CleverStart

In my last post, i spoke about the need to get your hands dirty and make a sale as the single most important thing to do when starting your business.  I also mentioned that there are several other important ingredients that go into the mixing bowl when starting your own business, one of which is the Due Diligence phase.  it’s basically market research.  it is making sure you obtain the appropriate information necessary to make an educated decision on whether or not to launch your business.  in the world of finance, mergers, and acquisitions, it goes much deeper into scouring over the books of a potential acquisition target, checking their P&L’s, cashflow statements, speaking with current employees, customers, vendors, etc….this, while not useful to you now, is what you can also expect if and when the time comes for you to experience the pot-of-gold-at-the-end-of-the-rainbow for any entrepreneur known as a liquidity event.  a liquidity event is when you take your company public or sell your company.  thus converting the inherent and intangible value of your company into tangible, cold hard cash.  specifically, if you own half of your company that sells doughnuts, and your company earns 50,000 dollars a year, then it might be WORTH (inherently) 250000 because of the proprietary doughnut making technology you have, or the awesome relationships you have with customers, etc…but you only receive $50,000 a year on sales, and that is all you’ll ever receive until you experience a liquidity event.  now, if Krispy Kreme knocks on your door and says i will pay you $250,000.00 for your company, and you agree, then BAAM, you now have 250K of cold hard cash in your pocket.  that 250K is not an inherent value or an estimate of what your company is worth on the open market, that is cold hard, and LIQUID cash.  and that is the meaning of liquidity event. 

as you can tell, this blog is easily sidetracked, this posting should be titled Due Diligence and The Definition of Liquidity Event as pertains to a small doughnut maker.  moving forward, i am not a grand master entrepreneur and i do not deal in high finance terms of IPO’s, Mergers and Acquisitions, EBITDA’s or any of the sort.  I speak to you, the fellow small business owner, who is working with whatever you have in the THREE areas that matter the most, your head, your heart, and your checking account/credit card.  that is how i started all of my businesses, and that is the audience i wish to address.  so to me, and to us, due diligence is simply making sure you have a good idea before you and spend your valuable time and hard earned savings on this new venture.  One key point to remember is, do NOT, i repeat, do NOT ask your mother, your wife, your cousin, or your grandma what they think about your business idea.  they will of course love it.  they love you, after all.  even if they are in that industry, even if you THINK they have the requisite experience to give you valuable advice, PLEASE, seek out other sources of information!  It is like my last post, where i said make a sale, except two or three steps prior to making the sale. 

Here is what i would do:

1) pretend you are a customer of a competing service or product.  find out as much as you can about how they sell their product, what they charge, how they market/advertise/sell, and dig deeper, how did they get started?  who is their biggest client?  most companies that are relatively new love posting articles about themselves on their website.  try and look at their section where they list all of their press releases.  these probably NEVER got read by anyone, but they wanted to put that out for all the potential clients who visit their website to see.  this is a valuable source of information. 

2)  digest and learn from what you read.  this sounds pretty simple and stupid, but it is important.  if 5 out of 5 competing companies in the space you wish to enter all state that they received large sums of startup capital, or got some huge lucky break, then it’s probably safe to say that you too may face those same challenges.  In my experience in the software world, i quickly realized this sad fact.  every other competitor had started out with either a blank check from a very enthusiastic investor, or had personally funded the company in sums that i couldn’t even dream of having in my checking account, OR, they worked for the company that became the new startups first client.  Meaning, they had the inside track and their first client essentially funded the entire company.  Thus, if you read these signals, you might be smart in thinking that it would be difficult to simply release your competing service and expect to rake in a ton of new sales right away. 

3)  FIND OUT YOUR COSTS OF GOODS SOLD!  wow, another brain buster here.  i have seen way too many would be entrepreneurs launch their business without the slightest clue as to how much it costs to make the product or provide the service that they are offering.  For example, at CleverStart, we COULD charge everyone $25 for the entire kit and kaboodle of web services.  We would surely get a lot of business because of our aggressive pricing structure, but shoot, we would be working our fingers to the bone and probably wouldn’t have enough to make our mortgage payments at the end of the month.  Okay, that was a very over simplified example, but be sure to include things like marketing, advertising, shipping, payroll, and carrying costs into your calculations of costs of goods sold.  just because you sell your widget for $10 and the manufacturing cost is $2 does NOT mean you will pocket $8 on every sale.  You have to warehouse that widget, you have to set up phone lines, internet lines, web hosting, you have to ship those widgets, you have to print labels to go on the packages of those widgets, you have to somehow get people to visit your widget website or to call your widget sales person, you have to have someone to handle all the phone calls demanding widgets…does anyone return widgets?  who pays for that? 

4)  Will anyone buy your product or service?  yes, you’re a millionaire; no, you’re in debt up to your eyeballs.  this is more than thinking your product or service is better than the competition, it’s seeing if your potential customers would even want a different product or service.  do you think 250 million americans really want a new phonebook that is blue w/ purple tabs instead of their yellow pages?  your bluepages might be better, look prettier, cost less to manufacture, but do people really want it?  if you’re not sure, spend your time and a very very very small budget and call, email, and direct mail a small sampling of homeowners to survey them on whether or not they would prefer a different phonebook.  My guess is that they are probably indifferent and could care less.  and there you have it, i just saved you a lot of time and headache.

Hey, this isn’t a doomsday posting to dissuade any of you would be entrepreneurs from joining the ranks of the self employed, but for your own sake, do the research!