."

George Lorimer

In my experience, good things don't just magically happen.  The actions that result in positive outcomes generally have to pass the acid test of noble principles, such as these:

• The fundamental importance of honesty, integrity, and responsibility;
• The inherent worth and dignity of every single person;
• The importance of justice, equity, and compassion in all relationships;
• The enlightening power of a continuing, free, and responsible search for truth and meaning;
• The right and the responsibility of each individual to act in good conscience in moderating behaviors, both personal and corporate;
• Respect for the interdependent web of all existence upon which we all depend for survival.

Five words.  Fourteen syllables.  Leadership defined.  Think Abraham Lincoln, Mohandas Gandhi, Martin Luther King, Jr. Think also about great leaders you have known personally, but who acted on a smaller stage and never became famous.

Vision.  Commitment.  Execution.  Focus.  Principles.

Are you a leader?

What is a spin-out, anyway?

Question from a reader: What is a spin-out?  I've heard the term, but I'm not sure what it really is. 

In physical terms, a spin-out occurs when centrifugal force overpowers whatever is connecting a rotating object to some central hub.  The power acting to make the object independent is stronger than the power constraining it within the existing system.  Objects would fly off the earth, for instance, if the earth were spinning fast enough to cancel the power of gravity.

In business, a spin-out is a new corporate entity formed to exploit some opportunity that is not directly aligned with the core business of the parent organization out from which it is spinning.  (Pretty good, huh?  Only an English major could construct a sentence like that.) 

Not all spin-outs become free-standing enterprises.  The new entity might be set up as a “division” of the parent, rather than a totally  independent company; but it is managed independently as a consequence of its differences from the parent.  Typically, the defining difference is a new marketplace or target demographic, for which the parent provides no economies of scale or special knowledge.

New market.  New buyer group.  New business model.   Spin-out. 

Notice I didn't include "new manufacturing technology."  A new manufacturing technology that improves profitability will not typically trigger a spin-out.

I also did not include "new ways to address the needs of the customer."  Once you have customers, you should always be working on new ways to address their needs.  Otherwise, you will surrender them to competitors who manage to do just that.

Spin-outs are appropriate when there is a truly fresh market opportunity, a chance to serve a different batch of end users, with its own particular compelling needs.

Sometimes the spin-outs continue to take advantage of some "commodity" parenting services, such as accounting, payroll, or central computing power.  Typically, however, they do not share marketing and sales staff because of the clear market differences that caused the spin-out in the first place.

I hope that helps.

Don't pay bills with equity!

Equity for services is a risky deal for everybody.

Bootstrapping is a trendy topic right now because early stage investment is hard to find, particularly for businesses that do not promise extraordinary growth potential.  One of the bootstrap financing techniques often suggested is the trading of stock in the enterprise for products or services needed by the start-up.  I have a strong opinion on this practice. 

It's a terrible idea.  Here's why...

As I have pointed out in other posts, equity is forever.  Swapping shares in your company for one-time needs might be compared to paying for an oil change by giving the mechanic partial ownership of your car.  Without the oil change, your car might eventually grind to a halt; but do you really want to enter into a long-term relationship with the mechanic?

Let's get specific.  Suppose you offer an attorney a share of your company for preparing incorporation  papers, and she accepts.  Now, as a shareholder, the attorney has permanent access to your corporate records and the right to participate in all ownership activities.  The dream, of course, is that the company is on a fast track to outside investment and on to liquidity.  The lawyer will get to draw up all the financing documents and then the merger or IPO papers for a healthy fee; and the tiny share of ownership that you gave her will be insignificant to the fortune you will make when you sell the business. 

Here's what really happens most of the time.  The company, if it survives beyond its first year or two, grows nicely, but slowly.  It doesn't need, or warrant, serious outside investment.  The best way for you to make real money is not through a liquidity event, but through handsome personal compensation.  You have occasional need for a lawyer, but you try hard to avoid those inflated fees whenever possible.  They are, after all, money right out of your pocket.  The lawyer now has a marginally profitable client relationship and a meaningless share of a company that will not be sold.  BUT she also has all those pesky rights I mentioned earlier.  If she gets grumpy, she is in a position to create some real pain.  This is not a good deal for you, and its also not a good deal for the lawyer.

Now suppose, instead of trading for legal services, you trade for a salesperson, as proposed by more than one author.  The dream this time is that the salesperson will be a huge success and a liquidity event will occur on schedule.  The reality, more often than not, is that the salesperson has some early success, but not enough to foster venture capital or an early liquidity event.  Then the company's growth settles in to the typical modest upward trend, and the commissions earned by your minority-shareholder-salesperson do not meet his financial needs or aspirations.  The bloom is off the rose.  You're unhappy with the results.  He's unhappy with the results.  You part ways.  BUT he still owns a piece of your company and has all those pesky rights, including the right to assert that you are over-paying yourself to the detriment of minority shareholders.  Does this still sound like a good deal?

Jim Flowers (that's me) has said this before:

Cash is the recommended medium for acquiring products and services that are not strategic to the business.  Bestowing equity on any entity in lieu of cash payment amounts to paying forever for products or services that may not even remain relevant a short time into the future.

The use of equity in bootstrapping is sometimes very smart, and it is sometimes unavoidable.  It is, however, always risky.  I strongly recommend that it be employed only as a last resort and only for strategic requirements, not commodities. 

Who gets a piece of the action?

Question from a reader: Four friends helped me put together a prototype of a new product I dreamed up.  If I start a company, should they all get stock?

You are not alone.  I hear this question, in one form or another, quite regularly. 

Equity is forever - or at least until you sell the company.  And it is typically reserved for people or institutions that are active in the business, as long-term, strategic participants or financial risk takers. 

Cash, on the other hand, is the universally recommended medium for acquiring commodity products and services that are not strategic to the business.  Bestowing equity on any entity in lieu of cash payment amounts to paying forever for products or services that may not even remain relevant a short time into the future.

The following questions may help you with your deliberations.

Will your friends be key employees in your new company?  Or did they simply provide some free labor for you when you had no money to pay anyone?

Did one or more of them contribute a significant idea that improved your product?  Or did they merely help you execute your ideas?

Have you already led them to believe that they have earned some ownership share in your invention?

Since you have four friends involved, I am tempted to guess that you may have one or two who might be considered strategic, and others who are not.  As tough as this may seem, now is the time to bite the bullet and make such distinctions clear.  It will take some Moxie; but it's absolutely the correct thing to do.  Here's why.

Any equity given to non-strategic players clearly devalues the equity of the true strategic participants, including you, both financially and psychologically.  Consider this line of thinking: "I did a mountain of inventing and weeks of work for my shares.  All he did was turn a few screws one Saturday afternoon."

Minority shareholders have the right to inspect the books of the corporation.  That means that they constitute a potential leak of sensitive information to non-shareholder employees, competitors, suppliers, or others.  They can also formally object to compensation plans that may seem to unreasonably favor owner-executives.

Minority owners can create difficulties with important shareholder actions downstream, particularly equity financing and re-structuring for merger or acquisition.  Laws vary from state to state, but there are potentially annoying anti-oppression provisions in force almost everywhere.

So - when in doubt, pay cash.  And when there is potential mis-understanding, clear it up quickly.

How to deal with lawyers

Question from a reader:  I just got a $3,000 bill from my lawyer that I wasn't expecting.   What should I do?

Above all, remember this.  Good legal advice is a good investment.  Time and again I hear sad stories of good companies seriously damaged, or even destroyed, by the fine print.  We all wear seat belts when we drive.  Your attorney is one of the seat belts of your business.

Unfortunately, unlike seat belts, attorneys are not simple to operate; and they do not come come with owner's manuals.  The good news is, however, that they are like computers.  They will do what you tell them to do - quite literally.  Clear and precise instructions are crucial - in writing.  And the instructions have to be clear to them, not just to you. 

If you tell your attorney to protect you from any possible danger, you will get a document for the ages, and a bill to match.  Seat belts do not protect us from infectious diseases.  Likewise, complex contracts cannot remove all business risks.

Here's what I do.

First, I do my homework.  The business deal belongs to me, not to my lawyer.  It's my responsibility to get it right.  So, I rough out the agreement I think I want, usually just with bullet points.  Then I ask my lawyer to review the points, to let me know whether they are reasonable, and whether there are any specific issues I may have overlooked.  That doesn't take long and doesn't cost much.  Sometimes I even specify the number of hours I want her to devote to the review.

Once the review is complete, and I have a complete list of bullets, I ask how long it will take and how much it will cost to create an appropriate legal document incorporating all the bullets.  I do my best to avoid open-ended work assignments for my lawyer.

Any request I make to an attorney is a work order.  Attorneys sell time.  The hourly price depends on the experience level of the particular attorney.  I try to remember that I am buying hours of work, just as if I were hiring a teenager to do odd jobs around my house.  So I set boundaries, in writing.

If I have a surprise, like an unexpected bill, I remind her of the boundaries.  Her firm can make a client service mistake, and they can also correct it.  But, if it turns out that I was the one who inadvertently modified the boundaries, because I gave bad instructions, I pay the bill.

My lawyer wants my business.  I want reliable legal counsel.  We work together to create a relationship that is mutually comfortable and sustainable.

You and your attorney can do the same.

The Century of the Entrepreneur

"You can carve this in stone: the 21st century is the Century of the Entrepreneur. And the world is a better place as a result!"

Jim Blasingame

A few years back Jim Blasingame declared that we were entering the "century of the entrepreneur."  He listed four principal factors contributing to his conclusion: rapid advances in technology; an expanding view of market risk as exciting; a cultural shift in the definition of an appropriate work venue, with home now included; and broader public understanding of the power of equity participation.

Now, only ten years into the new century, we find ourselves in the midst of global turmoil.  Equity markets are undergoing major re-structuring.  Traditional weather patterns are now unreliable, disrupted by climate shift; and famine lurks.  Political and religious unrest abounds,including organized terrorism.  Piracy is most definitely back.  Yikes!

Was Blasingame wrong?

No, he was absolutely correct; but I'd like to offer a handful of of amendments to his list of entrepreneurship accelerators to be considered.

Technology shifts clearly stay at the head of the class.  Some specifics, however, are worthy of note.  In the industrial 20th century the ability to communicate globally began at near zero, but ended at universally available at almost no cost.  A business necessity that once demanded large corporations with economies of scale is now available to you and me, from any location.  And, on top of that, modest quantities of just about any product can now be economically transported around the globe in hours or days.

There are also some additional, less visible, but quite powerful, changes in the entrepreneurial landscape.  For example, computer-assisted design and manufacturing advances have radically reduced the time and cost of creating new products.   Once again, the scale factors required of 20th century industrial giants have been made available to individuals and small enterprises.  And the internet.  Ah, the internet.  Cheap marketing and advertising resources have never been so accessible.

BUT, the increasing cost of energy for transportation is driving many types of production, once centralized for economies of scale and moved around the world chasing cheap labor, to be re-de-centralized to be nearer to supplies of raw material and/or consumer markets.  (Sorry about the double hyphenation.  It just seems right, but only this once, of course.)  This is particularly evident in emerging trends in food production. Decentralization implies smaller units of production, which translates into the opportunity for entrepreneurial entries into markets formerly dominated by large organizations.  Global distribution of centrally, mass-produced goods (which was essentially a 20th century invention) is already falling out of favor, for straightforward energy cost reasons.

Risk is, of course, as Blasingame pointed out, exciting.  But it's still risk.  However, the recent economic shakeout definitely changed the relative attractiveness of entrepreneurship.  It suddenly became less risky.  What?  Yes.  Those stable, secure jobs in large industrial and financial institutions just aren't as secure as they once seemed.  The relative risk of personal entrepreneurship as compared to traditional employment options has been drastically reduced.  Which is better: being at risk and in the dark; or being at risk and calling the shots?

So, the 21st century entrepreneur can design and produce sophisticated products as quickly and cheaply as a large company, communicate with clients instantly, anywhere, and transport goods in small quantities on a global scale, all at a lower relative personal risk than ever before.

The Market is there.  The ability to perform Magic is more widely available than ever before.  If you have the Moxie, go find some solid Mentors, and give entrepreneurship a try.  Jim Flowers agrees with Jim Blasingame.  This is most definitely the century of the entrepreneur.  And making the world a better place should be a piece of cake.  There's unbelievable room for improvement.

How to eat a five hundred pound marshmallow

"Plans are only good intentions unless they immediately degenerate into hard work."

                                    Peter Drucker

The vast gorge that lies between noble intent and significant achievement is, of course, quite real, and widely documented.  Lofty goals are commonplace.  Noteworthy achievement?  Not so much.  And this is particularly true for entrepreneurs and their ambitious startup plans.

Many years ago one of my friends presented me with a clever metaphor that I have since used on a regular basis.  Speaking about one particular challenge, he said, "This is like a five hundred pound marshmallow.  I can't even get a firm grip on it, let alone eat it.  But if I chop it up into bite sized pieces, I can at least make some progress." 

It seems to me that the vast gorge between intent and achievement might be addressed in the same manner.  So - I hereby offer a simple experiment that you may perform in the comfort and security of your own office. 

How to eat a five hundred pound marshmallow...

Commit to specific, short-term, relevant actions that are obvious and powerful pre-requisites to lofty outcomes, rather than to the outcomes themselves.  Hold the outcomes in mind, of course.  But focus on the actions, one at a time.  Select one.  Complete it.  Review your situation.  Determine what the next most relevant action should be, and take it.  Repeat as needed.

Example.  Don't resolve to increase sales by $1,000,000. 

Instead, visualize your business as vibrant and prosperous, larger than it is today, with more clients, placing larger orders.  Then execute one specific, measurable, immediate, relevant action on the path to that prosperity.  Perhaps it might be to make five prospect calls today.  After those five calls are made, assess the fresh information.  The next most useful action might be to make five more calls; or it might be to compose a new introductory pitch; or it might be to lower prices by 10%.

Bonus: every time you actually complete one of those relevant actions, you get an accomplishment boost, a nice recharge for your Moxie.

So, remember the old English proverb, "If wishes were horses, beggars would ride."  Transform your vision into meaningful action.

P.S.  This system also works for New Year's Resolutions.

Heisenberg Compensators - On Sale NOW!

"The future is uncertain... but this uncertainty is at the very heart of human creativity."

    Ilya Prigogine

Three common traits of successful entrepreneurs are: 1) the ability to accept uncertainty; 2) a voracious appetite for additional information; and 3) creativity.  Business winners are seldom rigid, except in their tight focus on their vision.  They are generally committed to action, but seldom to a particular action.  Instead, they devise and select actions that are appropriate to each new situation as the world evolves about them.  And they learn from their mistakes.

My friend Matt told me that we would save a lot of time and trouble if we simply told all fresh entrepreneurs just to go out and buy Heisenberg Compensators.  That would remove all the risk from their startup ventures, he said.  They would all get rich, and fast.

I agreed with Matt, then ran to my computer to find out what in the world he was talking about.

In case you are uninitiated, like me, it turns out that a Heisenberg Compensator is a critical component of the Star Trek transporter system.  It adjusts for the fact that we cannot know both the location and the momentum of a sub-atomic particle simultaneously (Heisenberg's Uncertainty Principle). Without the compensator, the objects or people being transported would arrive scrambled at best, and more likely not at all. 

From my point of view, a successful entrepreneur is, in fact, a walking, talking Heisenberg Compensator, constantly assessing the locations and directions of the various components of his business world and making tiny, but regular, adjustments to his action plans.  There's no need to buy one, after all, if you can be one.  Besides, late model compensators are definitely in short supply, which makes them absurdly expensive.  (I checked on Craig's List - couldn't find one anywhere.)

Learn to bend and you won't break.  Bend in just the right direction, and you'll be a huge success.

Besides, there is seldom a way simply to force a positive solution anyway.  Turning up the power on the transporter cannot remove the need for the compensator.

So, as my other friend, the Earl of Chesterfield, once said,

"Prepare yourself for the world, as the athletes used to do for their exercise; oil your mind and your manners, to give them the necessary suppleness and flexibility; strength alone will not do."
 

Aim. Fire. Ready.

A leader or a man of action in a crisis almost always acts subconsciously and then thinks of the reasons for his action.

Jawaharlal Nehru

Sometimes the mind, for reasons we don't necessarily understand, just decides to go to the store for a quart of milk.

Diane Frolov and Andrew Schneider, Northern Exposure, Three Doctors, 1993

When it comes to something like dating, we all readily admit to the importance of what happens in the first instant when two people meet. But we won't admit to the importance of what happens in the first two seconds when we talk about what happens when someone encounters a new idea, or when we interview someone for a job, or when a military general has to make a decision in the heat of battle.

Malcolm Gladwell, author of Blink

So - what happens when we act in response to what Gladwell calls "rapid cognition?" What happens to us when others do the same?  Do we have a choice?  Or does it just happen?

Should grooming matter to an entrepreneur?  Must elevator pitches be airtight?  What's in a name?

Comments are open.  Let's have a hot discussion.

Goal-setting - the ugly secret

Inherent in every goal is permission to stop trying.

This is particularly dangerous in competitive environments - business, for example.  When specific, static targets are used to define the meaning of the enterprise, outcomes tend to be less than optimal, particularly for start-ups. Why?  Because, according to Gene Bellinger, as we near our goals most of us simply do not try as hard.  Our motivation wanes.  He uses systems theory to explain the phenomenon.  I prefer simple metaphors.  I use sports.

In 2006, Phil Mickelson led the U.S. Open by a stroke as he stepped to the 18th tee.  A par would win.  A bogey would force a playoff.  He had been playing steadily, reliably.  He was nearing his goal.  And he lost his edge.

Once focus is lost, once tension is relaxed, the door is open to the adversary.  Phil made four poor shots in a row and squandered his chance for a historical run of three grand slam wins in succession. 

In the 2007 Fiesta Bowl, upstart Boise State led Oklahoma 28-10 after 3-1/2 quarters of play.  Oklahoma sucked it up and roared back with to take the lead.  With seven seconds left to play Boise State was 50 yards out.  Oklahoma had it won.  They only had to survive one more play.  Oops.  At least they managed the tie that Phil had blown.  They didn't lose until overtime.  Oklahoma, it might be argued, played the game from a survivor mentality.  Boise State, on the other hand, played the entire game, and also the overtime, from an underdog mentality.

Many commentators have suggested that Tiger Woods plays golf as if he were trying to destroy his opponents.  His record is not perfect, of course.  No one is perfect.  But he almost never surrenders a lead.  In fact, he typically attempts to build his lead, even when logic might suggest defensive play.

Some football coaches are criticized for continuing to score against a clearly defeated opponent. 

Neither Tiger nor the football coaches want to lose their edge.  Regaining it is too difficult.  They look beyond the current game.  Relaxing and permitting sloppy play amounts to practicing mistakes, obviously a sub-optimal application of time and energy.  That's why the coaches never tell their starters to let up.  But to show good sportsmanship, they do usually send in their less skilled players.

So - what is the substitute for traditional goals?

Bellinger argues for pursuit of continuous improvement as a better model.  In industry this is called the Deming Cycle.  Vince Lombardi demanded "relentless" pursuit of perfection. (The Super Bowl trophy is named after him, by the way.)  It's not just your blogging buddy Jim Flowers arguing that traditionally conceived goals contain the seeds of eventual defeat. 

For any entrepreneur, commitment to a powerful, continuous process in support of a grand vision is far more reliable as a motivator, and as a management model.

Three things to know about salespeople

"No computer network with pretty graphics can ever replace the salespeople that make our society work."

                                                                                         Clifford Stoll

My friend and fellow blogger, Anne Clelland, reminded me recently that I had asserted a universal truth about salespeople.  She challenged me to post it so others might refute me, so here it is (Rule Number Two, below), and more.  Comments are open.  I'd love to hear your opinions.

There are exceptions to the following rules, I'm sure, but not very many IMHO.  I'm willing to risk stating them in boldface type; but I've done dumb stuff before.  Here goes...

Number One:  For purchases that involve personal risk of any sort, people prefer to buy from other people.  Personal risk takes a variety of forms, of course.  The cost of the item relative to the financial resources of the buyer is almost always a discriminating factor.  The look and feel of a publicly visible item as compared to the buyer's self-image also plays a part.  And so on.  The point is this.  Buyers want to trust an actual person to be selling something that will not harm or seriously disappoint them.  And they want someone to blame if the deal goes sour.

For most prospective entrepreneurs this means that you probably have a human sales force in your future.  Given that, I recommend that you pay close attention to the other two rules.

Number Two:  Commission salespeople are perfect optimizers of dollars per working hour.  They all adopt behaviors that maximize their income for whatever time they choose to invest.  If they sell multiple products, they will bias their energy toward the ones that have the highest potential return to them.  Salespeople who do not act in this manner commonly find it useful to make fresh career choices.

The bias of the sales force is useful information for you, the business owner.  If your sales force ignores one of your products, it is probably a dog, or at least badly priced.  Or the commission rate is too low.  Or the sales cycle is too long.

By the way, any salesperson who is not on some sort of commission is really just an order taker, and should actually be replaced by a "computer network with pretty graphics."

Number Three:  Commission salespeople typically do not maximize their total income.  Unlike teenagers at a pizza buffet, they stop when they are full.  They do follow Rule Number Two and maximize dollars per hour invested in selling.  But when they have made "enough" money, they take off and play golf.  The definition of "enough" varies widely, of course; but the phenomenon is real.  They want the time on the golf course more than they want the extra money.  Behavioral psychologists call it satisficing.  They are maximizing their happiness per hour.

Some companies fight the golf option by increasing the commission rates at higher levels of sales.  Others simply accept it and hire additional salespeople. 

So - what do you think?  Have you observed these same behaviors?

The power of principle

"A people that values its privileges above its principles soon loses both."

             Dwight D. Eisenhower

"Back of every noble life there are principles that have fashioned it."

    George Lorimer

A few days ago I was reflecting on corporate vision statements.  At the close of that post was this sentence, "Of course, that brings me face-to-face with what-should-come-next.  But I'll tackle that one later." 

Later has arrived.

What-should-come-next simply has to be corporate principles.  At least I think so.  It turns out, however, that searching on "corporate principles" delivers only a hodge-podge of anecdotal references to specific statements by individual companies.  There is no clear evidence from the engine-of-all-knowledge that there exists a coherent sense that a business should be "principled."

"Well, well," he said sarcastically. "Isn't that a great big surprise?" 

Corporations are carefully designed to limit the personal liability of the people who own them.  The very same mechanisms that protect investors from undue business risk, also nicely protect them from inconvenient responsibilities.  When Union Carbide managed to kill thousands of people in Bhopal, India, none of its actual owners lost a single penny beyond their loss in the value of the Union Carbide shares they had purchased on the New York Stock Exchange.

Here are two examples of public statements of principle by corporations.

RTI International - Corporate Principles

As we pursue our mission of improving the human condition, we adhere to the values that have served as RTI's foundation throughout our history: integrity, excellence, innovation, respect for the individual, respect for RTI, fiscal responsibility, and objectivity.

Balfour Beatty - Guiding Principles

    * To fulfil our responsibilities to shareholders, customers, suppliers, employees and the wider community.
    * To treat all groups and individuals engaged in or affected by the business with the highest standards of integrity.
    * To conduct all aspects of our business at the highest level of excellence and professionalism and have regard to the traditions and practices of the markets in which we operate.
    * To pursue our financial performance goals without losing sight of longer term objectives or of the wider context in which our business operates.
    * To seek continuous improvement in all aspects of the way in which we operate and do business.
    * To ensure we conduct our business and make our decisions within a clear ethical framework.

Call me crazy, but I just don't believe that these go far enough.  Mentioning a clear ethical framework is good; but what, pray tell, are the specifics of that framework?

Tim Ferris, in his bestseller, The 4-Hour Work Week, speaks proudly of winning a kick-boxing championship by circumventing the spirit of the rules of the competition.  His triumph denied some other kickboxer a trophy.  Loosely-regulated financial institutions, in a frenzy born of unfettered greed, precipitated a global economic disaster.  Union Carbide killed people.  The only difference among these three events was the scale of the unfairness.

As an entrepreneur, you are preparing to launch your own company.  Perhaps you have already launched.  In either case, I encourage you to weigh in heavily on the side of broad responsibility for future corporate actions.  Here are some principles to consider, tweaked for appropriateness to the business context:

• The fundamental importance of honesty, integrity, and responsibility;
• The inherent worth and dignity of every single person;
• The importance of justice, equity, and compassion in all relationships;
• The enlightening power of a continuing, free, and responsible search for truth and meaning;
• The right and the responsibility of each individual to act in good conscience in moderating behaviors, both personal and corporate;
• Respect for the interdependent web of all existence upon which we all depend for survival.

By the way, upon reflection, I would have to say that a clear statement of principles should precede composition of a vision story.  I had the order wrong.  And this time I know what comes next - commitment.  More later.

The story of business

"Imagination is the beginning of creation. You imagine what you desire, you will what you imagine and at last you create what you will."

                                                    George Bernard Shaw

I've been trying to figure out the "corporate vision" thing. 

It's trendy.  And it certainly makes sense as a way to communicate the Motivation behind the Moxie.  But making it real, and useful, is no mean feat, I think.

Being a faithful member of the global internet community, I started my figure-it-out quest by invoking the world's favorite search engine.  That proved to be an interesting and time-consuming exercise, but not very helpful.  My wanderings turned up lots of "vision statement" references and a few "methods" for creating them - both corporate and personal.  But I did not locate a definitive path to a tight grip on the process or on the presumed outcome of the process.

Abandoning the search engine method of intellectual inquiry, I decided to test a pre-electronic alternative.  Reluctantly, I admit, I concluded that my only hope was to turn away from the screen and to think about it, alone.

Upon reflection, it now seems to me that a presumed requirement for a good vision statement is verbal conciseness.  It has to be tweetable. That obviously places arbitrary boundaries on the opportunity to deliver a rich description of a preferred future state. The greatest writers of all time have routinely agonized over the inadequacy of even the most well-crafted prose to capture the fullness of what can be observed, let alone what might be imagined. Where, therefore, could an entrepreneur possibly obtain such linguistic wizardry as might evoke corporate inspiration in only 140 characters? 

Where, indeed?

So - now I'm thinking with my keyboard.  Somebody once told me that extroverts often think with their mouths.  I guess a keyboard qualifies as a mouth, of sorts.  This is fun, actually.

Suppose I get crazy and switch from "statements" of vision to "stories" of vision.  If I were to wake up inside my company three years from now, what would I see?  A vision, after all, is what I see.  Is it OK to add what I would hear, what I would feel?  My sources say yes. To tell the story of my future I'll still have to write excellent prose, but at least I can break the single sentence barrier.

OK, I'll search again - this time on "corporate stories." 

Visualize me typing madly right now.  I think I may be on to something, and I really want to see the outcome of my search.

Bingo!!  Success on the first un-sponsored entry.  And I quote...

Help me hire a hit man...

Reads the sign of a panhandler outside a subway station in San Francisco. Apparently, she does quite well.

In Olympia, Washington, a guy gets similar results with motorists by holding up a placard that says: "Why lie? I need a beer."

A man in Times Square offers this only-in-New-York service: "Tell me off. One dollar."*

These three entrepreneurial panhandlers succeed (in their own way) because they know something many business people have yet to discover: Nothing's more powerful than a good story. 

Bingo #2!!  And I quote...

Reading Bruce Temkin's "Use Storytelling To Define Your Culture," I found this article useful because Bruce suggests telling stories about corporate achievements will have more success in cementing employee passion for customer service than management telling people not to do something. I believe stories are so important because when attempting to motivate people to follow an idea its less about pure facts, and more about how people relate to those facts.

I, Jim Flowers, am now a happy man.  I can post this little dissertation feeling comfortable that I have, at least for myself, moved past the "vision statement" roadblock.

Of course, that brings me face-to-face with what-should-come-next.  But I'll tackle that one later.

Six reasons to sell out early

Your company will probably be sold earlier than you expect, and for less than its maximum value.  Here's why.

1-  You will create a problem for a large competitor and they will offer to buy you out – to get you out of their hair.  Your alternative to selling at their price is to wait for them to grind you to a pulp.

2-  You will get divorced and the settlement will require liquidation of all your assets.

3-  You will suffer an untimely death; and your heirs will not want to run the business.

4-  You will be hit by a bus and disabled.  By the way, disability is much more likely than early death.

5-  You will have a falling-out with your partner(s).

And the biggie...

6-  You will simply tire of it and decide to quit.

I wrote about this particular phenomenon a few weeks back.  Here's an excerpt from that post.

In a recent post on Inc.com, Joel Spolsky recalls asking Jessica Livingston (author of Founders at Work) to speak about why start-ups fail.  "That would be boring," she told him. "They all fail for the same reason: People just stop working on their business."

Spolsky goes on.  "The more I thought about it," he says, "the more I realized Jessica was onto something. Why do start-ups fail?  As she pointed out, it's usually a collapse of motivation -- everyone wanders back to civilian life, and the start-up ends, not with a bang but a whimper."

Think about that.  "People just stop working on their businesses."

Wow.  They just plain run out of gas.  They exhaust their supplies of MOXIE.

So, you will probably sell out earlier than you planned, and realize less money than you expected.  UNLESS, of course, you anticipate the various contingencies and protect yourself and your business from their possible ill-effects.

GPS for entrepreneurs

Rule of thumb:  Without a Map, you WILL get lost.

And by Map I mean a well-conceived strategic plan, carefully vetted by your Mentors.

Now don’t get me wrong. I am not a big fan of inch-thick business plans, especially early in the process.

But I am definitely a fan of a clearly articulated set of  “rules to live by.” This where you lay out in a nicely organized fashion the bullet points that describe your Market, focus the power of your Magic, and communicate your Model, your Management system, and the way you handle the Money.

Begin with the Four Fundamental Factors Self-Check.  That will get you started on the right track. 

A simple guidebook will be incredibly useful, not just to you, but to everyone else in the company. They will read and use bullet points. They won’t read or use your version of The Encyclopedia Britannica. Later, when the time comes to prepare a big fat plan in order to raise serious money, you can just fill in the space between the bullets and re-order them a bit to fit the latest trendy format for formal plans. That’s not hard, just a task along the way to outside funding.

Search on "business plan."  Starting with the Small Business Administration, you'll find a gold mine of free resources to assist you in the mapping process.

You can also buy my little book.  It's not free, of course; but it's a good read at a fair price.  At least I think so.

What the heck happened?

Surprising success!

Shocking failure!

A recent Roanoke Times news article about formation, growth, sale, and dis-mantling of New River Pharmaceuticals points out how point of view means everything.  The company was an investment grand-slam home-run, but an economic development fizzle.  In the 2008 government statistics, it will go down as a business that closed up shop.  Never mind that its investors pocketed 2.6 billion dollars.

If you root around in the entrepreneurship literature, it becomes clear that everything is unclear, hopelessly confused by the nature of the collected data and the imprecision of the questioning. For example, "not surviving" can include successful sell-outs like New River as well as companies that were never serious attempts at business building in the first place. Many (most?) single proprietor home-based businesses are either hobbies or temporary experiments, rather than solid runs at building something permanent.

Of course, once-published, often-quoted. Pretty soon everyone says that 90% of new businesses fail early.

My conclusion is this: most businesses that are ill-conceived fail; most businesses that are well-conceived succeed. Ill-conceived businesses are sometimes saved by outstanding downstream management. Well-conceived business are sometimes ruined by poor downstream management.

And sometimes, as elsewhere in life, nobody can figure out what the heck happened.

Who owns your company?

What? 

You probably thought YOU owned your company, or at least that your shareholders did.

Shareholders do, of course, own the net assets of the company and the rights to future profits.  But there are any number of additional stake-holders.  The list includes employees, suppliers, distributors, and, most important of all, customers.

On numerous occasions I have felt compelled to encourage wild and crazy entrepreneurs to tidy up their workplaces.  Often the response to my incredibly polite suggestion goes something like this:  "It's my company.  If I like it messy, it's nobody's business." 

Would you put your money in a bank with a messy lobby? 

Your customers, along with your employees, and every other stake-holder on your particular list are putting their money in your bank.  They are counting on your company to look after their best interests.  In return, they work together to deliver profit to you and your shareholders.  They "own" your profit before you do.  Without their cooperation, you have no company. 

A tidy office is a personal decision.  A tidy company is a necessity.