Start-up: March 2005 Archives

Jason at A Thought Over Coffee sheds some light on the chaos that can be a part of the start-up of a new venture, especially when it also involves moving half way across the country.

Accidental Verbosity has a wonderful follow-up to my post on friends as partners from a few days ago.

At some point every new entrepreneur has to address the question of how much to charge for their product or service. For many entrepreneurs this is one of the most agonizing decisions they have to make during their start-up. For most, they fear charging too much and scaring customers away. Many go so far as to almost seem to be apologizing to the market for having the gall to actually try to compete. They end up charging significantly below what the market may be willing to pay.

There is a good article at NFIB on pricing strategies for new businesses. It offers a simple approach that helps take some of the guess work out of pricing. Do your homework of what the market is charging. Make sure that what you charge covers all of your costs, including overhead. An operating margin of 50% to cover overhead is a good rule of thumb. And finally, build profit into your pricing strategy. Making money is your goal, and you can only create profit if you charge enough.

My only additional advice is to keep your business strategy in mind. If you truly have a safe niche that no other business is competing within, you can charge a little more. However, make sure you really have a niche, as many who think they do are really just offering a variation on a theme. This strategy involves trying to differentiate your product or service to gain existing market share from others, which requires meeting or slightly beating existing market prices.

Remember, pricing your product or service is part science and part art. Gather data about the market, but also follow your intuition about what your customers will pay based on your business strategy.

National Dialogue on Entrepreneurship examines displaced workers choosing entrepreneurial strategies as a solution for their unemployment.

"North Carolina's New Opportunities for Workers (NOW) program, which provides entrepreneurship training to displaced workers, is one recent example of such an effort. These strategies make sense according to a new survey of unemployed Americans by Right Management Consultants, a Philadelphia based career transition firm. Overall, 44% of the unemployed consider self-employment. Only 10% actually take the leap, a percentage equivalent to the levels of entrepreneurial activity found in the general US population. Another interesting survey finding concerns the age of those with this interest. Older workers (aged 61 plus) have the highest levels of interest in self-employment while younger workers (aged 21-30) have the lowest interest levels. These findings run contrary to other research that shows that entrepreneurial activity is most prevalent among those between the ages of 25-44."

I have written several posts about the challenges of being in business with family. Another situation with its own set of issues is going into business with a friend. I see this happen time and time again with young entrepreneurs. Three buddies sitting in their dorm, at a coffee shop, or in a bar decide it would be a cool idea to go into business together. While it is important to know and trust your partner, many friendships have other baggage that can create real problems, particularly in times of trouble in the business or as the business grows.

Startup Journal has an article on friends as partners in which the author asserts that it is the "easiest way to start a business enterprise....(and) also one of the easiest ways to end a friendship."

When I see friends in my office who want to start a business together, one of the first things I say to them is that they have to be prepared for the fact that the odds are pretty good that they will no longer be such good friends in a couple of years. There is also a chance that they can become better friends, but it is at best a coin toss as to which way it will go. Of course, that speech usually falls on deaf ears since that would never happen to them.

It even gets more complicated when three or four friends go into business. Alliances begin to form from the beginning that undermine the foundation of trust in the overall partnership.

So who do you go into business with if not friends. Well, the friendship may not be the problem in and of itself. In fact, I think it is necessary to be friends with your partners to have any chance in the long run. But there needs to be more to it than that. It is a necessary condition, but not a sufficient one. It is like a marriage; love is never enough by itself to insure long term success.

Friendship should be the foundation, but here are other issues to explore before "tying the knot":

- Do your share the same vision for the business?

- Do you share the same aspirations for the business? Does one want to build an empire while the other create a simple lifestyle kind of business?

- What are your work habits and work ethic? Are they compatible enough to keep the partnership feeling fair to all the partners?

- How much time off to you plan to take each day, each week, each year?

- How much money will you put into the business?

- How much do you expect to get out of it?

- Who will be the President of the company? What roles will the other friends play?

- How will decisions be made?

- What is everyone's credit rating? Can all help to guarantee a loan, if necessary?

- What if one of you gets married and the new spouse gets a job offer in another city? Would you move away?

- What are your core values and how do you want to see them play out day-to-day in the business?

- How will employees, customers, suppliers, etc. all be treated?

- What will you consider to be real success in this business?

There are probably countless other questions to talk about, but this is a start. Talk. Talk some more. Listen to your gut if you don't like the answers you hear from potential partners. Go in with your eyes wide open rather than with stars in your eyes.

Partners should be friends, but friends to not always make good partners.

When we started our health care business I had no experience in that industry. Now normally that is not advisable. However, there are ways to overcome a lack of experience.

I had two partners who were very experienced in health care, so that helped quite a bit. But, I also tried to learn as much as I could from those who worked in our business. In fact, when one of our facility managers had to be let go, I was the only person who could possibly step in and run the business until we could find a replacement. Luckily, I had spent time with the staff and had built a certain level of trust. They took me under their wings and helped me make it through a very difficult time in our business. I learned so many important lessons during those few weeks about the health care business from working side-by-side with our staff as they cared for our patients. It made me a much more effective leader as our company began to grow.

On a similar vein, Bizjournal has a story about an entrepreneur who bought a plumbing business without ever having worked in that industry.

"As the new owner of Superior Mechanical Inc., a local commercial plumbing company, Richard Drennen had ambition and energy aplenty. What he lacked at the time of the 1999 purchase was knowledge of plumbing - commercial or residential.

"In the ensuing months, he labored on the work site alongside his employees, resolving any credibility concerns they might have had."

Knowledge and experience of the type of business you are starting or buying are certainly important to have. But, a lack of either, or of both, can be overcome.

StartupJournal reports that more entrepreneurs are using blogs to create their own public relations.

"When GreenCine Inc. launched an online journal two years ago, the San Francisco online DVD-rental company hoped that a steady diet of film reviews, festival dispatches and filmmaker interviews would energize its community of cinephiles, turn regulars onto new movies and attract more members.

"It worked. The company's blog, GreenCine Daily, sparked a 20-fold rise in hits on the GreenCine Web site to about one million a month. Even better, films critiqued by the blog's two writers are often snapped up by renters. Despite little marketing, membership numbers and revenue have doubled in the past year."

I made a post a couple of days ago about a couple of new entrepreneurs blogging on their experience.

Time to update my lecture on "Bootstrap Marketing"....

Well, today is the day that my senior students turn in their business plans. Jason gives us his thoughts on the pain and pleasure of this process. He is planning on opening his coffee shop in Montana this next fall.