Scaling a business is harder than starting a business - mindmap

I've prepared a new mindmap using The Brain.  The link to the Brain is
https://webbrain.com/brainpage/brain/1570D08C-2B19-DA79-A992-AA010A150300

Copy the above link and paste it into the web address block on your browser, then press the enter key.  You will have to set up a free account to open the Brain.  This is easy and will not require you to open a free trial of TheBrain.

You can open the elements of the Brain by clicking on the colored dots on the various blocks.  You can reduce the bottom panel by clicking on the down arrow in the middle of the top of the bottom panel.

PowerPoint in higher education is ruining teaching.

Great slideshow on how not to use PowerPoint or any other presentation software.

PowerPoint in higher education is ruining teaching

Is it technology looking for a market or a market looking for technology?

Whenever I hear a company CEO say, "We have great technology and we're looking for new applications for the technology," I know this company is heading for trouble.  When I hear a CEO say, "We know this market and we're looking for new technology to solve problems that exist with users in this market," I'm interested.  So are investors!

It is so tempting for those who have developed a technology to think that there must be a market that can use this technology, that the technology developers lose objectivity and try to start a company to find the market that can use the technology.  This company is about 90% of the time doomed to failure. So, why don't the owners/developers get it?  Businesses succeed because there is demand (a market) for their products and services not because they have great technology.  OK, the most successful companies have great technology AND demand for their products or services.

But, you say, what about a market that will develop in the future and the entrepreneur who has a vision that the market will develop in the future?  Well, you've heard that timing is everything.  Most entrepreneurs who have a vision of a future market can't imagine how long it takes for a market to develop and exhaust their resources before there is a viable market.  Those that enter this nascent market just at the inflection point when a viable market is developing succeed while those who enter too soon fail.  This is particularly true for companies that have a new technology.

Don't get caught in the trap of having an interesting technology and believing you can start a company to find a market for the technology.  Knowledgeable investors know this is a formula for failure.

Is the cost of complying with SOX worth it?

When I team-teach a portion of our Business Ethics class in the Rollins MBA program, one of the presentations by a team in the class is on the pros and cons of SOX.   The side that discusses the cons always questions the cost/benefit of compliance with SOX.   After the presentation, I ask the class to determine the percentage of stock traded, as a percentage of the shares outstanding, in a publicly traded company on the New York Stock Exchange in a given week.   I'll suggest a large company and tell them to go to Yahoo or some other site for this information.  They usually find that the number of shares traded in a given week for that company is 2-3% of the outstanding shares in the company.

Then, I ask the class to tell me the market cap for that company based on the quoted price per share at that time and most of the class gets the answer right - the share price times the number of shares outstanding.

Then, I ask them to predict the effect on the price per share if the New York Times or the Wall Street Journal has a headline that the SEC is accusing one of more executives of that company of wrongdoing.  The students are usually at a loss at predicting the price decline that will occur, but some find a few companies where that has happened recently and excitedly announce that the price per share went down 10-30% in one day resulting in a decline in the market cap by several billion dollars.  So, the alleged wrongful (unethical by definition) conduct may have reduced the wealth of the shareholders in that company by several billion dollars.  How could this be?

Because stock prices are set by transactions at the margin (only 2-3% of the outstanding shares per week) in normal trading.  But, when a public relations disaster hits, it would not be unusual for more than 5% of the outstanding shares to be traded in one day driven by institutional sellers.  So, what is the lesson in my Business Ethics class?

Unethical conduct by one or more executives in a publicly held company can result in a reduction in shareholder wealth by hundreds of millions (or billions) of dollars when the wrongdoing may only have benefited the executives by a few million dollars or less.  So, the value of the increased oversight by the board of directors and the audit committee caused by compliance with SOX should by measured by avoiding the reduction in shareholder value if wrongdoing is prevented.  But, how can shareholders know if wrongdoing is prevented?  They can't; but, in my experience, the invisible hand on the executives of the company due to SOX is a form of insurance against wrongdoing and the premium paid is the cost of complying with SOX.  Based on the public relations disasters many companies have faced when wrongdoing is discovered, the premium for reducing the likelihood of wrongdoing by complying with SOX is well worth it.

"Vapor" Opportunities

I often tell my students to be very careful when considering a new business opportunity if you are on the outside looking in with a solution to a problem you perceive to exist.  An example would be for someone with software development experience in, say, customer service software who decides to develop software to automate some aspect of medical records in doctor's offices.  He or she talks to a few office managers for doctor's offices and develops a set of features for this software based on this very limited information.

Our entrepreneur then induces a doctor's office to be a beta site for the software and, with a great deal of hand holding, decides that the beta site was a success.  This is a disaster about to happen.  Usually, the doctor's office in the beta test has not paid money to use the software and, therefore, didn't have to consider the value versus the cost of the software product.

Inevitably, the software needs many bells and whistles to handle all the variations "required" by different doctor's offices making it impossible to charge a price that the doctor's offices are willing to pay that will cover the actual cost of delivering the product.  The entrepreneur deceives him or herself into believing the "value-added" by using the product exceeds the price the entrepreneur must charge and the entrepreneur runs out of cash chasing a "vapor" opportunity.

Compare this to a person with some knowledge of software who works as an administrator  in a large doctors' office who sees the need for a similar product, but with a simplified set of features that will meet the need.  He or she sees that the product can be developed, from the beginning, to have flexibility to handle additional features, if a doctors' office is willing to pay for them.  This person decides to team with a software developer and designs the software to meet the real needs of a doctor's office that have subtle, but very important, differences from the needs perceived by our first entrepreneur.  The bells and whistles (that often cost more to develop than the basic product and often cause more problems for the customer) are offered only as add-ons.  This entrepreneur has a real chance of succeeding.

What I've described above happens very often.  The first entrepreneur conducted a superficial analysis of the problem he or she perceived to exist and developed a product without knowing the subtle aspects of the customer's problem that will be the difference between success and failure of the product.  This often happens because of an arrogance on the part of the first type of entrepreneur who thinks he or she can understand the customer's need and thinks he or she knows the decision making process the potential customer will use in deciding whether or not to pay money for the product.

In reviewing a business plan, I always look for a section that walks the reader through the thinking process of a potential customer in deciding to purchase the product.  I very seldom find this analysis and, when I ask the entrepreneur to verbally tell me, the entrepreneur can only give me generalities that are useless.  Yet, when I ask someone like the second entrepreneur described above who has had personal experience in dealing with the problem, he or she can usually give a very good explanation of the customer's decision making process.  Which of these entrepreneurs is likely to raise capital from investors? 

The lesson - team up with a person with real experience at dealing with the problem you think you can solve with your product; not by simply interviewing the person, but  by making the person a part of your team!

The best way to prepare for a major negotiation

All entrepreneurs need to be good negotiators.  Few are.  Why?  Because they usually have little experience at negotiating major matters and have no training in negotiation.  Negotiation skill is not intuitive, it is learned.  I teach Negotiation in the Rollins MBA program and hammer into my students that the key to successful negotiation is preparation.  Although there are many aspects to preparation, the one that is most important, yet usually missing, is to develop a good alternative to whatever you are about to negotiate.  That is, if you are preparing to raise capital from angel investors, know what angel investors want and the terms to expect.  But, more importantly, court more than one angel or angel group at a time so you can turn down an unacceptable deal .  The strongest way to negotiate is to let it be known that you have an alternative deal that may be better than the deal the other side is trying to negotiate with you.  Otherwise, you are negotiating from weakness and the other side will spot that weakness immediately.  OK.  Why doesn't everyone do this?  Because it is very difficult to develop the relationships necessary to have an angel or angel group take an interest in making an investment into your company.  If you follow my advice, you have to develop at least two of these relationships in parallel and manage the process so that you have at least two potential investors or groups of investors with whom you will negotiate at the same time.  But, you say, don't all investors or investor groups ask who else is considering an investment in your company and insist that you tell them their names?  Yes, this is a common practice by investors, but you have to have the courage to say you won't disclose this information.  An investor who walks away solely because you won't tell the investor the name of the investor's competition is an investor who will probably demand unacceptable terms anyway.

So, the best preparation for a heavy duty negotiation is to lay the groundwork to have an acceptable alternative to the deal you are about to negotiate.  This takes planning and time.

All major corporations should be inspired by the story of the British Mustang

A story appeared in Slate Magazine several weeks ago that should inspire all large corporations to encourage entrepreneurial thinking in their organizations.  Here's the link http://www.slate.com/id/2293662/