So you want to launch a business...

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.

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."
 

Simple is not easy.

"Too many entrepreneurs correctly envision a great business opportunity, but can't clearly communicate the value of their proposition. In fact, simplicity is one of the most complex challenges you will face in selling your business plan."

                                                                                                    Marty Zwilling

When I spotted Marty's assertion I was reminded of an earlier post - on simplicity.  It's actually worth repeating.  Here it is.

When I was in college I occasionally played chess with my roommate.  Now this guy was/is a wizard - Phi Beta Kappa as an Economics major, Harvard Law School, president of a billion dollar company.  You get the idea - one smart dude.

If I tried to compete with him on a full board, I would lose every time, and badly.  Chess is a complex game, and he could quite simply deal effectively with more data at one time.  BUT... I found that if I traded him pieces until there were only a few left on each side, I could WIN, at least some of the time.

I had found a way to make the game simpler, to increase my chances of success against a powerful adversary. 

The ability to reduce your strategy to its essence lowers your risk.  It permits you to understand very clearly (in most cases) what is required and what will result.  It also enables you to make things understandable to your employees, your allies, your clients, and your investors. 

In describing your prospective business, this amounts to communicating four things, clearly and concisely.

• What will you do? 
• For whom will you do it?
• Why do they need it?
• Why will they pick you?

Make no mistake, however.  A simple strategy is generally a good idea; but simple does not mean unsophisticated.  Remember Thoreau's apology to his friend: "Please excuse me for having written such a long letter, but I did not have time to write a short one."

And a simple strategy does not automatically make success come easily.  Even though I managed to give myself a fighting chance to win at chess, I didn't always win.

This has been said and written many times by many people, but I'll give credit to someone who said it in my presence just two weeks ago.  "Never confuse simple with easy."  Brian Engleman, SRI International

Business plan competitions - vicarious mentorship

"American Idol" for business.

VT KnowledgeWorks will be hosting an all day Entrepreneurship Summit in just three weeks. 

One segment of the program is a student business concept competition.  27 student teams from around our region submitted one-page concept documents in the first stage of the competition.  After two rounds of preliminaries, the field will be reduced to three finalists.  Those teams will do live, stand-up presentations before a panel of judges and a room full of spectators on April 2.  They will deal with both questions and criticism in public. 

This is not a revolutionary program by any means.  Universities around the world have been hosting similar events for years.  It's a great learning experience, and not just for the student teams.  Non-competitors who go to observe the public finals receive meaningful vicarious mentorship as the panelists point out to the teams how their concepts and their presentations might be strengthened.

In our particular case, the morning student competition will be followed in the afternoon by serious attempts by real-live entrepreneurs to convince angel investors to support their ventures - again, in public.  Two regional organizations that are deeply engaged in early stage investing processes will bring together pre-screened company founders and highly-qualified investors in a "Live-Fire" funding event.  Vicarious mentorship for prospective entrepreneurs doesn't get more useful than this.

This is where the founders' Market, Magic, Model, Message, and MOXIE get the ultimate Mentor test.

When events of this type hit your town, spend a few bucks and go sit in.  The payoff may well be more valuable than years of business class tuition.  (Just don't tell the professors I said that.)

Vendo ergo sum

Please quote me.  Vendo ergo sum.

With all due respect to René Descartes, pictured at left on one of his better days, his famous declaration of existence does not apply to businesses. 

"I think, therefore I am."  Or in Latin, "Cogito ergo sum."  Some careful translators and students of philosophy have rendered it from its original French as, "I am conscious, therefore I am."

For me, certainly.  For my business, not so much.

A business must be more than merely conscious.  To exist as a business requires that a sale be made.  Vendo ergo sum. 

An enterprise without a sale is at best a proto-business.  It might be an institute.  It might be a hobby.  But it is not, I repeat, NOT a business, at least not yet.

So, when in doubt, sell something.  It will amaze your friends, delight your family, impress potential investors, and get the attention of your targeted marketplace.  It's a really cool thing to do. 

Stop thinking.  Stop talking.  Stop over-developing.  Sell something.

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.

Bootstrapping is strategic under-development

Velocity is great, if you are on the correct vector.

A while back I talked about strategic under-development as a cheap and fast way to get your product right.  Release 1.0 really is the ultimate market survey.  Bootstrapping, too, can be viewed as strategic under-development - for your entire business model.

Brian Armstrong offered this great tidbit on his blog about "how to quit your 9-to-5 to build a business and lifestyle you love."

Quoting Bijoy Goswami, Brian tells us

"Getting funding can be the death of a company. It’s like adding gasoline to your rocket ship. If it’s pointed in the right direction (i.e. you’ve got your business model right) then it can be great but otherwise it’s just going to take you in the WRONG direction faster."

Brian goes on.

"Bootstrapping is all about testing and refining your business model constantly. You’ll know when you’ve got it right because your customers will start PAYING you. It doesn’t matter if they SAY they like it, wait until they actually “vote with their dollars”. It pays to get this right before seeking any funding."

This is precisely why, by the way, many, if not most, early stage investors want to see real sales before they invest.  They want to have proof that the market will respond as you have predicted.  They want you to be on the correct vector before they fund your increase in velocity.