Oct 182008

Dr. Earl R. Smith II

Most of my advisory work is with middle-market companies. They generally have revenues between fifty and one hundred million annually. However, I do like to work with an occasional start-up. I find that it keeps me sharp and in contact with the basic ideas behind any business. There is something immediate and even raw about a start-up environment. Perhaps it has to do with the fact that the team is making something out of very little. Perhaps it is the fact that the team focuses primarily on the business of the business and is just beginning to encounter the challenges of the business of business.
I see many start-ups and only work with one at a time. Over the years, I have developed a set of filters to help me choose which ones to work with. It might surprise you to learn that those filters do not focus on the business of the business – I have worked with companies in a wide range of industries – but on the senior team and my estimates of their ability to learn and grow along with their company.

Most entrepreneurs are concerned about the success of their company – I take that as a given. However, many are concerned for reasons that I discard out of hand. Entrepreneurs who are starting a business to get rich – anticipating an exit while the company is still pre-revenue – are of little interest to me. Those that see the business as a way to gain power over others find a similar fate. It is that rare case when the senior team is dedicated to the value proposition of the company because they truly believe in it that attracts my attention. Then I am prepared to being my own substantial resources and experience to bear.

The question becomes ‘how are they prepared to go about making the business a success’? Getting a business off the ground is hard work that demands lots of time and effort – entrepreneurial success requires lots of time well spent and lots of intelligent and focused effort. My contribution – having successfully launched and managed six successful businesses – is to help the team do both. Here are some of the areas of focus that I emphasize:

The Customer is King: One of my favorite sayings is ‘amateurs have markets and pros have customers’. Many entrepreneurs get so in love with the technology that they hesitate to test it with potential customers. I remember during the heady days of the technology bubble running into CEOs who would tell anybody who would listen that their customers were idiots – unsophisticated dolts that did not really understand the value proposition which the CEO’s company was offering. My favorite reply was “near as I can figure, your customer is running a highly profitable business and you are counting the days until your burn rate puts you out of business. Am I missing something here?” Well the point was not taken at the time I made it but so many of those businesses are now gone that maybe some of the x-CEOs have not got the message.

The consumers must not only like a particular product launched by the company but also be willing to pay for it. The best of all situations is that they cannot wait until you deliver it. Well, that is the second best. Our customers – that is how eager they were, funded one of the companies that I started.

Pricing is Critical: A second area that I focus on is pricing. This is one of those business-of-business questions. Teams focused on the business-of-the-business often mess it up. Start-ups are high-risk options for customers. The company may not be in business by the end of the year – so how is a decision-maker going to risk their job by going with such a risky proposition. If there is a risk in trying your new technology and yet another risk that your company might not be around to service it, why take both risks? Start-up teams need to have a good answer to this question – most do not.

Pricing – particularly first stage pricing – should reflect the fact that a decision-makes is going to be taking a risk in closing a deal with your company. The pricing structure should be clear to the customer.

Parsimony: One of the biggest mistakes that entrepreneurs make – particularly venture funded ones – is that they do not husband their cash. In the early stages, a company is all about using cash in such a way to give it a chance to reach a cash-flow-positive level before the investment capital runs out. Unnecessary expenditures need to be eliminated. Budgeting needs to be done carefully so that the available funds are put to high-return uses. Money management is important for any business, money management determines the success of many companies, and the successful companies all have a proper financial policy. Companies that have been in business for more than two years and still do not have a reliable cash flow statement have approached me. This is not a company – it is a science project.

A critical point in any start-up comes when cash flow turns positive. At that point, it is not living off the investment capital and can conserve the remaining balance for a rainy day. Management should drive very hard to accelerate the arrival of that day.

My work with start-ups has brought me into contact with some very special CEOs. I particularly enjoy working with young entrepreneurs with very sharp learning curves. To be able to look back over a year or two of high-gain growth and realize that I had a part in bringing it about, is very satisfying indeed.

© Dr. Earl R. Smith II


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