Author Archives: Gary Rushin

Why Study Business Failure

Study Business Failure to achieve Business Success

Study Business Failure to achieve Business Success

    Studying Business Failure

      Knowing Business Failure has Resulted in Business Success

We can write about business success, however we need to learn from business failure.  Once I mentioned at a business forum that I study “failure”. The look I received was of shock and puzzlement.  Why would you want to study failure and not the successes of entrepreneurs like Steve Jobs?  Obviously they missed the point.  Yes, studying the successes of Steve Jobs is important, but equally important is to study failures of start-ups and mature companies to identify missteps, symptoms, causes, and the reasons companies came and went.  Remember Steve Jobs studied the business failure of Apples’ previous management upon his return to the company.  Think of the company he left us with.

Think about it, NASA studied its mistakes to make corrections with the space shuttle program. Pharmaceutical companies and financial services companies study product design failures to make improvements, and hospitals study their service offering to improve the quality of healthcare service. Successful companies create value for shareholders, customers, and other constituents from learning from business failure.

Knowing how value was destroyed will make you a better business owner, investor, and stakeholder.  Studying the phenomenon of entrepreneurial failure can create value, a return of investment, by understanding the fundamental causes behind business breakdown.  Studying business failure should be performed because starting the business strategy process.

Business failure does not end in bankruptcy liquidation.  In the event a company declines in value and is considered worthless, the enterprise failed from the perspective of the owner.  However, the business or the assets of the business in the hands of others may result in the re-creation of value, jobs, and new business in the eyes of customers, suppliers, and employees.

When discussing business failure, I mean that the business has fallen short of its goals, thus failing to satisfy investors’ expectations.   Business failure involves the loss of capital and the inability to make the business successful.  With the fall in revenues and/ or the rise of expenses, the company cannot continue to operate under existing ownership and/or management.

Learning from Business Failure

Learning from business failure can be viewed from different perspectives.

  • First: Reviewing the business loss from a financial and emotional cost perspective.
  • Second: Studying the process of learning outcomes
  • Third: Grieve /understand reality/ reflection
  • Four: Journey to Business Failure

The Business Life Cycle and Stages of a Distress Business

We can start at looking at business ecology from the business life cycle perspective.  Although the business life cycle has various definitions and stages, fundamentally the business life cycle can be viewed from birth (startup), growth (emerging), maturity (stable), decline (distress), and either failure (insolvency) as well as revival (renewal).   Different causes of business failure depends generally where the organization is located on the business life cycle.

A failed business rarely moves from prosperity to bankruptcy in one step.  Each step has diagnostic value.   Business operators, adviser, directors, investor will learn from studying failure.

Early Stage—In the early stage of business failure, companies operate with inefficiencies that show a lack of synergies in production and distribution.  Customers complain about quality of products and services.  Both revenues erode and margins suffer.

Intermediate Stage—In the intermediate Stage of business failure, the trouble in production and distribution are severe.  For manufacturing companies, inventory build up or material shortages are quite noticeable.  Employee morale is low.  Rumors about the company’s problem spreads.  Top employees begin leaving as “the cream” search for green pastures.

Late Stage—In the Late Stage of Business Failure, both management and reporting systems breakdown.  Vendors are requesting cash for delivery.

Business Failure: Why Start-ups and Young Companies Fail!

Speaking about startups and young companies, start-up and young companies face different issues than older mature companies.  The primary causes of start-up company failure are lack of resources, competence, and inexperience.

Financial resources–The inability to obtain financial resources necessary to develop or maintain an operational synergy is a problem. For young companies the lack of financial endowment tends to be the number one cause of business failure.  The deficiency on financial resources prevents the company from developing the operational infrastructure (systems, processes, and people) and applying an adequate strategy to succeed because of the lack of sufficient working capital either in the form of internal cash or line of credit.   To create a sale, an organization needs working capital to pay for the revenue generating process (payments to vendors, employees, overhead, etc.) until cash is received from the sale.   And there is a point where bootstrapping is no longer sufficient to execute the strategy.

Business competence and management–Subject matter experts tend to establish new companies on the belief that making an entrepreneur endeavor work is not as hard as people think.  Such beliefs are furthest from the truth.   The inexperience and lack of business acumen is the principle factor of young company failure.  Studies have shown that the deficiencies in the competence of management negatively influenced the direction of young companies toward business failure.  Many subject matter experts lack the acumen about the complexity of business.   Both not understanding marketing and finance contribute to the business demise.

Business Failure: Why Mature Companies Fail!

For mature companies, business failure generally is traced to the inability to adapt to the changes of the environment.  The company ignores changes in economic conditions, changes in competitive conditions, changes in technology conditions, and changes in societal conditions.   When the company is in decline, in large part management tends to be “in a state of denial”.

After the financial crisis and the current government budget problems, economic conditions shifted for the entire business landscape.  As an example with the U.S. federal government, the largest buyer of goods and services, cutting back on contracts, large defense contractors and other government service providers is forced to reduce employment and expenditures.   Companies that primarily depend on government contracts the cutbacks are starting to impact the bottom-line.

 

Need Top Suggestions On How To Improve Sales Calls?

Sales Calls Strategy

Making sales is the lifeblood of every profitable business. To be great at selling through telephone requires unique skills in communication and mastery in the sales process. Sales calls to different prospects may be intimidating at first, more especially when prospects tend to shy away from your idea. Practice, determination and preparation can greatly improve your sales’ performance hence see you achieve the set targets and goals in your company.

Sales Calls StrategyThink of Sales Calls Prospects and Objectives

Research your prospects – The first step at sales calls would be to gather much information as you can on who you can call to get their attention and know their interests. The much information you will have on them and their specific requirements, the better.

Objective of the sales call – You should also ask yourself whether you are seeking to make an appointment, whether you are simply giving information or whether you want to wrap up a sale through the phone. Putting in a sure objective will assist you to communicate much more effectively and progress in your sale calls. Experts from service providers like the business phone system Calgary will advise you that the call should not be leading because this way, prospects will ask so many questions that might affect the objective of the call.

Grow a rapport with your prospect – Although you may become keen to arrive at the sales pitch, it is important if you slowed down and took the time to heed to the responses made by the prospects. Getting involved in a conversation creates rapport and exhibits that you mind about your client’s concerns and needs. It would also be good if you do not dive straight to a hard auctions pitch.

Know your organization’s services and products – Having such knowledge will assist you to explain to possible customers how their problems will be solved through your services or products. For instance, if you realize that an impending client is in a bazaar looking for automobile parts and your company manufactures various kinds of parts, you should tailor your sales pitch immediately.

Needed Feedback About Sales Calls

Finally, get feedback about the sales calls from contemporaries about the sales calls. You should have your supervisor or co-worker listen to the sale calls and give their standpoint on how fine you communicated with your prospects. You should also make gradual adjustments to advance your sales calls. Sales calls enable companies to have the word out on their services and products to potential customers. You should also know when to make follow ups but do it professionally not to sound naggy.

 

Business Restructuring! Do You Know When it is Time?

When do you know it is time for a business restructuring? Wait too long..it may be too late!

Restructuring TimeA restructuring, is it time? Tick, tick, tick, the clock is ticking. In less than a week payroll is due. The company does not have enough cash to pay the 200 employees and you are not even thinking about how to pay the suppliers. The credit line is fully drawn and you have no more collateral to give. What do you do? How much time does the company have? These are the type of issues the company is facing. Is it time for a business restructuring?

If you cannot meet payroll, staff will leave, the state will be notified that the employees have not been paid, and this will be only the beginning of the company’s problems.  You know that if the company does not meet payroll, the game, known as the business, is over. And this is the only the start of the problem. For a privately owned business, personally guaranteed company obligations will default, and the personal assets of the owners will be seized.

This is not so much of an extreme case. This scenario often happens. So thinking about the company from the perspective of how to avoid or change the situation is critical.  A business restructuring may be needed and now!

Business difficulties can happen quickly and for many reasons. Businesses may suffer from lost market expectations, reduced operating earnings, or severe cash flow troubles. Whether triggered by marketplace forces or internal dynamics, an early assessment and quick decisive moves will be needed to reinvigorate earnings and company value (PriceWaterhouseCoopers LLP, 2012). This is when you know that a business restructuring must commence.

Stakeholders Want Answers

Collectively, employees, vendors, bankers, and other creditors (the stakeholders), will be assessing answers from the rubble of the company to questions ranging (DiNapoli & Fuhr, 1999) from “What’s in it for me? to “What are my alternatives?” to “How did this happen and when do I get my money?” Think about it; the following questions each stakeholder will want to know:

  • The causes of the company’s distress
  • Required steps to affect an effective restructuring
  • Management’s capabilities, abilities and costs to execute a restructuring plan
  • Assessing alternatives to the restructuring and the related costs
  • Determining the goals of the various stakeholders
  • Establishing the value that can be realized from company for a restructuring, a sale or liquidation of the business

Many issues can cause business distress. Liquidity constraints can limit the business from operating efficiently. Cash flows, cash reserves and access to a working capital line of credit can result in a short-term liquidity crunch. The inability to pay employees, suppliers, and the taxing authorities can be acute. This will lead the company to failure.  A business restructuring will be required.

Economic Downturn

An economic downturn, shifting buyer taste or behavior, increased competition, ineffective operations, disruptive technologies, incompatible strategies, issues that can seriously place the company into financial distress. Left unanswered can result in threatening the organization’s existence.   A host of problems will trigger declines in revenue, customer loss, key employees, profitability, and cash flows that will lead to working capital constraints. Distressed symptoms often occur well before crisis hits and is felt. Before you know it, the company is in a death spiral. This situation is not inevitable, and in many cases, can be halted and reversed. Taking aggressive action and discovering at an early stage through reviewing the organization’ strategies and it operations efficiencies can lead to a swift, decisive action to restore organizational performance and enterprise value.  Timely action is critical in making this happen.

When a company is doing poorly that failure appears imminent, only a restructuring or turnaround can restore performance and profitability that can enhance the value of the business.

The best way to learn how to restructure a business is to study failure.  Think about it, NASA studied its mistakes to make corrections with the space shuttle program. Pharmaceutical companies and financial services companies study product design failures to make improvements, and hospitals study their service offerings to improve the quality of healthcare service. Successful companies create value for shareholders, customers, and other constituents.

Many companies that once dominated their markets later slide into corporate distress often occur. These organizations lose their touch. It is often said that success breeds failure. Companies no longer have that “mojo” that touch, which creates shareholder value. When a company succeeds, we assume that they know what they are doing, but in fact it could be they got lucky. Companies create an overconfidence bias, becoming so self-assured that they think they do not need to change anything.

Business Restructuring

A number of factors influence a business restructuring strategy to achieve recovery. From an external perspective, in most part, the competitive environment and the maturing of the industry influence the selection and effectiveness of the turnaround strategies. From an internal perspective, the severity of the financial distress and management failure is a contributing factor to formulating the turnaround recovery strategy. The choice of the restructuring strategy is a function of the company size, management perception of the external factors, but most importantly, the degree of resource availability.

For a small business, given the exceptional high mortality rate, elements of decline and failure are important. Small business failure is generally attributable to issues of management control. Performance deterioration and resource availability are critical factors of for the enterprise success in addition to the strategies chosen to, in some cases, stop the bleeding.

Two organizations that have members that can effectively structuring and implement a business restructuring strategy include the Association of Insolvency and Restructuring Advisors (AIRA) where you can find a Certified Restructuring and Insolvency Advisor (CIRA) and the Turnaround Management Association (TMA) where you can look for a Certified Turnaround Professional (CTP).  Remember…tick, tick, tick the clock is ticking maybe to your business’s decline.

References:

DiNapoli, D., & Fuhr, E. (1999). Trouble Spotting: Assessing the Likelihood of a Turnaround. In D. DiNapoli, Workouts and Turnarounds II: Global Restructuring Strategies for the Next Century: Insights from the Leading Authorities in the Field (Vol. I). John Wiley and Sons.

PriceWaterhouseCoopers LLP. (2012, August 20). Restructuring and recovery. Retrieved August 20, 2012, from PWC: http://www.pwc.com/us/en/transaction-services/restructuring-recovery.jhtml#

 

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Raising Money: Increase Your Facebook Activities and Twitter Chats to Access Working Capital

Raising Money? The Use of Alternative Credit Assessment Tools and Financing are changing the Game. Small Businesses will Benefit!

kabbage-CANFor small businesses raising money, innovative sources and frameworks for credit risk assessment are changing the game to enhance borrowing possibilities.

Traditional Credit Assessment in Raising Money

Raising money is a daunting task to small business borrowers.  Most lenders depend on traditional credit information sources and analytics such as obtaining an entrepreneur’s credit score. Providers of credit such as banks, credit card companies, depend on credit scores to assess the prospective risk posed by the potential borrowers.

For the small business borrower raising money, many entrepreneurs feel that they are at a disadvantage.  In an empirical study by Allen N. Berger, Adrian M. Cowan, and W. Scott Frame (2011) found the use of consumer credit scores rather than business credit scores by community banks in small business lending when the banks underwrote small business credits.  Community banks often used the scoring for only very small loans typically under $50,000. The study suggests that community banks depended more relationship lending than the using of technology when utilized credit scores for automatic approval/rejection of loan applicants.

In the U.S. the most widely used statistical credit score model is the FICO score initially developed in 1956 by Bill Fair and Earl Isaac and sold by the FICO Company. The FICO Score model is designed to measure the risk of default by taking into account numerous factors in a person’s financial history such as payment record, the utilization of credit, length of credit history, the type of credit used, and other proprietary metrics.

Currently there is an emergence of companies chasing small-business loans by using alternative data sourcing then consumer credit scores to extend credit.  These companies include Capital Assess Network, Kabbage, and Amazon

Kabbage, Inc.

Kabbage leverages social media data as part of lending decisions. The company grants working capital to online merchants as its credit risk model encompasses social media and loyalty assessments in an effort to attract, interact with, and retain small business clientele.

The Atlanta base company founded in September 2011, Kabbage connects with clients Facebook fan pages and twitter feeds.  According to the Credit Union Times (Samaad, 2012), Facebook and Twitter feeds are immediately analyzed and translated into capital. With merchants increasing the number of followers, the enhanced activities and chatter on Facebook and Twitter increases the amount of capital access.  Known a Social Klimbing, the merchant cash advance is called a “Kabbage Advance.”

The advance is not a loan. No interest charge is assessed.  A fee is charged base on how long the advance is outstanding. No prepayment is assessed for early payments.  Advances range from one to six months. The company founded a correlation between the activity on social media and default rates.  Merchant cans obtain advances as low as $500 up to $100,000.

Last year in May, Bank Technology News awarded Kabbage’s CEO Rob Frohwein for conceptualizing its breakthrough technology and data platform that provides working capital to small business in less than seven minutes.  In winning the Top 10 Innovator award, Frohwein was recognized for its significant impact on small business (PR Newswire, 2012).

Kabbage received venture funding by Mohr Davidow Ventures and BlueRun Ventures.  Additional investors include David Bonderman, founder of TPG Capital, Warren Stephens, CEO of Stephens Inc., the UPS Strategic Enterprise Fund, and TriplePoint Ventures.

Capital Access Network, Inc.

Capital Access Network, Inc. (CAN) is becoming a significant player in providing small business credit scoring and capital.  The company developed a technology platform that automatically analyzes a multitude of business performance variables that integrate data sources from banking, credit card processing data and other sources with its proprietary risk models assessing over 100,000 transactions over multiple business cycles reviewing over 650 SIC codes.  Its model is considered an alternative to the FICO score. Over $2.5 billion in working capital financing were granted to small businesses since 1998 through NewLogic Business Loans, Inc. and AdvanceMe, Inc., both CAN subsidiaries.

Determining the strength of a business based on business performance rather than personal credit scores and the ability to provide access to capital has given CAN a leg up on other small business lenders. WebBank, a Utah-chartered FDIC industrial bank underwrites the loans for NewLogic Business Loans Inc. and AdvanceMe, Inc.

Headquartered New York headquarters, Capital Assess Network has presence in Boston, Atlanta and San Jose, including Costa Rica.  The company employs approximately 400 people with the majority focused on data services technology and analytics.

Other Alternative Lenders in Raising Money

The companies using alternate means to assess credit risk to provide financing for small businesses include ZestCash, BillFloat and LendingClub.

References:

Berger, A. N., Cowan, A. M., & Frame, w. S. (2011, August 1). The Surprising Use of Credit Scoring in Small Business Lending by Community Banks and the Attendant Effects on Credit Availability, Risk, and Profitability. Journal of Financial Services Research , 1-17.

PR Newswire. (2012). Kabbage CEO Selected as a Top Innovator by Bank Technology News . Atlanta: PR Newwire.

Samaad, M. A. (2012, June 27). Kabbage Links Social Media With Cash Advances. Credit Union Times, p. 15.

 

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Raising Money: So you are thinking of raising money for your business from Venture Capital firms?

To Get Venture Capital Funding, You Must Begin Thinking Like a Venture Capitalist When Raising Money!

When raising money, think like a venture capital. For many entrepreneurs, success begins with a great idea. However, how do you get this idea off the ground?  Raising money is needed for your company, but how do you attract investors?

Venture-CapitalMany young, emerging growth companies, understand that venture capital serves as an alternative.  Often, venture capital provides cash funding in raising money, which is exchanged for shares in the business and an active role in the enterprise’s future.

In January the National Venture Capital Association, one of the trade associations representing the U.S. venture capital industry announced the results of its industry paper, MoneyTree Report, on venture funding for fiscal year 2012.  The Association with PriceWaterhouseCoopers reported that venture capitalists invested about $26.5 billion in 3,698 deals last year. The report showed declines in both dollar and deal transactions down about 10% and 6%, respectively, from 2011. Fiscal year 2012 was the first drop off in venture capital activities in three years.

Economic uncertainty hindered the growth in new investments. As a result, many venture capital funds shrunk during the year. Venture capital firms have increased fund reserves  to support funding of current  investments and have become more discriminating in assessing new deals.

Understand that before a venture capitalist takes on higher risk the firm will determine the upside pay off. What this means is that the entrepreneur must do his or her homework to meet the expectations of the venture capital firm in raising money.  This is a two-way street.

Venture capital funding comes with a price. Some of the considerations the venture capital firm will review in raising money when assessing a potential investment include:

  • Enterprise leadership.  Evaluating the background, knowledge, and business acumen of the leadership teams is most important. Can the company’s leadership manage the business through the obstacles of a new business?  For the management team, each member should be prepared to explain how he or she would overcome any difficulties and how to get done more with less. For the entrepreneur, be warned that the venture capitalist is going to look into their eyes and ask, “Does this person know how to make money?”
  • Product and Service Offering.  Surprisingly, many venture capital firms say they cannot find good deals.  These firms are in large part, looking for emerging growth companies that offer products and services that can potentially provide a competitive advantage in the market place.  Venture capital firms want to know a lot about the specific industry sector and how the business will effectively compete with the competition.  The leadership must provide a strategic plan that synthesizes the marketing, sales, and distribution tactics that will be employed to attract and retain the targeted customer base.
  • Potential Return on Investment. Know that the venture capital firms are willing to take on high risk, it the potential returns are high too.  If the venture capital believes that the financial up side will be worth the risk, the firm will make the investment. To make this happen, the leadership will want detailed financial projections that are in line with the strategic plan in raising money.

Venture capitalist want to mitigate or manage their risk. Entrepreneurs, on the other hand, can assemble a strong management team, provide a well-written business plan, and show a leadership team that can execute the plan in raising money.

For a free online video course on how to raise money go to: http://garyrushin.com/raising-money-mini-course/

 

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Crowd Funding: the Next Turnkey Financing Source for Entrepreneurs and Small Businesses

Crowd Funding: Turnkey Financing Source for Entrepreneurs and Small Businesses

If ideas for a big creative project swirl in your head, but you need money to make it happen! Look at crowd source funding. Crowd funding may be the answer. People want to support creative activities for example looking for filmmakers needing money for documentaries, independent musicians needing money for musical projects, or just plain ideas that need money to make the world a better place. Alternately known as crowdfunding, crowd financing, equity crowdfunding, or hyper funding, crowd funding enables access to turnkey financing that supports projects with little regulatory friction. This is because, equity participation are not given to providers of the funding. In short, crowdsource funding aligns visionaries needing money with participants wanting to fund the vision. The U.S. is not alone; crowd-funding opportunities has gone global to include opportunities for Eurozone and Canadian businesses and entrepreneurs as well.Crowd-Funding-Vision

But now wait! The Jobs Act of 2012 is a game changer. Small businesses and entrepreneurs will have increased access to crowd funding sources. The U.S. federal government will allow participants in crowd funding projects to received ownership stakes. The U.S. Securities and Exchange Commission is writing the prudential regulations (the rules) for equity participations in crowd financing activities. With the recent departure of SEC Chairwomen Mary Shapiro, the regulations have been delayed (Mandelbaum, 2012). The SEC is tasked to protect investors. Investing in small business, especially start-ups, are notoriously risking and fraudulent activity can take place.

What is Crowd Funding?

A collective effort by consumers that network and pool their moneys, usually through the Internet, crowd funding enables the investment in and support of efforts initiated by other people or organizations (Ordanini, Miceli, Pizzetti, & Parasuraman, 2011). Kickstarter and Indiegogo are leading intermediaries organized to support crowd funding. Kickstarter alone helped facilitate over U.S. $350 million in project financing pledges.

Founded in 2009 by Jeff Chen and Yencey Strickler, Kickstarter is a New York based Internet funding platform for creative projects surrounding the arts to include films, games, and music to art, design, and technology. Backed by Union Square Venture and other venture capital firms, Kickstarter’s revenue model includes receiving five percent of the funds successfully raised through its platform (Milian, 2012). Indiegogo, a San Francisco based crowd-funding site is another player in the crowd finance space. Pledges to projects can be funded in U.S. dollars, British pounds, euros, and Canadian dollars.

So how does this work?

Financial backers, which are armchair philanthropists of projects, put their trust in the project creators by providing cash in return for a promise of a future return. The return can be naming credits as with a film, a discount price of the develop item, or some insignificant benefit. With the Jobs Act, crowd funding in the U.S. is about to evolve. Providers of project funding will be able to receive equity participations. Entrepreneurs will have greater access to capital as new providers of crowd sourcing and investors see opportunities.

Examples of projects that successfully received funding in 2012 (Santos, 2012) include SmartThings, which raised over $1.2 million with the help of 5,694 backers. With an initial goal of raising $250,000, SmartThings designed a device to let users digitally monitor and control parts of their homes. As a digital hub, allows the use of apps to switch on and off appliances with a bevy of sensors and products. OUYA raised over $8.6 million from more than 63,000 supporters. The goal of the company was to initially raise only $1 million. The company’s project was a $99 Android-base gaming console that offers its own controller and promises to make game development affordable.

References:

Lazar, S. (2012, December 27). Meet The 25-year Old Who Raised Over 8 million on Kickstarter . Retrieved May 7, 2012, from Huffington Post: http://www.huffingtonpost.com/shira-lazar/pebble-founder-eric-migicovsky_b_1497515.html

Mandelbaum, R. (2012, December 26). Crowdfunding’ Rules Are Unlikely to Meet Deadline. Retrieved January 3, 2013, from New York Times: www.nytimes.com/2012/12/27/business/smallbusiness/why-the-sec-is-likely-to-miss-its-deadline-to-write-crowdfunding-rules.html?pagewanted=all&_r=0

Milian, M. (2012, August 21). After Raising Money, Many Kickstarter Projects Fail to Deliver. Retrieved December 27, 2012, from Bloomberg: http://www.businessweek.com/news/2012-08-21/kickstarter-s-funded-projects-see-some-stumbles

Mulian, M. (2012, December 5). Crowd-Funding Site Indiegogo Is Going International. Retrieved December 27, 2012, from Bloomberg: http://go.bloomberg.com/tech-deals/2012-12-05-crowd-funding-site-indiegogo-going-international/

Ordanini, A., Miceli, L., Pizzetti, & Parasuraman, A. (2011). Crowd-funding: transforming customers into investors through innovative service platforms. Journal of Service Management , 22 (4), 443-470.

Santos, A. (2012, December 27). Insert Coin: 2012’s top 10 crowd-funded projects . Retrieved January 3, 2012, from Engadget: http://www.engadget.com/2012/12/27/insert-coin-2012-top-10-crowdfunding-projects/

TechCrunch. (2011, February 14). Startup Sherpa (Kickstarter): How To Get Successful Projects. Retrieved from YouTube: http://www.youtube.com/watch?v=kqDNWcu6Hs0

 

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Business Failure: Business Success Can Breed Business Failure

“Corporate failure is never the results of a random set of events. It is normally a reflection of deep-seated corporate shortcomings.”

 (Chartered Institute of Management Accountants, 2012)

Business Success Can Breed Failure

We have all heard about the stories of companies that once dominated industry but later fell into business decline. There are many reasons for this. The usual suspects for business decline include becoming to dependent on existing customers, the inability to adapt business models to deal with destructive technologies, the lack of leadership, and focusing on short-term financial performance all have led to business demise. One reason not often mentioned for business decline is the hindrance of learning at both the individual and organizational levels about the true causes of business success. Success can breed failure (Edmondson, 2011). Learning enhances your capacity to face and respond to situations. However, from the business success perspective:

  • We draw wrong conclusions about the business success. We believe our success is because of the strategy, the talent, or the business model used is the cause of the success creating a false premise. Tombstone-of-Successful-Company
  • We fool ourselves developing an overconfidence bias. Although faith in ourselves strengthens our self-assurance to make a decision and execute a strategy, it can also breed closed mindedness and foster a “well if it worked before, it will work again” rational, which is not considering environmental changes and just plain luck.
  • We do not fully analyze the causes of the business success.  We will ferret the causes of a failure because we have to know why something bombed. However, we will not devote the time and resources to find out why the company was successful—again maybe because of false assumptions.

When companies catch the upward draft of success, the arrogance of the enthusiasm kicks in. Not surprisingly, the virus of success can become fatal in five or ten years (Kolind, 2006).  Think of Research In Motion (RIM) and AVON, companies in decline. The downdraft winds of business decline are a factor of the business life cycle.  The death cycle of business decline encompasses three factors: company size, company age, and company success.  One of these three factors can result in increase in:

  • The number of layers in management
  • The number of departments
  • The amount of formal procedures
  • The length in time the long-term planning process
  • The number of budget items
  • The amount of meetings
  • The quantity of reports

A problem is when the company loses its mojo. Success blinds management and causes lose touch with its customers.  Bureaucracy grows, information gets filtered and delayed, and arrogance breeds. Unfortunately, management will begin blaming others for performance slippage when the company begins to slide due to the downdraft of business failure.

Recommended actions include:

  • Question the causes of business success and failure.  Do not get stuck looking at the symptoms.
  • Do not get enamored at a cult personality be it CEO, advisor, leader or expert.  Question decisions and recommendations.  Remember, there is no such thing as a stupid question.  What is stupid is when you fail to ask the question.
  • Have strong, independent advisors and directors.
  • Complexity is the “fog of noise designed to hide reality.” Find and streamline to clarity.
  • Align pay and remunerations with risk.

References:

Chartered Institute of Management Accounting. (2012, February 15). Understanding the causes of corporate failure. Retrieved December 15, 2012, from Financial Management: http://www.fm-magazine.com/feature/depth/understanding-causes-corporate-failure

Edmondson, A. C. (2011). Strategies for learning from failure. Harvard Business Review , 89 (4), 48-55.

Kolind, L. (209). The second cycle: winning the war against bureaucracy. New York, NY: Pearson Prentice Hall.

 

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Bootstrapping Raising (Money) Capital Techniques

Bootstrapping Raising (Money) Capital Techniques

Alternative Entrepreneur Capitalization (Raising Money) Methods

Bootstrapping is important for new and small businesses. Among other things, on average, many companies develop and flourished through the use of bootstrapping without access to long-term external financing, over a five-year period (Winborg, 2009). Bootstrapping is a form of raising capital (money) for the business. Many studies demonstrated the important role played by bootstrapping (Brush, N.M., Gatewood, Greene, & Hart, 2006). A large percentage of the businesses examined used bootstrapping to secure resources. These companies had reduced dependency on external financiers for capital. The positive influence of bootstrapping was demonstrated by profitability from the use of some kinds of bootstrapping methods (Patel & Sohl, 2007).

Access to capital continues to be tight. In a third quarter survey of lenders (Phoenix Management Services, 2012), the majority of lenders identified uncertainty as their chief concern regarding future economic growth. Less optimism was shown for opportunities of their borrowers, indicating a slight pullback in their own customer growth expectations and a reduction in new capital investments and hiring expectations.  Respondents were asked whether they plan to tighten or maintain their loan structures i.e., collateral requirements, guarantees, advance rates, and loan covenants. Accordingly, in each of the four loan structures, 82 percent of lenders anticipate maintaining their loan structures in their in the near-term, which showed a slight shift towards tightening loan standards.  For the entrepreneur, use of bootstrapping techniques will continue to play an important role in funding operations.

Bootstrapping can be grouped into three types.

  1. Cost-Reducing
  2. Capital (Money)-Constrained
  3. Risk-Reducing

Ten tested and widely used bootstrapping techniques (Sherman, 2005) include:

  1. As an entrepreneur, save personal costs by wearing multiple hats in managing the business.
  2. Equipment and furniture does not have to be new, acquire or lease used assets in operating the business. Also be cognizant not the over pay for service warranties.
  3. Use a large company to lower costs by sharing office space or subleasing. Try of get access to conference rooms, reception services, and office equipment such as copy machine, etc.
  4. For short-term working capital, apply for several credit cards at once and use the unused credit limit as an operating line of credit.
  5. For inexpensive human resources, utilized the services of retire executives that desire to stay busy and remain “in the game” as mentors. The U.S. Small Business Administration’s Service Core of Retired Executive Program (SCORE) is a great source for such experienced executives. Additionally, hire students that are willing to sacrifice salary to gain experience that can enhance their future. Go to: http://www.score.org/
  6. Maintain excellent customer relations with key customers to encourage them to pay early.
  7. For maximum flexibility and cost controls, commit only to short-term obligations and leases.
  8. As a means of fulfilling a contract, have your major customers acquire the equipment needed to meet the contract and lease the equipment.
  9. Depending on state and federal securities laws, use the company’s shares in lieu of cash with your vendors (i.e., suppliers, landlord, etc.) and professionals (i.e., lawyers, accountants, specialists). Keep in mind the dilution ratio you will be giving up and remember put forth a stock buyback terms.  The company’s shares are illiquid.  Offer them a means to “harvest” their investment with you. Think of the Sam Walton former executives and office employees became multimillionaire with the start up of Walmart.
  10. To acquire and gain access to key products and services utilize commercial barter exchanges.

Entrepreneurs have an explicit motive for using bootstrapping techniques. The deliberate choice of using bootstrapping strategies can be seen in proactive ways from reduce risks, restricting expenses, and funding business activities. Such techniques allow for business opportunities without the need to own a sizable resource base and without the need to source external financing. These methods minimize the need for cash by obtaining resources at little or no cost. Additionally, the use of resources can be acquired without the need for bank financing. Overall, entrepreneurs can utilize their social contacts to obtain free access to specific resources.

 References

Brush, C., N.M., C., Gatewood, E., Greene, P., & Hart, M. (2006). The use of bootstrapping by women entrepreneurs in positioning for growth. Venture Capital , 8, pp. 15-18.

Patel, P. F., & Sohl, J. (2007). Bootstrapping to buffer a venture’s core commercialization processes. Academy of Management Conference. Philadelphia.

Phoenix Management Services. (2012). Lending Climate in America 3rd Quarter 2012. Chadds Ford: Phoenix Management Services.

Sherman, A. J. (2005). Raising Capital (Vol. 2). New York: American Management Association.

Winborg, J. (2009, January). Use of financial bootstrapping in new businesses: a question of last resort? Venture Capital , 11 (1), pp. 71–83.

 

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Bootstrapping: “The art of learning to do more with less.”

Bootstrapping, the Purest form of Entrepreneurship

Bootstrapping…bootstrapping…bootstrapping, it can be said that the purest form of entrepreneurship is bootstrapping.  During the prelaunch phase of a company and at times when access to business capital is difficult, bootstrapping is the way to go. To compete with existing businesses entrepreneurial firms face two major disadvantages: the burden of smallness and the disadvantage of newness. The reality means that the majority of start-up businesses and small businesses lack available resources to effectively compete (Winborg, 2009). Access to capital is a major issue for entrepreneurs. InexperienceBootstrapping, The Purest form of Entrepreneurship of many entrepreneurs has made it extremely difficult to obtain debt and equity when lack of a track record, reputation, or collateral for loans exists.  Starting with personal savings, followed by funding through family and friends, have been the main sources of finance for the vast majority of entrepreneurs. Engaging in “bootstrapping activities” is the way to go in operating the business.

Do not be discouraged with the thought of bootstrapping. There exist many great American bootstrapping success stories. A snippet include (Sherman, 2005):

Apple Computer. In 1976, Steve Jobs and Steve Wozniak sold a Hewlett-Packard programmable calculator and a Volkswagen van to raise $1,350. Through bootstrapping, the partners built the first Apple I personal computer in Job’s garage.

Hewlett-Packard Co.  Starting with $538 in 1938, Hewlett-Packards first client was fellow bootstrapper Walt Disney, who required sound equipment for the production of Fantasia in 1940.

Microsoft Company. With is high school sidekick (Paul Allan) and dropping out of Harvard University, Bill Gates moved into an Albuquerque hotel room in 1975 to start the company and write the programming language for the first commercially available microcomputer.

Nike Inc. William Bowerman and Philip Knight in the early 1960s sold imported Japanese sneakers from the trunk of a station wagon with startup costs of $1,000.

Lillian Vernon Corp. With her brainstorming idea of selling monogrammed purses and belts through the mail, Lillian Vernon established a mail-order company in 1951.  As a recent bride and four months pregnant, Lillian needed to earn extra money to support her new family. Society in the 1950s dictated that she stay at home for the duration of the pregnancy. A home-based business was her answer.  Lillian took $2,000 that her husband and she received as wedding gifts and designed a bag and belt set targeted at high school girls.  She manufactured the set through her father’s leather goods company. Than placing a $495, one-six-of-a-page ad in the September 1951 issue of magazine Seventeen the company generated $32,000 in orders by the end of the year.

The use of bootstrapping requires imaginative and parsimonious strategies for marshaling and controlling necessary resources. Think of bootstrapping from two perspectives:

1.    Raising money without the use of banks or investors.
2.    Gaining access to resources without the need for money.

First, entrepreneurs can raise money through the use of personal credit cards, cross-subsidizing from other businesses owned or through employment, reducing the time for invoicing seeking advanced payments and loans from friends and family. Entrepreneurs can hire temporary employees, share premises and/or employees with other entities, share or borrow the use of equipment, and obtain emotional support, skills, and knowledge from friends and family.

A key question that should be asked, “Do I need it or want it?”  In the event the entrepreneur needs a resource, try to use a bootstrapping technique to get it. If the entrepreneur wants a resource, defer the purchase. Preservation of cash is important.  This means controlling cost too.

Based on the writing of Oswald Jones and Dilani Jayawarna (2010) some bootstrapping techniques include:

•    Customer related

  • Receive payments in advance
  • Obtain advance payments
  • Increase invoicing
  • Select customers that pay on time

•    Delay payment

  • Negotiate payment conditions
  • Barter for goods and services
  • Lease rather than purchase

•    Owner related

  • Change salary payment period from weekly to bi-monthly
  • Use personal credit cards
  • Cross-subsidize with other businesses or employment
  • Fund through friends and family

•    Joint use

  • Borrow equipment from other companies
  • Use temperate employees or contractors
  • Share equipment, premises and employees

Simply put, bootstrapping is “entrepreneurship in its purest form” (Salimath & Jone, 2011). Overcoming resource constraints enables business operations to continue with the aid of external financial resources. Bootstrapping transforms human capital into financial capital also known as sweat equity that converts into bankable equity. It is about creating value that includes the idea of “meeting the need for resources without depending on long-term financing (debt or equity).  Bootstrapping is the strategy of necessity for entrepreneurs and not of choice.

For entrepreneurs that want to learn how to raising money for their business, push to following button:

or go to http://GaryRushin.com to sign up for a free video training course. The course is offered for free for a limited time. Sign up Now!!

Sources:

Jones, O., & Jayanwarna, D. (2010). Resourcing new businesses: social networks, bootstrapping and firm performance. Venture Capital , 12 (2), 127-157.
Salimath, M. S., & Jone, R. J. (2011). Scientific entrepreneurial management: bricolage, bootstrapping, and the quest for efficiencies (Vol. 17). Orange, CA: Journal of Business & Management.
Sherman, A. J. (2005). Raising Capital (Vol. 2). New York, NY: AMCOM, 2. 30-33.
Winborg, J. (2009). Use of financial bootstrapping in new businesses: A question of last resort? Venture Capital, 11 (1), 71-83.

 

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Know Your Niche

Getting to Know Your Niche

“Niches typically describe smaller sets of customers who have more narrowly needs or unique combination of needs.”

Philip Kotler

Sometimes, deciding what niche to focus on for your niche marketing business can be quite difficult. How do you choose when there are so many possibilities? Other times, the answer quickly becomes as clear as day.

Whether you have a concrete idea and are ready to roll, or need to spend a little time deciding just what niche is right for you, you will need to do some research before truly beginning your niche marketing business.

Your niche should be something you enjoy (like hiking, biking, painting or cooking) but that also allows for you to fill a void in that niche. For example, if you enjoy cooking with organic ingredients, maybe you can provide a product like an organic cookbook, offer recipes of the month and exclusive coupons for organic foods.

Just be sure you know what you are talking about and enjoy it, because it will quickly become your bread and butter, both literally and figuratively!

Once you have chosen your niche, you will then want to ask yourself the following questions: (All may not apply.)

* What is the formal definition of this niche/topic?

* Who is typically interested in this niche?

* Who is/are my target market(s)?

* Is there a broad target market? Or a narrow target market?

* Are there many other marketers already catering to this niche?

* How can I stand out from other marketers in this niche?

* How will my business/offering be different/better/valuable?

All of these questions and more are critical to answer before getting to work. Why? Because it is absolutely critical to understand what you are doing before you begin doing it!

You will also most likely need to differentiate yourself because unless you have hit the jackpot with an off the wall, yet realistic idea, you will most likely be joining a niche that already has marketers catering to it.

How do you stand out? Well, you begin by offering quality products and services. Don’t just say you know what you are talking about. Actually do the research, put together valuable information, and provide your customers with something your competition isn’t; Expertise!

Your target market/customers will soon realize that your products are better than the rest and that your commitment to customer service is what truly sets you apart. Respond to requests in a timely manner. Act on calls to action, like increased functionality or product improvements. And pay attention to feedback. What your customers are saying to others is often just as important (if not arguably more) than what they are saying directly to you. While not everything they say is worth listening to, 99% of it certainly is. Just as the old adage goes in the restaurant and retails businesses, the customer is always right!

Remember, niche marketing isn’t about you. It’s about them. Your customers are the very essence of your business. They are who you are selling to and providing for. If you put them at the top of your list, you will soon be at the top of theirs!

 

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