$200,000 on a Product – and No Marke

Here’s one that really gets me. I’ll be making an example of an entrepreneur I talked with recently, and since he seems like such a good guy, I feel a bit badly about this. But I’ve heard it before on numerous occasions. The story boils down to this.

Between web design and related consulting, finding a fulfillment company, product design, manufacturing product prototypes, and other meticulous investing in the business, he plowed $200,000 and two years into his business before approaching the marketplace to see if anyone wanted the stuff he was making.

In this case we don’t have a failure to invest, but we still have overcaution. It’s like putting off the moment of truth because one suspects that maybe there really is no demand for the product.

So when he finished going through his $200,000 to the point where there was nearly nothing left to invest, he came to me. Needing help with marketing, no less. Great, I thought. I like his product, and I like him and really want to help. Our $2,000 lowest-priced consulting package should be a good fit.

Nope, he said. Money’s really tight. (It is now, after he spent it all.)

He said: I was thinking more along the lines of the “AdWords campaign diagnosis” you offer for $249.

(Although I don’t always have time to offer this service, I would have been happy to do it for him, and will be happy to do it for you if you request it.

We also do a fuller diagnosis of your current AdWords + Overture campaigns for $349. A more comprehensive diagnosis package that includes a website usability audit runs a bit more, up to $999.

Warning: after an in-depth review of your operations, we try to talk you into hiring us! If you’re interested in the diagnosis offer, email me at pagezero@gmail.com.) Turns out he didn’t want the diagnosis, either. Just 30 minutes of my time on the phone. To be honest, that’s not really a service I offer. I spend too little time managing this business as it is to be directly consulting in 30-minute chunks. It’s not profitable to run a consulting business based on 30-minute one-off consultations, believe it or not. :) Not only that, but I can’t be particularly effective in 30 minutes, and might wind up giving poor advice and come to regret it later.

As nice a guy as he was, I agreed to do it. And I don’t mean to offend the gentleman, but it really made me wonder.

If the whole initial investment in getting a business up to the starting line is just a “cost” with little more than high hopes attached, how are you going to be able to fund true profit centers, like hired help or consultants, software, advertising, and other “kick it up a notch type” costs, when they arise?

How Smart is This?

Another friend of mine offers marketing consulting.

 

A prospective client he spoke with this week decided at the last minute that my friend’s consulting services (reasonably-priced though they may be) were unaffordable due to a recent slowdown in business. I thought “fair enough, maybe his furnace is on the fritz and the kid needs braces,” but on second thought, I said to myself, “Wait a minute! Didn’t my friend just save him $3,500 (per month) with a couple of pieces of free advice based on expertise he’d spend years honing?

And the consulting services are unaffordable? How about taking that $3,500 my friend had saved the prospect and using that, for starters?”

What a shame. But that’s psychology for you. Many of us have to fight the tendency to hold the purse strings too tightly for our own good, lest someone out there “get the better of us,” or because a spouse or smug columnist warns us against “foolish spending.” But the distinction we sometimes fail to make is: a $20 bottle of wine or a new $400 set of dishes are truly “spending.” That $20 bottle depreciates pretty much to zero the minute it pours down your gullet. If you can’t afford those things, you shouldn’t rack up the credit card for them. But a marketing or software expenditure, surely, must be considered for their potential as investments in long-term growth.

Burning Through Venture Capital

The over-planners create the ultimate prototype, worry about every logistical detail. Unless you’re burning through millions of somebody else’s venture capital, this approach can be a real risk. A safer approach would be to get some willing customers first, then create the product. Or come up with some compromise strategy where at least some cash is always coming in.

One way or another, I’ve noticed, many small business owners become tight-fisted at precisely the wrong times. But when is excess caution actually a risk?

A friend of mine, an accountant with no dependents, just took out half the equity in his home to invest in the growth of his business. “I’m using my home like a piggybank,” he said. Foolishness? I don’t think so. Demand for his business is growing, so he’s expanding it.

Fashionable Frugality

Frugality can be as much of a fashion statement as anything else. Isn’t Ikea one of the largest companies in the world because it caters to one’s need to feel “frugal”? Every time I spend an entire day cursing to put together an Ikea desk, I say “never again” will I be a victim of the fashion of frugality or the cult of “do-it-yourself.” You do it yourself until it becomes irrational to do so.

Then there are the business owners who actually have a fair chunk of change — from family, from a good job they left — and enough spare time to invest in planning their assault on the marketplace. These can be the most prudent and rational investors of all. And that can be a big problem. The one thing that the children of the migrant farm workers knew, once they got going as entrepreneurs, was cash flow. They knew they had customers waiting for some of the grapes they were growing on their small farm. Things aren’t all that risky when you have customers.

Getting Customers: Not Risky if it Works

Probably, though, that risk is mitigated by one factor: customers. If every transaction is profitable, the business pulls you along and demands investment, but that investment is less risky than it might seem.

I ponder on these types of things in order to attempt to explain the behavior of those who claim to be small “business” owners, but who do not invest in growth. I chalk a lot of these seemingly random decisions up to a cult of caution that can be insidiously instilled in us. Financial columnists and our forebears alike may want us to believe that being careful is what separates the smart from the dumb, the comfortable from the broke. Really, though?

 

Although my family isn’t particularly introspective – - we don’t sit around the campfire discussing what our rather modest family tree got up to in the old days — it’s worth noting that while my 93-year-old grandma always wanted the safe route for me (a nice school, a nice job as a lawyer or something, a nice membership at a golf and/or curling club), her own husband, the late great Grandpa Edric (Eddie) Goodman, went “into business for himself” in his mid-forties, with a partner managing to acquire a failing machine shop, the one he’d worked at as a machinist all his adult life (having emigrated from England as a skilled tradesman). He turned out to be a pretty big success by Goodman standards (although the standard is getting higher all the time). He got to drive a fancy car for a couple of years. But it was stressful. He died 30 years ago. I noticed recently that the company is still going strong, with fourteen employees.

“Don’t Believe a Word of It!”

Newspaper reporters and grandmas have the luxury of counseling caution. Don’t believe a word of it, I say.

When you’re a smaller company, it’s always difficult to make the decision to invest in software, outsource a project, or generally invest in growth.

As a business owner, I know that. Right now, for one of the things I’m working on, I have to assess whether a $12,000 investment in programming time is worth it. Not an easy choice. But it’s a decision that needs to be made on rational grounds. The temptation is to go on gut feel — “that sounds like a lot.” Since the default of $0 is always beckoning in the background, you can convince yourself that pretty much any level of expenditure from $100 to $100,000 “sounds like a lot.” But in deciding whether to pursue a software purchase or marketing initiative, we’re not dealing with personal consumption. Many of us, by cultural inheritance, still equate a purchase not made with the virtues of parsimony and self-denial.

But that’s probably not the way to look at this. It’s more in the realm of making good or bad business decisions.

There’s also a responsibility to meet other risktakers halfway, isn’t there? Too many of us expect to achieve certain objectives while failing to acknowledge that the freelance programmer (say) is taking a pretty big risk in working for multiple clients without the safety of a long-term contract.

We’ve all heard about so-called entrepreneurs who push people around and leave a trail of unpaid bills.

I can’t stand those types.

Fatal Simplification

If you believe to what you read in the paper — even in the business section — life’s financial decisions can be simplified down to spending vs. saving. In short, life is a struggle between profligacy (scary! yikes!) and caution (nice, good). Since the default value in American society is profligacy — the savings rate has fallen from over 8% of income 25 years ago to about 1%, according to a story in this week’s Sunday New York Times — caution is held up as a virtue. So it’s written up as “should we put that $3,000 into an IRA, or buy that plasma television?” In fact, for those whose financial canvas is the wider one of the business owner as opposed to the salaried worker, that’s not the tradeoff.

Assuming for a second that no bank loan is in force, that $3,000, if not spent on the TV, doesn’t necessarily go in the IRA… because there is no $3,000. That small business owner pays themselves $3,000 less that quarter, or that month, to invest in some aspect of the business.

Elsewhere in the Times, there was a wonderful story about the children of migrant farm workers from Mexico who now operate California vineyards like the ones their parents toiled on. For such a story to unfold, clearly hard work is a given. Access to education for the children is a must. But at some point, it goes beyond hard work and saving. Savings and assets are risked to pursue the dream. The choice wasn’t between the “stuff” and the retirement account. It was neither of those. It was investing in a growing business. It goes without saying that this is risky. You not only have to come up with the money to invest, you have to make the right investment. In equipment, marketing, people… all of the above, and in the right proportion. Hard work is a constant, but it can’t erase bad decisions.

The “New” Entrepreneurial Education

I was heartened this week to see special supplements devoted to this ill-served yet huge market in both leading Toronto papers. In today’s Globe and Mail, the Report on Small Business led with an article about more small businesspeople taking “entrepreneurial education” at business schools to help them understand what they’ll need to do better if they want to grow. The article is titled “Out of the boardroom, into the classroom.”

Boardroom?? Anyway…

The case study of a fledgling small brewery owner taking business courses was intriguing. “We [Steam Whistle Brewery] had not really taken a five-to-10- year look [at our business],” acknowledged Mr. Heaps, a philosophy-degree graduate and son of the founder of Upper Canada Brewing Co. Ltd., which was acquired by Sleemans Breweries Ltd. in1998.

A story about how a regular person could learn to run a small business had turned into a story about how a brewery owner’s son started a… brewery.

Having a father who founded a brewery — that’s something you just can’t teach. The story was suddenly a lot less interesting. I won’t disagree, though, that Steam Whistle is indeed worthy of Heap’s aim to make it “Canada’s premium pilsner.”

Most small businesspeople have a lot more to worry about than a 29-year-old brewery-owner’s-son-whostarts- another-brewery does. And when you’re worrying, you understandably make decisions based on instinct and emotion, not sound planning.

Every week, I talk with the owners of small, growing businesses who have only their gut to advise them on how much to spend on growth, and what to spend it on. Because few have the time, money, connections, or inclination to sign up for “entrepreneurial education,” what happens, I think, is that they’re guided by the cultural preferences and prejudices that leak into the rational part of the brain.

The $100,000 Reality

When you have revenues under $100,000, of course, what you ultimately have at the end of the year is losses, until you turn the corner. In life, some are better able to handle those losses than others, obviously. The straightforward advice you might get from an expert — have a business plan, get a loan, etc. — can only take you so far. We can’t all plan every detail, more so for entrepreneurs over the age of 40 who may be starting a second career.

A “not atypical” client of mine, for example, was a former furniture company executive who pulled together a designer and a niche idea, and no doubt some financing to go along with his savings, to start his own outdoor furniture business. When he came to me, he wasn’t much in the mood to talk of business plans and strategy — each day was a hectic mess of details. More importantly, he had $150,000 of inventory sitting in a warehouse. It had to be sold as quickly as possible. The website was built, but they weren’t coming.

Well, obviously that’s not optimal. It might even seem backwards. Luckily in this case, people love the product when introduced to it, and are more likely to respond when mailed a color catalog. A perfect job for Google AdWords! Soon, that inventory was moving. (The client partially paid me with furniture. Every time I fire up the BBQ and have a cold Steam Whistle Ale on that cedar bench, I think about his success story.)

No, there aren’t very many good roadmaps on this bumpy road to small business success.

Sage Advice for Entrepreneurs from Andrew Goodman

In the world of Google AdWords e-books and consultants, Andrew Goodman is my “competitor.”

He’s the “other” AdWords guru out there, based in Toronto. His first book actually came out a year before mine. Rivals may have their rivalries, but I have great respect for Andrew, his knowledge, and his contribution of sensibility to the often irrational world of Internet marketing.

Andrew recently wrote an article that I just thought was spot-on brilliant, deeply insightful, and 100% relevant to everything I’ve been talking about today. Stick around and listen to Andrew. He’s got some very wise words for you here.

Turning the $100,000 Corner

By Andrew Goodman

Although we often hear that small business is the heart and soul of the economy, it gets a disproportionately small amount of ink. Sound advice is tough to find. Maybe that’s because every situation is so different. More likely, it’s because information is filtered through the lens of those who finance business. It’s tough to make a profit lending money to “mom and pop,” or at the very least, there is little incentive to help them actually succeed. So that’s not who runs the ads in the magazines. And that’s not what they write about. Big deals and big money rule the business press.

Watching Google AdWords fund the growth of one of the world’s largest technology companies has always been so interesting to me because so many of Google’s 280,000 global advertisers are small accounts. It really is a huge engine of growth.

According to OECD estimates, in Canada (just for example), small businesses contribute 45% to the nation’s GDP. Some are quite small: there are 1.1 million firms with revenue under $100,000. And small firms created 63% of new jobs last year.

Many of them are the smallest of the small. 88.6% of these companies have 1-9 employees.

Concise Advice

On the subject of education, mentoring and wisdom, everything you need to know can be boiled down to two things:

1. Buy Good Advice

2. Act On It.

There’s hardly a situation in life where those two rules won’t help. And with that in mind…