The Art and Science of Starting Up
By Rosalind Resnick
As a former journalist who has founded two companies, I am a firm believer that entrepreneurship is more art than science. You have to be lucky, for starters, and I surely was that when I launched my first company, Net Creations, with a partner during the dot-com heyday of the 1990s.
You have to be savvy, too, knowing when, as the old saw goes, "to hold 'em" and to "fold 'em." We were that as well. Having built an electronic database and pioneered the then-novel strategy of having users "opt in" or elect to have their names included -- we sensed in the summer of 2000 that the winds had changed.
We were able to get out just in time, selling the company for $111 million in cash just prior to the tanking, big time, of the dot-com phenomenon. Similarly, my second company, Axxess Business Centers, which I launched in 2002, is partly about timing (and, let's hope, luck), too. Having sensed a sobering demeanor on the part of today's fledgling companies, I am striving to package what they need to start a company and consult with them as they strive to find their own way.
As I said, it's an art, finding an innovative idea whose time has come and riding it until its time is up.
NOW FOR THE SCIENCE.
Another part of entrepreneurship, however, is science, and it is my belief that, if entrepreneurs get that part right from the get-go, they can free themselves to focus on the part that can't be as controlled as easily, namely the art.
When it comes to science, in other words, why should entrepreneurs reinvent the entrepreneurial wheel? Science, after all, is all about the rules that govern our world. Just learn the rules, make them the prefabricated part of running your company, and advance immediately to tending to the stuff that makes you special. What follows is a look at five such rules that I consider the "science" of company building.
Nail down your business model. First and foremost, when starting a business, you must figure out how you are going to make a profit. Back in 1999, at the height of the dot-com boom, many start ups thought all they needed were hits, clicks, eyeballs and market share to raise money at sky-high valuations.
Now that the financial markets have come crashing back to Earth, entrepreneurs once again need to build businesses the old-fashioned way, with a solid business model for generating sales and profit. That means, if you're a retailer, you must sell your product for more than you paid for it -- and turn your inventory quickly enough so that your profit isn't consumed by warehousing costs and debt service.
If you're a broker or middleman, you need to find a way to bring together buyers and sellers to create a valuable transaction for which one of the two parties is willing to pay you. If yours is a B2B company -- a business that sells to other businesses -- it's a good idea to start building a reseller network of sources that can send you business on a regular basis. It's also important to create products and services that generate recurring revenue so you can accurately forecast your sales and profit and avoid the punishing cycle of feast or famine.
Make sure you don't run out of money. No matter how carefully you research your startup costs, you will inevitably end up spending more money than you planned. That's because it's difficult to anticipate every cost overrun, repair, or customer service issue that will arise. On the flip side, it's also difficult to anticipate customer demand.
Many start ups fall victim to cash crunches that prevent them from taking on new contracts or large orders. For example, a general contractor must typically pay workers at the end of each week while waiting weeks or even months to get paid by corporate or government customers. A small shoe importer who lands a major order from a mass-market retail chain may not have the working capital necessary to pay overseas manufacturers to crank up the production line. Other startups either underestimate the time necessary for sales to ramp up or for cash to come through the door. The rule is that a new company should have at least three months working capital on hand to cover its expected operating costs. It's also a good idea, whenever possible, to put in place a credit line to help smooth out seasonal dips in cash flow and occasional lag times in payment from major customers.
Track your numbers on a daily basis. Running a business without knowing your sales and expenses is like flying a plane without instrumentation. You may be able to stay in the air as long as the sun is shining and you stick close to shore, but the minute you head into a cloud, you lose visibility and run the risk of a collision. That is why installing accounting software from the beginning is mission critical.
Working with my clients at Axxess Business Centers, I am constantly amazed by the number of business owners who have no idea whether their sales are going up or down or whether they're making any money. Easy-to-use software programs allow even the novice owner who knows nothing about accounting to generate charts, graphs and reports that show how the business is tracking month-to-month, year over year, and by product and customer. By keeping close tabs on your numbers, you can spot potential problems at a glance and nip them in the bud before they become financial disasters.
Stick close to your customer. Many first-time entrepreneurs believe -- mistakenly -- that if they build a better mousetrap, customers will flock to their door. Battle-scarred veterans have learned the hard way that building a business is all about listening to the marketplace and giving the market what it wants.
Especially when launching the company, you, as the founder, CEO and principal investor, must work directly with customers, listening to their problems and learning about their needs. As your customer base increases, you can keep in touch regularly through phone calls, newsletters and visits. Even as your business develops, never assume that you can stop prospecting for customers. Indeed, schedule at least an hour a day to market your business.
Plot an exit strategy. Most people who start businesses -- especially for the first time -- aren't thinking about selling their companies. It's quite the opposite! When my partner and I launched NetCreations, my dream was to run my little company for the rest of my life. Anyone who wanted to take it away from me would have had to pry my cold, dead fingers from my desk. Looking back on what happened when the Internet market collapsed, we were fortunate to be able to sell out -- to a European conglomerate -- before it was too late.
The moral? You need to start surveying the landscape of potential acquirers before the ink is dry on your business plan. You must start building relationships with those companies so that you will be on their radar screen when it comes time to sell or seek a strategic partner to take your company to the next level. It's also important to figure out what these companies want -- a proprietary technology, a product line extension, an entry into a niche market -- so that you can shape your company accordingly.
NOW, FOR THE ART.
Entrepreneurs don't start companies because they want to manage people, track numbers, handle customer complaints -- or even cultivate potential acquirers. It isn't the science that drives them. Rather, it's the art -- the desire to design beautiful buildings, cook tasty food, or invent an ingenious new widget.
But the science can't be ignored, and so it must--and happily, can -- be learned. Indeed, that is the principal behind Axxess Business Centers -- to package what can be canned for presentation to clients who can then incorporate it immediately. When it comes to entrepreneurship, getting the science right smooths the way for tending more deliberately to the art.
Rosalind Resnick, founder, president and CEO of Axxess Business Centers, is a former business and computer journalist who built her Internet marketing company, NetCreations, from a two-person home-based startup to a public company that generated $58 million in sales. For an another Entrepreneur Byline by Resnick, see "How I Sold My Company for $111 Million".
Entrepreneur's Byline comes to BusinessWeek Online readers courtesy of EntreWorld.org, a resource for entrepreneurs that is sponsored by the nonprofit Ewing Marion Kauffman Foundation.