Entrepreneurship, Leadership, Start-ups

Identifying and short-listing your next start-up ideas

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So what is a good start-up idea? How do you even go about finding one if you don’t have an idea weighing on your soul?  How do you narrow your focus if you have several ideas?

Somehow, the topic of start-ups became a four-part blog series for me.  First, themes of my successful start-ups.  Second, themes of start-up failures.  Third, reasons start-up ideas never launch and lastly, this blog on how to identify and short-list start-up opportunities.  Below is a sampling of themes that my partners and I have used as a funneling process to evaluate potential ideas, before getting too deep on the economic evaluation.

  • The industry is irrelevant. The underlying economic opportunity is much more interesting.  There are few industries we wouldn’t pursue given the right economic model.
  • “Go where they ain’t” as an old business school professor of mine use to say.  I.e., seek off the grid areas that attract much less competition. My brother has a company that picks up sludge from food and beverage processing facilities; I will go out on a limb and state there aren’t lots of Harvard MBAs flocking to this sector.
  • There is significant disparity in power along the value chain. Both of my prior start-ups took advantage of this dynamic by offering a service that was critical to the 800 lb. gorilla in the industry, who in turn could force the rest of the value chain to play along and help pay for our offering.
  • There is a noticeable gap between the “experience” and the “expectation.”  Each of us is confronted with this scenario often.  Which of these occurrences could uncover an opportunity for your next business?
  • Important items/occurrences/events are discussed only hypothetically, when real data could be collected, analyzed and monetized.  This creation of primary data is a key piece of the offering of great consulting firms, like Bain and Company.  Where could you offer new and relevant insights based on primary data – and get paid handsomely for it?
  • Larger company frustration points, build vs. buy situations and political situations. It’s often easier for a large company to fund or purchase an outside group than to build the capabilities internally. I’ve witnessed acquisitions that didn’t make sense, but simply satisfied a large company political situation.  Creating a company that can fill these known voids can lead to great exit options in the future. Of course, to be aware of these type opportunities, you need to be intentional about networking in the right circles. Or maybe you work at that large company right now, and already see the voids that could be filled by your new start-up.
  • The prevalence of smaller established players.  There are a lot of cash strapped small companies, that much like real estate, can be had cheap if you have the cash.  And often with small companies, the cash-strapped nature of the business can be a function of an owner co-mingling business and personal books vs. the underlying economics of the business itself.  Buying vs. starting from scratch can eliminate a lot of infancy problems.

And more and more, I find myself focusing on a new layer of thinking. In addition to finding the right cash flow business model, I’m equally interested in how the new entity can help crack a serious social problem(s). The excitement of achieving strong business results while simultaneously having a strong Kingdom impact would make getting out of bed each morning and going to work a pretty awesome experience.

How do you identify and short-list your next great business ideas?

Entrepreneurship, Leadership, Learning Spanish, Start-up Failures, Start-ups

Start-up failures I’ve witnessed

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It’s no secret that most start-ups fail and become painful financial lessons.  I recently wrote about the themes of my past successful ventures (Got some start-up ideas in mind?).  On the opposite side of the equation, I’ve seen some common themes in start-up failures where I’ve had a front row seat as a witness.

Lots of people continue to pursue start-ups.  According to CNN Money, 340 of every 100,000 adults launch a business each month, creating 565,000 start-ups monthly.  Incidentally, immigrants (particularly Latinos) at 560/100,000 people, are almost twice as likely as Americans born in the US to launch their own business.  Learning Spanish is becoming increasingly important (Why we moved to Costa Rica for a year).

While the aggregate statistics are interesting, my perspective below is based on a much smaller world of friends and acquaintances that have started a business.  Typically, this involves making the jump from W2-earning corporate life and partnering with one or more people to pursue a start-up.  In no particular order, here are the most common drivers of failure I’ve observed:

  • Legal steps, such as detailed operating agreements are overlooked or delayed.  When I hear someone tell me “it’s not a problem, we are good friends and we’ll get all the legal stuff done later on” or something of that nature, it feels like one of the few times in my life when I can really predict the future.  Spend the time and the money on professional advice, as it will protect the business and the friendship.
  • The business is based on a personal passion with no real understanding of the economic engine or the practical implications of running the business.  Not to be confused with passion plus capability plus a good business model, which is a great combination.
  • The focus is on a remote probability business (albeit with a potentially large payoff).  When the overwhelming majority of your success is out of your control that is a hard business.  When you are trying to create demand vs. fill demand that is a hard business.
  • The cash flow is not managed or even worse, not really understood.  To say “cash is king” is a “master of the obvious” type statement, but it’s amazing how many people get into a business and don’t understand it, or for that matter, the differences between gross and net sales, gross and variable and net margins, etc.  If you (or your partners) don’t understand these concepts from some level of experiential knowledge, be careful throwing money into a start-up.
  • The exit options (I.e., beyond annual salary and/or distributions, how do you monetize this thing at some point via a sale or public offering) are not considered at the outset or actively managed along the lifespan of the business.  When you are simply ready for a new challenge, or there is a business downturn or a bump elsewhere in your personal life, if you haven’t already determined how to exit, it won’t happen.  As coach John Wooden said, “When opportunity (or presumably tragedy) comes, it’s too late to prepare.”

What are the most common (and possibly avoidable) reasons for start-up failures you’ve observed first-hand or experienced first-hand? 

What might be just as sad as a start-up failure is a great start-up idea that simply dies a dream.  Most of the conversations I’ve had with friends and acquaintances regarding potential start-ups land in this scenario.  More thoughts on the reasons for this in a later entry.

Entrepreneurship, Leadership, Start-ups

Got some start-up ideas in mind?

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Start-ups get into your blood.  My partners and I sold our last start-up a year and a half ago and my integration commitment was up five months ago.  Since then, many friends have said “You must have something in mind, what are you going to do next?”

With summer over and my girls back in school I have more time for reflection, and find my thoughts are more and more focused on – what’s next?

In the spirit of “experience is only the best teacher if it is ‘evaluated’ experience,” I thought I’d share some common themes from our (i.e., myself and two great partners) last two successful start-ups.  I deem them “successful” because we had lots of fun, created some cool professional opportunities for some great people, maintained a great life balance and earned returns over 55X invested capital on both.  I mention this last point not to be boastful but rather to establish some creditability for the points listed below.

Macro Considerations:

  • We didn’t create a business and then go look for a customer; in both cases we were asked to provide something from someone willing to pay.
  • Both businesses had asymmetrical risk profiles with significantly more upside that downside.
  • We didn’t quit our day jobs to pursue our dream jobs.  Both concepts were crafted on the tail ends of previous ventures.

Set-Up:

  • Trusted, proven partners with equal entrepreneurial bents, with a shared understanding each of us would play to our individual strengths.
  • Exit options were extensively evaluated as a part of the original planning.
  • Lifestyle balance was a non-negotiable item.
  • A willingness to simply get going and course correct along the way if needed.

Legal:

  • Before business was formally commenced, significant energy spent on legal operating agreements, and early on, equal focus dedicated to employee agreements, vendor contracts, etc.
  • Created (and defended in one case) intellectual property we believed acquiring companies would value in a sale process.

Operations:

  • The economic engine was very clearly understood from the outset.
  • Intentionally minimized support headcount, support procedures, etc.
  • We always priced our service based on value (unashamedly) and never pursued the pricing race to the bottom in order to “win” business.
  • Knowledge of how large companies run was critical to the success of each business, operationally and in the exit phase.
  • We managed our financial books like we were a public company from day one.
  • We hired A-players and took good care of them; and attempted to align with A-players at the customer.

Exit:

  • We helped drive the exit demand by creating the market – or as we called it “inception” type planning to spur identified acquirers to pursue a sale.

Again, these themes are simply what worked for us – there are lots of ways to put a start-up together as they are as much art as science.  However, there tend be to corollaries I’ve witnessed when certain of the above items were disregarded.  More about those examples next time.