Startup 101: Stop focusing on your product and start focusing on your customer

February 19, 2018 ENT670 – Adv. Entrepreneurial Strategy, Entrepreneurship Comments (0) 0

The most common definition of business suggests it is the “organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs” (Pride, Hughes, & Kapoor, 2013). In a manufacturing-driven society, this definition might be valid, yet it arguably emphasizes an outward-in approach to product and service development and in doing so has potentially set a generation or more entrepreneurs off on the wrong foot. So many entrepreneurs believe that the “thing”—the product or service—they have created will “satisfy society’s needs” without giving enough thought to understanding what society needs, values, and expects. The focus on the thing poses one of the most significant long-term barriers to success for entrepreneurs.

Entrepreneurs devote too much time and energy to the perfect execution of the product or service at the outset. In fact, many entrepreneurs invest—maybe even over-invest—in the thing before they understand if there’s an actual market for the thing. Not long ago, I spoke with an entrepreneur who had an idea for a new technology product and a pool of funds to develop the product. He was searching for a developer to help get this product off the ground but had not thoroughly researched the market opportunity for what he was about to create. Moreover, he had done little more than cursory research on his target customer. His focus was on product execution, rather than customer understanding. Unfortunately, this approach is all too common with startup entrepreneurs. A good product or service—one that meets a customer's desires—will be far better than a great product or service that misses that mark.

Steve Jobs once said, “Customer’s don’t know what they want until we have shown them” (Isaacson, 2011). To Jobs’ point, when new ideas for products and services are solicited from customers, those ideas tend to mirror competitive products in the marketplace or be derivations of products or services already available (Furnham, 2000). However, this should not suggest that knowledge of the target customer and customer input is without value. In fact, one might argue that Jobs and...

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How to find and qualify new licensing opportunities

January 18, 2018 Licensing Comments (0) 16

One of the most significant challenges for licen­sors is to keep the opportunity pipeline full. Regardless of the size of the licensing pro­gram, finding and qualifying prospective li­censees can be a challenge. Some licensors need more opportunities to explore, while other licensors have the opportunities but do not have a defined qualification pro­cess. Unfortunately, some licensors have both challenges. To overcome those challenges a licensor might consider the following sales and business development techniques.

Key assumptions

Let’s start with three fundamental assumptions:

  • You have a strategy for each of your licensed properties;
  • You’ve identified the product cat­egories that align with your core brand message and best support your li­censing growth goals; and
  • You have a realistic understanding of the value of your brand and licensed properties.

While having a defined strategy for each licensed property and knowing the catego­ries which each property fits best is a great starting point, you also need to have a real­istic expectation of your licensed property’s value to a prospective licensee. For example, you may have a top brand in one category, but your brand might not bring significant or even incremental value to the market leader in another category that you’re targeting; therefore, your brand probably has less value for that category leader than it would for the number two or number three player. This will be a crucial factor in targeting and qualifying licensing prospects.

With these assumptions in mind, you can begin developing or refining the process to grow your licensing program.

Finding prospective licensees

Prospective licensees fall into two camps: Those who know and see value in your brand, and those who do not. The former is likely to be already knocking at the door to pitch new ideas, but the latter creates the biggest challenge for most licen­sors.

The best way to identify possible new op­portunities is through Environmental Scan­ning—careful monitoring of the marketplace—for new licensing deals in your target product categories. You can also identify potential opportunities by not­ing specific changes at companies within those target categories, which might in­clude:

  • Changes in licensing, marketing, or other senior leaders;
  • A shift in organizational strategy, new product line development or line extensions; or
  • Expanding...

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Fear and panic in entrepreneurship

October 14, 2017 Insights and growth, Motivation Comments (0) 209

I’ve been reading meditations from Mark Nepo’s The Book of Awakening every morning for several years. A few weeks ago, the reading from September 27 in the book struck a chord with me relative to the challenges of fear and panic in entrepreneurship. Here is that meditation and my takeaways:

 

Leaning In

Few situations can be bettered by going berserk.” – Melody Beattie

It was the philosopher Michael Zimmerman who told the story of being a boy in school when someone passed him a pair of Chinese handcuffs, a seemingly innocent thimble-like casing with an opening at each end. It was passed to him without a word, and, of course, through curiosity, he slipped his left forefinger in one end and then his right in another.

Mysteriously, what made them handcuffs was that the more you tried to pull your fingers out, the tighter they held you.  Feeling caught, he panicked and pulled harder. The small cuffs tightened. But suddenly, it occurred to him to try the opposite, and as he leaned his fingers into the problem, the small casing slackened, and he could gently and slowly work his fingers free.

So many times in life our pulling in panic only handcuffs us more tightly. In this small moment, the philosopher as a boy reveals to us the paradox that underscores all courage: that leaning into what is gripping us will allow us to work our way free.

 

I can personally identify with this story.

I have learned the hard way that panic begets panic. I know this to be true through all my life and business trials. I also know that the majority of the times I have panicked, especially as an entrepreneur, it has involved matters of money. But, it’s often not really about the money itself. It’s more about what the money represents—a lifestyle, security, safety, and the like, and losing those things strikes a chord of fear in us. Panic always comes from fear, doesn’t it?

As the handcuff story above tells us, the more fearful we become, the more we entrench...

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The Friday Review

October 13, 2017 Friday Review Comments (0) 359

An occasional Friday post about random things and interesting finds.

Thinking.

The things happening in America right now trouble me in ways I cannot yet verbalize. I cannot help but think that the lack of critical thinking is at the root of many of our cultural challenges. This article in Edutopia, Overcoming Obstacles to Critical Thinking by Randy Kasten strikes a chord. I believe we need to start teaching critical thinking skills much earlier. Maybe we should start in elementary school. Would you agree?

 

Listening.

I’ve been shaking up my podcast listening lately. Among my new favorites are:

  • How I built this with Guy Raz. An interview show with successful entrepreneurs and others about how they built their movements.
  • Longform. Another interview show, but this one is with non-fiction writers who discuss their writing.
  • The Good Life Project Podcast. Jonathan Field’s interview-focused podcast exploring what it takes to live a good life.
  • Self-made man. Mike Dillard’s podcast about men who are striving for greatness.

 

Reading.

I finished Tyler Cowen’s The Complacent Class a few months ago. I’m still distilling my takeaways, and I will likely write a few posts about my thinking on his theories. In, It’s time to think differently about entrepreneurship, I did reference his thinking on cultural segregation and the possible impact on entrepreneurship.

With the required reading for my graduate classes, I’m finding it hard to get into reading much of anything other than magazine articles. Still, next up on my reading list are:

In case you missed it.

I just finished an 8-week graduate class in Advanced Entrepreneurial Finance. I’ve written a lot about business finance from an entrepreneur’s perspective. If you’ve missed those posts and are interested in reviewing them, they’re listed below. I have also included in several of those posts downloadable example spreadsheets for creating pro formas, calculating financial ratios, and determining customer acquisition costs.

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8 Shark Tank Takeaways for Entrepreneurs

October 10, 2017 Entrepreneurship Comments (3) 285

The new season of ABC’s Shark Tank started a few weeks ago. If you are not familiar with the show, it’s a business “pitch show.” Each week several entrepreneurs pitch their businesses to a group of investors (also known as “Sharks”) hoping to secure funding for their venture. Although it is dramatized, like all reality shows, I am a fan because it aligns with my own experience as an entrepreneur and I believe aspiring entrepreneurs can learn a few lessons from the interactions those pitching on the show have with the Sharks.

Here are just a few of my Shark Tank takeaways for aspiring entrepreneurs and those looking to grow their business through outside investment:

 

1. Know your true opportunity.

Too many entrepreneurs go into business chasing what they perceive to be a market opportunity only to learn that the market is not significant enough to warrant an investor’s interest. Think about where the business could go, without being too unfocused, to grow. But be realistic. Just because there are millions of dog owners in the market does not mean you will sell every one of them your new dog product.

It is also critical to have a keen knowledge of your competition. You should consider how easy it might be to knock-off your product or service offering, or otherwise, move into your market. This is especially true if your competition is larger than you and the market opportunity is right. Competitors with deep pockets can be a startup killer. It is essential to understand how your business is realistically different.

Keep in mind that, investors want to maximize their returns. If you’re targeting a market that has limited potential, there’s little chance you’ll be funded if the investor doesn’t see a market opportunity you may be missing. Invest the time to understand the true opportunity before seeking outside investment.

 

2. Live and breathe your numbers.

Your business financials are the lifeblood of your company. Investors will want to know your...

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The Delicate Balance of Inventory Management

October 9, 2017 ENT650 – Adv. Entrepreneurial Finance, M.E. Program Coursework Comments (2) 228

ENT650 - Week 8

Any business that holds and manages inventory does so with the goal of selling that inventory to produce revenue for the company. The key is to maintain just enough to meet demand, but not so much as to have money tied up in inventory for a period longer than necessary. No business holding inventory desires to have more, or less, inventory than is needed to meet customer demand at any given time because failure to meet customer demand will negatively influence sales and profitability. These factors make inventory management one of the most significant challenges any business, but particularly a small business, can encounter.

Depending on the kind of business, there can be many different types of inventory. For example, manufacturers will likely have an inventory of raw materials, work-in-progress inventory, and finished goods inventory at a minimum. A retailer might have merchandise inventory, a service business might have an inventory of hours available to resell, and a magazine or online publication might have an inventory of space that could be filled with advertisements. How each business type manages its inventory may be a little different, but each has the same purpose in mind: To maximize cash flow.

Demand forecasts are an integral part of inventory management. If the business demand forecasts are incorrect, it can be a significant blow to cash flow. For example, if the business assumes the demand will be high, and the assumption is erroneous, it may have too much cash tied up in inventory assets, which in turn would restrict cash flow because the product on hand is not selling as predicted. Conversely, if the business predicts the demand will be low, and the assumption is incorrect, it may not have enough inventory to meet customer expectations, resulting in lost sales and therefore tighter cash flow.

One of the simplest ways to manage physical inventory is to measure productivity and turnover (Traster, 2007). The idea here is to determine how often during the year the business can convert its inventory assets into cash (learn more about inventory turnover and other financial ratios here). Assessing the most appropriate turnover...

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How to use Financial Ratios

October 5, 2017 ENT650 – Adv. Entrepreneurial Finance, M.E. Program Coursework Comments (4) 230

ENT650 - WEEK 7

In an earlier post, Financial Ratio Analysis and the Entrepreneur, I shared some insights on Financial Ratio Analysis and how investors and lenders may consider and use financial ratios to determine whether to invest or lend to an entrepreneur. Entrepreneurs should also understand how to use financial ratios in the regular course of business operations.  Each financial ratio has a purpose, and when compared to industry benchmarks, a ratio can provide insights as to a venture’s performance as well as help set stretch goals for business improvements and growth.

The most common financial ratios used by investors and lenders include:

Leverage Ratios

These ratios indicate the long-term solvency and highlight the extent long-term debt is used to support the venture. Leverage Ratios include:

  • Debt-to-Equity Ratio which measures how much debt is used to run the business.
  • Debt-to-Asset Ratio which measures the percentage of the company’s assets that are financed by creditors.

Learn more about Leverage Ratios and how to calculate them here.

Liquidity Ratios

These ratios measure the businesses ability to cover its debt and provide a high-level overview of financial health. Liquidity Ratios include:

  • Current Ratio which estimates the company’s ability to generate cash to meet its short-term commitments.
  • Quick Ratio which measures the ability to access cash quickly for immediate demands.

Learn more about Liquidity Ratios and how to calculate them here.

Efficiency Ratios

These ratios offer insights into operations and help to spot problem areas related to inventory management, cash flow, and collections. Efficiency Ratios include:

  • Inventory Turn-over which examines how long it takes inventory to be sold and replaced within a year.
  • Average Collection Period which looks at the average number of days it takes customers to pay for goods or services.

Learn more about Efficiency Ratios and how to calculate them here.

Profitability Ratios

These ratios evaluate the financial viability of a venture and provide a measure of comparison and performance to the venture’s industry. Profitability Ratios include:

  • Net Profit Margin which measures how much a company earns after taxes relative to sales.
  • Operating Profit Margin which measures earnings before interest and taxes (EBIT).
  • Return on Assets which provides insights on how well management is using the company’s resources.
  • Return on Equity which measures how...

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Calculating Profitability Ratios

October 5, 2017 Finance, Resources Comments (0) 152

Profitability Ratios evaluate the financial viability of a business and provide a measure of comparison and performance to the industry in which the business falls.

These ratios include:

NET MARGIN RATIO

The Net Margin Ratio measures how much a company earns after taxes relative to its sales. The formula is as follows:

Net Profit Margin = Net Profit/Revenue

A higher net profit margin tells the investor the business is more efficient and flexible and capable of taking on new opportunities.

 

OPERATING PROFIT MARGIN RATIO

The Operating Profit Margin Ratio measures earnings before interest and taxes (EBIT). The formula is as follows:

Operating Profit Margin = Operating Income/Net Sales

This gives the investor an idea of whether they want to invest in a company and bankers an idea of whether they should consider providing additional debt financing.

 

RETURN ON ASSETS RATIO

The Return on Assets Ratio measures how well management is using the company’s resources. The formula is as follows:

Return on Assets = Net Income/Total Assets

This will vary widely by industry but it gives investors an idea of how well the company is leveraging its assets to benefit the investment return.

 

RETURN ON EQUITY RATIO

The Return on Equity Ratio measures how well the business as an investment is doing relative to the investment by its shareholders. The formula is as follows:

Return on Equity = Net Income/Shareholder’s Equity

This helps investors understand how much money the company is earning for each invested dollar and may be a good predictor of return for their investment.

While these formulas are straightforward, I have created a spreadsheet calculator for readers to use an explore. If you’re interested, you can download the Efficiency Ratio Calculator using the button below. If you would like to learn more about Financial Ratios and how they may be used, read the post, Financial Ratio Analysis and the Entrepreneur.

 

 

 

A few notes on this calculator:

  • This calculator is an example and...

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Calculating Efficiency Ratios

October 5, 2017 Finance, Resources Comments (0) 173

Efficiency Ratios provide additional insights into business operations. These are useful in helping an investor or lender spot key problem areas related to inventory management, cash flow, and collections.

These ratios include:

INVENTORY TURN-OVER RATIO 

The Inventory Turn-Over Ratio measures how long it takes for inventory to be sold and replaced during a period (typically a year.) The formula is as follows:

Inventory Turnover = Cost of Goods Sold/Average Inventory*

The longer inventory sits on the shelf, the more it costs the company because gross profit is not realized from the sale. Sales and inventory management are key measures for investors.

*Average Inventory = (Beginning Inventory+Ending Inventory)/2

 

AVERAGE COLLECTION PERIOD RATIO

The Average Collection Period Ratio measures the average number of days customers take to pay for products or services. The formula is as follows:

Average Collection = Account Balances for the Year/Net Sales for the Year

A short average collection period compared to industry standards is preferred by investors.

While these formulas are straightforward, I have created a spreadsheet calculator for readers to use an explore. If you’re interested, you can download the Efficiency Ratio Calculator using the button below. If you would like to learn more about Financial Ratios and how they may be used, read the post, Financial Ratio Analysis and the Entrepreneur.

 

 

 

A few notes on this calculator:

  • This calculator is an example and is for use as is. It is not supported in any way. It is not intended to be a tool to use without customization based on the specifics of an entrepreneurial venture and its unique financial statements.
  • This calculator is only an example to give the reader an idea of how such a tool can be developed. The numbers within are not based on a real business. I compiled this as an offshoot of work in a graduate class, but I have created developed similar models for entrepreneurial ventures. Each business venture is different, and so is the ratios used and considered for that enterprise.
  • Financial Ratio calculations are done...

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Calculating Liquidity Ratios

October 5, 2017 Finance, Resources Comments (0) 151

Liquidity Ratios measure the amount of liquidity the business has to cover its debt and provides a high-level overview of financial health.

These ratios include:

CURRENT RATIO (Also known as the Working Capital Ratio)

The Current Ratio measures the company’s ability to generate cash to meet short-term financial commitments. The formula is as follows:

Current Ratio =Current/Current Liabilities

The current ratio serves as an early warning sign of the business possible cash flow issues for investors and lenders.

 

QUICK RATIO (Also known as the “Acid Test”)

The Quick Ratio measures the businesses ability to access cash quickly for immediate demands. The formula is as follows:

Quick Ratio = Current Assets – Inventories/Current Liabilities

A ratio of 1.0 or greater is acceptable, but it is industry dependent. Generally speaking, investors prefer a higher quick ratio.

While these formulas are straightforward, I have created a spreadsheet calculator for readers to use an explore. If you’re interested, you can download the Liquidity Ratio Calculator using the button below. If you would like to learn more about Financial Ratios and how they may be used, read the post, Financial Ratio Analysis and the Entrepreneur.

 

 

 

A few notes on this calculator:

  • This calculator is an example and is for use as is. It is not supported in any way. It is not intended to be a tool to use without customization based on the specifics of an entrepreneurial venture and its unique financial statements.
  • This calculator is only an example to give the reader an idea of how such a tool can be developed. The numbers within are not based on a real business. I compiled this as an offshoot of work in a graduate class, but I have created developed similar models for entrepreneurial ventures. Each business venture is different, and so is the ratios used and considered for that enterprise.
  • Financial Ratio calculations are done annually using actual numbers. This model can be used in that way. It can also be used to calculate and review ratios monthly. Monthly numbers would allow the...

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