In the United States, 71 percent of people say they would like to work for themselves, but only 8 percent are actually self-employed1. In Canada, the pattern is the same: 58 percent would like to be self-employed, but only 11 percent are. There are lots of dreamers, but very few doers. Still, the doers add up—15,000 Americans take the plunge and start a new business every day2. If they can do it, so can you. Productivity 
Risk and Reward Big rewards usually come with big risks. Entrepreneurship is no exception. In the United States, 80 percent of new businesses celebrate their first birthday, but only 56 percent make it to their 4th anniversary3. In Canada, 77 percent of new businesses make it past the first year, but only 60 percent survive past 4 years4. Of the businesses that survive, many are just limping along. Entrepreneurship is risky business. It usually takes a lot of swings and misses before you hit one out of the park.
Experience Venture capitalists (VCs) are professional investors who fund small companies that have the potential to be the next Google or Microsoft. It’s like looking for a needle in a haystack. VCs fund less than 1 percent of the business plans they review5. When VCs fund first-time entrepreneurs, only 18 percent of the companies are successful6. But the odds of success rise to 30 percent when VCs fund an entrepreneur who’s been successful before. There’s no substitute for experience. In the medical device industry, researchers found that startups performed better if their founders had previous experience with other medical device companies. Experience also helps with finding new ideas. Inc. magazine found that many entrepreneurs got the idea for their new company while working for their previous employer. Fred Wilson is a VC with Union Square Ventures in New York. He’s funded over 32 startups, and estimates that two-thirds of his successful investments made partial or complete transformations of their business after he invested7. That’s why VCs would rather invest in an “A” team with a “B” idea, than a “B” team with an “A” idea. Ideas change, but winners find ways to win. For your startup, nothing beats the experience of having tried, and failed, and tried again. Each failure teaches you what not to do the next time around.
Business Strategy Clayton Christensen is a professor at Harvard Business School. His “Theory of Disruptive Innovation” proposes that certain innovations change the playing field so much that existing companies don’t want to compete8. There are two types of disruptive innovations: low-end disruptive innovations, and new-market disruptive innovations. Low-end disruptive innovations find low-cost ways of providing good-enough products to customers who are over-served by established companies. For example, Dollar General provides good-enough products at lower prices than Wal-Mart because they do away with all of the frills and convenience of a full-service store. New-market disruptive innovations find new applications and new customers for old technologies. The resulting products or services are usually more affordable or easier to use than existing solutions. For example, the first personal computers used the same transistor technology as mainframe computers, but they lowered the price and increased the ease of use to the point where computers could be used in the home. The market for personal computers started small, but now dwarfs the market for mainframes. By using old or existing technology, entrepreneurs reduce their technical risk, and free up their time to find new customers and new markets. Based on his study of the disk drive industry, Christensen found that disruptive products had a 37 percent chance of high growth, compared to 6 percent for non-disruptive products. For your startup, focus on products that are low-end or new-market. Your goal is to find profitable niches that your competitors don’t want to serve, or don’t know about.
Second is Best In sports, first across the finish line is the winner. But when it comes to new markets, it’s better to be second than first. In a study of 500 brands in 50 product categories, the failure rate was 47 percent for the first products in a new category9. Even when they survived, pioneers only averaged a 10 percent market share. Instead, the best strategy was entering the market after pioneers had identified the opportunity, and focusing on sales and marketing. On average, these followers started 13 years after pioneers, but became the leaders in 53 percent of the product categories, and had a market share of 28 percent. Follow Michael Masterson’s advice: spend 20 percent of your time on the product, and 80 percent of your time on sales and marketing. Without customers, you don’t have a business. Networking It’s a small world out there, and random meetings can pay big dividends for your business. Swedish researchers followed a group of 380 nascent entrepreneurs for 18 months, and found that being a member of a business network accelerated the time to first sales and first profit10. Formal business education did not make a difference. So forget about getting an MBA. Instead, go to networking events, and tell everyone about your business.
Automatic Business Your goal is to build a business that can eventually run on its own. It’s nice to take vacations without worrying that everything will fall apart. The secret is recruiting excellent people to fill key management roles. For each role, someone must have the authority to make decisions, and the responsibility for mistakes. These roles are listed in the table below11.
When you’re starting out, you may be responsible for all of the management roles by yourself. But as your business grows in size, there will be too much work for just one person. To avoid burn-out, you must recruit good people, and delegate authority and responsibility. Your business will also need systems and procedures for training new employees quickly and efficiently. Your ultimate goal is a system that enables average people to achieve superior results.
Your Way, Right Away Have you noticed that McDonald’s always tastes the same? Whether you’re in Pittsburgh or Prague, you know exactly what to expect when you order a Big Mac and fries. The credit goes to Hamburger University. Since 1961, Hamburger U has graduated more than 80,000 restaurant managers and owner/operators11. Students learn how to set up systems and procedures for repeatable service, quality, and cleanliness. Every McDonald’s uses the same systems, and that’s why you can count on consistency around the world. For your business, have you written down exactly how to make your product? Do you have a training program for delivering perfect service every time? It takes a lot of effort to develop good systems and keep them updated. But it’s worth it in the long run because you won’t always be around to watch everything. Personal MBA You can easily spend $100,000 for an MBA degree12. Not to mention the cost of not earning any money for 2 years. Instead of sitting in a classroom, why not learn the theory in your spare time and apply it right away in your business. Out of hundreds of business books I’ve read, here are my top 12 recommendations. Go to your local library or bookstore, and get started on your personal MBA. Startups
References
Copyright © 2009 by Paul Lem, M.D. Buy the book at www.MasterLifeFaster.com |
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