Startup: An Insider's Guide to Launching and Running a Business (11 page)

In any case, when new projects, or investments of any kind of labor or capital are considered, I like to take the time to draw a dollar sign high up on the
whiteboard, above any notes or diagrams. The point is then made that whatever details we draw or discuss must ultimately pass the test of connecting back to the dollar sign. If we cannot demonstrate by logic or function that the project will result (in one way or another) in value (dollars) being created for the company, then the project does not make sense, and we table it.

A number of interesting but ultimately pointless projects have been unceremoniously filed away in the “won’t do” drawer because of this practice (and that’s a good thing).

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This chapter has given a quick look at some core business ideas that are important to me, and end up being very frequent subjects of discussion with the businesses that I mentor. The subject will now change to one that is very near and dear to me: marketing. A recurrent theme of this book is the effort required to communicate your value proposition and story to customers; I will cover a number of topics from that world in the next chapter.

Marketing

At the beginning of this book I made the following assertion:

Most folks think that building a product or packaging a great service is the hardest part of becoming a successful business owner. The thought is something along the lines of, “If we can just build the web site, or open the restaurant, or create the widget—then we are going to be rich!”

Building it, opening it, or inventing it is usually the easy part. The hard part is what comes next—connecting with customers, communicating your value, and convincing them to pull out their wallets to give you money.

Figuring out exactly how you will connect the product with enough customers in a short enough time span so that you survive, and grow to thrive—that’s where the real work awaits.

From my perspective, building technology or providing goods or services is more about marketing than anything else. In this highly competitive world, quality products
have to be a given
—there are simply too many other options for customers to choose from.

Marketing is not advertising. Advertising is just a part of a marketing plan. Marketing is your approach to interacting with the market—deciding what to build, for whom, when, and in what way, and how you will connect it with customers to make money.

Marketing is as much art as it is science. If building a piece of software is like folding an origami crane—complex and time-consuming, but following a predetermined pattern—then marketing is more like a dance where the music is constantly changing and new people are constantly appearing on the dance
floor. These are two radically different processes, and require radically different competencies. The marketing dance will take many forms, and will consume a significant amount of resources if it is to fulfill its goal of connecting your product with customers. This section of the book is about that dance.

Choose Your Product Well

What comes first? The realization that you have a great idea and that you can sell it? Or the realization that you want to run a business?

It can happen either way, but in either case you have to have a proposition that will stand up to the truth of the market. A weak idea can be supported to success by excellent execution. A strong product can be a complete failure with poor execution. The best scenario is to run a company around a strong product, and then back it up with excellent execution. That combination is the stuff legends are made of.

So what does it mean to have a product that will stand up to the truth of the market?

For one thing, it means the product is
compelling
—it solves a problem for people to the extent that enough of them will reach for their wallet and give you money for it. Simple enough, huh?

It also means you can
control
it—this is called the
barrier to entry
for your competitors. Once you unleash your idea on the world, how can you protect the new niche or market that you have created? Patents and copyrights are designed to help with this. Operational excellence is another way to protect your idea. If you hit the ball out of the park, it will be harder for others to follow you.

So before you can have a business, you should have a strong product concept. Again, this can be a physical product, a service, or a combination of both. What are some of the factors that we should consider when choosing what we are going to sell, or evaluating an existing offering? Here are some starting points.

What You Have to Work With

What are your strengths and advantages? What makes you a natural fit for your industry? Every entrepreneur and every team has its unique attributes. Can you identify some unique characteristic or attribute that is available for
you to leverage? You should have
some
of the following characteristics available to you:

• Skills
  : This is where most people start: their area of expertise. This should be connected with other strengths or strategy points to make the business great.
  
• Experience
  : Similar to skills, this is your (or your team’s) history of applying skills to a task. This is the category of lessons learned, scar tissue, and wisdom.
  
• Resources
  : Do you have access to a unique resource that would give your business a natural advantage over your competitors? The company that acquired us is a great example of this, as they are a consortium of newspaper companies, with a tremendous set of resources within the organization (including sales staff, offices in cities across the country, business relationships, and control of television and print resources coast-to-coast). In the late 1990s, all of these resources were a great launching pad for a portfolio of online advertising brands (Cars.com, Apartments.com, HomeFinder.com, etc.).
  
• Knowledge
  : Distinct from skills and experience, knowledge in this sense is something that you know or have realized about your market that other companies don’t seem to grasp yet (or at least they are not visibly moving on). Knowledge of a single key fact can make all the difference for a business starting up. Google realized that text-based advertising and market-driven pricing were a good idea at just the right time. That realization combined with the resources of their growing online search platform helped them create a multi-billion-dollar enterprise.
  

What Are You Shooting For?

The combination of attributes just mentioned can help you to identify what you should be creating as a product or service. The next step in that evaluation process is to look at how the product or service can be leveraged over time to make an amount of money for you that is worth the time and effort required. If you execute the idea well, and market forces work as you
expect them to, what is the potential financial upside for your business concept in the very best case? What are you shooting for? Be very specific in what you think you can accomplish, and justify your plan to yourself by working out the numbers. In working out the numbers, you end up defining the scale at which you believe you can operate—that is to say the number and size of transactions you plan to create.

The question of scale has a couple of components: demand of the market and your capacity to obtain or produce product for sale. The market must need your product in quantity,
and
you must be able to produce enough of that quantity to meet demand.

What Is the Opening in the Market?

After identifying what resources you have to work with, look for a natural point of entry in the market itself. Consider that the marketplace is like a castle; a castle with walls and moats preventing the casual bystander, or even a fairly determined assailant, from getting inside. As with all good castle stories, your objective is to get in there, to take over a part of it. As you stand on the grassy field just below that imposing structure, you begin to study what your challenge looks like. You naturally start considering what your approach should be. Do you storm the main gate? Do you try to climb the 80-foot-high walls on the south side? What if you noticed a gap at the corner of one of the walls—wouldn’t it be better to hit the gap, the opening, the weak spot where your effort for entry would be least?

Of course it would be. And marketing is no different. Look for a niche that has been overlooked or underserviced by other players in the market. Choose that as your entry point.

Once you get started, make it your objective to burrow in so deeply that you come to “own” it. Once other players notice you are gaining ground and profiting from your strategy, you are already months ahead. In many markets, this is enough protection to survive if you are committed to constant evolution—always looking for new angles. If people follow your lead and move on your niche so long as you have been adapting, morphing, and improving all along, it will hopefully be difficult for them to catch up. This strategy often forces larger players to just buy you outright instead of trying to follow you. This sequence of events worked very well with our apartment real estate site: we found a niche, burrowed into it, and then were bought by a larger competitor.

While the niche strategy is a common one, not all markets are going to have a clearly defined niche approach. Sometimes the best plan is to march up to the main gate of that castle and start battering the door down. It should go without saying that this type of approach is often best suited to well-funded and highly resourced operations.

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What Separates a Hobby from a Business?

Your customers are your reason for being. If I wanted to sound snooty I would say that customers are your raison d’être—your reason for being. (Give me a moment to fetch my smoking jacket and brandy snifter.) Customers are important. If you think about it, customers and their willingness to pay you are the only things that separate your business from being a hobby. A hobby is nothing more than an activity you do that nobody pays you for. If you love fly fishing, you can promote that outdoorsy pastime from a hobby to a business just by getting people to pay you to show them how to fly fish, guide them to great trout streams, and so on.

It all comes down to the customer—to his or her willingness to listen to your message, process what it means, and then decide to fork over hard-earned cash. You have to love it when people choose to spend time with your product, and willingly pay you money for it. And in case you are wondering, no, customers are not always right. They should, however, almost always get what they want—and they should be permanently installed as the rotating, shining center of your business’s solar system.

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Will You Be a Whale or an Eskimo?

Eskimos traditionally depended on killing one or two whales to survive for a whole year. They risked everything on being successful in this task. Whales, on the other hand, survive by eating millions of tiny shrimp. A failure to capture
any one, any thousand, or even any ten thousand of those shrimp will not matter to the whale’s survival.

Businesses can operate in either mode. You can position your product so that you need only a few large clients, or so that you need to acquire many small-value clients. This is a fundamental point of analysis when deciding what business to pursue, or how to position an existing operation or product offering for future growth and stability. Neither of these options is right or wrong; each carries its good and bad points.

Early on, you are faced with a choice of which approach to take. In most cases, your expertise, product, or value proposition will dictate to you which of these choices is most appropriate. It is most common for businesses these days (especially online) to default to the mode of going for lots of relatively small transactions. It is very useful to recognize that both of these distinctions exist, and simply make a note of your choices as you set out to establish yourself in the market. The whale/Eskimo dichotomy can also present itself as your business grows, as I will describe.

For example, consider the following scenario. The fictional OJC company makes bread. They bake and ship whole-wheat loaves to several small grocery chains and have experienced 2 to 3 percent growth yearly for the last ten years. OJC gets picked up in an article on healthy eating by the
Los Angeles Times
, which is quickly followed up by a proposal from MegaMart to provide heart-healthy wheat bread for 250 warehouse stores coast-to-coast. Great deal! That is a fantastic way to grow! It is a terrific opportunity. The knowledgeable CEO knows that saying yes entails a major risk, however.

In order to meet the demand of the additional stores, OJC will have to triple its production capacity and hire extra shift workers. This entails an outsized capital outlay, which makes the CEO nervous. What would happen if they go for it and then eight months into the arrangement, MegaMart decides to pull the contract? It could put the future of OJC in question because it may not be able to cover the loan it took out to build up its factory. Left with overcapacity and a huge debt to pay, OJC could be forced to shut the operation.