Fail Fast or Win Big: The Start-Up Plan for Starting Now (2015)

CHAPTER FOUR

Lean Resources: Less Is More

There are several definitions of the word entrepreneur. I like this one, by Stevenson, the best: “[T]he pursuit of opportunity without regard to resources currently controlled.” In other words, you run forward even though you don’t have all the resources at present to build the product or service. You just keep moving forward, knowing that at some point you will figure it out. But there is good news. There has never been a better time to employ a “lean resources” mentality, as there are so many lean resources that can help you. Let me explain.

In past experience at various companies, I managed annual budgets ranging from $25,000 to over $100 million. If you think that having more money yields better creativity, guess again. Do you know when our teams were most creative? When we had small budgets— or almost no budgets. People tend to think more creatively when they have to get around a lack of funds or resources. What I discovered over time is that, in order to be successful, it’s best to adopt a lean resources mentality.

“Genius is one percent inspiration and ninety-nine percent perspiration.”

—Thomas Edison, Life

More often than not, it’s the mentality or behavior of an entrepreneur that attracts people and resources; they just come up with creative solutions. Don’t have the money for public relations? Create such a powerful story or event that it is written about in the local or national press. Don’t have money for a trade show booth? Attend the event with samples or images of your product and look for buyers anyway. Can’t pay to have your food product sampled at a retail location? Get a table at a farmers’ market and sell your product there. Need additional capital or a way to generate pre-sales? Create a crowdfunding campaign.

LEAN RESOURCES ARE EVERYWHERE

In today’s business world, technology and new emerging marketplaces allow an entrepreneur to accomplish an incredible amount with lean resources. For instance, you can use cloud Software as a Service (SaaS) tools to build your own website, virtually for free. You can source small amounts of your product and sell them on Amazon.com to test the idea and generate some revenue at the same time. You can take that amazing pulled pork barbeque recipe and sell pulled pork tacos at a farmers’ market as a test for starting a food truck. The new 3D printers allow you to create prototypes for very little money. You can build a mobile application in your spare time, test it with friends, refine it, and put it up for sale in an online app store. Additionally, social networks have become so powerful that, for little money, you can craft an online marketing campaign to drive product awareness and sales.

How many more food-truck success stories do we need to hear? They are a great way to test a new food concept, at a significantly lower cost than opening a restaurant. Let’s see…. What are the average U.S. national costs to start a new “food concept” restaurant? $500,000. What are the average costs to start a food-truck business? $50,000 or less.

Many businesses can be started simply with a little capital. If you are an accountant, tax attorney, marketing expert, chef, painter, car detailer, and the like, start a consulting practice or weekend business to test your idea. Love dogs? Open a dog-sitting or dog-walking business in an urban area. A small lifestyle business can give you the pleasure and income you desire, or it can grow into a large company. So, start something you care about.

Look, it’s takes lots of hard work to make your new business successful. It just does not have to take lots of money. It will, however, require having a lean resources mentality. In early January 2011, two students indicated they would like to participate in our annual Entrepreneur Day, held on the campus every March. I asked them what they planned on selling. Sunglasses. But they did not have them yet. They had no idea how long it would take to get them manufactured. We agreed they should go offshore, get some stylish sunglasses in the university colors, and sell them at a price point they could test. With customer feedback, they could take a little more time and have a line of sunglasses created for them. They ordered 300 sunglasses at $3 each and sold them all for $20 each. They took those profits, created a crowdfunding IndieGogo campaign to raise even more funds, and designed their own sunglasses brand. Today, they have sales of over $750,000 with their unique line of sunglasses selling in six countries.

BUILD A COMPANY TO FUND A COMPANY

I have been mentoring an entrepreneur who is using the most amazing strategy to generate revenue in an existing “commodity products” business—all to fund his next big idea when it arrives. Over the past six years, and starting with a $3,000 credit card purchase for some HDMI cables from China, Adam has grown his online e-commerce business to over $3 million per year. He sells more than 100 different products, with an average gross margin of 60 percent.

Adam has become an online e-commerce expert, is highly experienced in search-engine optimization, and is insanely curious about products and trends. He is always selling products that I just heard about, so there is always growing customer demand for a good period of time, usually about 24 months. He does not even have his own website. Adam sells everything on other online platforms and outsources the operations and shipping as well. He runs the entire business out of his condominium, and uses university student interns to assist him. Talk about running a LeanModel Framework business!

But Adam has created this business over time to do two things: First, to provide him with an entrepreneurial lifestyle; and second, to generate enough cash flow so that he can fund a big idea when he sees one. Well, he sees one now and has the cash on hand to set up the business, test a prototype, and see if he is on to something. Whatever his result, it’s an amazing fundraising strategy that builds one business to fund another. And Adam will hold 100 percent equity in both companies. Consider if this strategy makes sense for you.

LEVERAGE IS KEY

As an entrepreneur, you use that LeanModel Framework mentality in order to move faster to take advantage of an opportunity. As part of that philosophy, you need to leverage all the lean resources that are available to you. Even if you have raised the necessary capital to fund a new opportunity, you want to extend your “runway” of cash as far as you can. The traditional term for how you go through cash on hand via time is called the burn rate. That is, how many months of cash do you have to launch and run your company?

That is the traditional view. However, I propose that you launch and run your new start-up so lean that you might actually produce cash early on to help fund the company. How about creating a rapid earn rate mentality that produces revenue as fast as possible? Another strategy is to keep your expenses extremely low. You need to leverage everything.

Let’s walk through the major areas that you should be aware of regarding resources that you can leverage:

• People Are Experts, Too

• Local and Global Talent

• Local Community

• Financing Options

• Technology Tools

• Manufacturing

PEOPLE ARE EXPERTS, TOO

When students ask me what the most important thing is that they can acquire while they are in school, and for a few years after they graduate, I have a two-word answer: skill sets. As a person looking to shape a career, and potentially become an entrepreneur, you have to build and strengthen your skill sets to the point where you can potentially be an expert in your given area.

Being an expert gives you several options. One option is to leverage your expertise into creating a company by treating yourself as a “rapid prototype.” That is, you use your talents and expertise to launch a company around an expertise you already possess. For example, I am mentoring several entrepreneurs who started their companies on a part-time or weekend basis. In a short time, or over a few years, they have become experts in a given area, where they can leverage that expertise to start a company. Some examples:

• Online marketing expert in either search-engine optimization or social-media marketing

• Forensic accounting specialist who understands how to do a solid financial analysis

• Sustainability or environmental specialist who advises other companies

• Photography expert who creates several businesses including online photography classes

Examine your skill set and determine if you can launch a potential company around that expertise you have, and then add more services or products once you get traction in the marketplace.

LOCAL AND GLOBAL TALENT

Leverage the expertise or work abilities of others around you, either in your local community or worldwide, using Internet technology. I assume you are aware of the workforce resources in your local marketplace. Utilize that network to leverage any resources that might be available at local universities.

For example, at our Lavin Entrepreneurship Center, we annually place more than 50 student interns in positions with small companies in the area. We have other resources on the campus, including student incubators and specialty courses in engineering, science, and mobile computing where, as part of their graduation requirements, students have to create a product. Most universities have similar course requirements that involve practical applications, and you can leverage these resources for your own product development. The potential at local universities is underutilized; if I were creating a company today, I would locate it two blocks from a major university.

If I were creating a company today, I would
locate it two blocks from a major university.

Other great local resources are community incubators, small business centers, co-location facilities, start-up programs, start-up weekends, and shared community resources. Often, local business organizations offer free services or even a small office to help young companies get started. In addition to accessing these resources, you’ll be spending time with other people looking to create companies; you’ll network your way into local entrepreneur groups. Indeed, what you could learn and leverage from other local entrepreneurs might be immeasurable in its value to your start-up.

I mentor an entrepreneur who developed some software tools. We realized Andrew might be better able to grow his company by placing him in a technical, entrepreneurial environment and still keep his company costs low. He moved to San Francisco, took a co-location office inside of RocketSpace (a start-up company co-location facility), leveraged the 50+ other technology-oriented entrepreneurs inside that facility, and leveraged four software freelance contractors located in four different countries; the result was that Andrew tripled the revenue of his company, all with just one employee—himself.

As you craft your business model and do your research on your opportunity, evaluate the resources of elance (www.elance.com) and oDesk (www.odesk.com). These are just two of several online communities that can provide a pool of freelance talent to help you out in a variety of ways. For instance, you can place “projects” on these websites and have people bid on them. Then, if you select someone to do the work and it’s done correctly, you accept the work and pay the individual.

While this method accesses an immense pool of potential talent, do your due diligence before hiring anyone. For example, ask for references and descriptions of past projects completed. While the advantage of a freelance market is its worldwide talent pool, a disadvantage is its potential complications of different time zones and cultural attitudes. You can use online tools like file sharing and video conferencing to handle the communications, which speeds delivery.

LOCAL COMMUNITY

More often than not, I find that entrepreneurs don’t know much about all the critical resources available in their local communities. It’s essential you know the resources available locally. Aside from the nearby talent described earlier, resources could include other entrepreneurs, potential mentors, co-location facilities, incubators, “free” or shared space inside another company, and city or state grant-sponsored facilities or programs.

In addition, consider exploring the local “retail” opportunities to test your product or service, whether those are the local farmers’ market, flea market, independent fashion goods store, organic food store, or local pet shop. If you think about who might help you get your product or service off the ground, and possibly assist in testing the waters, it will most likely be someone at the local level. Often they are entrepreneurs themselves and they will want to see you succeed.

If you test your product or service in such a local environment, be sure you have some measure of control in the supply, delivery, and selling processes. In others words, you test locally before you meet that national or global opportunity. The adage “You only get one chance to make a first impression” applies to entrepreneurial endeavors as well. It’s easy to improve the product after it’s been tested locally, but it’s hard to recover when you have failed on the national stage.

Let’s consider this entrepreneur: Isabelle started her company on the campus of her university when she was a student, and I managed to help her get the product placed in the university bookstore. At first, everything was great and her product was selling well, but then she started having quality problems. She quickly pulled the product, corrected the quality issues, and relaunched. Sales took off, and Isabelle slowly expanded into the local community, using independent retailers. She then expanded her store presence throughout the region and ultimately on a national level. Today, she has over 60 stores across the country carrying her products, and she is in discussion with two major retail brands, which would expand her distribution to over 200 stores. Why are those two brands interested in working with her? Because of the rave reviews she received in those 60 independent stores that carried her products.

FINANCING OPTIONS

Once you have crafted a solid business model around a real opportunity, and you have utilized the lean resources offered in your local and global community, you may need to identify ways to raise additional capital to fund the start-up. My hope is that you are doing something so lean that your start-up does not require a significant amount of cash. However, let’s assume that you need a certain amount of capital to start the business and that you do not have that capital today.

First Stop: You

The first place to look for money is you. What can you downsize, sell, or eliminate to free up some cash? If you really believe in your opportunity, what skin are you willing to put in the game? Investors and venture capitalists love an entrepreneur who has invested in his or her own business, who has put down cash, made sacrifices, and contributed sweat equity. Investors invest in passionate people who have bet on themselves.

Banks or local lending facilities might also be an option. Find out if there are any city or state grants available for entrepreneurs. In addition, review your credit cards and their corresponding interest rates to see if that is a viable option. Remember, never risk more than you can afford to lose.

Friends and Family, Do it Right

I am always a bit nervous about recommending the use of friends and family as investors in your start-up business. For best results, don’t treat them like investors—treat them like a friendly bank. Here are some simple but important rules that may help to keep your friendships and family intact:

• Set expectations accordingly. Even if you firmly believe that your start-up will be a success, it’s smart to remind friends and family of the historical facts related to new businesses. More than 50 percent fail in the first two years, and even the “overnight successes” take five years to reach potential, on the average. This is not an investment strategy that makes sense. So ask them not to treat it like an investment.

• It has to be their discretionary funds. If friends and family are still willing to take the risk because they believe in you, you need to be convinced that they can afford to lose it all, without a major impact on their lives. If you are not sure on this matter, don’t take their money.

• It’s a professional transaction. Treat the transaction as you would expect to be treated by a bank. That means writing down and signing the terms of the agreement, after making sure everyone understands them. Insist on paying market rates for commercial loans, since the Internal Revenue Service has some specific rules related to gifts.

• Repayments tied to your cash flow. Since you don’t really know when you will generate cash flow, try to avoid obligations with fixed repayment schedules. With cash flow obligations, investors receive a percentage of your operating cash flow (if any) until they have been repaid in full.

• Loans are better than equity. Offering debt is better than offering equity, especially in the early stages when you have no valuation for setting equity percentages. Plus, you don’t want investors, especially friends and family, who really don’t know your business questioning your every move.

• Pay the money back quickly, wisely. This loan is real and it needs to be paid back. However, some founders are too focused on quick repayment, and they compromise strategic decisions. Better to pay it back in smaller, consistent micro-payments unless your cash flow increases dramatically. If that’s the case, pay it back.

TECHNOLOGY TOOLS

The technology available today is absolutely amazing. It’s leveled the playing field for entrepreneurs looking to create a business, and it has enabled anyone to sell something to someone, somewhere. That’s incredible, actually.

If you are looking to create a business, or you are already an entrepreneur, you have to be insane not to investigate the variety of technological tools at hand to start and manage your company. Even if you don’t like technology, you need to understand the technology that might give you a competitive advantage.

For example, you might be selling organic honey from Australia, with special antioxidant properties. People all over the world might be looking for that honey. So, instead of just selling it in your local town in Australia, you utilize online marketing to drive sales on your website, or you can sell your products on Amazon.com and reach a global “online mall.” In addition, several niche websites that focus on organic foods may want to sell your product. Thus, you can dramatically increase the chances for your success if you learn to utilize and leverage technology that is at extremely reasonable costs. Additionally, technology can help you keep your costs down and your opportunity high, which is critical to a start-up.

About two years ago, I helped a couple of student entrepreneurs start their business here on campus. They had created a healthy protein drink; think of it as a protein-based meal replacement, with fresh, natural ingredients, a simple menu with great pricing. Instead of putting them in a traditional brick-and-mortar environment, we convinced the university that everyone would be better served if they were located just outside the recreation center on campus, in a 20-by-10-foot stainless steel and black canvas kiosk. That recommendation meant not very much overhead—just electricity and water.

The business was so successful, the students now have six locations in California. They heavily utilize technology to run their business, though. The iPad touch screens serve as cash registers; a cloud-based point-of-sales system runs the business operation, including the financials, for $35 a month. They utilize Square (a wireless payments vendor) as their virtual merchant vendor to process customer payments. Also, they can “look into” the business from anywhere in the world via their smartphones, and “see” sales happening in real time, either in total or by location.

Instead of creating training manuals for the employees, these entrepreneurs developed training videos and posted them in a private YouTube account for managers and employees to access. What’s more, this multi-million-dollar business does not have a corporate office. They conduct their meetings with employees and managers using local meeting places. Technology enables a lean resource mentality.

Specifically, there are two major groups of technological tools to consider. The first is what I call technology platform tools. These tools allow you to open a business and sell your product. The second, technology-enabling tools, allow you to market and run your business. As you could probably imagine, however, there are many more tools out there. Get curious.

Technology Platform Tools

With these technology tools you can either create or leverage existing Web technology platforms. On the creation side, there are simple but powerful website creation tools like WordPress, Weebly, Tumblr, and SquareSpace. These website-building tools, often free for a simple version or free for a trial period, allow you to rapidly build your website and begin showcasing your brand to the world. The advice here is to investigate all your options, and work with a freelance designer to create a powerful and useful website using one of these or several other website tools. The reason you want to use a website platform tool is for its ability to maintain and update your website without needing a programmer.

The next level of website platform tools especially designed for e-commerce are Shopify, Volusion, and Big Commerce. One of the entrepreneurs I mentor built his website using the Shopify e-commerce platform. He built his website in less than two weeks. The tool has a built-in editing feature, the ability to add and edit products, and several merchant choices that allow customers to use their credit cards for payment. The monthly website fees start at $28 per month. I am not endorsing Shopify; I just offer it to illustrate how these tools are used.

Another e-commerce tool is Big Commerce. About a year ago, we helped Mark, a local entrepreneur, to build his online e-commerce strategy. We chose Big Commerce, mostly for its robust capabilities. It has almost Amazon.com capabilities and features: built-in content editing, flexible shopping-cart options, easy export of all transactions to a financial tool like Quick Books, email capabilities, and more. All this comes with pricing that starts at less than $30 per month. We designed the website using Big Commerce themes and template pages— no programmer necessary—in less than two weeks, with multiple product categories and multiple products.

Technology-Enabling Tools

There are so many of these cloud-based tools that I don’t know where to start. Here’s a simple list of potential tools in the order you might use them when starting a company:

• LinkedIn: To build your network of knowledge experts, entrepreneurs, and industry experts

• Google Alerts: To bring you information on key subject matter via email

• Google Trends: To help you track online search trends

• Survey Monkey: To use for online potential customer surveys

• LegalZoom: To help you with your legal needs

• DropBox: To share files and collaborate with others

• Skype: To conduct face-to-face video meetings with employees and partners

• Square: To turn your smartphone or iPad into a cash register

• Constant Contact: To email prospects and customers

• HootSuite: To manage all your social-media marketing efforts from one platform

• POS Lavu: To keep track of point-of-sale and manage inventory

• YouTube: To post your product or demo videos online and on your website

• Google Analytics: To understand visitor traffic to your website

I don’t know if there has ever been a time when so many tools were available to potential entrepreneurs. Anyone with access to the Internet can leverage these tools to support a start-up business. And quite a few of them are free, so take the time to learn the potential here—it could impact your new business in a big way.

MANUFACTURING

We had years during which industries moved their manufacturing overseas. It seemed that everyone who wanted to manufacture something would run to China. Cheaper labor. Cheaper costs. Now, manufacturing in the United States seems to be making a comeback. In several recent articles, experts cite the increase in “Made in the USA” advantages, which include reduced shipping expenses, more rapid turnaround of product design changes, and better quality control. The good news is that today’s entrepreneurs have many options when considering who and where their product will be manufactured.

The first option is local manufacturing or distribution. Although the cost might be higher initially (owing to lower volumes or higher labor costs), the advantages of having your manufacturing and/or distribution partners available nearby are great. You can meet with people fact to face—there’s no substitute for that. You can visit the facility and truly understand its capabilities. You can be nearby as they build your prototype, allowing you to manage the process better. You can more easily review the product quality. In short, you save time and money by being close to each other. Obviously, the logistics of getting your product delivered to you or to stores in your local market are simplified with lower costs. So, examine your local marketplace first to determine if manufacturing nearby is a viable option.

When local isn’t the best choice, China is still a strong source for manufacturing. I asked Adam, a local entrepreneur in San Diego, who sells more than 100 products and uses 10 manufacturers in China, what he would recommend to a novice entrepreneur looking to manufacture a product for the first time. Adam travels to China regularly and meets with several manufacturers each visit, usually at trade show events. Here are Adam’s recommendations in regard to Chinese manufacturing:

1. Start by looking up the website www.alibaba.com and reviewing the kinds of products and pricing costs that are available from Chinese manufacturers. While you should not really select a manufacturer directly from this website without referrals or a recommendation, it will give you a great idea of what’s possible.

2. Go to www.globalsources.com to get a better understanding of all the trade shows that are happening in that part of the world where manufacturers attend and show off their latest products and capabilities. You may find it worth your while to attend a specific trade show that may have 100 manufacturers showcasing a certain type of product or technology.

3. If you really want to “blow your mind,” attend the Canton Fair in Guangzhou, where over 150,000 products are showcased and you can have face-to-face meetings with manufacturers to explore other products.

Here’s one final comment, this on near-shore manufacturing: Keep your eye on Mexico. The country is making solid strides with cross-border programs and their manufacturing capabilities. Brad and James are two local serial entrepreneurs, Brad in technology electronics production, and James in fashion accessories and clothing. They both utilize manufacturers in Mexico and they speak highly of the quality, the reasonable costs, and the ability to ship to the United States very quickly. Both Brad and James say they will increase their business in Mexico versus China in the near future.

3D Printing Is the Local Wild Card

Keep your eye on 3D printing, as it will provide some interesting solutions for low-volume, unique products or prototypes. According to Gartner Research, an industry analyst, 3D printing as an industry is estimated to grow from more than $450 million in 2013 to over $5.7 billion in 2017. That’s pretty rapid growth.

My predictions are that 3D printing will present some real entrepreneurial opportunities. First, we will see produced some specific, low-volume products made from 3D printers. For example, do you want to buy 100 customized smartphone cases as a giveaway at an event? You will be able to upload an image online, send it to your local store, where it will be printed to order, for your easy pickup. Or, do you like a special kitchen drawer knob, but need only 20 of them? No problem; the local home supply company will make them in-house with their 3D printer.

The entrepreneurial opportunities will increase incrementally as customers learn to design or create their own 3D-manufacturable products. Similarly, an entrepreneur can utilize 3D printing to rapidly prototype a product. Either way, you should learn about and keep your eye on 3D printing as either a service or an opportunity.

ENTREPRENEUR INSIGHT

About four years ago, Paul and Griffin, two college students, saved enough money to do one final surfing trip to Costa Rica after graduating. Then, as they told their parents, they would go out and get real jobs. But while on that trip, they noticed a wrist bracelet being sold on the beach. They each bought one. They liked them a lot, so they went back and bought 1,000 more with their remaining money. Once back on the mainland, they sold them to their friends— all of them, in less than one month.

Thinking they were on to something, Paul and Griffin used the profits to track down the beach vendor and order some more. They quickly sold those as well. They divided up their responsibilities: Griffin would build a website and sell online, Paul would start calling on local stores. They ran this business out of their apartment. They used the profits to sustain a meager living and continued to pour every dollar into new inventory. The more people they contacted, the more product they sold. Then they brought in unpaid student interns to help. Today, their multi-million-dollar business is thriving, and they are still running the business lean.

KEY TAKEAWAY

As an entrepreneur, you need to figure out ways to conserve your resources while you keep moving forward. As you build your start-up, examine every opportunity to leverage all possible resources so as to maximize your opportunity by spending as little cash as possible. Leverage everything.