Building a Prosperous Business

"Manage or Be Managed"

FROM IDEA TO REVENUE: TOP 10 POINTS TO BUILDING A PROSPEROUS NEW BUSINESS

By Rod Alan Richardson

Starting a new business can be relatively easy. Breaking through to revenue can be more difficult; and sailing off into prosperity is an achievement few experience. Where do new ventures break down? Contemplate these ten points and see if your venture measures up.

Find out if your idea is financially feasible – Can the business you are proposing make money? Having an accountant run a financial projection of future cash flows and expenses will help you determine if your new venture is worth pursuing. The time to do this is at the very beginning of the new venture. Understanding financial potentials will help you make important decisions about investing cash and time into your new enterprise.
Sell things that people want to buy – DO NOT start with an idea, produce it and then try to figure out who is going to purchase it. Companies like Sony can do this, because they have a billion dollar research and development budget. A friend of mine said, “Most farmers see a plot of land and decide to grow a crop. At the end of the year they harvest it and look for a buyer. If I were a farmer, I wouldn’t put a seed in the ground until I knew who was going to buy my crop.” Several years ago, I launched a company that sold unique products from around the world. My investors would always say, “Do people really buy this stuff?” As it turned out, people didn’t buy that stuff—even after spending several hundred thousand dollars in marketing. The need for your products should be obvious. The more definite the demand for your products is, the easier it will be to raise capital for your business.
Create a Real Opportunity – Have you defined a real investment opportunity with your new venture? My partners and I spent days in meetings with a wholesale plant grower. They were trying to keep investors interested in the project. Though everyone was aware of the potential their growing technology could produce in terms of profits, it quickly became apparent that the business management team had not correctly identified the opportunity. Instead, we pointed out that under their current infrastructure, they did not have enough growing space to create a profit that was investment worthy under their current business model. If they had focused on providing a specialized product to a volume retailer, then they would have an exciting business. As a result, they were not ready to see the issues and lost their investment groups. A typical private placement (non-public investment) opportunity should produce a 100 – 400 percent return on investment in three to five years. Can your business do this?
Know the limits of your experience – Too often, we build a new business with the people who are closest to us, or we go it alone. I once heard the story of a gentleman that was a cashier at a convenience store who had a dream of building an airline. He quit his job to pursue his dream. Let me propose that your presentation to potential stakeholders would be much more rewarding if you were able to say, “Hi. I’m Bill the founder. Let me introduce you to my CEO, Jerry, who was formerly the Sr. Vice President of Southwest Airlines,” than to say, “Hi. I’m Bill. I can operate a cash register. Give me money to build an airline… please?” Augment your experience with a team of people that are experts in their respective fields. Find the best people you can afford while keeping your eye on the cost benefit ratio.
Determine your industry –In the sales process, products and services are divided into clearly identified segments. These segments are called industries. If you try to launch a new product outside of a predefined industry, or category, you will run into a myriad of social difficulties. To determine which category your business fits in, ask yourself the question; “If I were to place an ad in the phone book yellow pages, which section would I post myself under?” If you know the answer to this question clearly, you will eliminate a lot of difficulty in assembling your market research, industry analysis, and marketing messages. Remember that each industry demands a different approach to marketing and distribution. Each time you try to market to multiple industry markets, you create new demands on the revenue of the business—and ultimately decrease, or eliminate your ability to be profitable.
Know your marketplace – Markets are interesting animals. They are composed of distinctions like demographics and psychographics. The more you understand about who you are going to sell to and where they live, the better off you’ll be. Cultures vary by region, state, and even city. For example, Dallas and Fort Worth, Texas, have a rivalry making it difficult for a Dallas based firm to sell services into Fort Worth, and vise versa, even though they are part of a connected metropolitan area. Different marketing methods may be needed to appeal to different community cultures.
Look for the shortest, least resistant path to profitable revenue – Is your business pre-revenue, or are you already selling products? Your business should be profit focused. Look at your overall costs when planning a new product or seeking to improve an existing one. Determine what your actual costs are and if they are all necessary. Too often we plan on investing more money into a product than we need to. The customer may pay the same amount for a less complex product that serves them just as well. Many new ventures focus on building overhead prematurely instead of allowing demand to dictate the needed expenses. As a result, the burn rate (the rate at which cash goes out of the organization without being replaced by revenue) devours the venture before it can get to any level of cash flow. Keep in mind that many institutional investors may not look at your project unless you are already in revenue.
Look at competition realistically – The universe is abundant, and there is enough and to spare; however, many businesses don’t view the world this way. They see the glass as half empty and see an impending drought coming on. These businesses, seeing the world as scarce, will seek to dominate their field. As an overly generalized rule of thumb, each market segment can handle 3 major players. The rest, as the theory goes, play for the scraps. The market leader will dominate the majority of the market. Applying pressure to the market leader will certainly bring a response. Any CEO, noting a decline in sales, will redouble his efforts to maintain his lead. Understand that large companies have large marketing budgets and staying power. The only way to keep them from immediately eradicating your new business is to deal with niche markets that are too small for them to worry about. You’ll want to stay under the radar until your viable enough to go toe-to-toe with a major market force. Though the market is large and there are plenty of customers, expect to be attacked.
Be Unique – As an emerging company, you can be a nimble company. Because your infrastructure is small, you have the ability to provide a level of service that may not be possible for a large competitor. A large competitor’s systems may be too cumbersome for them to adapt to changes that you will throw to the market. Make sure your uniqueness provides added value to the market. You will need to be distinctly unique to get attention. Remember that once you’ve appeared in the public with a unique angle, and you are successfully gaining customers, you will be copied quickly. You must innovate regularly to keep your unique edge. In our company, we do a quarterly review to assess all market threats. We keep a new and fresh marketing approach in development at all times. When planning a new business, all of these things will need to be accounted for to demonstrate to your stakeholders that your business will survive and thrive.
Know how much money you really need – Underestimating your financial needs will put a huge crack in the foundation of your new venture. Do you think you know how much money you need? Double your estimation, and then double it again… now we should be close. Plan on several rounds of capital. There are too many unforeseen variables that require far more cash than you are able to plan for. Remember that all large companies are in continuous capitalization—as are most businesses for that matter—through loans, private placements, or public offerings. That’s why many large companies go public, to have access to a large, continual source of cash. It takes approximately $70 Million to become a household name. In the first couple of rounds, it’s important to not ask for more money than your financial projections demonstrate that you need. If you think you need more money than you are asking for, adjust your financials until they are correct. Ask for lower amounts during your initial fundraising until you have demonstrated that people will purchase what you’re going to produce. This will also protect your stockholders from dilution (decreasing company ownership).

Of course there are many additional points that could be covered in an article like this. I could fill volumes trying to describe all the details that go into routinely launching profitable businesses. The ten areas I chose to highlight are the areas I see most commonly ignored. Ignored—not because the entrepreneur doesn’t know better, but because it takes a lot of work to get the answers. If you are in alignment with all of these areas, your success is not guaranteed; however, you have come a long way toward creating a prosperous business.