The number one goal for new entrepreneurs is to grow their businesses to the point where they can finally get paid and begin to make a living from their new venture. Tyler Barstow and Belmont alumnus Matt Fiedler, co-founders of Vinyl Me, Please, are trying to adapt their business model to reach that important goal.
I still look forward to the beginning of classes each fall. I am excited to see the new groups of faces in each of my classes. I am excited to try out the new materials and new pedagogical approaches I worked on over the summer. I still get a few butterflies in my stomach when I first step in the classroom the first day of classes.
This fall I am teaching two undergraduate classes here at Belmont.
Venture Planning is a class that I teach at least one section every semester. It is the final course that our entrepreneurship majors, minors, and social entrepreneurship majors all have to take before they graduate.
A couple of years ago I made a fundamental shift to make this more of a business modeling class than a traditional business plan class. Although I continue to refine and tweak the new approach, the results of the change to business modeling have been remarkable. The final reports in the class are much stronger and we have more students feeling ready to move ahead with their businesses when they graduate.
Even in the face of what seems to most of them as a permanent recession — it has been the economic reality since this group first entered college in 2008 — this group is excited about the future.
My other class this year is somewhat of a new class for me. I have taught International Entrepreneurship to students studying abroad, but I never have taught it in a classroom on campus before.
We are not just looking at the nuts and bolts of internationalizing an entrepreneurial venture, although that is where we will end up at the end of the term. Instead, we are beginning looking at some big questions and issues.
Our first topic is quite fundamental, yet profoundly important in today’s world. Is market capitalism moral? Does engaging in capitalism corrupt one’s character?
We will then focus on what drives entrepreneurial activity — or in many cases what inhibits it — around the globe. We will explore the role of culture and public policy issues such as taxation, regulation and property rights. We will also look at the role of entrepreneurs in shaping culture through how they conduct themselves in their work.
These are incredibly timely issues given the debate not only here in the U.S., but around the globe.
We will be exploring these issues not from a political viewpoint, but at a policy and cultural level examining what empirical research tells us about each of these issues.
I am so glad to be back in the classroom again this fall. I guess someday this may no longer be the case — I may no longer feel the magic of that first day of classes each year. I have seen this day come for many a colleague over the years.
And when that day comes I know it will be time to walk away from the whiteboard and hang up the shingle for my bait shop!
The late, legendary Silicon Valley attorney Craig Johnson used to say, “The leading cause of failure of start-ups is death, and death happens when you run out of money.”
And the leading cause of running out of money in a start-up is poor financial forecasting.
At the core of unrealistic forecasts is the undying optimism of most entrepreneurs. Their “what could possibly go wrong?” attitude leads to many forecasting disasters. My father used to say that when he looked at investing in an entrepreneurial venture he would always double the start-up costs and triple the time it takes to get to breakeven.
My rule of thumb is a bit different. I believe that being overly optimistic leads to entrepreneurs making fatal mistakes in estimating revenues, which is at the heart of most forecasting errors. So, my approach when reviewing a business is plan is to cut revenue forecasts in half.
Here are the four most common revenue foresting mistakes I see:
Assuming an “instant on” button for a new business. Most business plans I read show significant revenues from the beginning of the business, sometimes even for the very first month that they open their doors. The reality is that it takes time to build a customer base for any business. That is why an entrepreneur should have at least six months personal living expenses available to make it through the startup in addition to the money the new business needs.
The magic of the hockey stick. A common pattern in business plans is to show a relatively slow initial start to revenues, and then assume some that unexplained breakthrough will occur that leads to a sudden and dramatic increase in sales. When you graph this type of revenue forecast it looks just like a hockey stick. The reality is that such sudden growth is just not that common and usually results from specific actions.
Assuming enough sales to make the business model look successful. In this mistake entrepreneurs forecast their expenses and then they plug in enough revenues to make the business become profitable. When I press these entrepreneurs, their explanation of revenues is “well, these are the revenues I need to make the business work.” The truth is that the market will not give you the sales you need, it will only give you the sales you earn through a well-executed business model.
The marketing plan tells a different story than revenue forecasts. The marketing plan should specifically explain what you are going to do to achieve the revenues you forecast. Why will customers want what you are selling? Who are these customers? How are you going to communicate to them about your business? The marketing plan should explain in words the numbers shown in the revenue forecast. Most plans just do not make this connection.
To avoid running out of cash before your business model has time to work requires an accurate assessment of how much money you will really need to get the business off the ground. While knowing your costs is important, accurately forecasting your revenues is critical.
It is so sad to see a business model that has real potential fail simply because the entrepreneur was unrealistic about how much money it would take to get to the point of success.
They need the help and support of a whole host of people who are directly involved in the business, including employees, partners, family members and investors.
Entrepreneurs also need to develop key “partnerships” with people and organizations that are not a direct part of the daily operation. These partners work closely with an entrepreneur in some way that is important or possibly even critical for the operation of the business. Even though they are not as directly involved day-to-day as employees and customers, the support of these key partners can be at least as important for a business’s success.
Let’s look at an example of key partnerships for a simple business model. My students all know that I have one more business start-up in me. I plan to open a bait shop when I retire from teaching. Why a bait shop? My first significant small business experience was running the bait shop for the marina that our family owned in Wisconsin when I was fifteen years old. So it seems appropriate to me that my last business venture should also be a bait shop!
An entrepreneur can use key partners to help reduce risk by sharing that risk with partners. In Dr. C’s Bait Shop, I will seek out suppliers who will help reduce the risk associated with my inventory. Minnows and worms are perishable, so I will work with suppliers that are willing to deliver inventory often and only deliver it when I need it. That reduces the risk that my inventory will go bad if I have a stormy week that would lead to a significant drop in sales.
Dr. C’s Bait Shop will need a space to operate in a good location. I will try to find a landlord who will rent me the right building and offer good service at a fair price even though my business is new. I may even be able to get the landlord to pay to fix up the space I need and add that cost into my rent. So, key partners can help entrepreneurs secure needed resources without actually spending their precious start-up cash to acquire them.
I will seek out counsel from people with more experience in the industry to help serve as advisors. I will talk with bait shop owners in other markets and connect with old timers in the Tennessee fishing community.
Finally, I will build legitimacy for my bait shop among angling enthusiasts by volunteering in local hunting and fishing organizations.
Good networking with key partners is much more than just introducing myself and giving them a business card. I need to earn their support by making the relationships between us mutually beneficial.
So as simple as my bait shop business is to operate, its success depends on building a network of key partnerships. While being an entrepreneur means you do not work for anyone, it does not mean you don’t work with anyone.
In May of 2005 Jason Duncan walked across the stage at Belmont’s graduation. At that moment he became the first alumnus of our new entrepreneurship program.
Like many who have followed him, Jason had worked on a business he wanted to launch while studying in our program. His plan was to move to Montana and open a coffee shop. He even had a name for his coffee shop – EVOKE.
However, as is often the case, nothing went according to plan.
Try as they might, he and his wife Jenni were never able to open their coffee shop in Montana. But they did find a way to get into the coffee business. Since every attempt to open a store seemed to meet a roadblock, they adjusted their business model and opened EVOKE as a mobile coffee catering business.
“EVOKE did not set out to be a mobile coffee catering company,” said Jason. “But what we found out is that we grew up doing this, made money, and knew that we now had a foundation to stand up on.”
Although they had success with their mobile coffee catering business in Montana, in 2008 they decided that their best chance for long term success was to move EVOKE to Jason’s home town of Oklahoma City.
“When we moved EVOKE to Oklahoma City, we knew we had two options: to work our tails off and learn from our mistakes in Montana or shut EVOKE down and move on,” said Jason. “We knew we could be better. We took the first option and worked tirelessly to run a solid company based on what we had planned years ago.”
Jason and Jenni realized they would have to adapt their business model once again in this new market.
“Oklahoma was very different than Montana,” explained Jason. “We had competition, which we did not have in Montana. So, we focused on a key part of coffee: The relationship.”
The customer relationship part of the business model is the one that most often gets misunderstood. There is not one best way for all businesses to interact with customers. But there is one best way for your business model to build a relationship with your customers.
The large national coffee chains are built on a relationship with their customers that supports the core of their business model, which is efficiency. They are good at getting a large volume of people through their stores each day.
EVOKE’s business model was based on a different relationship with their customers. They chronicled their ups and downs openly and honestly in a blog to allow their customers to get to know them on a more personal level. They worked hard to become part of the fabric of their community. By following this model, EVOKE has become one of the top coffee catering businesses in the country.
But they never lost sight of their original plan.
“We did not change our vision as we grew and kept our eyes on the ‘final’ goal — if there is one in business,” said Jason.
So on the first of May this year, their plan to open a coffee shop finally became a reality. They opened the first brick and mortar EVOKE coffee shop in Oklahoma City.
The value proposition — the collection of things a business offers to the target market to solve a problem or satisfy a specific need — is how an entrepreneur attracts customers away from the other choices they have among all of their competitors.
Most value propositions for new businesses come from some fundamental trend in the economy, in demographics, in technology or in society and culture. These trends lead to changes within industries.
For example, the widespread use of the Internet forever changed industries such as music and newspapers. Inflation in the economy both led to soaring healthcare costs and more recently begun to affect the food industry. Inflation has clearly shaken up both of these industries
A fundamental role of being an entrepreneur is to find solutions for the problems and needs customers have that result from the change that follows disruptive trends like these.
Once the entrepreneur identifies the new business opportunity, the next step is to identify the specific offerings that provide enough value to customers to get their attention and motivate them to purchase from the new business.
It could be something about the product itself, such as its price and value, features, performance, durability or design. It could also be something about how the product or service is delivered to the customer, such as its method of delivery (in their homes, on-line, in an exciting new retail location, etc.) or the specific services offered to go along with the product. Or, it might be something about the personnel of the company, including their expertise, responsiveness, or reliability.
It is almost always best to identify and focus on one or two things that will make your business stand out to customers. Focus on the most important need or problem the customers are facing. Offer that feature to the customers with excellence in mind, making sure all employees understand its importance. And make that key feature the heart of all of your promotion and other communication with the customer.
The best way to develop the key features that are at the heart of your value proposition is to listen to your customers, as while you may think you know what the customer wants, most of the time you will not have it quite right. You will probably have to adjust your product or service to fit with what the customer actually wants or needs.
You may have started with something that is too complex and confusing to the customer. What you thought would be one of many features of your product may need to become the only thing you focus on.
Sometimes the entrepreneur starts too narrow, and what was thought of as the product or service is only one of its key features – you may need to broaden what it is you offer.
Or you may discover that what you offer is a great value, but you have not been selling it to the right target market.
Once your customers affirm that you are offering the right value proposition, it needs to become the focus of everything you and your employees do every day.
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