Tag: business model

Turning Passion into a Business Model

Healthy vegetables
Image by Jerzy Górecki from Pixabay

Many people are driven into entrepreneurship based on a desire to share a deeply held passion they have with the rest of the world. Passion is often the fuel that propels people to take the entrepreneurial leap.

Bootstrap!

Starting with your passion rather than with a compelling market need inherently increases the risk of your startup. There may or may not be enough people who share your passion. Until you test the market, you cannot be confident that there is a big enough market and that your customers will be willing to pay enough to make your business profitable. These are the key elements of a successful business model.

In her article about the five steps to turn a passion into profits, Caroline Castrillon explains how to mitigate the risk of building a business from a passion. She suggests that you start small, don’t quit your day job, set manageable goals, outsource whenever possible, and set a clear vision for the business. These steps help you prove there is really a market for your idea while limiting your financial commitment. These are all foundational elements of bootstrapping.

Pivot Your Passion to the Market

As you bootstrap your startup, you need to use the information you learn from the market to pivot your business model. Wes Moore, founder and CEO of BridgeEdU, says he succeeded turning his passion into a thriving business by learning what problems his potential customers have and using that information to strengthen his business model. This often requires the entrepreneur to pivot from their initial business model to one that better aligns with customers’ needs.

When the Market Doesn’t Exactly Share Your Passion

Getting entrepreneurs with a strong passion to pivot their business model is easier said than done. I have found that they may become defensive when they feel what they are passionate about is being challenged. However, it does not mean the entrepreneur needs to give up what motivated them to create a business based on their passion. They just may need to tweak what they offer. A pivot to the business model may be necessary to better align with what the market is seeking.

Ryan Reisdorf turned his passion for healthy food into a thriving business. However, he had to be willing to pivot his initial offering to make the business successful.

Ryan, a Type I diabetic, wanted to create a business that sold “healthy eating.” He founded his business, called Placemat, to sell healthy prepared meals in Nashville. He got some advice from a mentor at the Nashville Entrepreneur Center that fundamentally changed the value proposition of his new business.

“I pitched him on what I was doing. And he’s like, ‘You’ve got it wrong, man. You’re leading with something that 90% of the world doesn’t care about – health. You’re providing a seamless way for somebody to have a private chef come to their home. That’s it. Nothing more, nothing less. When you get into the home, that’s when you get to talk about health and the why of Placemat. When they take that first bite, that’s when you get to talk about health. That’s where your value is.’

“And sure enough, I took his advice and haven’t looked back. It’s changed the direction of the company.” (from “Ryan Reisdorf” in Entrepreneurial Voices)

Ryan pivoted his value proposition without compromising on what drives him as an entrepreneur — offering customers healthy food. He just needed to adjust how he sold it to his customers. He has found a business model that is fueled by his passion and meets a market need!

We Must Move Forward

Colorado hike
From a Colorado hike. Jeff Cornwall

“No man ever steps in the same river twice.” (Heraclitus)

The ancient Greek philosopher Heraclitus may not have been an entrepreneur, but some of his teachings sure do capture the world of startups.

One of my former business partners liked to say that being an entrepreneur reminded him of being a shark. If you don’t keep swimming forward, you will die.

Businesses Must Move Forward

The entrepreneur’s world is like the river described by Heraclitus. Change is inevitable. And change is a constant. Entrepreneurs must never forget that the same changes and disruptions that helped create an opportunity for them at their launch will continue long after they open their doors. If they are not ready to adapt, the change that created the opportunity could eventually lead to their business’s demise. Change in the competitive and macro environments are continuous like the flowing river, creating the need for pivots to the business model throughout the life of most businesses.

Even being a first mover in a new market does not guarantee that you’ll control that market. New competitors will see the opportunity you discovered and come in to take market share from you. You will need to sharpen your business model to ensure you continue to meet the needs of your market and offer the value they seek.

Customers’ needs and preferences evolve and change. You must keep up with these changes and be ready for new expectations. We certainly saw significant changes in customer expectations after COVID.

Demographic changes also create the need for pivots in business models. For example, and one that is near and dear to my heart, Boomers are creating a boom in the construction of 55+ communities. For example, Pulte Homes identified the potential in this market more than a decade ago and now is building communities for aging boomers nationwide.

Entrepreneurs Must Move Forward

Business models are not the only aspect of entrepreneurship that demand change. Entrepreneurs themselves also cannot stand still.

The job description of the entrepreneur constantly evolves and expands to meet the needs of their growing business. Entrepreneurs need to learn and grow as leaders of their businesses.

Entrepreneurs and their teams are prone to boredom and burnout as the business becomes established and professionalized. Even a busy entrepreneur can become bored. Many of us who are drawn to entrepreneurship are drawn to the excitement of the startup. This includes the founders and their founding team members. Once the business is up and running and the founders now have to manage an established company, many entrepreneurs report feeling bored, stagnant, or stuck.

For other entrepreneurs, where the business ends up is inconsistent with their vision. Early on, we often do everything and anything that the market wants from us, sort of an “anything for a buck” strategy. Building a strong market presence eventually requires pruning the offering to the market and focusing on a more specific target customer.

For example, Susan and Jen faced this inflection point in their business, J’s BBQ. Susan describes it like this:

“We’ve always known this part (the brick and mortar) of our brand is not something we planned on doing long-term. We want a better balance for our family, while the brand continues to grow. Reconfiguring our balance is where we’re at right now.

“Our demand has once again exceeded our kitchen’s capacity, and our family’s needs continue to persist. In order to put our next plan into place, we need to shift gears. If you become stagnant or trapped as an entrepreneur, if your current business plan reaches a plateau…you’ve lost the momentum and everyone feels it.” (“Jen, Susan, and Jadon,” Entrepreneurial Voices).

Entrepreneurship is a journey of change and evolution.

“Nothing endures but change.” (Heraclitus)

The Power of the Value Proposition

I have written before about the challenges new businesses face as they try to get established in the market and build revenues.  In one post, I compared new businesses to annoying little gnats flying around in the face of the market.

At the heart of early success for a new business is identifying a compelling value proposition that you can offer to the market.

Your marketing mix, that is the combination of your product positioning, promotional plans, and pricing strategies, all need to reinforce the value proposition you are offering to your customers.

Andrew Gregson explains how pricing reinforces the value proposition in a post at StartupNation.

The most popular pricing strategy for startups and small businesses is to follow the lemmings and charge what everyone else charges or to calculate the costs and target a certain margin. Both are disasters. Following the pack leads to average profits at best. Marking up from costs leaves money on the table.

Even though getting pricing right is tough, it is critical to put in the time to ensure your pricing reinforces your value proposition.

 

Good Debt. Bad Debt.

Image by walkerud97 from Pixabay

Young entrepreneurs generally seem to be reluctant to consider using debt to help finance their businesses.

The reasons they cite are many.  Often, they are concerned that they already have a heavy debt burden due to student loans from college.  Others tell me they watched their parents get deep into debt and don’t want to do the same.  The requirement to sign personal guarantees for business debt terrifies many young entrepreneurs.  More than a few tell me that Dave Ramsey’s anti-debt message shaped their negative perceptions about debt.

When I tell my students that, generally, I prefer debt over equity financing, I see shock on many of their faces.

Bad Debt

There are certainly many instances when taking on debt financing for a business is not a prudent decision.

When I hear of entrepreneurs maxing out credit cards to finance a startup, it sends shivers down my spine.  I know that there are countless stories in entrepreneurship magazines about “heroic” entrepreneurs who went tens of thousands of dollars in debt with credit cards to create incredibly successful businesses.  But for every successful use of credit cards to launch a business, I have seen dozens who end up with failed businesses and mountains of credit card bills that haunt them for years.

Bankers can tell countless stories of business owners with business models that are no longer competitive seeking loans to keep their failing businesses afloat.  Rather than keeping these businesses on life support by continuously pouring money into them, these entrepreneurs need to come to the hard realization that they have come to, what I call, an “Old Yeller” moment.  Sad, but true.

Some debt funds short-term needs for cash, while others fund longer term investments in your business.  However, sometimes we use debt for the wrong purpose.  For example, when I was a young entrepreneur, I used a line of credit to invest in things that were actually tied to growth capital.  A line of credit is meant to fund short-term timing issues with cash flow, such as funding inventory purchases or paying for payroll on a project that will be billed upon completion. I used it for hiring staff and adding new space that would take much longer to generate cash flow. 

Fortunately, I had a good banker who helped coach me on the proper uses of lines of credit. He also provided us with a long-term term loan to use to fund the investments we needed to make in staff and space to grow our company.  I never made that mistake again!

Good Debt

Good debt begins with debt that your business and you can support.  This is how bankers make decisions on making loans.

Bankers always look to multiple means of repayment when making business loans.  The first source of repaying is a healthy business with more than enough cash flow to fund the debt.  The second line of defense to ensure loan repayment is the personal guarantees of business loans by the business owners.  If your financial house is not in order, your chances of getting a loan for your business are diminished.  Finally, bankers will use assets pledged as collateral to pay off business loans, but only as a last resort.

“Bankers only give loans to people who don’t need it,” is a common refrain I hear from small business owners.  The reality is, bankers only give loans to people who they are highly confident can repay those loans.  After all, it is our deposits in the bank that they are using to fund loans.

Bankers understand what makes good debt, and you should understand and follow their criteria for using debt. 

Use With Caution

The requirement of personal guarantees are a sobering aspect of taking on a loan for your business.  Keep in mind, personal guarantees are not only a financial tool used by banks.  It is also a psychological tool.  If you are not confident enough in your business to personally back the loan, then why should the bank?

Another risk with taking business loans is that although your business might be solidly bankable when a loan is made, times can change.  We need to look no further than the thousands of loans that went from safe and solid earlier this year, to being rated as highly at risk for default after pandemic took hold.

When you need to use debt, make it a priority to pay down your business loans as quickly as possibly. Certainly, don’t pay off your loans so aggressively that it hurts your cash flow. However, once you have a good cash position, the next most important goal is to pay off your loans.

The reason I prefer debt to equity is that debt is like a house guest.  When you pay it off, it goes away.  Equity is like adding a new member to your family.  Once you take their money, they are there to stay!

Hopscotching Your Business Models

Image by Merio from Pixabay

The coronavirus and economic crisis have certainly challenged many entrepreneurs to do some serious re-evaluation of their business models.  One of my friends compares it to being a toddler playing at the beach, getting knocked down by wave after wave after wave.  More often than not, this has resulted in more hopscotching than simple pivoting when it comes to business models.  Rather than incremental changes, known as pivots, entrepreneurs are being forced to reinvent their businesses on the fly as the pandemic creates seismic disruptions in society and in the economy.

Typical Pivots

Significant pivots in business models are common during the early days of a new venture.  We pivoted the business model of every startup I have ever launched once we opened for business and received feedback from the market.  In the days when we relied on formal business plans to guide our startups, some of these pivots could be rather jolting.  Today’s business modeling tools facilitate a more incremental process of pivoting during early days of a new business.  Steven Blank refers to this as the searching stage of customer development.

Once the searching stage leads to a clearer picture of what the market truly needs our business model to be, the execution stage begins.  This is where the focus shift from customer discovery and pivoting, to scaling and building business infrastructure.

Hopscotching the Business Model

The disruptions being caused by the coronavirus and the governmental policies that are following the outbreak, force established businesses to jump, or hopscotch, to a new version of their business model or even a new business model entirely.

Some of these are more survival strategies.  For example, distilleries across the country have shifted some or even all of their production capacity to making hand sanitizer.  Such efforts have helped ease the temporary strain on the supply chain for hand sanitizer until the market can stabilize.  Restaurants, with their dining rooms temporarily closed, are turning to curbside service, grocery sales, home delivery, family take-out meals, and so forth to bridge the gap until they can return to business as usual.  Boutiques have found that people are buying fewer new outfits, as we are mostly working from home.  So many have decided to make face masks a fashion accessory.

Some changes in business models look to be more permanent.  I have already highlighted changes in travel and music that are likely to be more permanent post coronavirus.  I plan to look at other industries over the coming weeks.

How to Navigate the Need to Hopscotch?

So what is an entrepreneur to do during such a crazy time?

Steve Blank suggests using a tool called the Market Opportunity Navigator to help uncover new opportunities for a business to pursue amid the coronavirus.  In his blog post, Blank offers a great case study to illustrate how a healthcare company discovered how to hopscotch its business model.

Ted Ladd offers a process in a column at Forbes that is helpful.

The first step is to deconstruct your business model to its core parts using the Business Model Canvas.  As I tell my students, the business modeling tools we have at our disposal today are not just to help you launch your business.  They are powerful tools to help you navigate your business through the many changes that are likely to come in the future, even in “normal” times.  This article in the Cape Cod Times offers some specific things to consider when deconstructing and re-evaluating your business model.

Next, Ladd suggests that entrepreneurs reimagine each part of the business model, using creative thinking processes, to reinvent each part of the model in the new world created by the pandemic.

Finally, Ladd suggests that, just like you did at the startup stage, you need to work with your customers (which may be entirely new customers) to test and refine the new elements of your business model.

SCORE offers three tips for those hopscotching their business models:

  1. Don’t forget the need for quality in what you offer, even if it is a temporary change in your model.
  2. Stick to what you know — don’t forget your core competencies.
  3. Don’t leave your old customers behind.

The Need for Resolve

One of the first blog posts I made as the coronavirus crisis began to unfold was about resolve.  As I stated at the end of this post:

The resolve we are seeing among entrepreneurs will pay off for our economic future.  It will take time and hard work, but these entrepreneurs are the ones who will lead us into our next economic expansion….and we will have one!

To ensure this bright future, don’t just get ready to pivot — get ready to hopscotch!

Humility, Not Guilt

Image by Bluehouse Skis from Pixabay

Over the past few days, I have talked to many business owners whose business is either stable, or even growing.  Many express a sense of guilt over their current success. I get it. The news is full of small businesses failing, and yet they are lucky enough to have a business that is doing okay.

A Sense of Guilt

The coronavirus has not impacted all small businesses in the same way.  Certainly many have been decimated by the sudden shock of the virus to our daily lives.  Here in Franklin, TN, where Mrs. C and I call home, restaurants, coffee shops, retail stores, and other “non-essential” businesses have been ordered to close their doors. The owners of these businesses struggle to make it through by offering carryout, delivery, and/or going online.  Anything to keep the lifeblood, that is cash, flowing into their businesses.

On the other hand, some small businesses are holding their own. For various reasons, their business models help insulate them from the ravages of the current economic chaos.  

I would urge these business owners to save their feelings of guilt for things that they have consciously done that are wrong. You did not cause these crises.  You have done nothing wrong.  We need your businesses to succeed. Your businesses will be the foundation of economic growth once we get through the immediate crisis.  Your businesses will help reignite the economy, helping to create jobs and spawn entrepreneurs to create new businesses out of the ashes of this economic disaster.

Be Humble

A good way to frame this is to think of the impact of a tornado. One house can be completely wiped out by the storm, and yet the house next door is completely intact.  Is it because the one whose home was spared had some great foresight to pick their lot over the one next to theirs? Of course not! It is a result of the randomness that is a part of our lives.

So what should these business owners be feeling right now? How should they psychologically process the seemingly randomness of their good fortune while seeing others fail?

I would urge business owners whose businesses are still operational to turn any guilt they have into humility.

Feel humble that out of events that no one could have predicted, you are fortunate enough to have a business model that allows your business to continue.

Remember those entrepreneurs less fortunate than you.  Be humble, feel grateful, and keep moving forward. We need you!

The Linear Thinking Crisis

America has raised two successive generations trapped in linear thinking.

I see it year after year as students get ready to enter the world of work. Many of the young people view their careers through the lens of linear thinking.

The Linear Career Path

Students come to me for both formal and informal advice.  Their career decisions leave many stressed, and even emotionally paralyzed.

They have to get into the right school. They have to get the right professors. They have to land the perfect internship. They have to land a dream job that feeds their passion.  Step after step, they are convinced that one wrong move jeopardizes their future.  They are convinced that each step along the path predetermines the eventual outcome of their careers. One misstep leads to a dead end, from which they can never come back.  They have methodically followed the “one path” in life that they believe will lead them to success once they enter the work world. However, when they reach the point in life when they enter that “real world”, the nice clean path they thought would be waiting for them is not there. No wonder so many students move back home to “figure out life” after college!

The Un-coachable Entrepreneur

Many aspiring entrepreneurs we work with also have this same mentality.  They identify the one business that will bring them fulfillment and feed their passion.  They accept no feedback from mentors, professors, or even customers that challenges their thinking.  They have “figured it out,” so they expect all to get out of their way and let them forge ahead.  Customer discovery, market research, advice from experts be damned!

They are what my good friend and mentor-extraordinaire Shawn Glinter calls the un-coachable.

Don’t get me wrong.  There have always been un-coachable entrepreneurs, at least during the four decades I’ve been working with entrepreneurs.  What is different is how many more we are seeing.  They suffer from the same generational affliction of linear thinking as many of the students I work with.

Time for New Approach to Thinking

And now we face unprecedented economic and social disruption from coronavirus.  Linear thinking no longer will work for life plans nor business plans.

Phil Lewis wrote an excellent piece a couple of days ago about the critical need for lateral thinking. Lateral thinking is coming up with novel, even non-logical, solutions to a problem.  It is creativity at its best.

The critical point is this: it does not matter a jot what you do or where you work. Everyone has it in them to add transformational value through lateral thinking—even, or especially, in times of change or crisis.

Small business owners and entrepreneurs are facing personal crises within the broader context of the coronavirus crisis. The ones whose businesses have the best chance to survive, and eventually thrive, are the ones who can become nimble, lateral thinkers.

Nothing we have learned in the past can prepare us for what is next.  Entrepreneurs, particularly young entrepreneurs, must break free from their habit of linear thinking and find new solutions to the new problems this transformation we are living through has created.

These new problems are coming fast and furious.  There is no time for a contemplative approach to business planning and business modeling.

Experiment often. Fail quickly. Find traction. God speed!

(Photo Source:  Jeff Cornwall)

Why is Tuition the Same for Online Courses?

There will always be many families that want their children to have the campus experience. For them, the total costs beyond tuition, such as room, board, and transportation, are more than worth the price. When I meet parents after graduation, their words clearly express their satisfaction with sending their child to our university for four years of education. I love working with our students in a traditional college setting, so I am grateful that so many see value in what we offer their children.

For a growing number of other families and for many adult learners, online education offers an alternative that provides a different bundle of features that meet what they want from a university education.

Education is not a homogeneous market.

What is interesting to me is that the tuition charged both on campus and online is about the same for most universities.

Continue reading Why is Tuition the Same for Online Courses?

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.