The Myth of Undercapitalization - Six Ways Entrepreneurs Achieve Success in Spite of Start-Up Money
This year more than 17 million people will become entrepreneurs, according to the National Association of Self Employed (NASE). By the end of the year, 8 million of them will return to the corporate world because their entrepreneurial effort did not succeed. Many will say the businesses failed because of insufficient capitalization. Actually under-capitalization is not the cause of failure, but a symptom of a far more serious problem.
Many experts will say that undercapitalization is the main reason for the failure of an entrepreneur to achieve the dream of having their own business. They will point out that failing entrepreneurs did not start with a large enough bank account to offset the period it takes before a business is profitable. Statistics always back up this theory because, sure enough, the money has run out before the business is profitable. Therefore, they argue, the theory must be accurate.
Hogwash!
The fact that capital ran out before a business is profitable overlooks other factors having an impact on capital. Yes, the business failed because it ran out of money, but under-capitalization is not the culprit. Let me explain.
In 1952, an interstate highway was built to bypass the town of Corbin, Kentucky. A small motel owner saw this as potentially the end to his business so sold off his entire operation to pay outstanding debt. Penniless, he took his first social security check of $105 and decided to use it to start a new business. With no other income, no savings to draw on, this small check represented his only capitalization. He developed a product and traveled through the area looking for restaurant owners that would sell it, giving him just five cents for each one sold. Twelve years later he sold his business for two-million dollars. Twenty years later the business would be sold again, this time for $840 million, with the stipulation this entrepreneur would remain the spokesperson. It seemed appropriate because the inventor, a gentleman by the name of Colonel Harlan Sanders, had become one of the most recognized people in the world.
Dave and Lucile moved into the first floor flat of a house at 367 Addison Avenue, Palo Alto, California. Soon, Dave would begin working part-time in their garage with Bill, who rented the cottage behind the house. Together they had $538 in working capital and a used Sears-Roebuck drill press.
Bill had been studying negative electronic feedback. They tinkered together and made a gadget they called the audio oscillator which they called the 200A "because we thought the name would make us look like we'd been around for awhile," says Dave later. The Walt Disney Company ordered eight oscillators, giving Bill and Dave’s company, Hewlett-Packard, the ability to grow into the corporation we know today.
These are two of the more prominent mega-companies that were under-capitalized when they started. Smaller companies share in success despite a lack of start-up capital.
Steven and Bennique Blasini started BFX Imageworks in Hollywood in 2001 without any capital. They lived off savings for six months and used their existing home computers to build their business. In a few years they grew into a multi-million dollar company, winning awards for their cinematography work. These people have proven the secret to success is not capital related. The secret lies within each of us. Let’s look at what it takes to be a success.
BEFORE YOU START
Select the right business
When the entrepreneurial bug bites, many people decide to do what they have always done. Although this may seem to be a logical step, it is not necessarily the best move. When selecting their entrepreneurial venture, one must consider the lifestyle they desire, the business location, what they have to invest in their business, and how they can add value to the sea of people already in the same business in the same area.
A friend of mine, Greg Doyle, coaches people transitioning from the corporate or academic worlds into the entrepreneurial world. He helps his clients discover a business that best matches their goals. Greg finds that 95% of his clients end up discovering a business that they say they would never had considered on their own, or that they had prematurely dismissed.
Know how to turn dreams into goals
This could very well be the biggest stumbling block for new entrepreneurs, and continues to be a struggle for experienced businesspeople.
It is easy to have dreams. Young girls dream about meeting a handsome prince and having a magnificent wedding. A young boy becomes captivated by a sport and dreams about making the final play to win the championship. A new entrepreneur dreams about opening their business and then retiring on the beach in Maui. Why is it that only a small handful of people attain these, or any dreams? The answer is really quite simple; they know how to turn their dreams into goals.
Success is a matter of taking a dream and turning it into a goal. It is more than semantics. A dream is a desire while a goal is an actionable plan.
The transition from dream to goal involves four steps:
1. Assign measurable actions. Determine what needs to be done in pursuit of your dream. Be specific, listing big actions first, then “chunk” the actions into the smaller components that will make them happen.
2. Apply an element of time. Take each of the measurable actions and assign a start and end date to it. It is acceptable to have more than one activity at the same time unless the task requires your full attention.
3. Examine your resources. Even people that have mastered the first two steps falter at this step. Examining your resources requires a hard look at what you have at your disposal. Resource needs could include licensing, knowledge, office or retail space, materials, vendors, office supplies, a method to receive and deposit income, bookkeeping, referral sources, and a variety of other possibilities. Be extensive in your list of resource needs by thinking of different customers from the time you get their attention until post-sale.
4. Examine the cost. Look at both financial and opportunity costs required to achieve your goal. Financial costs include the cost of opening and sustaining your business until it becomes profitable. Opportunity costs refers to what you will have to put on hold in pursuit of attaining you goal. For example, you may find that boosting your sales will mean you forego a vacation next summer.
If resources are insufficient or the cost is too great, you need to rethink the goal. This does not mean to reject it as it may simply need to be tweaked slightly. If the goal is too soft, go back to step one and two and increase your expectation or shorten the timing. If the second phase validates that the goal is possible, you can continue the road to success!
Assess your strengths
The third component to position yourself for success is to assess your strengths. Assessments are done online by answering a series of questions to reveal your competitiveness, sales drive, persistence, and other aspects of your personality.
When I started MaxImpact, a leadership and organization development company in Rochester Hills, Michigan, I decided to take three different assessments. To be honest, I took them because they are a product offering of my company. However the information I learned was extremely valuable. For example, the assessments showed that I had a real challenge in cold-calling.
They indicated I would always be reluctant to make the first call, but once I made one call I would find subsequent calls would be easy for me. As a result I force myself into the first call by making it a “soft-call”. By not allowing for interruptions, I can continue for dozens of additional calls.
Assessments are an inexpensive way to enhance your ability to negotiate, close a sale, make decisions and much more. They are a critical stop on the road to success.
WHEN YOU'RE READY TO GO
Find someone to hold you accountable
In corporate America workers always have a supervisor to whom they are accountable. On the other hand, many entrepreneurs feel they are their own boss and do not need a “supervisor”. This view overlooks the fact that even a corporation’s CEO is held accountable to the Board of Directors.
The reality is that entrepreneurs with a mentor, accountability partner, or one-on-one coach outperform their competitors. I gained some first hand experience when I started to work with an entrepreneur in Colorado. We had a weekly telephone meeting to share each other’s goals and exchange ideas. Initially the calls were nothing more than justifications as to why we had not reached our goals from the prior week. Eventually we both tired of making excuses and began challenging each other. We developed a model that enabled us to be challenged to make real progress in our businesses. In a less than two months we had become so busy it was difficult to schedule our calls around our increased client appointments.
We both continue to use our process to help others focus on moving themselves closer to reaching their goals.
Differentiate
Robert Middleton, the author of “Info Guru”, says you must “differentiate or die”. He could not be more correct. Let’s say you are one of the hundreds of realtors in any given area. In a game of numbers you will get a certain amount of business regardless of what you do, but not enough to thrive. If you are patient you will pick up referrals from past customers, but still fall short of real success. Now imagine that you are able to differentiate yourself. Let’s assume you live in a transient area where people from another geography location, say Texans, were constantly moving. If you were able to establish yourself as someone who completely understood what a Texan was looking for in housing style, property amenities, and neighborhood assets, you would be able to shorten the time it took Texans to find the home of their desire. Now you are differentiated.
The Blasini’s low overhead allows them to work with smaller Hollywood Studios that cannot budget to work with the larger competitors. This is one of their success secrets.
You need to find a significant way you add more value than your competition. Something as simple as, “I provide personal service” is not good enough. This type of statement solicits the response, “Well I should hope so.” To make an impact your prospect needs to say, “Wow!”
The bottom-line: if you cannot make a compelling argument as to why someone should deal with you instead of your competitor, you are operating with a huge handicap.
AFTER YOU OPEN
Understand best-in-class customer service
Most entrepreneurs feel they already know enough about customer service based on their own experiences as a consumer. The shortcoming of this belief is that they only know the specific things they have conscientiously noticed. Best-in-class customer service is more like elevator music – you don’t notice it until it is missing.
Customer relations are vital to the success of a business. Every professional should personally understand how to deliver customer service that will not only retain their existing customers; it will create a customer base that is consistently telling others about what a great person or company you are to deal with.
Best-in-class customer service is not a one-time lesson to be learned, it is a continuous learning process taking advantage of personal ideas coupled with the experiences of others.
Putting it all together
Although it would be naive to suggest capital is not important in a business, having validated goals, as mentioned here, are much more important. These goals are bolstered if the business has a personal match to one’s interests and desires, if a qualified accountability partner is enlisted, strengths are understood and exploited, and the entrepreneur is continually looking to increase knowledge and skills – especially with regard to customer retention.
Any entrepreneur CAN succeed if they follow these six steps, whether or not they take them in order. The key is to admit to yourself that no matter how successful you have been in the past, the world of entrepreneurialism requires special knowledge and accountability. If you are entering into this very rewarding world, make sure you get the help you need.
Rick Weaver is President of Max Impact, a national leadership and organization development company based in Rochester Hills, Michigan. Rick is an accomplished business executive with experience in retail, market analysis, supply chain and project management, team building, and process improvement. He has worked with hundreds of companies to improve sales, processes, and bottom-line results. MaxImpact offers leadership and organizational development services along with employee assessments and background checks. Contact Rick at 248-802-6138 or via email, rick@getmaximpact.com. MaxImpact is on the web at http://www.getmaximpact.com.
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