Knowledge and Experience

I participated this week in a chat regarding the difference between knowledge and experience, and, more specifically, whether or not formal education is worth the price paid. Living in Canada, the price of an undergraduate degree is about $25,000 which is significantly lower than in the US. As a result, the length of time required to pay off any student loan here is much shorter than in the US, and the value of a degree may not be exactly in line.

I reflected on my own degree, and the experiences I had during university. I changed my majors several times over the course of 5 years, taking a fairly diverse selection of courses both within and outside my selected area of study. Yes, I had a social life, but I also had an academic life. Additionally, most summers I worked in one of the laboratories on campus.

Following my graduation, I spent several months looking for full time work, eventually taking a job at a large insurance company, where I remained for over 3 years. From there, I moved to consulting work, which I have been doing ever since,

I learned very different things on the job from what I learned in the classroom, and I don’t think either one could stand on it’s own. Sure, you don’t need formal education to succeed in life, but for most, it will help define paths. Likewise, without work experience, there is too much of a focus on the theoretical, which does not always reflect reality.

The ideal scenario is to have both, which is, perhaps, why co-op programs are so popular. However, this could be taken even further, with companies working together with universities to provide real world examples to be used in courses as projects and assignments. Some courses already Integrate guest speakers into the teaching schedule, which is great, but there is no replacement for hands on training.

If your company has been having a hard time finding qualified hires fresh out of university, you may want to approach the universities to work with them to better prepare their students for the real world. If you do so, then everyone wins as the students end up with a more practical education, and the businesses end up with a selection of prospects for employment who have been properly trained to work in the real world.

The Founder’s Exit Strategy

As a founder of a business, you likely are not thinking about leaving the business, at least in the early stages of the business development. However, if you’ve ever entertained the thought of seeking investment dollars, an exit strategy ought to place itself high on your list of priorities.

There are, fortunately, only a few basic strategies for the longevity of a business and the role the founders play in it. The business can be profitable, earning a nice income for the founders, perhaps generating some dividends. Alternatively, it can be targeted in an acquisition, allowing the owners of the business to sell their interests in the business. Or, in what many investors will deem the best scenario, it can go public with an IPO to raise more capital, but also allowing the owners to capitalize on their stakes in the company.

All three scenarios have variations, but they form the basics. Each attracts a different type of investor, and any business owner looking for an investment should have their strategy in mind when attempting to raise capital.

Investors will need to share the exit strategy of the owners, assuming the investment itself is not the exit strategy. As such, an unclear exit strategy coming from the founders breeds some doubt as to whether or not the business has been thought through to its logical or desired conclusion.

Some investors want to find dividend generating businesses to invest in, which provide lower risk on their investment, and while perhaps not as lucrative as an IPO, are also easier to manage, and to divest themselves of since the stakes are often lower.

Others hope for an acquisition, seeking to flip the business over a few years, after helping it grow to another level. The risk is a little higher, but the business will likely still be profitable (otherwise who would want to buy it?) and can still provide some short term gains.

Last, some investors are always looking to hit homeruns. They aren’t interested in the short-term gains, but the potential for a huge gain over the course of their investment as the business goes public and raises billions in capital.

If you approach an investor looking for a homerun with a business that will generate ongoing dividend returns, or one that is aiming to be acquired by an investor who wants to be in the business for many years, the nature of the business, the management team, the market outlook – none will matter since you’re targeting the wrong person.

Question: Assessing Competency in an Interview

Perhaps one of the more difficult things to assess in an interview is whether or not the candidate is competent in the needed area. After all, it can be quite easy to talk in a manner that indicates competence without actually being able to do the job, and it can be extremely time consuming to conduct a complete test of the candidate’s ability to perform.

In some businesses, it has become the practice to request a portfolio, or a sample of the candidate’s work against which their abilities can be assessed. However, many businesses shy away from this practice, and some candidates are reluctant to provide copies of their work for a variety of reasons.

What methods does your business use to assess the competency of potential employees prior to making an offer

Naming a Business

There are a few common methods used for naming businesses. In general, though, naming a business should be a serious endeavor, as it will continue to be used to identify your business long after the reasons for choosing the name may be relevant.

Named for the Owner

The simplest, often used in service-based businesses, or those which have grown out of a consulting or sole-proprietorship, is to simply use the name of the owner[s] as the name of the business. Common examples include Dell, HP, Ford, Lloyd’s, Harry Rosen, and many others.

The industries in which this is fairly common are legal and accounting, in which the people involved in the business are highly relevant to their clients, or fashion, in which the name of the business is the name of the designer behind the business.

Named for the Product

Other businesses name themselves after what they sell. This can serve a business well if the name is chosen to be both specific and vague such that it covers its market effectively, and can outlive the life of any of its specific products.

Examples of such businesses include Home Depot (which caters the home renovation market) and Business Depot (servicing the business market).

Named for the Vision

Some businesses use their name as a derivation of their vision. As an example, No Frills is a grocery store which tries to keep everything as simple as possible. Best Buy includes an association with good deals as part of their name.

One additional factor to consider when choosing a name is that there needs to be an avoidance of brand confusion. If there is another business with a similar sounding name, even if they sell a different product, you need to be sure that your target market will not confuse the two businesses. This includes looking for a domain name that is easily associated with your business, and the domain most easily associated with your business is not owned by someone else.

Think About Boxes from Inside the Box

It’s a rare occurance on Dragons’ Den when an entrepreneur arrives with a valuation that is reasonable and a business worth investing in. This week, that happened, and perhaps there’s a reason why these entrepreneurs succeeded where many others have failed.

Bryan McCrea, Channing McCorriston and Evan Willoughby came pitching their business, 3twenty Solutions, which converts shipping containers into modular buildings. They were asking for $115,000 for 25% of their business, which had, in its first month of operations, $70,000 in sales. Their estimates for the first year of operations was about $500,000 in sales, which would triple each of the following two years.

Running at about 15% net profit, that meant the business was tracking to have $75,000 in profit in the first year. Their requested investment, with a valuation of $460,000 was quite reasonable, to the point that Robert Herjavec made the unusual move of making an offer on the condition that there were no other offers, at the price they were asking for.

Kevin O’Leary tried to muscle his way into a deal, made all the more difficult because of Robert’s pending offer, and was politely, and then not so politely, told to screw off with his offer of $115,000 for 50% of the business. It was pretty clear, though, that the three entrepreneurs were hoping for a deal from Jim Treliving or Brett Wilson, who had to deal with the fact that Robert left them little room for negotiation.

Brett, with his knowledge of the oil industry (which provided a significant number of potential clients for the modular units), made an offer of $120,000 for 25% of the business, raising the valuation slightly to $480,000. He was aware that part of what Bryan, Channing and Evan were looking for was a strategic investor, who would provide more than just dollars to their business. While investors will often take a seat on the board of directors, it is not usual (though not unheard of either) for them to take an active role in the running of the business.

The deal was accepted, and completed after due diligence.

What Bryan, Channing and Evan understood that so many pitchers on the Den do not is that an investment is not about free money, but about selling something of value. The investor is buying a piece of a business, and they expect to pay a fair price for it. To do that, one must be brutally honest about the value of their business, taking into consideration the work that has gone into the business to date, the assets owned by the business, and the sales history of the business. While some businesses can look to the future in calculating their value, that is the unusual case.

As CBC prepares for next year’s pitches for the Den (auditions are being held shortly – if interested, click here for more information), entrepreneurs hoping for a moment of fame would be wise to watch past episodes, and focus on the pitches that resulted in offers. Make sure you know your numbers, make sure you understand and can present the revenue model clearly.

A Convincing Argument

I just finished reading a book by Scott Adams, author of the Dilbert cartoon, and was browsing through the list of his best quotes, as picked by his fans. There was one recurring theme, which I think was best expressed in the quote:

If you think that offering excellent reasons for your thinking will change anyone’s mind, you might be new on this planet.

In business, it’s important that you understand this because it relates to how you turn prospects into customers. That is, what type of arguments should you be presenting to convince someone that your product or service is worth spending their time and money on?

The key is that while facts cannot be ignored, they’re also not the most important piece of your marketing and sales pitches. Purchases are driven by emotion, and so you have to connect with your prospects at an emotional level. Sure, you need the facts to back you up, but they should not be the basis of your arguments.

No News is Bad News

There’s a famous saying:

No news is good news.

which many believe to be true. In business, however, where other people are involved, whether they be customers, vendors or employees, little could be further from the truth.

Not everyone likes to be informed of every little change, but when change is happening, people generally like to be informed. They like to be reassured that the status quo will remain, or how it will be changing. The lack of news during times of change, or perceived change, is one way to trigger rumor-mongering, which rarely has a happy ending.

This applies not only internally, for example, when an employee is fired (and people start to wonder if the company is starting to downsize), but also externally. As an example, we can examine what happened this week with one well-known company.

Earlier this week, it was discovered that Apple had rejected an eBook reader published by Sony because of the way purchases were made in the application. Specifically, Apple has a standard purchasing procedure (known by developers as IAP) which the Sony application was not using.

Looking at the Apple guidelines, however, it becomes a little unclear as to what the problem with the Sony application might have been, and what the rejection of the application might mean for other applications, for example, the Kindle app. The guidelines clearly state that all purchases made within an app must use the Apple IAP process, which apparently this app did not.

However, initially there was no comment from Apple, and people started to talk. Was Apple about to take on Amazon for violation of their guidelines in allowing people to purchase books without using the IAP process?

Afterward, to deal with the various rumors that had festered, Apple announced that no changes were being made to their policies, though their announcement left some room for doubt as to how accurate that statement might be. The real issue, though, is the length of time it took to get clarification from Apple.

Apple failed by providing no news, which created a world of speculation as to what the news might be, had they cared to share it. Rather than prevent this, Apple responded and failed to solve the problem.

In your business, when change is expected, make sure you provide information, even if that information states that nothing is changing. People like to be reassured, and the preemptive announcement that there is nothing new can save you from dealing with a large number of rumors that have no basis in reality.

When the Menu of Services for your Business is Lacking

A friend recently asked about how to develop her business, when all her prospective clients are requesting a service she does not offer. The service being requested is not, from the perspective of people who understand the industry, an assumed skill, and in this particular case, the friend does not have the skill, nor the desire to acquire it.

My friend asked me, since I’m in the same industry, what I might suggest for her. The truth is, from the description about, there are two possibilities for what’s going on, and each has a different approach.

The first possibility is that her prospects all require her services as well as the complementary service, and will generally only work with firms or freelancers who can provide both. The solution here is simple in concept, though execution can be tricky. Find another business which offers the complementary service, and start sub-contracting that portion of the work to them. In return, that business will send you work in a reciprocal agreement.

While you are unlikely to get an exclusive agreement like this, it can help bring in new business that you would otherwise have never seen, as well as enable you to close contracts that might have been lost.

However, there is another possibility, and it needs to be considered carefully. It is possible that the prospects she has been in discussion with are not her ideal clients. I’m often surprised by how many people in business do not understand who their perfect clients are, and spend great efforts pursuing the wrong types of clients. The perfect client is going to help your business grow in the direction you want it to go. If that client is asking you for something your business does not provide, and does not want to provide, then that is not an ideal client.

In this particular case, I believe the first answer is the better one. Many people in her industry either offer the complementary service themselves, or have a list of providers they use who can. When the menu is lacking, you have to choose to either supplement with an insert from another company, or redefine who and what your busienss is, and what services belong on the menu.

Question: How do you name your business?

Something many businesses struggle with in their early days is finding a name which identifies them. Sole proprietors may have it easy, since they can name it after themselves. However, as soon as additional people join the business, using your name to identify the business may not be the best idea. However, there are certainly exceptions, for example, Dell or Gucci.

When you named your business, how did you choose the name? What vision were you trying to portray with your choice of name?

Mentors

Last week, I asked about finding a mentor, or where you might look to find a mentor. Perhaps the best answer was the one from Jeremy:

Friends in business, business partners, customers that you respect, or hire a business coach!

The best approach here is to address each on its own.

Friends in Business

These are your peers, who have no vested interest in the performance of your business in particular, beyond a desire to see you succeed. They may not have much more experience than you, but their experiences are similar, and yet different enough to be of use. An issue you face now might be one a friend dealt with a while ago. Additionally, this mentorship relationship can be reciprocal, with you giving your friend the benefit of your experiences when they need it.

The downside to such a relationship is that finding a friend with sufficient experience, and where having a mentor-like relationship will not impact your friendship, can be difficult. Not every business owner can find such a resource, but if you can, it should certainly be used.

Business Partners

The upside to business partners as mentors is that they know exactly what issues you’re facing, and the implications of the decisions you need to make. The downside, though, is that they also have a vested interest, and some of those interests might not align themselves with your own.

When using a business partner as a mentor, try to find at least one other resource who can act as a mentor as well.

Respected Customers

This one may be surprising, but the perspective customers bring to a business is not to be taken lightly. They see the short-comings of your business, as well as what it is you do well that keeps them around as customers. If you have a customer who has experience with business, and with whom you have a good relationship, try to at least spend some time with them on a regular basis to get feedback on how your business is developing.

Business Coach

This is, perhaps, my least-liked approach to mentorship, though many advocate it. My primary issue with such a mentor is that they are in the business of mentoring, and as such, want to see you succeed. However, this lends itself to a potential pitfall, in that if you succeed too quickly, you may abandon them sooner rather than later. Of course, that also might result in more referrals, but you are a guaranteed customer, while referrals are a maybe.

However, a business coach who has experience running a business (other than their coaching business) could be an extremely valuable resource. If this is the route you are taking, be sure to get personal referrals for a coach from other business people you know and trust.