The Lean Startup movement gets that learning underpins all innovation – and startup success.

The lean startup concept also understands that the learning is about finding out what ‘doesn’t work’ as much as ‘what does’.

In this way, it resembles an experimental process of hypothesis (also know as a guess) followed by empirical test followed by acceptance, rejection and reformulation of the hypothesis.

So, as this sounds rather scientific, can science teach us anything about lean startups and innovation?

What can top physicist Richard Feynman teach us?

Watch  this short video and find out…

In this old video, you can just about hear Feynman explain that the search for a new scientific law (or for us, innovation) starts with a guess!

Then, we work out the consequences of the guess – ie. is it significant or insignificant? This helps us choose what to focus on as we want significant innovation rather than insignificant innovation.

Then we experiment to see if our guess is right.

In the lean startup case, we test markets and customer response and reaction. As Feynman says we compare our ‘guess’ with what we ‘observe’ to see if it works.

And, if our guess disagrees with what we find when we test – it is wrong!

That is the essence of science, and, of innovation and success startups too. Only Feynman knew this in 1964 – and we are just discovering this now in the startup and innovation field….

Successful investment proposals come in many shapes and sizes – they may be long documents – or they may be short documents. Sometimes, there is little or no document at all (although this is more rare).

The key thing that all proposals do is they find a sweet spot between the conflicting demands of putting together the best team, developing the best product and creating a profit with return to shareholders.

These three elements – team, product/ service and finance (ie cashflow, investment and profit) are like the base elements – fire, water, air and earth. Without them, nothing can be created – but equally, they are in conflict.

Team, product and finance in conflict?

Yes!

Think about it, a top team might include the CEO of a FTSE 100 company – but he or she might cost you £50k to £100k per year. Can you afford this? Or, perhaps, would you want to afford this?

Equally, you might be able to design or develop the perfect product is only you had £1m – but, would you be able to make a profit?

Lastly, if you cut costs so far that you have no money to spend on sales and marketing, how will you ever launch your product or service?

Hence, these three areas are in conflict – more spent on marketing means you need to raise more money and will offer lower returns in the short term (although, with the prospect of better returns in the future).

Equally, you want to build a non-exec and management team with the right experience, knowledge and contacts. But, are they all committed to your project? Will you be able to pay or reward them sufficiently? And, if you are giving shares and options away to your management team, have you left enough on the table to make the investment attractive to investors?

That’s why the search for funding is really about the push and pull between these three factors.

And, that’s why, when you take our questionnaire – Is My Business Ready for Investment - you’ll begin to see whether your proposal has adequately dealt with all three elements – team, money and product – and therefore, whether your business is truly investment ready.

Of course, many entrepreneurs don’t take finance – but, they still go through the process. Why? Simple – they are investing their time and money and so want to know that they are making a good investment.

That is why, even if you don’t want to take on external finance it is still a great idea to ask – Is My Business Investment Ready?

So, now is the time to take the survey and find out…is my business investment ready?

It explains the concept behind the book and how it can help new and old entrepreneurs learn from my mistakes.

Giving up equity to partners is dangerous. It will cause you major problems in the future – if your busines is successful – if you don’t get the splits right from the outset.

Find out how I split the equity on my first business – and why it became a problem.

Then, don’t do as I did!

Instead of just being a way to save costs, freelancers are discovering that they bring original ideas and solutions to their clients. But does it work? Can freelancers help avoid failure and stimulate innovation?

To find out, we are conducting a survey with an analysis of the results and some thoughts on how businesses, agencies and departments might go about resolving those challenges and find new ways to innovate and grow. Please complete our survey and in return we will email you the full results once analysed.

She says that had she not experienced the failure, she might never have gone on to write one the worlds’s most popular series of books.

JK Rowling’s most memorable quotes, taken from the video, include

I talk about the benefits of failure – simply because failure means a stripping away of the inessential – I stopped pretending to myself that I was anything other than what I was and began to direct all my energy into the only work that mattered to me – the one arena in which I truly belonged – I was set free…

it is impossible to live without failing at something unless you live so cautious you might as well have not lived at all – in which case you have fail by default.

The knowledge that you have emerged wiser and stronger from set backs means that you are, everafter, secure in your ability to survive.

You will never truely know yourself until tested by adversity. Such knowledge is a true gift and it is worth more than any qualification won.

Rock bottom was the solid foundation on which I rebuilt my life.

What can entrepreneurs learn?

Firstly, failure is a part of life and a part of business life. It might be small – you missed out on a contract or sale. Or it might be bigger – your business fails. It might affect your marriage and it affects your finances and the car you drive (or perhaps, for a few years, you just walk).

Secondly, to avoid failing, means taking no risk at all – so means could never achieve anything thing and therefore is failure by default.

Thirdly, having experienced failure, whether small or great, the opportunity is to use it to strip away the inessential parts – to know yourself and focus on what you do brilliantly.

Only when you know what you can do brilliantly can you truly be successful.

Hence, failure is the rock on which all future innovation and long lasting success is based – just as JK Rowling said.
Thirdly,

An early innovation that got replaced?

Stock investors have rediscovered Warren Buffett’s investment principle of ‘never lose money’ and entrepreneurs are now focused on how to avoid small business failure, rather than searching for growth at all costs.

So have we all become neg-heads? Not at all, instead there is a new realism to what it means to grow a successful business and that it all begins with understanding business failure and how to avoid it so that your business has time and space to innovate.

Okay, so what are the 5 ways to avoid small business failure?

1. Take no debt 

Debt ties you down and stops you being flexible. However, in my experience, the worst problem is that it encourages entrepreneurs to hold onto a business idea that isn’t going to work and it stops them looking developing that idea into something that can make money.

For most entrepreneurs, debt involves putting up prized assets, such as a home. This then involves your partner or family (most probably) in the outcome of your business and they too become emotionally attached to your business idea not failing.

Strangely enough, taking debt removes your freedom to fail and the learn from that business failure – because something as important as your home is on the line. Don’t do it – give yourself time to fail and learn from business failure – this is the only way to create a truely unique product, service or business.

2. Make your costs as flexible as your contracts

Next up – costs! These are a big issue in the early days because whilst customers and clients may buy from you once, there is no guarantee that they will buy again.

Equally, in a tough economic climate, most businesses will not provide a contract but want to buy your services on a drip feed or bit by bit basis. In this case, if you lose a contract – or it simply isn’t renewed – then you need to be able to adjust your costs just as quickly. This means – no fixed costs!

Examples of fixed costs include permanent staff (but not freelancers, and you can now advertise freelance jobs free), office space, cars and phone contracts. None of this necessary. So why do so many entrepreneurs make this mistake? Well, somehow having an office to go to, or a car to ride in gives a new entrepreneur (or ex-student / ex-employee) a feeling of comfort. So fight the feeling! 

I can tell you it is far more comfortable to know you can pay your bills than have a soft expensive chair to sit on.

3. Take no partners nor shareholders

Partners and shareholders require rules – lots of them.

The rules need to cover how the business is governed and run, how the money gets spent, who gets the profit and salaries and what happens when it goes wrong. Sound simple? It isn’t. 

Imagine setting up a government – democratic-ish – where some people have more votes than others – on a small island and then you’ll have some idea of the complexity. Imagine that as the island becomes successful it grows, more land, more people (some with votes, many without), a few ambitious barons and yes, you have idea of the increase in complexity that follows initial success.

Now, many small businesses take on partners to dish out shares because at the outset when they are worthless. Well here is the bad news, as soon as the business is worth something, then you’ll need all the rules and constitution of a small island.

Yes, after an intial success, your business will almost certainly fail if, for instance, you have some partners or shareholders on a free ride whilst other are working their socks off.

Of course, if you are raising 10m GBP or US Dollars, then you’ll need partners, shareholders and a constitution – but at least you can now afford the lawyers to set it up and run it correctly. Anything else is a massive distraction to be avoided like the plague.

4. Reward people for great work with more work (not profit share, stock options)

Okay, mistake number four; you’ve got your partners and handed them large chunks of shares, now you’ll be thinking about giving more shares to your employees. C’mon, this does not make sense.

You reward great work by paying on time and a renewed contract. Simple. Why pay a second time in the form of share options?

Share options distract your team from growing the underlying value of the business and encourage them to see a quick sale on a hyped up valuation. The result? The business will take on massive risk in order to grow as fast as it can whilst also massively increasing the risk of out right business failure.

Of course, the option holders don’t lose out if the business fails, they just move onto the next opportunity. It is the original shareholder(s) who lose out. Therefore, the incentives of a shareholder / founder and an employee on a stock option deal are in conflict and yes, poor decisions/ risk management is what you’ll end up with. This is a recipe for failure not for success.

5. Don’t forget – it is all about product, price and perception – nothing else matters

Hopefully, you’ll now be ready to buy into the idea that debt, fixed and inflexible costs, shareholder partners and stock option incentives are a route to business failure. The essential problem with all of these is, that whilst they can all be resolved by patient management, they are a huge distraction from what really matters – product, price, perception and the sales that come from that.

Now, partners, shareholders, fixed costs and share options all have their place in large or very large ventures – or those that are funded by Venture Capital. They just don’t have a place in small, innovative start ups.

So, the biggest cause of small business failure is the inability to focus on what your business does.

So, focus on price – that means, deliver the best price whilst producing a profit and constantly drive your costs per product down so that you remain competitive and can grow. Equally, a program of constantly enhancing and improving your product is critical too.

Customers will stay with you if they see the product they buy gets better – whilst the price remains static / low or even better, falls. Lastly, this will allow you to concentrate on the perception your customers have of your business and your products and services. Now, you may think this is about marketing, and it is, but not big advertising and promotional marketing. Instead, it is all about how your customers – current, previous and future – think about your business, products/service and customer service.

Another way to think about this is to simply call it innovation. You need to innovate, constantly and re-invent your business, products and services. Look, great pop stars such as David Bowie, Madonna etc have done it all their career. You need to do the same.

Conclusion?

So, the cause of small business failure is largely down to an inability to focus on what matters – product, price and perception – which is often caused by a mix of debt, rigid costs, partner/ shareholder complexity, share options.

This ability to innovate around your business or technology or what ever you do is the key and is the result of being able to avoid the key reasons for small business failure.

So, let’s learn from these mistakes. Innovate and avoid these things and focus relentlessly on what matters.

In some ways this is good – as it is a fast growing sector with very high levels of innovation (and failure rates). On the other hand, it means that we see the same errors of strategic business thinking repeated again and again.

So, to help out, I’ve laid out the three key mistakes that I’ve seen after 11 years working in digital innovation.

You may have some of your own – so please feel free to contribute.

1.) 1 in 100 Chinese customers

Many business plans start with this fallacy. They begin with the population of the world, or a country or a business sector and then say – ‘if we could only get 1% of that market’ then we’d have a business worth £x million.

Of course, this is designed to make ’1% of that market’ sound tiny. But this is because you are working top down.

Take China for instance. The population is 1.3bn people. Okay, so 1% is 13 million. Is that a lot? Well, it is greater than the population of London. It is around half the UK’s working population. 13 million is also around about the peak level of TV viewing in the UK of the England vs Slovenia world cup football game.

So, when a start-up business begins with a huge numbers and asks if you could take just a tiny part of it – 1% say – they are making the mistake of working from the top down.

Instead, it is better to ask, what does it cost to gain a single customer? From which you can then ask what it would cost to reach 13 million viewers – well advertise around a major England football match – but to win 13million customers is going to require constant marketing and conversions of leads from your advertising. To give you an idea, a single 30 second TV slot reaching 13 million world cup fans would cost £300,000.

The error then, is to work from the top down. Begin, always, with what does it cost to acquire 1 customer? And then argue whey you customer acquisition costs will reduce as you gain size and momentum.

2.) If I build it – they will come

This is the Google error. Okay, okay, Google had one massive success – the search engine – and ever since, every product has failed to deliver or failed to dominate its market in the way that you’d expect the Internet giant to do, given their brand reputation and quality of engineering.

Take a look at this great article about why Google projects fail – and you’ll find that it is because Google does not do marketing. Amazing really, as their income is entirely dependent on classified advertising that they themselves don’t do marketing.

Apart from one success, Google has delivered many greatly engineered products – but doesn’t lead the market in any of them.

That is because Google still believes that if they build it – the customers will come. Well, that simply isn’t true for anything but the most ground breaking of products (such as search). All the other products are great - and could be excellent if they included marketing.

So, why don’t business start-up entrepreneurs include the marketing? Well, simple – because the costs are huge! And, if fully costed, probably make the idea untenable.

Therefore, the successful entrepreneur has two options – reject the business idea – or do it anyway, but use stealth marketing. That is use the new (and therefore) cheaper channels – such as PR or social media or digital marketing – using freelance contracts. But you do need to be very good at this.

Either way, for consumer products, marketing will be 50 to 60% of your costs (okay, this may include commissions to 3 parties) and for industrial products, this might drop to 15 or 20%.

Nevertheless, fail to include enough marketing spend, and unless you have an utterly amazing product, you’ll end a failure.

3.) I haven’t built anything, haven’t done anything but if you give me lots of money, this will all change.

You may laugh, but this is the most common mistake.

Often it comes from someone who is thinking in a corporate way – ie. build the plan and then persuade – rather than an entrepreneurial way – ie. let’s have a go and see what happens / we learn (but without spending too much money or time.

The difference is massive.

One the one hand, you have a highly practical ‘go out and make it happen’ approach – which whilst it will be messy, will actually deliver some results. And those results – either good or bad – can be used to devise the next step in the business strategy.

On the other hand, you have a planner who shows no sign of being able to implement something on a tight budget.

Now, no matter how much cash you raise – your budget will always be tight in an entrepreneurial start-up business. In fact, if you can’t run a tight business, you shouldn’t set yourself up as an entrepreneur.

So, the reason that so many business plans don’t get cash – is because they don’t get started. Investors and business angels want to speak to your customers to see if you are any good. If you don’t have customers – there is no one to speak too – and the risk level on your business idea goes through the roof and the investment cash stays in the pocket.

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What do you believe are the biggest start-up mistakes? Let us know by adding your comments below….

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In this 2nd of the 7 point plan for growing your business in 2010, Lewis talks about the importance of rapid product and service innovation and the three key factors of:

- delivering smaller incremental benefits
“your brands need to stand out – so start delivering smaller improvements earlier”

- getting to market faster
“gain the advantage for longer – by getting to market early”

- learning about how your markets have changed with regular product and service releases
“social media is your best research tool – if you have something to sell”

Click here to see the full set of videos on how to grow your business in 2010

Can you do this?

Okay, we know the answer lies with outsourcing – but how much can you outsource and how do you do it safely?

Here are our 7 key tips for successful entrepreneurs… 

1. IT support should be outside of your company in most cases. If you are concerned about access to IT support staff, hire a local company. If a problem occurs, you can always take your machine over to their office or meet them for a coffee.

 

2. 80% of your total marketing staff costs should be outside of your business. If your internal marketing team are ‘doing’ marketing rather than ‘co-ordinating’ then you probably have an opportunity to increase productivity

 

3. Human Resources and training are probably outside your company already, if not, then this is an obvious next step. HR is a highly sensitive area and the laws keep changing. So, you need a specialist who spends 5 days a week on this topic and can also turn up in your office at short notice (staff problems are always at short notice), hence, resource this skill locally.

 

4. Finance – you are more likely to in-source finance help – that is, ask a bookkeeper to come and help you prepare your monthly accounts in your office. You can arrange this yourself, or you may prefer a freelance Finance Director to do this for you. In some cases, the Finance Director will actually do the books for you – this makes sense if you have very few items or are setting up your accounts

 

5. If you are contracting with senior freelancers, don’t forget that many will also carry out more junior activities (such as a Finance Director will do bookkeeping) at a lower rate – so you don’t have to pay their full rate for everything.

 

6. Write your stop doing list. This is the list of things that you are no longer going to do because they no longer work, but you’ve kept on doing them hoping they might start working again. Some things just stop working – so accept it, stop trying it, and move on.

 

7. Find a way to meet more local freelance talent faster. Find a local event – such as http://www.enterprisefreelancefair.co.uk where you can meet 40 or so freelancers in a couple of hours. Event such as these will massively increase your flexibility and are a great way to find new, more productive, ways to innovate and grow your business.

 

Feel free to add your own tips below….

Sticky going...

What shall we call this period – between the first recession and whatever is to come in the form of substantial public sector cuts and reductions in government spending?Shall we call them the treacle years? The years of trudging along with heavy boots - just about keeping the forward momentum of your business but demanding constant and focused effort?

Sometimes it seems that way.

Okay, so how do we first survive and thrive in the treacle years?

Here are my 5 key tips – feel free to add yours at the end…

Firstly, it is important to recognise that the stodginess of business isn’t your fault. That’s good, so we can stop beating ourselves up about it.

Secondly, having accepted that there is a limit to what we can do, we can start to focus on our spending or cash burn. If you have enough cash for another 12 months – find a way to make it last 24 months. If you have cash for 2 years – see how you can make it stretch to 4 years.

Thirdly, recognise that you need to find new markets - those markets that have some growth in them. We live in austerity times, so austerity products at austerity prices work. Equally, some luxury sectors are growing fast too – because whilst customers cut back on everything else, they still want some treats.

So, your task is to find the growth sectors and move into those sectors.

Fourthly, innovate. Innovation isn’t expensive – if it is, then something is going wrong. Instead, innovation is about a mindset – about a desire to improve things – and use the fact that you have little or no money to find really creative ways to innovate.

Fifthly, put back your retirement date by five years. By giving yourself another five years you’ll create a little thinking space which will help the creativity and also you’ll ensure that you are planning for a marathon and not a sprint.

Lastly, learn to love the taste of treacle. That means, become really really good at what you do – so that you can charge a premium for it – or your products – and make a profit and grow market share.

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Got any tips for surving the treacle years? Feel free to add them below
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In this first video of the 7 point plan, Lewis deals with three key points

1. We are now learning to live with tough credit terms (as per pre-dot.com boom)
Lewis talks about the forecasts that net lending will remain negative until 2011 and that the new credit terms are here to stay.

2. Our markets appear slow but actually, most markets are shrinking fast, with a few growing quickly too
Lewis discusses how mature markets are getting squeezed either by lower prices which maintain demand, or higher prices coupled with much lower demand – both of which means shrinkage of market for most businesses.

Equally, there are a few key sectors which are growing rapidly, digital media, freelancing, green technologies etc… and that successful business needs to be connecting with if it is going to achieve growth.

3. And the Good News - slow or no competition (no one has any money, which makes it easier to start new ventures….)
Lewis agrues that the old notion of “early mover advantage” is gone. In this business climate it is more important to take your time and get your proposition right.

…click here to watch all the videos from the 7 Point Plan – How to Grow Your Business in 2010..

“Review IR35 as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self employed, or restrict labour market flexibility.”

Ernst & Young's says Get Agile

I recently got sent a link to the report that Ernst & Young launched at Davos earlier this year and it has some important lessons and advice for successful entrepreneurs – you’ve got to become agile.

Davos, you may already know, is the economic summit attended by global CEOs and world economists to discuss the current major business and economic trends and therefore the issues facing their global businesses.

So, essentially, this is top quality stuff – but the question remains – what value or use is this for small and medium sized businesses (SMEs)?

The answer is that what affects our big brothers will impact on us, the successful entrepreneurs, too – only, traditionally, SMEs get to find out about it later. Often, a lot later….

So, interpreting the Ernst & Young report – what can we decipher? Quite simply – if you want to grow your successful business then you need to build agility into its DNA.

Steve Howe, Managing Partner, Americas — Ernst & Young said “leading organizations need to look at talent and the value of different perspectives in a new way to drive innovation, mitigate risk and support new ways to achieve success.”

Mr Howe is encouraging established western businesses to find new ways to drive innovation and mitigate risk. And, in his view, this requires a new way of looking at talent – or perhaps our staff and teams.

Okay, so, we are right back to the issue about people – it is what makes or breaks a successful business. And what the EY team are really saying is that we have to find new ways to engage that talent to bring new perspectives on our businesses and find ways to innovate with lower risk.

How do you do that then?

The most effective way to acheive this flexibility is to create and use flexible pools of local freelance talent.

Also in the report, Donald Sull, Professor of Management Practice at London Business School, expressess the idea that establshed/ western business have high absorbtion rates – that is they are able to weather shocks with a protected core market, diversified cash flow, a strong brand or long-term customer contracts.

However, the risk is that new companies growing up in the large emerging markets (India, China, Brazil for example) have a a much great agility which is what allows them to spot and exploit new opportunities.

He says “companies from developed countries, by and large, have the advantages of absorption — size, established brands, technology, diversification and so on,” however. “lacking these advantages, emerging-market firms typically rely on agility. To me the striking thing is how fast agility can trump absorption.”

So, what Professor Sull is saying is that the emerging market business will thrash the established market businesses – unless those businesses can become agile!

Let’s put it another way – your business will go bust if it doesn’t become agile.

Okay, so getting back to agility – how do you do it? Well, as we said in the beginning, draw in a different perspectives and innovate with lower risk. How do you to this? The only way to acheive this must be to open your business up to more people with a wider range of experiences, whilst reducing the risk.

The only way I can see to do this is to engage with an expanded pool of freelance or outsourced talent – who can get to know more about your business and who are given more opportunity to innovate for you.

I put this to Richard Burton, Brand Strategy and Development, Ernst & Young Global Marketing and he told me

“Finding a way to embrace and leverage flexible freelance talent seems like a very smart thing to do”

So, there you have it.

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Looking for more tips on how successful entrepreneurs can grow their business? Check out our 7 Point Plan to Growing Your Business in 2010…

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Seven Point Plan

The credit crunch is hardly over, but at least we can now focus on how to grow our way out of the problems we are in – rather than worrying if everything was going to collapse.

So, in this new credit chastened environment, how do you, the successful entrepreneur, grow your business in 2010?

To help, here at Rags to Wreckages, we’ve put together a 7 point plan on how successful entrepreneurs are moving ahead and starting to grow their businesses again this year.

Each point of the plan will be an individual video clip and we’ll make that available to newsletter subscribers early next week.

So, if you want to get access to these videos on what you need to change, what you don’t need to do and what successful entrepreneurs are focusing on, click here.

Three special questions every successful entrepreneur asks

Successful entrepreneurs are constantly asking three key questions –

1. ‘what isn’t working’
2. ‘why isn’t it working’ and
3. ‘can I do anything about it’?

These three questions are the most important questions in the entrepreneurs vocabluary and a lifetime can be spent on developing the skills and abilities to answer those as successfully as possible.

So, what might these questions mean in practice? Let’s have a look…

Well, you might say that the European labour market isn’t working. That is, unemployment levels are much higher than in Asian countries or the US and the long term unemployment rates are far higher too. Why isn’t employment working? Well, mainly due to taxes, costs and the bureacratic burden of employees.

But is there anything you can do about this? Well, taxes are political – so let’s not go there – but knowing how the structure of the labour market works means that companies would be attracted to simple and cost efficient ways to hire staff. So, the freelance and contractor sectors of employment are the growth areas. And, therefore, can you build a business to meet this increasing demand?

Another typical complaint – house prices – might lead to a different answer. That is, house prices in the UK are very high – relative to earnings - and therefore it is hard to sell your property and move to another. This has all sorts of macro-economic disadvantages, but leaving those aside, it has lead many entrepreneurs to believe that the solution lies in either a direct sale approach to house sales (ie. cut out the agent) or a digital online database (property portals).

Now, let’s ask why houses don’t sell easily in the UK? Well, high price is one reason, but is it the agent? Evidence todate of 10 years of would be websites dedicated to cutting out the no-win/ no-fee agent – and replacing with a fixed adverting charge have failed to make any inroads into the market.

In fact, as it becomes harder to sell property, so it seems that the commission motivated agent in the middle is critical to ensuring that the two parties agree and close the deal.

Equally, the rapid proliferation of property portals suggests that property sales are going online? But no… instead, property adverts are going online – but the quality of those adverts is poorer now than before. Why?

Well, the agents treat the property portals as an advertising cost and therefore, don’t want to display all their stock at once – only those properties most likely to generate sales leads.

Hence, the all comprehensive promise of property portals is falling apart and anyone wanting to buy a house now has to look at multiple websites to see what they might buy.

It seems that property and property sales are – once again – returning to the existing structure of buyers, sellers and media used to generate leads.

Hence, it seems that business plans dedicated to changing the way that we buy and sell our houses have failed.

Now, the quickest way to make houses easy to buy and sell would be to cut their price in half – and that could be achieved by a massive increase in the availability of cheap land. Ah, back to politics then.

So, as we all agree, there is something deeply inefficient about how property is transacted. But there isn’t an obvious way to change it – other than by radical politically lead reform. Which isn’t easy either. It is a bit like capitalism – it is the least worst system.

The risk is that many young entrepreneurs may spend too much time (and money) attempting to make perfect an imperfect system.  Sometimes we just have to accept that there is ‘nothing much we can do to help’. If so, then find out fast and move on.

You see, often the successful entrepreneur is portrayed as someone who never gives up – where as, in fact, he (or she) may simply be willing to give up faster – and therefore find something that works quicker.

If you perfect the use of our three special questions then you’ll get there faster, waste less money and time and achieve a greater result.

This explains why the current owners will also meet £9m worth of liabilities as part of the sale.

However, the key is that it shows how long term liabilities can sink a business. How on earth did the independent get it self into this state? Probably by negotiating cheap print deals in return for long term commitments? And, of course, staff redundancy costs and office leases…. Time for a new way of doing business – contractors and freelancers and short term contracts, anyone?

GOAL - goals for business - the good, the bad and the alternatives

Goal Setting is powerful. And I’m a big fan of setting goals… but…

… goal setting can have plenty of unintended consequences.

Like the back of bottle containing powerful chemicals – perhaps for clearing a blocked drain – they should contain the warning ‘use with caution’ and ‘discard when passed the use by date’.

A classic goal for first-time entrepreneurs – who are building their first business – is to sell the business for a set amount – say £5million – in 3 years time.

This goal has both good outcomes and some nasty consequences – so let’s have a look at each.

Good outcomes…

This goal can be shared with a team. Typically it is used to encourage shareholder partners or sometimes suppliers to buy into the business plan and ambition.

If you have no credibility as an entrepreneur – say you have just left full time employment and not previously had a profit & loss responsibility within your ex-company – then this goal is a clear sign of your intentions.

As a result, it can help to make people take you seriously.

Downsides…

However, the people most likely to take you seriously are equally inexperienced partners, freelancers or suppliers.

There is a danger here of the blind leading the blind.

More experienced freelancers or suppliers will want to wait until you can pay for their services in full (or at least in part) or can demonstrate the ability to deliver the growth required to achieve a substantial valuation within a couple of years.

Therefore, the real galvanising effect will be limited.

If however, your business has achieved growth and decides to take on new equity partners to fund further growth – then again, you may be tempted to set a ‘sell for £x million in y years’.  And this may be necessary to get agreement on investment. Still, at this stage, you will have a clear track record, assets against which the investments are being made and some logic behind your projections (hopefully).

Still, inexperienced entrepreneurs are under the false impression that business angels and investors want to hear this at the early stage.

Now, inexperienced investors may be impressed by these claims, but more experienced investors – who may also have greater knowledge and business wisdom to bring to your business plan – will be less impressed if your business lacks a track record.

However, let’s say that you do have a business which has delivered growth and that your claim to sell for a large amount is credible. Is this still a good goal?

No.

Let me explain what happened when my partners and I set this goal and what went wrong…

By 2004 we had built an online publishing business delivering £400k of revenue per year by publishing property books, analysis and information. In order to grow the business we took on a property partner and set a big goal.

The original goal of the business was to sell for £5m in 2004 – and as we had missed that goal, we set a bigger goal to sell for £20m.

The new partner meant that we built a full set of shareholder agreements that tied all the shareholders to the business until we had achieved our goal.

And, if any partner left before the goal was achieved, then that partner would forfeit nearly all of his shares. It was called a ‘bad leaver’ clause.

The result of that goal becoming hardwired in our business was that we set ourselves up to succeed spectacularly – or fail spectacularly.

In the end, it failed spectacularly. Even despite the fact that we received an informal offer for the business of £12million in 2007, the business closed in August 2009.

The trouble was that the goal which galvanised the team in the first place became the ultimate and sole focus of the business.

As soon as the possibility of achieving that goal began to fade, so the business took a dive. The partners to the business felt trapped and unable to leave because of the shareholder agreement.

The result was that the business – which still had some considerable value – was not led by motivated or driven individuals.

We were not motivated by a desire to make a difference or to deliver a better service, no, all that was left was the money. That was the sole reason to carry on and equally what made us feel trapped. Working for just money is so far away from the pure entrepreneurial spirit in which we had begun, that we felt like we’d built ourselves a corporate prison.

We had locked ourselves in, with the result that the business self destructed.

Okay, so that was the mistake – what would we do differently next time?

Change the goal!

We learned the power of goals – for both good and bad.

So, how do we set a goal that allows the business to grow?

Simple,  set a revenue per employee goal - because this goal is about creating a sustainable strong business that is low stress to manage and as a result is a lot more fun for the shareholder/ business partners. Don’t set a fixed value goal.

And, in a strong and stable business the partner exhaustion is much reduced and the desire to escape the business – whilst being trapped by the shareholder agreement – is reduced too. Lastly, partners are not trying to run to a fixed date deadline that isn’t really in their control.

A stable high revenue per employee business means that if revenues reduce, headcount reduces too at the same pace.

It allows some partners to leave the business – because the business is not fixated about a specific goal by a specific deadline – and therefore increase the strength of the business rather than diminish it (as the revenue per employee ratio will increase when a partner leaves).

It also means that partners would be paid market rate for their work – and not a reduced rate on the basis of an anticipated capital sale in a few years.

This ratio will also ensure that the business does not overload with senior executives before the business can afford them.

An alternative view on this is don’t have partners…

If you don’t have partners then you can change your business goal whenever you wish.

And that is the point about goals – their benefit is that they are powerful and unchanging – except when they have served their purpose and need to be discarded.

Think then, of business goals as a target to aim at – but ultimately, you probably will discard that target -once it has served its purpose. And, you must be absolutely certain that you retain the ability to discard any goal that no longer serves the business.

So, let’s do a health check, does your business have any goals that have passed their sell by date?

Sometimes a plaster just won't cover it!

Warren Buffett, still one of the world’s most successful investors, is good at owning up to mistakes.

He has declared on many occasions that holding onto his textile company in the 1970s was an error and that he accepts full responsibility for not listening to the advice telling him to exit the business.

Even in his latest letter to shareholders he warns that “we will make plenty of mistakes”.

But, according to John Kay in the FT, politicians and corporate leaders just don’t own up to their errors. He quotes Alan Schwatz the ex-CEO of busted Bear Stearns as saying

“with the benefit of hindsight, would I have done things differently? Yes, I would have… I just simply have not been able to come up with anything, even with the benefit of hindsight, that would have made a difference.”

What Mr Schwatz is saying is that no lessons can be learned from our errors. However, I bet he still believes he was worth his large corporate salary for all the years of not being able to make the slightest difference to the outcome?

Oh dear.

So, who is right? And Does it pay to own up to your business errors?

And, if you do own up, does that help you come to terms with what went wrong and get it right next time?

And, can you become a more successful entrepreneur by making more mistakes?

.

However, as Rags to Wreckages readers know, there is an easier way – use freelancers instead. What you can’t achieve with your vote, you can achieve with your feet. Change the way you do business!

Asked the question, “what advice would you give a young graduate entrepreneur looking to start out in business“, he shared three key and controversial principles from Rags to Wreckages;

• take no debt – find ways to build a business without debt (this is how the internet can help)
• employ no one - use contractors, freelance etc but don’t write employment contracts that accrue liabilities
• follow your passion – you will only be successful if you deliver excellence and for that you need to follow and stick to your passion

Testimonials from the evening which was sponsored by Best of Chester, include:

“This was certainly a thought-provoking event.  Mr Lewis was an excellent speaker, imparting valuable advice based on his first-hand experiences”

Chris Pyke, Head of Chester Business School

“very thought-provoking and useful for me as a business owner”

Simon Yates, Yates & Co Financial Planners

“It was fascintating to hear some of Neil’s Rags to Wreckages views, particularly regarding keeping debt low, contracting workforce and the evolution and learning process. All common sense things, but attributes that are rarely considered, probably because they are so obvious.”

Darren Mercer, Mercer & Associates Wealth Management Ltd

• Why Many Great Sounding Businesses Ideas Don’t Make Money – and – The Rock that Wouldn’t Budge
• Why Brittle Businesses Break – and – How Glass was Cursed with Brittleness
• Goldilocks and the three Shareholders
• They Know What Needs to Be Done But They Don’t Do it – and – The Bug and the Light
• New Entrepreneurs Don’t Say No – and – How the Rhino got his Thick Hide
• Why Government Schemes are the Death of a Great Business – and – How the King was Fooled by his White Knight
  
• If You Could Hire the Best Person Tomorrow Why Would you Traditionally Employ Anyone Today – and – Why Fear Drives Man More Than Success