Recently in Start-up Category

"I've developed this really cool product and I have applied for a patent."

"I want to show you this awesome app that I helped design."

"We've got a great idea for a website."

Those of us who work with entrepreneurs hear these types of introductions all the time when people come to meet with us.  Whether it is a result of years of development and research, or a sudden inspiration that leads to a "eureka moment," these aspiring entrepreneurs have come up with what they hope to be the next big thing.

The problem is that many of these entrepreneurs have gotten the design of their business models backwards.  

Rather than look to the market to tell them where opportunities are, they have come up with an idea and are trying to run full speed into the market with it.  

Starting a business by trying to find a market for an already developed product usually leads to a long and often futile launch of the new venture.  It results in a very expensive start-up process, as revenues tend to be very slow to materialize.  Expenses just keep piling up as the entrepreneur tries to find a target market with customers who need the product.

The approach to starting a business that has the best chance of success is to look to the markets for ideas.  

Start by looking at markets you already are familiar with from your knowledge, skills, and experiences.  The best business opportunities come from solving everyday problems that you have observed from your previous work experiences, your hobbies, or things you see in your everyday life.   

Look for groups of customers who share a common dissatisfaction with how they are being treated or who cannot find what they really want.  It may be something as simple as a market that has not been given good customer service.

Look for markets that are ready to try a new product to replace the old ones they now using.  That is what has led to the success of the Nashville-based app company Aloompa.  Much of their growth has come in the music festival market, where their apps replace outdated printed programs.

Look for markets where something that has worked in other similar markets has not been tried in your market.  That is what inspired Bob Bernstein to open Bongo Java, a neighborhood coffee shop in Nashville, that was like the ones he loved in his home town of Chicago.  

Look for markets with "pain" and then develop a product or service that takes care of that "pain."  

My favorite meeting with an aspiring entrepreneur is when they come to my office and say, "I have found a market that needs...."  

I know they are starting down the right path to develop a business model that has a good chance of success.

With the continued weak economy and little hope of recovery anytime soon, we can expect to see even more "accidental entrepreneurs" emerge. These are unemployed people whose best hope of generating income is to become self-employed or to start a business.

Ami Kassar is a typical accidental entrepreneur. Kassar had spent a decade in senior management with a large, national credit card company based in Philadelphia. When the recession hit in 2008, he suddenly found himself unemployed. His employer did not survive the recession-induced shakeout in the financial industry.

Finding a new job that was similar to his old one did not look very promising, so Kassar decided to launch a business. He started Multifunding, which helps small businesses find debt financing.

Like most entrepreneurs, Kassar faced challenges in the startup of his venture. However, many of his missteps can be traced back to habits and expectations that came directly from his years of working in a corporate setting.

So let me offer a brief job description of an entrepreneur to help those of you who, like Kassar, are facing a career transition:

1. Do everything. The temptation when you start a business is to continue to concentrate on what you did well in the corporate world and bring others in to take care of the rest. However, to build a successful business you need to learn every aspect of your business and perform every job. You need to know the business inside and out, from top to bottom.

2. Become a financial wizard. Set up a sound record-keeping system. Be your own bookkeeper for as long as you can. Just as you need to know every aspect of the operation of the business, you also need to know the numbers. The best way to do this is to make the financial aspects of the business a major part of your job.

3. Minimize overhead. The temptation is to surround yourself with the comforts you had in the corporate world -- a nice desk, a new car, a big office, support staff, and the newest and best gadgets. However, paying for all that overhead is what stands in the way of your bringing home a paycheck. So start lean, bootstrap whenever possible and make operating frugally a part of the culture of your business as it grows.

4. Watch your cash flow. As the old saying goes, "The leading cause of business failure is running out of cash." Learn the rhythm of your cash flow. Watch every expense like a hawk. Treat every dollar as iff it might be your last.

5. Schedule balance. Startups quickly become all-consuming. They can take up every waking moment if you let them. Build time in your life for those things that really matter -- your family and your friends.

Fortunately, Ami Kassar is an accidental entrepreneur who is making a successful transition out of a corporate career. Multifunding is now growing and doing well.

To be successful, accidental entrepreneurs have to develop new work habits and an understanding of what the job of an entrepreneur is really all about.

In two previous columns, we began looking at the "three-legged-stool" -- that is, whom small businesses need as supporting advisers. The first two legs were a business-minded attorney and a CPA.

The final leg of the stool is a business banker.

Because bankers are generally not able to lend money until businesses are well established, many entrepreneurs seem to be in no hurry to establish a relationship with a specific business banker.

However, Allan Joiner, senior vice president, relationship manager commercial and industrial banking with Avenue Bank, identifies two main reasons to connect with a banker early in your venture.

"First, your banker is your advocate," Joiner said. "Having an advocate within the bank can not only demystify some of the finance world for you but will be your champion inside the bank for future requests.

"Second, a good banker will become a trusted financial adviser. Because bankers are exposed to multiple business and industries, they can be a great sounding board for ideas and help strategize on ways to reach financial objectives."

With all the Web-based resources out there, including completely online banks, a personal relationship with a business banker may seem less important.

"Developing a personal relationship with a banker can make all the difference when you have an urgent need or run into difficulty," Joiner said. "There is no substitute for the service a dedicated banker can provide who has a vested interest in you and your business."

Successfully working with a banker requires a proactive, intentional plan. There are specific steps that entrepreneurs should follow to build a strong long-term relationship with their bank.

"Developing any relationship takes mutual effort and understanding," Joiner said. "For starters, it is just as important for entrepreneurs to interview the prospective bank to make sure the fit is right as it is for the bank to evaluate the entrepreneur.

"From there, strong banking relationships are built over time through regular two-way communication and performing within mutually agreed-upon expectations. While developing a good relationship with a banker cannot prevent occasional difficulties or (ensure) that the answer to every request will be yes, a constructive relationship with the bank is infinitely more beneficial than an adversarial one for both parties."

One of the most common mistakes made by entrepreneurs is not understanding how bankers think -- and specifically how they make decisions on business loans.

"Banks are not in business to take equity risk," Joiner said. "Banking is a low-risk industry. Because we fund loans largely with depositors' dollars, banks are not in a position to extend credit without a minimum of two readily identifiable repayment sources.

"Most startup businesses will not be eligible for traditional bank financing because there is no history of cash flow and often little, if any, residual collateral to retire the debt if the business fails."

There are many other advisers who can be essential for the success of entrepreneurs. But, as my father always stressed, the foundation of any successful business is usually built on a strong relationship with your attorney, CPA and banker.

One of the first bits of wisdom my father shared with me many years ago was that a small business needed "a strong three-legged stool" to support it. The three legs should consist of a strong attorney, a CPA and a business banker.

To save money, many startup entrepreneurs cut corners on legal work. With all the use of do-it-yourself legal websites, many entrepreneurs seem to be questioning whether they need a personal relationship with an attorney.

"Every business is different, and that is equally true for their legal needs," said Chris Sloan, an attorney with the Nashville office of Baker, Donelson, Bearman, Caldwell & Berkowitz. "For the truly simple, small, mom-and- pop types of businesses, you may be OK with a do-it-yourself approach. But if you are expecting a lot of growth, or have partners, an off-the-shelf approach is often a poor fit."

I tell entrepreneurs that when it comes to partnership/shareholder agreements, you can pay your attorney now or pay him a lot more later.

"There's a reason why we call partnership disputes 'business divorces,' " Sloan said. "They can be just about as nasty and emotional at times.

"The best way to avoid that is with an agreement that addresses issues like decision-making, dispute resolution, what happens if someone dies or wants to leave, and how and when to shut or sell the business.

"With a good agreement, you accomplish two things. First, you avoid a dispute down the road, and second, you have a chance to preserve the personal relationships."
Shape the issues

"First, find a business lawyer," Sloan said. "Many lawyers cannot think outside of the law school approach of spotting every issue and addressing it. Those are not business lawyers.

"A good lawyer also has the heart of a teacher; they should be able to explain things in a way that the client can understand them and feels comfortable. How they do this also gives you a good indication of how they will write, how they will negotiate and how they will interact with another party.

"Lastly, remember that lawyers are like doctors; there are many different areas of expertise. Just like you wouldn't go to an internist for open heart surgery, you shouldn't go to a public securities lawyer or a litigator for startup work."

One attorney with whom I worked in my business past used to say that he wanted me to first shape the issues we were working on for him from a business perspective, and then he'd do the lawyering.

Sloan agreed with this advice.

"My job isn't to say, 'Do this. Don't do that.' It's for you to tell me your business objective, and for me to advise you on the different ways to accomplish it and the risks associated with each one."

A strong legal foundation is one of the three legs of the stool supporting a small business. My subsequent columns will examine the other two legs of the stool.

One year ago today I blogged about a new microfund here in Nashville called Jumpstart Foundry.  I have decided that it is time to take a look back at this experiment.  There have been several initiatives like this across the country and they seem to be playing an important part in helping launch new ventures at a time when we need them the most.

Jumpstart Foundry was started by a local venture firm called Solidus Company.  The goal was to support local entrepreneurs and to help accelerate the growth of start-ups in the Middle Tennessee area.  Like most microfunds, JumpStart Foundry (JSF) has focused on very early-stage concepts.

Each of the selected concepts for our first year of operating this microfund received $15,000 in equity capital and special arrangements with participating partners for marketing, accounting, legal and technology services.  In addition, three members of the group offered their knowledge and experience to mentor the entrepreneur and accelerate the success of the project.  In return for this investment, JSF received a collective 10% ownership in the Common Stock of the company.

Because I have established for the Belmont University Center for Entrepreneurship a "no investment, no consulting fee" policy for alumni and student ventures, I have not participated financially in this fund.  However, I have been very active as a participant in this program and as an adviser for a couple of the funded businesses (I also make it a policy not to formally sit on their Boards, however).

So far the project has been a success.

Vic Gatto, a partner with Solidus Company and the driver behind JSF, shared with me some of the reasons this microfund has been so successful thus far: 
 
Diversity & Quality of our Mentors:  "I intentionally have assembled a strong group of very talented folks.  We had a good group last year and this year it will be incredibly strong and deep.  No matter what challenge an entrepreneur runs across - one of our Mentors will have direct experience in this area and be ready to provide hands-on, direct, first person guidance.  This is true in the typical areas of accounting, finance, marketing, fundraising (like other micro funds).  But it is also true in detailed technical areas such as: Scaling performance in a cloud hosted app, choosing Ruby or PHP for dev, successfully negotiating angel term sheet,  the use of 99 designs to inexpensively build a subscriber base of users, as well as lots more...  The point is - our 60 Mentors are entrepreneurs & angels themselves...not in some distant past but right now - today."

Program Content:  "Lean Startup / Customer Development in practice.  Everyone has heard the buzz words, but the JSF program will force you through the Build-Test-Learn loop. Our participants will iterate fast, build cool stuff, and get out of the building and learn about what works and what doesn't for 14 weeks until they discovery a product / market fit with paying customers to prove it.  It is a very active - 'jump in and swim' approach to the startup process."

High standard:  "We are going to be highly selective and targeted in who is accepted into the program.  JSF intends to launch 100% of our companies post graduation.  We can only achieve this in small batches.  Last year we ran at a rate of 1 per month as we built the infrastructure.  This year we will have a cohort of 6 over 14 weeks in the summer.  This may grow to 8 or 10, but we believe that quality trumps volume.    We will build Nashville one small group at a time over the next 5-10 years.  There is no shortcut that can maintain quality."

JSF Angels:   "Jumpstart is creating an angel network for the explicit purpose of supporting our graduates after the program.  These angels understand the Jumpstart Foundry way and are interested in getting involved for two distinct reasons.  They know we have very high quality investment opportunities and they are interested in building the entrepreneurial ecosystem in Nashville."

Alumni (and TS network):  "Over the next several years JSF will build a strong culture and alumni network.  JSF graduates will share a common bond with other graduates and current participants.  This will lead to opportunities available only to JSF alums.  However, we realize that building an alumni network  is a long-term process.  For this reason, we have accelerated this process by joining the Techstars Network.  It's not an exaggeration to say that Techstars may be the greatest organization for tech startup mentorship in the world.  Acceptance into Jumpstart means access to the TS alumni network, and that access is priceless." 

One of the things we learned this first year is that our entrepreneurs, like all entrepreneurs, can get a bit lonely.  To help build a community of support, we are changing our model this second year from funding one deal a month, to funding a cohort of entrepreneurs who will all work together over the summer in a 14 week program.

JSF is now accepting applications for the summer 2011 Jumpstart Foundry cohort.  The deadline for application is March 18, 2011.  You do not have to be from Nashville or intend to keep the business in Nashville.  But, if your experience is anything like mine was when I came here eight years ago, there is a good chance that once you are here you will definitely want to stay here!

During the on-going recession, entrepreneurship is becoming an even more popular path for women in America.  Elizabeth Fuller has an article in CSM that explores some of the common practices of women entrepreneurs:

"If opening a business demands courage, opening one in the aftermath of the worst economic downturn since the Depression demands a special steeliness, especially for female entrepreneurs. Because women-owned businesses are concentrated in retail and service industries - think Estée Lauder, Coco Chanel, Mrs. Fields Cookies, even Zipcar - they were among the first to feel the downturn. Now, in a fragile recovery, the business climate requires other qualities, like resourcefulness and patience."

Their strategies?  Keep debt low and bootstrap at every opportunity. 

Those who have been in my classes know that I often bring in knowledge from other disciplines to add to our understanding of the process of entrepreneurship.  In any given day I might bring in concepts from economics, psychology, music, theology, philosophy, biology, and any other number of areas of study to help us understand the process of new venture formation.

One concept that all aspiring entrepreneurs should pay attention to comes from statistics.  It is the null hypothesis.

A website aptly called Null Hypothesis offers a very clear explanation using the silly hypothesis that "the loss of my socks is due to alien burglary".  Rather than try and prove this hypothesis to be true, statistics takes the approach of supporting this hypothesis by refuting the opposite hypothesis of "the loss of my socks is nothing to do with alien burglary."

Null Hypothesis explains the process this way:

In statistics, the only way of supporting your hypothesis is to refute the null hypothesis. Rather than trying to prove your idea (the alternate hypothesis) right you must show that the null hypothesis is likely to be wrong - you have to 'refute' or 'nullify' the null hypothesis. Unfortunately you have to assume that your alternate hypothesis is wrong until you find evidence to the contrary. So it's innocent until proven guilty for the aliens.

"So how does this apply to entrepreneurship, Professor?" 

Here is how it works.

Most aspiring entrepreneurs spend their waking hours trying to prove that their idea for a new business can work.  They quickly gather some cursory industry data and talk with people already working in the industry with one thought in mind:  "What can I uncover that will validate my desire to open this business?"  They selectively only pay attention to information that reaffirms their desire to get the business open as soon as possible.  As a result, they fail to uncover information that may not paint such a rosy picture about the viability of the business idea.

When I talk with aspiring entrepreneurs, I always take the opposite approach.  I start asking them questions that try to prove that their business idea cannot work.  That is, I come at their idea using the null hypothesis.  I shoot as many holes in their idea as I can come up with.  If after I am done it is still standing, I feel better that they may be on to something.

Over the years this has resulted in some pretty frustrated students.

I once overheard a student exclaim, "That Dr. Cornwall sure is a negative guy for being an entrepreneurship professor!"

My approach has been called "being Cornwalled".  I have been labeled the "Simon Cowell" of entrepreneurship. 

It is not what my heart wants me to do.  I would love to be their cheerleader.  But I know that I am not helping them if all I do is blindly encourage them to jump ahead. 

One of the most important things I try to teach my students is to internalize the perspective of working from the null hypothesis.  When they come up with their next "great idea", I want them to immediately take the null hypothesis that it cannot work, and start trying to disprove or nullify it.  If the idea survives, then it is time to further develop the business model and possibly move toward launching the venture.

I know it may seem like we are coming at the same thing from only a slightly different angle.  But the difference in outcomes can be profound.

Once you start looking at a business idea from the null hypothesis, you uncover the weaknesses and holes in your business model.  If the idea survives evaluation from this perspective,  the odds are much better that the resulting business model will be much stronger when it comes time to launch than it would have been if all you did in your planning was try to rationalize starting the business.

If you cannot disprove the null hypothesis that the idea cannot work, you have saved yourself a lot of time, money and reputation capital from starting a business that was really doomed from the start.  And if you end up refuting the null hypothesis -- that the business cannot possibly work -- you can rest assured that your chances for success have grown significantly higher.

Even in the midst of the recession, I have had plenty of meetings with entrepreneurs suffering from Entrepreneurial Attention Deficit Disorder (EADD).  Had one just yesterday, in fact.

Even in a down economy there are many opportunities, and those with a creative mind see them everywhere.

For years I have had posters on my wall as part of my speech to those suffering from EADD.  My first one was a island golf hole with the word "Focus" on the bottom.  It actually went back to my days before I got back into teaching when one of my partners and I both suffered from serious bouts of EADD.  When I got into teaching, I found that it was an important tool when counseling student and alumni entrepreneurs.

Over the years the picture faded, but my need for such a visual aid did not.  So I bought a replacement a couple of years ago.  It is also a golf theme, this time with a green visual through a tough shot through some trees (A position I am not unfamiliar with due to my occasionally errant drives).

EADD is a blessing and a curse.  Some of the coolest business ideas I have pursued came out of episodes of EADD.  But, an inability to focus on one business at a time also led to some of my most trying times.

Moving on to the next cool idea before you nail the current one is not a recipe for a successful and healthy entrepreneurial career.

Entrepreneur.com features a summary of a method developed by author Scott Belsky to balance the need for creative thinking with successful implementation.

Belsky's approach offers three key steps (more than that would overwhelm anyone with EADD):

   1. Hire killjoys.  One of our partners played this role for us.  He tended to worry about the downside.  At first we thought he was, well, a real killjoy.  But over time we realized that his caution balanced our enthusiasm in a very important way.  Hiring people who can and will say "No" to some of your ideas can also work.
   2. Work with bias toward action.  Focus on getting things ready for market and then focus even harder on building customers.  No matter how tempting that next idea might be, leave it alone until your current business is nicely cash flowing.
   3. Change your vocabulary.  Celebrate implementation and business milestones, not creative free-for-alls.  Over time it will alter your culture to one of action and not just ideas.

If you suffer from EADD, read Tim Beyers' article at entrepreneur.com, buy Belsky's book, and find people who will hold you accountable for implementation and action.

With a growing number of people seeking entrepreneurship as an alternative path in this rough economy, there is increasing competition for the key resources that can make or break the startup venture.

New entrepreneurs are competing for essential resources, such as the funding, the customers and the staff they need to build a successful business. Attracting these resources often relies on how well the entrepreneur can deliver "the pitch" for his new business.

An effective pitch starts with a hook -- something that grabs the attention of the person one is talking to about a business. The most effective hook lays the groundwork to show the underlying need in the market for what the new business aims to offer.

A common mistake we see in pitches is that the entrepreneur waits much too long to tell what the business does. I had my students watch some examples of pitches the other night in class. You can find lots of good ones and bad ones on YouTube.

We were amazed that some of the people making a pitch waited more than halfway through their pitch to tell what their product or service is and what it does.
Answer key questions

Remember this: Early in a pitch the entrepreneur should present a clear mission statement. Who are you? What do you offer? Who is it for? What makes you unique?

The pitch must also show that there is "pain in the market" -- that there are people who are in need of what you are offering and are willing to give you their hard-earned money to pay for it.

Who needs your product? Why do they need it? How many of them need it? What are you doing differently from your competitors?

The pitch needs to be presented clearly. It should be an unambiguous answer to some key questions that a skeptical listener is likely to have about the business. How will you make money?

The presentation of the pitch needs to be compelling. The entrepreneur should show his enthusiasm. Make it a personal message to those listening, and make eye contact. Never use note cards -- this tells the world that you are not confident and that you don't know what you are talking about.

While it is important to be enthusiastic, you still must be authentic. Putting on an act rarely gets an entrepreneur very far. Be yourself in how you talk, in how you dress and in how you interact with others.

Finally, a strong pitch always ends with a clear message. What is the one thing that you want them to remember? What do you need from them? What do you want your target audience to do for you?

In this economy, entrepreneurs face competition on every front as they launch a new business. An effective pitch can help distinguish you from all the others trying to grab the attention of investors and customers.