|Arnold Kling Essays | Short Book Reviews | Favorite Links | Under the Radar | Home|
I tend to surprise people when I say that. It's not the answer they were expecting. But seriously, the best way to fund your business is with sales.
But don't you need to have something to sell before you can go out and sell it?
That's sounds like a reasonable point of view. But too many entrepreneurs get hung up on it. They're stuck on the idea that every aspect of their perfectionistic vision has to be in place before they can sell. They have this idea for a comprehensive solution that will solve everything--your network administration problems, your human resource problems, your office productivity problems--and they won't go out and sell until every aspect is in place. Until the feature that cures cancer is working, they're not ready to test the market.
Even before you have a product, you can start selling. And you should, because the selling process will help you sort out which features are necessary, which are nice-to-have, and which features people don't even want.
But how do you sell without having a final product?
Instead of starting out by selling your ultimate product or service, you might consider selling a stripped-down version or providing consulting services that are related to what you plan to offer. One tactic I talk about in Under the Radar is charging a company to do a "readiness assessment." You walk into a big organization and say, "There is a set of tools emerging that can handle network administration, human resources, office productivity, and cure cancer. For $50,000, I'll come in and assess the readiness of your organization to adopt and implement these tools."
So now you've got some money to play with. And then you can use the "readiness assessment" as a vehicle for articulating the value of your company's tool.
So your book is not about how to do fundraising with, say, angel investors?
No. I'm actually pretty harsh about this. In Under the Radar, I say that fundraising is not for businesses. Fundraising is for charities.
I mean, a couple of years ago people had this simple four-step recipe for getting rich.
You need to focus on funding your business by selling stuff. Once you have the slightest glimpse of that approach, and your mind is open to the concept that funding your business by selling stuff might be the model, then Under the Radar will make sense to you. You'll understand why I chose to emphasize certain topics, and why I picked certain examples. On the other hand, if you come to the book expecting another four-step approach that avoids selling to customers, then you're going to be really annoyed.
I suppose a company could start out without venture capital, and then get venture capital after it's been in operation for a while. Do you talk about that in your book?
Not to any great extent. Under the Radar includes over two dozen case studies, and a few of them eventually went from the "under the radar" model to the venture capital model. But that transition did not necessarily work terribly well.
There are two issues.
Meanwhile, there are a lot of ideas that might generate businesses worth $10 million or $50 million, but will never get you to $1 billion. Those are perfectly valid ideas, but no matter how well you do with them, you cannot afford to play in the venture capitalist system, which requires such enormous returns and really brings a lot of expensive overhead with it.
So, if your business idea is really big to begin with, you probably should be trying to get venture capital right away. If your business idea is smaller, and fits in the range of Under the Radar, then you never want to deal with venture capital.
Venture capital goes for really big egos that project outward. You need to be able to broadcast your vision in a persuasive way.
With the Under the Radar model, your charisma comes not from what you project out but from what you take in. You gain the trust of your customers and partners by listening to them and adapting to their needs. It's more of an interactive model as opposed to a broadcast model.
In that sense, there is kind of a fit between the Under the Radar approach and the Internet. If you really thrive in an interactive environment, as opposed to a broadcast environment, then the Internet suits you as a medium and the Under the Radar model suits you as an entrepreneur.
With the collapse of all the dotcoms, is this a bad time to start a new business?
Actually, the stock market does not have much effect on the Under the Radar model. You are thinking in terms of building a business that is not going to get big enough to take public. You focus on getting sales and profits, not on pitching to investors. So the things that worked before the stock market collapse are still working.
Can you give some examples?
Small web consulting firms are still having success. I'm not saying that's the business I would get into right now, but the Under the Radar web shops are doing much better than the high flyers that were big on buzz and had lots of overhead.
What kind of business would you start?
Off hand, I can think of four categories that are very promising.
This is where you go into a specific business niche, say, mental health care professionals, and offer them web-based IT solutions. These small businesses are way behind in their use of technology, primarily because they cannot handle issues like network administration, software upgrades, and so forth. One of the companies that I discuss in my book is trying to offer a total outsourcing solution, where a legal office, say, could have all its hardware and software managed remotely.
A lot of industries are highly fragmented from the purchasers point of view. For example, one of the cases in my book is a company that gathers information from about 1,000 different operators of charter jets and aggregates this onto a single web page for corporate executives and their travel assistants to be able to book flights.
A good email newsletter is very inexpensive to produce and distribute. It also is an excellent vehicle for advertisers, because you get a well-defined audience that is inclined to read the ads as well as the content. So if you can develop an expertise in a particular field, an email newsletter can be the most profitable way to capitalize on that expertise.
Around the world, there are many people with skills that are in short supply in the United States. You can go to Africa or India and find people who can staff call centers or help digitize information in catalogs. Every day, the rapid drop in the cost of telecommunications is creating more opportunities to enable people in foreign countries to "telecommute" to the United States.
What sorts of mistakes do entrepreneurs make, and how can you avoid them?
Well, mistakes are part of the game. You can't avoid all of them. I made plenty of mistakes, and I talk about those in the book. But here are some examples of problems that seem to be pretty common that ought to be avoidable.
It is very common for partnerships to break up before a business really gets going. I think that when you have a team of people starting a business, you need to test one another more. You need to be honest with one another about how much effort you really can commit, and how much financial pain you're willing to take.
But the fact is that there is no way to guarantee that a partnership will last forever. So it is important to set up your company with the right contingency provisions that allow for a quick, fair restructuring that keeps you out of court.
Many entrepreneurs are wildly optimistic about how quickly they can make sales. I call this phenomenon pioneer time, because it's like they have their watches set to run faster than the market.
The problem with pioneer time is that when reality hits and you find out how long the real sales cycle takes, you run out of money. Instead, if you have a conservative estimate about the sales process, your plans will be more realistic and you have a better chance to survive.
I would say that 99 percent of all web sites are counterproductive. This is bad news if you've got a typical web site. But it's great news if you're one of the people who follows the advice of someone like Jakob Nielsen or myself. A web site that enables users to accomplish their goals is a tremendous competitive advantage.
It seems at first as though paying your suppliers with equity instead of cash is a smart thing to do. But you wind up getting tangled up with all sorts of burdensome and dysfunctional relationships.
If you cannot spare the cash, then instruments like convertible debt or preferred stock are a better choice than common stock or stock options. What you want to use are financial instruments that make it possible for you to exit from the relationship gracefully at a predetermined price.