The Realities of Founder Ownership Dilution

File this little blurb under “Founder Reality Dope Slap”.  It will hurt.  I too have felt the sting of what I am about to write.

Now that you have been sufficiently warned but have continued to read on, your fair game! *teasing

There is a certain mindset that every entrepreneur has to own very early in the game of success.  It is critical to “winning” (Thank you Charlie Sheen – who was lucky by birth, not talent) and exiting.  It has to do with ownership and how it changes over the life of a successful venture. Over the years, I have heard so many entrepreneurs utter the words, “I want to retain control of my company” that I have actually made it a key litmus test in any early discussion with an entrepreneur.

The plain and simple truth is, in most cases, the founders will very quickly give up control of their company to investors and at a very early stage.  Even in companies that experience early success, the need for acquiring growth capital, will most likely put the founders in a situation where they will dilute their ownership under the 50% line.

Translation: When you take money, you give up control.  The more you take, the less you keep.  THIS IS NORMAL!!!!!

This ability to accept that you will quickly answer to investors and a board is a critical mental gate to hurdle.  Investors will test this.  If you were to sit down with me, I will ask you outright.  Are you prepared to give up control of your company?  Are you prepared to own very little of it when you are done?

If you answer No, most likely we are done.  You get a hearty handshake and a pat on the back.

I’m not trying to be cruel.  I’m trying to help.  Look at it like this.  100% of nothing is nothing.  10% of $100M is not bad.  Which do you want?  How do you get to a $100M exit?  You get working capital and work your arse off making that capital grow.  When you take capital, you give up ownership.  This is called dilution.  Don’t fixate on it.  Even the investors get diluted.  It’s business.

Here is your mantra: If you exit with somewhere between 5-10% ownership, you won.  Those are pretty average percentages for most exits.  It is waaaaay better than 100% of $0.

You job is to make the 5% part of a REALLY big number. So make peace with it, get over it, and go make it happen.  When the investors ask you if you are OK with giving up more than 50% of your company (over time), just respond that you understand and let the chips fall where they may.

Popularity: 62% [?]

“Skin in the Game”, Old-School Entrepreneurial Road Rash

If you have ever tried to raise money, you have heard the phrase “Skin in the Game”.

It is the one key phrase that will shut down any fundraising conversation in microseconds.  There is no retort.  There is not response.  It is the point in the conversation where you wish you could fold up your laptop, gather your pitch material, and slink out of the door.

In my opinion, it is one of the more overused and over-abused terms in the game of entrepreneurial finance.  It is also one of the more common excuses for not funding someone and a pretty lame way to do it.  Time to call the bluff!

Road Rash

In terms of startup funding, people in the investment word usually proclaim the “Triple F” (friends, family, and fools) round as the first phase of funding.  In reality there is one phase before that.  Bootstrapping also known as leveraging or “Skin in the Game”.

In other words, when you put “Skin in the Game”, you are funding your effort by tapping your assets. (Some people attribute the creation of this term to Warren Buffett) This could be savings, securities, or loans (like a 2nd mortagage).  For all intents and purposes, this is the act of senior managers/owners of a company putting their own money into their own company.

The concept here is that by investing in your own effort, you are signaling your level of commitment to investors. Some investors see this as the penultamate sign that you are emotionally and intellectually all in. In many cases, investors won’t belly up to the bar unless you have done so.

This logic is old, unfounded, and needs to be tossed out with the baby and the bathwater.  Here’s why.

If they could they would have…

No entrepreneur WANTS to take money.  Taking money means giving up a part of your dream in exchange for gas in the tank.  Often, due to the early stage of the game, this gasoline comes at a very high price.

It’s all relative….

An investors, especially those in the early stages, have already calculated their acceptable level of risk.  They have normally set aside an amount of cash they will use to invest and are willing to loose this without impacting their way of life.  The risk to investors should be minimal, even early in the game.  The risk to an entrepreneur who leverages themselves to the hilt or drains their bank accounts have taken on far more risk than any investor will. Asking for “Skin in the Game” is a Shylockian tactic.

Risk, reward, and the elusive exit…..

Most entrepreneurs own VERY little of their company by the time they exit.  They have been diluted many times over and stand to gain a very small amount when compared to investors.  In many ways their dream is no longer their own and the payout might be just enough to get them out fo the debt they started with.  For investors, any ROI could be considered a win given that most endeavors completely fail, i.e $0 ROI.

Demotivating executives…

Being an entrepreneur is stressful.  This stress hits them and their families 7×24.  One would think that an investor would not want to add to that stress by forcing them to get into hot water with their families.  Asking for “Skin in the Game” creates undue stress on the one group of people you want to be relaxed and focused not fending off phone calls from debt collectors, divorce attorneys, and significant others.

It doesn’t really matter….

Here is the kicker.  When an investor really likes what you got, they will overlook the need for “skin”.  When they fall in love, the entrepreneurs epidermis stays intact.  What does that tell you?

Sure, not having “Skin in the Game” creates one more potential obstacle but it should be more of a judgement call as opposed to a requirement.  Investors tend to forget their first effort and impose supposed industry standard rules on newcomers that they themselves may not have been subject to.

Now you know why.  Here’s to hoping this little ruse soon disappears from the lexicon.  I would personally h prefer that an investor tell me honestly why they don’t want to get involved then toss up the world’s oldest roadblock.  This doesn’t help the entrepreneur learn nor make the investor look any more savvy.

Popularity: 66% [?]

To LLC or not to LLC?

“I’m seeking investment. Should I create an LLC or C Corp?”

As an angel investor, I get this question a lot.  While I always recommend speaking with a business lawyer, let me give you my take from the capital acquisition standpoint.

Nine out of ten times, if you are planning to take in capital investment, I recommend becoming a corporation.  Sure, LLC’s are quicker, easier, and cheaper to create but when it comes to setting your company up for investment, a corporation is a better formation.

Why? A few simple factors tell the tale of the tape:

Profit and Loss

LLC’s are owned by members who have a percentage of the company.  Corporations are owned by share holders who have shares in a company.  LLC’s distribute the profit and loss to the individuals owners yearly using a tax form called a K1.  If you own part of an LLC, at the end of the year you will get a K1 document for use with your taxes, adding the amount on the K1 as a profit or loss to your personal taxes.  As an investor, taking the loss is  not a problem but if suddenly your company starts making money, the owners of the LLC now have a profit issue to deal with.  Imagine a K1 showing up on your doorstep with $250,000 profit.  Now you have surprise taxes to pay and you have been pushed into a new tax bracket. Not fun. With a Corporation,  unannounced distribution don’t generally occur, giving investors more control over their portfolio and tax position.  Liquidation of shares don’t usually happen without some warning and planning.

Resource Retention

Investors know that there are key personnel the company will want to retain and others it will need to attract. Since capital is usually restricted in a startup, the way to keep key people around is to offer them stock options.  This is normally done by setting aside an employee pool (usually 20% of shares) and putting a vesting schedule in place (2-4 years).  Stock options (the ability to buy stock in the future at a discounted rate) give employees incentive to stay and work hard even if they are not making industry standard salaries.  LLC’s do not allow for this type of incentive program and make it harder to retain key employees with anything other than cold hard cash, which is the one resource startups want to keep a tight lid on.

Costs and Capital

While it is quite common to convert an LLC to a Corporation, I learned something interesting a few years back that caused me to lean in favor of earlier conversion as opposed to waiting.  When creating a Corporation, in Delaware for example, certain fees and taxes have to be paid based on the Fair Market Value (FMV) of the company.  So the more money your LLC is making, the more it will cost to convert to a Corporation.  There is also the issue of legal costs and a clean, compact capital structure.  If your company is taking external investment, the cap table is going to get “messier” over time as more investors get involved and more classes of stock are required.  This makes the conversion from an LLC to Corporation more legally expensive as more time must be spent on paperwork and getting all of the necessary parties to sign off.

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Net-net, investors are just more comfortable with corporations and the legal constructs that surround them.  Corporations also create opportunties to do more creative financing like convertible notes and the like.

In the end, talk to your lawyer, talk to your investors and your partners.  Either form works.  The trick is understanding where you need to be in the near future and how your formation will support these needs.

Popularity: 81% [?]

The “Red Meat” Strategy to Building your Channel

Establishing a channel is a study in human psychology.  It has everything to do with people, choices, and money.  It doesn’t matter if your “channel” is a an online catalog, integrator, or pure reseller. If you are counting on someone else to sell your product into their customer base, you’ve got a channel strategy to deal with.

Note:  For those confused between Channel and OEM, Channel sells your product with your brand on it.  OEM sells your product with their brand on it.

One of the most common mistakes that I come across in speaking with Entrepreneurs is their desire to initially go to market with both a direct and channel sales strategy.  In all but the rarest cases, this is a recipe for disaster, burning through cash, and tears in many beers.   If you want to avoid the same mistakes of all those entrepreneurs before you, you need to understand two simple concepts.

Channel Simplified – Think “Chinese Food”

Channel Partners are usually “selling” from an a la carte menu of products and services designed to appeal to a wide and varied customer base.  They try put as many valued items on the menu as they can so that when their customers have a problem, they have the solution.  What really happens is the customer-facing individuals at the Channel Partner end up recommending certain items over others.  They develop a conscious (or subconscious) preference.

Why?  For one of many reasons; good margins, recognized product names that give customers a good feeling, trust in the product, and/or the chance to up-sell other items or services.  So out of a “menu” of 100 items, the Channel Partner might end up pushing 10 of them on a more frequent basis.  It’s natural selection at it’s best.  The items that make them money and keep their customers happy are the ones they are going to sell.  Sure, there is some occasional shuffle, but it is no revolving door.

Channel Simplied – They are all from Missouri

Here’s the scenario.  You just got back from the road after hitting every Channel Partner that would listen.  They loved every word you said and some even offered to have your kids.  Two months later, not a single phone call, order, or inquiry.  What gives?!?!

Well if you were paying attention, you might have caught on to the fact that Channel Partners follow the money, not the tech (caveat – unless you have a solution to a huge problem a customer is currently yelling about).  Since greenbacks rule, your solution is going to get put somewhere down in the mass of items on the lower portion of the menu.  Not where you want to be.  You see, all Channel Partners are from Missouri, the “Show Me” state.  Until you can fill their funnel and show them where new gold is buried, your just another vendor.  Noone in their right mind is going to start selling an unknown product over a known money-maker.

The “Red Meat” Strategy to Winning over the Channel

Yes, Red Meat.  Maybe I should say, Green Meat.

The only way to break into the top 10 of items a Channel Partner recommends is to displace (or supplement) an existing product/service.  The only way to do that is to feed them red meat.  In this case red meat is an analogy for warm leads. When you engage a Channel Partner you had better be ready to pump warm leads into their  sales funnel and go conquer customers with them.  If  you aren’t ready to do that, DON’T START.  If you can’t bring them leads and show how your product can make them cash, they will forget you.  The longer it takes you to bring leads and the more intermittent they are, the more you will burn the good will you earned during your previous discussions.

So here’s the trick, and where Entrepreneurs usually get it wrong.  When you say you are going to go to market with a Direct and Channel strategy, it’s a dead giveaway that you have not done this before.  Why?  ‘Cause anyone who has started a business before knows that Channel will need a healthy diet of warm leads in order to get them to love you.  If you don’t have any leads at all (or the flow is a trickle), your dead in the water.  This is why most start-ups have to embrace a Direct Sales strategy out  of the gate.  They have to spend 12-24 months priming the pump so that they have  a healthy supply of red meat!  It will also be helpful to show the Channel that you have happy customers who will be references and have vetted your product.

Net-net, Direct first, Channel Second.  If you have no meat in the fridge, you can’t feed your Channel.  If you can’t feed the Channel, your out of luck.

Popularity: 83% [?]

Looks like Agile. Smells like Agile. Tastes like Agile. MUST be Agile.

Last August I was asked to sit on a panel of investors at the WorkBar in Boston. The topic – Agile. The room was packed with entrepreneurs. There was energy in the air. You could feel the electric charge, that is until we started with the first question, “What is Agile?” The energy turned to confusion as everyone in the room wrestled with how to define “Agile”. We soon came to realize, none of us really understood it. It was all downhill from there…..

Well, life gets busy and time marches on. Since that warm day in Boston, I have lost count of the number of times I have heard or read the words Agile and Scrum. I decided I had had enough. Time to get to the bottom of it. What better way to unravel a mystery then to seek the gurus.

In this case, the gurus are Marjie Carmen and Robin Dymond at Innovel, LLC (www.innovel.net) . I was lucky enough to get over a hour with Marjie and Robin. It was enlightening and educational. Not wanting to be accused of being selfish, let me share with you what I learned.

What is Agile?

Marjie was quick to put me on the right path.

“Agile is not a Verb. You don’t do Agile! Agile is a mindset. It is an umbrella term that defines a number of methodologies like Scrum and XP (eXtreme Programming).”

The Agile mindset embraces the concept of developing software with an eye on Minimum Marketable Features (MMF). If you have spent a couple decades in software development, you have probably worked for a product manager who created biannual or annual product release schedules that consisted of hundreds of features and defect fixes. Software Engineers were assigned tasks, a deadline,and disappeared off into their groups and cubicles, working their butts off to make a deadline that was determined for them. Everyone coded like the wind until a month before release when Software Quality Assurance (SQA) and Release Engineering started their processes (testing, documentation, release notes etc). This methodology is referred to as the Waterfall Methodology because one process starts and finishes before the other one starts.

Processes like this make you think of companies like Microsoft and IBM. They release huge code bases (XP, Vista, Windows7) that require months to evaluate and implement, what we will call “eating the whale whole”.

On your mark, get set, SPRINT!

“Whale eating” is NOT the Agile Mindset. Robin enlightened me,

Agile methodologies revolve around very small (2-3 weeks), continuous release cycles called “Sprints”. Unlike trying to “eat the whale” in a one big bite, the Agile mindset focuses on “quick nibbles”.

Sprints are essentially small, releases that address a small set of features (MMF’s) in a quick manner with little to no interruption to the consumer/customer. Think Facebook or Twitter. They roll out changes rapidly and without effort on your part. Constant code improvement is part of the ecosystem. The beauty of Sprints is that the product manager decides what the release will include and works together with the cross-functional project team to get it done on time and correctly. The intent is to get the features (and bug fixes) in the Sprint out fast and error free.

Big Bug Fixing Bites the Big One

What became quickly apparent during my conversation with Marjie and Robin was the continued attention to quality and integrated testing. This is not your fathers SQA! In the old days, testing was performed after a new release was available from Release Engineering (a set of gate-keeping engineers that gather all of the code together and generate software releases for internal and external “customers”). The SQA team would take this new release and perform a huge series of tests including regression (what did we break?), new feature/functionality testing, and you would enter the break/fix/re-test repeat cycle. This could take weeks. The significant issue with this type of methodology (Waterfall) was that you didn’t know what was wrong until the end of the process when there was little time left to do anything about it. There was never enough time to run all the tests so testing was cut short. Features/defect fixes didn’t get into the release. Quality was compromised. Budgets were not met, customers were not happy. But everyone was working hard!

Enter stage left, Agile processes. Interestingly enough, when using an Agile mentality, the testing is “brought all the way to the front”. One of the first questions asked after the MMF’s are set is, “How do we test this?” If it can’t be tested during a Sprint, the feature might get moved out. In addition software development is done in teams with one engineer writing code while the other continually looks over their “shoulder”. The second engineer is reading code, checking algorithms, and testing. The net result is when the code goes to the release engineers it is, for all intents and purposes, tested and integrated. As Marjie put it, “when the code is done, it is really DONE!”.

Making sure testing is a parallel, integrated process is critical to success under Agile methodologies. The thought of leaving it to the end is nonexistent.

Scrum? What’s Rugby got to do with it?

I’ll admit it. When I heard the term “Scrum Master” I couldn’t help but think of Star Wars. Damn you George Lucas! But wait, in a certain sense of the term, a Scrum Master is a Jedi. Let me explain…

Scrum is a simple framework where stakeholders (sales, marketing, engineering, mgmt, customers etc) write down their “to do” list for the product. The team gets together and negotiates the MMF’s to be included in the next Sprint, noting the duration in the time box. The Scrum Master acts as the facilitator of this process, making sure that the team cycles through a process of engineering, demonstration, release, and adjustment. Cross-functional buy-in is the name of the game.

As Robin put it,

“The Scrum Master is a facilitator and a coach, they are not a boss or manager. They help the cross functional Scrum team become successful and they ensure the rules of the framework are understood and followed. Great teams have great coaches, and this also true for high performance technical teams.”

This is in complete contrast to traditional Waterfall approaches which foster long features lists, bug fixes, stove-piped teams, and sloppy coding.

Agile Polar Bears

One thing is abundantly clear. An Agile mindset is not for the light-hearted. Like the infamous Polar Bear club running into the Atlantic Ocean in the January cold, if you want to reap the rewards of Agile methodologies, you go ALL IN!

As an example, as Robin tells it, a large, highly technical, top 10 bank (who will go nameless but trust me, you KNOW them) embraced Agile and turned a two year software release cycle into an average of a release every 65 days. It was a three year process and required viewing Agile as a strategic investment. In these days of regulatory oversight and love-hate consumer-bank relationships, you can imagine this was quite a feat.

This is not to say that some companies do not run a hybrid waterfall-Agile process but this scales back the effectiveness significantly. Agile requires buy-in from the top down and across all internal stakeholders. It requires that the customers be involved and that cultures change.

It’s like the old light bulb joke.

Q: How many psychologists does it take to change a light bulb?

A: One, but the bulb has got to want to change.

Wrapping It Up

There is so much more to Agile methodologies. One article cannot touch the depth and breadth. The only way to truly practice Agile processes is to get training. Period, end of statement. Go seek the gurus at Innovel and get Agile.

In the mean time, check out these resources Marjie and Robin shared with me.

Websites of Interest:

• Innovel (http://www.innovel.net)
• Scrum Training (http://www.scrumtraining.com)
• Agile Advice http://www.agileadvice.com
• Extreme Programming (http://www.extremeprogramming.org

Books – General:

• Agile and Iterative development by Craig Larman
• Agile software development with Scrum by Ken Schwaber

Books – For Team Members and Managers

• Agile Estimating and Planning by Mike Cohn
• User Stories Applied by Mike Cohn
• Agile Testing by Janet Gregory and Lisa Crispin

Books – Software Development and Test Drive Design (TDD)

• Test Driven: TDD and Acceptance TDD for Java Developers by Lasse Koskela
• Growing Object-Oriented Software, Guided by Tests Steve Freeman, Nat Pryce
• Test-Driven Development in Microsoft .NET (Microsoft Professional) (Paperback)
• Pragmatic Unit Testing in C# with NUnit, 2nd Edition [ILLUSTRATED] (Paperback)
• Refactoring: Improving the Design of Existing Code by Martin Fowler

Subject Matter Experts

Marjie Carmen and Robin Dymond can be found at Innovel LLC.  Innovel  offers training courses and on site coaching services in the EU and North America to help teams and organizations get started using Lean, Agile and Scrum.

Popularity: 85% [?]

Shout out to Suffolk University E-Club

On February 17th I had the pleasure of speaking to members of the ALPHA and Beta Alpha Psi organizations at the Suffolk University E-club.  What a great time.  Lots of excellent questions and I had the chance to talk one-on-one with several inspiring CEO’s to be.

Popularity: 89% [?]

Hot Pocket – Burning the Tongue of Entrepreneurship

I read an interesting article  at Fortune about the “lemming-esk” actions of hedge fund managers and the risk it creates.  The “all my eggs in one basket” mentality creates significant risk for those who are invested heavily in funds that rely on a few good companies to keep their margins rising.  In this case Apple being the unwitting culprit.  No fault of their own.  Apple is just that good!

This brings up an interesting but disturbing parallel in the area of entrepreneurship and capital acquisition.  Investors, unfortunately, are in many ways exactly like these hedge fund managers.  It’s all about the Risk vs Reward curve and their own internal struggles.  Investors want their investments (you!) to succeed but they are risk adversed.

That might seem strange to say that angels and VC’s are risk adversed.  If you step back and think about it, isn’t investing in new companies ALL about risk?  Sure but the keyword here is “acceptable” risk.  This is where the hairy, bloody razor line comes in. In reality, this bloody line is the one you are trying to get investors to cross.   You are figuratively sitting on the other side of the line, all wrapped up in the emotion of your project, begging them to jump across.  You view is tainted by the dollar signs in your eyes.  Their view is tainted by the sinking balance in their portfolio.

Unfortunately you are probably not the first company this investors has given money to and chances are most of the previous investments were losses.  Now you know why the hardest thing to do in the world is to separate an investor from their cash.

Herding Fiscal Lemmings

So the question you are asking yourself is how to move the investor over to your way of thinking? How to get them to jump off the cliff, lemming style?

Here is the trick.  You can’t do it.

Here is the solution. Customers can.

Everything you have put together to show investors.  All your hard work. All the engineering.  All the fiscal and market analysis comes down to one question, “Will people buy it?”  Investors never believe you know the answer because they understand your view of the world is tainted (rose colored glasses).  Customers buying or signaling an intent to buy WILL CHANGE THEIR MIND.

You have to become “HOT” in the mind of the investor.  When the investor believes that customers believe you will be ‘HOT”, you become Apple.  Apple is hot, that is why investment managers add it to their portfolio.  It’s mitigated risk wrapped up in a nice hot pocket.  They know it won’t last forever but they will drive that gravy train till it runs off the track.  These investment managers are lemmings.  So are investors. They follow the heat.

Now go grab a Hot Pocket and figure out how become hot!

Popularity: 88% [?]

Warren Buffet’s “Abundant America”

Entrepreneurs feed on opportunity. Unfortunately, at times, it seems like it is hard to find.  Let’s turn to the master, Warren Buffet and his gang of merry men (and women) at Berkshire Hathaway for some inspiration.

Their 2010 report is out and I had to highlight this quote at the end of page 3.  It’s like a jolt of morning coffee!

“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

And yes, I KNOW that is a picture of Anne Hathaway.  She is just cuter than Warren Buffet. It’s a “Hathaway” thing….

Popularity: 88% [?]

Apple’s iPad – Loss Leader Success at it’s Best!

It takes balls of steel.

It also takes a tremendously well planned business ecosystem to sell a device like the iPad at profit margins which may approach zero ($0) dollars.

Brian Chen at Wired published an excellent article today about the $500 price tag of the iPad and how no one can touch it.  This got me to thinking about past discussions I have had with entrepreneurs about to-market strategies.  It occurred to me that a “loss leader” strategy was rarely discussed or embraced.

A Loss Leader is essentially a product or service that a company is willing to give away (at no profit or a loss) in order to leverage sales of another item or to capture market share. In Apple’s case, their loss leader, the iPad, is effective because they control the applications and data that runs on this platform.  They obviously realize, rightfully so, that there is much more high margin revenue to be made in selling zillions of apps, music, and books than one iPad per person.  You have to love the math.  And you have to love the sheer no-holds-barred attitude.

The reasons you rarely see Loss Leader strategies used as a startup to-market strategy is normally related to “runway”.  It takes cash to roll out a market plan that uses Loss Leaders.  Prior to launching a Loss Leader a company must create not only the giveaway but also the infrastructure required to capture the Loss Leaders effects.  This could extend the time it takes to get to market and the amount of resources required to get the full capture in place (the length of the runway).   Loss Leader creation hits the bottom line both in terms of labor cost (more time engineering) and COGS (cost of good sold).  If your company is making a widget as a Loss Leader (like an iPad), you have to be able to pay for them upfront (including shipping, marketing etc).  That takes cash that very few investors are willing to let you burn.

On the flip side, Loss Leaders can generate a significant amount of market attention in a very short time.  People love free, or better yet, cheap. ( actually Free makes some buyers act conservatively which is not always what you want.  Sometime really cheap is better.) Anywhoo…in this day and age of software the Loss Leader strategy is actually used more than we perceive.  Facebook is a good example.  So is Google.  It’s all free, right?  They foot the bill of software development, infrastructure, and support long before they see a dime.  In today’s vernacular this is called obtaining convertible customers but it is really just a Loss Leader strategy.

It’s an important and interesting strategy to consider the next time you think about launching a company or are brainstorming your next product release.  If you have a Loss Leader that can capture customers, generate high margin reoccurring revenue, and steal market share, it might be worth additional discussion.

Popularity: 93% [?]

Entrepreneurial War – Bad Market Analysis kills +100,000 people

If you didn’t catch the news yesterday, you were lucky. Me, not so much! I nearly tore my TV from the wall when a report came out that an Iraqi defector named Rafid Ahmed Alwan al-Janabi admitted that he lied about the existence of Weapons of Mass Destruction (WMDs) in Iraq so that we would topple his government!

Other than being completely and utterly infuriated by this, there is a lesson for Entrepreneurs.

For all intents and purposes, the “moral” to the story of the Iraq war is all about market analysis. One of the most critical elements an entrepreneur MUST establish is the level of market NEED for their products or services. This means conducting research, talking to subject matter experts, and validating the target market (whom ever will buy your product or service).

Validation is NOT:

• Quoting analyst statistics
• A pile of new paper articles and clippings
• A imaginary business scenario you think exists
• Based on the opinion of ONE PERSON

Think about it.  Our country went to war based primarily on the input of one person (and the propensity of many others to believe and justify his words) .  Can you imagine an entrepreneur asking you for $200,000 based on a discussion with one person?  No investor would be crazy enough to do so (let alone start a war).

Yes, it can be scary doing market research because you might learn you were wrong. You might learn someone else already did it.  You might learn there are bigger hurdles than you knew.  You can handle it.

What might also happen is you sharpen your approach, find a real market niche and succeed.  Do the leg work.  The life you save may be your own!

Popularity: 90% [?]