June 26, 2008

For Growth, What Matters Most?

To expand your business, what matters most? And how do you prioritize and stay focused?

The answer is simple: by concentrating on your model, people, and money. That's it. That's all. Your business model will make or break you -- and it may change often as you adapt to market shifts, launch new products or services, and respond to competitive threats. Your people will help you execute your business model. As I explained in a previous column [BusinessWeek.com, 4/23/08], you'll be constantly training and hiring people as your company's needs evolve. Your money will come from financing as well as from sales, two topics I've also addressed recently.

Let's talk about your business model first. But before I drill down into it, it's story time: I spoke recently with two entrepreneurs. They'd built successful companies before, but they hadn't established a track record of successful liquidity events. Sure, they'd sold companies, but they hadn't made enough on the sales to pay back their investors. Needless to say they were concerned about raising money for a new venture.

After a few minutes of conversation, their problem became crystal clear: Their former companies were essentially hobbies financed by friends and family. They weren't held accountable by these investors because they didn't report real progress to them. In fact, they barely even communicated with them outside of sketchy, constantly upbeat, reports over a beer at a barbecue. Eventually these informally funded companies floundered, and their assets were sold for a few bucks. Why? No business model.

Financiers Need to Be Sold on the Future Fast-forward to today. Now both in their late 40s, these two guys want to raise $1 million for their new business. Determined not to repeat their previous mistakes, they hired an MBA who said they should sell 20% of their company right off the bat. Wait a sec -- that means post-financing the company is worth $5 million. But there isn't a company yet. There's just a plan. What assets/alliances/compelling future does it have? What proof of concept, market traction, customers have signed on? Oops.

Whipped into a frenzy by their "groundbreaking" idea [BusinessWeek.com, 4/18/06], these two entrepreneurs forgot that professional financiers [and I include angel investors in this category] need to be sold on the fabulous future. Having the beginnings of a fabulous present sure help. Here's how to get one.

Of the business model-people-money troika I describe above, the model category is the first most essential exercise in creating a sustainable, scalable business. I also lump the business summary within the business model category.

To find your business model's potential shortcomings, be sure you can answer the following questions:

Do you have a compelling business summary? I offer the 10 most important points you need to explain below. Remember, every business needs a business summary. Its depth depends on whether or not you're seeking external financing.

Have you determined your product pricing, return on investment, and customer-expectation setting/communication?

Will you deliver client care via a self-help Web site or service contract? How will it become scalable?

Are you systematizing your business from the get-go with standard operating procedures, best practices, outsourcing, automation? Remember, more systems can mean less paid staff and increased efficiency.

Have you identified the market "pain" in your primary, secondary, and tertiary markets?

Can you clearly articulate your solution to this pain, how it works, and how it is delivered to customers?

How will you distribute your product/service? Through retail, online, third-party channels?

What is your revenue model? What are your revenue streams [variable, annuity, multiple, future]? What is your revenue recognition approach?

How will you run your company, keeping it focused via the six-month plan, prioritizing, processes?

You must be able to distill your business into a business summary. As you've seen in my previous columns, there are 10 areas for which you must be able to explain your business. These areas will be scrutinized by financiers, advisers, potential and current board members, strategic alliance partners, and key hires.

1. Company Overview. A few sentences describing your company's purpose/goal.

2. Pain. The specific market pain you will reduce/remove.

3. Solution. What your solution is to the market pain, plus a succinct description of how it works.

4. Company Information Background. Number of employees; short bios of key team members, including staff and board members if applicable.

5. Financial Information. Funding history if any; total money sought; source of dollars sought: venture capital/angel investors/loans/grants; anticipated use of funds; last year's revenue; five-year revenue forecast; monthly burn rate; projected cash flow-positive date.

6. Product. Short paragraph explaining the status of your product; product path [offerings available now and in the future]; and how each product will be segmented by customer.

7. Defensibility. How your intellectual property or market position will be protected from competitors; how you'll mitigate financial, human resource, product, and product development risk for financiers.

8. Competition. Your competitors, now and in the future.

9. Business Model. How you'll make money and expand your business.

10. Key Milestones. Deals/achievements that are accelerating/will accelerate your company's growth -- be specific about the status of each.

Spend the time to complete the above -- do the best you can, but get them done. Bear in mind that the structure of your business will change over time, too.

Bottom line, your top priorities are the following:

-- Business Plan. Pain and solution; product path; target markets; intellectual property; risk mitigation; and staffing plan.

-- Revenue Model. Revenue streams; five-year cost/revenue projections; and break-even/profitability date.

-- Execution. Six-month plan; prioritizing and focus; and systematizing processes.

Focus is the key, of course, to building a business. I find that in the business model and business summary stage, keeping one's focus can be tricky. Note that the areas of your business that are truly important are often not urgent. Sure, you'll fight your share of fires, but are those fires ever urgent and important in the long term? If it's someone else's issue, toss it back. As for the not urgent and not important, well, that's the stuff to delegate. Definitely.

In my next two columns, I'll tackle the other two key areas for growth: people and money.