Category: Business Model

Forecasting Revenues Key to Successful Launch

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.

Key Partners Support Success

Entrepreneurs cannot achieve success alone.

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.

 

A Long Journey

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 Right Value Proposition is Heart of Entrepreneurial Success

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.

Business Model Course Available

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The first course is six modules on The Design.  I have already signed up.  (Full disclosure — I am a full paying customer!!)

The objectives of the course are to facilitate the design of gamechanging business models with teams, startups and major organizations using powerful visual facilitation tools and techniques.

Interested in learning more about the course or about how to register?  Click here.

Simple Business Models Often the Best

Sometimes the simplest business models make the best opportunities.

We recently held our competition for the Baker Donelson Outstanding Student Entrepreneur of the Year award here at Belmont University.  The winner not only has bragging rights, but also receives a significant cash award to help with the growth of their business.

This year’s competition was particularly strong.  But in the end, the winning business was not a new app for your smartphone, a new web platform, or a breakthrough technology to change the music industry.  The student entrepreneur who was named the Outstanding Student Entrepreneur of the Year collects medical waste from doctors’ offices and funeral homes.

It took Jerell Harris, founder and at this time sole employee of QuickMed, a long time to get to the point of starting his medical waste management business.

Harris is not my typical student who comes to college fresh out of high school.  By the time he enrolled he had worked for several years, was married, and had a family of four children.

“I operated a small business for more than seven years,” said Harris, “but failed to take the company to the next level of growth. It was very frustrating.”

Eventually he decided to take significant step of entering college to pursue a major in entrepreneurship.

As he began to learn about entrepreneurship, Harris explored several business models.

The most recent one was a biometric attendance-monitoring concept aimed at reducing fraud within the state supported childcare industry.

The further he explored this idea, the more he realized that the technological complexity of the systems to operate the business, the cost of getting it started, and the general political climate it operated within made it too risky to launch.

After abandoning that idea, he decided to try and find a simpler business model to pursue.

Based on conversations with a friend, he recognized an opportunity in a well-established industry — medical waste management.  As he developed the business model for this idea, he discovered that it was relatively inexpensive and easy to launch.

But even a simple business model requires proper and careful execution.

“My entrepreneurship education has helped me tremendously,” said Harris. “I now understand how to make necessary pivotal steps that will help me reach my growth targets.  Above all, I have learned how to manage my company as it goes through various life cycles.”

Even though this medical waste management is a well-established market, Harris was able to find a value proposition that has helped him steadily gain market share.

“I have listened to the complaints in the market and developed QuickMed’s services based on those criticisms,” explains Harris.

Harris has ambitious goals for his new venture.  He intends to extend QuickMed’s waste collection services across the state of Tennessee by 2014.

When searching for a new business idea, avoid the common temptation to try and find a complex, trendy, or glamorous product.  Some of the best opportunities come from the most simple, everyday needs in the marketplace.

When Lightning Strikes

Most entrepreneurs dream of that one big break.  For some businesses it is getting the one big customer.  For others it may be betting that magical “shout out” from a national thought leader or big time media outlet.

Should you always walk through the door of opportunity that
the big break opens for you?  Sometimes yes, but sometimes no.

Business on Main has a video about a chocolate maker who got national attention for one particular recipe for beer infused chocolates.  Orders went through the roof.  And fortunately she was able to put in the twenty hour days Continue reading When Lightning Strikes

Business Modeling is Process, not an Event

Developing a sound business model is key to the successful launch of a business.

But you should never assume the business modeling is finished once the business begins to grow. Keeping a business model current is critical for long-term success.

A business model helps to ensure that all of the “moving parts” of the company are working together.

What is the value that is offered to the customers and what is it worth to them? Who is my target market? What do they expect out of me as my customer?

How do I get information to them, and how do they want to get the product? What are the key activities to make this all come together, and what will it cost? What are the resources I need to make this happen (money included)?

Developing a sound business model in a startup venture helps improve the chances that the business will survive the launch, begin to gain acceptance in the market and grow.

While a business plan may be important to secure financing, a business model is what will guide the entrepreneur through the inevitable trial and error of finding the best fit in the market.

Changes that result from forces such as technology advancement, demographic trends and new customer preferences can all require adjustments.

For example, a recent study by the Pew Research Center found that more than one third of all American adults now own a smartphone, which is changing customer preferences in how they want to communicate and engage in transactions with businesses.

These changes can have a profound impact and at the same time open many new opportunities.

Businesses expanding into new products or new markets should also give careful consideration to the business model.

I personally learned this lesson the hard way.

When we expanded our health-care business from Raleigh into Charlotte, N.C., we assumed that the business model we had developed in our first market would work equally well in the new market. However, we quickly found out that assumption was wrong.

There were significant differences in customer preferences and expectations in the new market. Unfortunately, we had made major commitments to space and staffing based on a flawed business model. As a result, our operation in Charlotte never reached profitability.

Even a more established business should revisit its business model, as every market experiences changes over time.

For most of its history, Best Buy had been a business that catered primarily to men, as they were the main purchasers of consumer electronics. However, a report in Harvard Business Review chronicles how over time more and more women became customers.

Best Buy found that these women were highly dissatisfied in their customer experience, as their approach to buying electronics was quite different from men’s.

To remain competitive, Best Buy made significant modifications to its business model.

Don’t assume just because you had your business model right when you opened your doors that it will always work smoothly. All businesses experience changes over time. Assessing and revising a business model is the best way to ensure that your entire business keeps pace.

Luck and Serendipity

While entrepreneurial success is tied to careful feasibility assessment, business modeling and planning, never underestimate the role that luck plays in an entrepreneurial journey.

I am not suggesting that aspiring entrepreneurs just sit and wait for an opportunity to come to them like a bolt of lightning out of the blue. As the Roman philosopher Seneca pointed out long ago, luck is the crossroad of preparation and opportunity.

Preparation comes from the development of what I call the process skills.

Entrepreneurs have a better chance of success if they learn fundamental business skills, such as accounting, marketing and managing people.

They also benefit from learning specific process skills tied to starting and growing a business, such as how to assess opportunities and translate them into business models.

Opportunities come from the development of content skills that come from our experiences in life. The best ideas for possible businesses most often come from jobs we have held, from our hobbies and interests and from our social network.

If we pay close attention, it is out of these experiences that we’ll notice customers who aren’t getting what they want or who are missing the service they expect. This is what creates the gaps and pain in the market that entrepreneurs can capitalize on with a new business.

There is one important caution regarding the opportunities that come from our experiences, though. Don’t become a slave to the status quo. Be ready to be surprised.

Luck is not the only element that leads to entrepreneurship. We also need to be ready for serendipity, which is when we find opportunity not by plan, but by accident.

The examples of the role of serendipity in entrepreneurial success are many.

For instance, the original plan for PayPal was to build a payment platform for the old hand-held Palm Pilot devices.

And 3M sticky notes came from an adhesive that did not work as well as it should have.

The key was that in both of these examples, while the original plan did not work, an entrepreneur was willing to pursue a surprising new direction that did work very well.

Entrepreneurial success can be the result of a path we did not expect.

While our experiences are important, we have to be careful not to get stuck in the old, traditional ways of thinking. And we must never become a slave to our original ideas.

So, the formula for success is quite often a combination of hard work and preparation, of the experiences we have in life and more than a few surprises.

Never underestimate the role of luck and serendipity in entrepreneurship.