Don’t Try to Hide the Obvious

Nothing destroys trust and respect faster than denying the obvious.  More often than not new ventures run out of small, open offices or shared spaces where privacy is sacrificed in the name of low overhead.  Information automatically makes its way around far more easily than is the case with dedicated conference rooms or executive offices.  That unpleasant phone call you have with a client with a large outstanding balance or a human resources dispute with an employee is right out in the open.

Manage Unpleasant Conversations

If you can foresee a conversation taking an ugly turn, do what you can to contain these exchanges by having the meeting or phone conference at an alternate location.  There is no reason to directly expose your employees to a conversation with an upset client.  One of your jobs is to serve as the buffer so your staff can focus on the tasks at hand.

At the same time, serving as the buffer doesn’t mean keeping everything to yourself.  If a client is legitimately upset with the quality of work, organize a meeting with your employees to address the problems.  Not only can this help your staff understand the expectations of the client and better cater to those expectations, but you may even get creative input on how to manage the issues.

The Touchy Subject of Money

It is generally best to avoid the topic of company finances with anyone except those with a real need to know.  We have been through some very good and very bad times in the history of our company.  While you want to think you are doing employees or partners a favor by giving them fair warning regarding financial conditions, we have come to learn this will generally only hurt everyone in the end.  Here’s why:

• Impact on Client Relationships. Clients are inclined to select vendors in good financial health.  The reasoning behind this is primarily a concern that vendors in poor financial health won’t have adequate resources to complete a project on time or, worse yet, that they will close up shop mid-project.  Unfortunately this turns into a vicious negative cycle as being rejected by a prospective client on the basis of financial health only worsens your financial condition, making it all that more difficult to attract new clients.
• Impact on Vendor Relationships. Unless you deal with all vendors on a cash (or credit card) basis, the last thing your new venture needs is a hint of financial instability making its way to vendors.  This can disrupt supply flow, making it difficult to deliver, hurting clients and ultimately harming your reputation.
• Impact on Employee Relationships. With the exception of employees with stock options or an existing stake in the company, your staff is there for the paycheck.  Knowing that paycheck is in jeopardy is likely to do one of two things: cause employees to prematurely seek new jobs or severely harm morale and general motivation.  Your employees aren’t there to share in the stress of being an entrepreneur or they would be running their own ventures.  Unless you are absolutely at the end of the line, try not to burden employees with negative financial news.

Know Your Company

In the end, there is no one-size-fits-all answer to the question of how open is too open.  You should constantly re-evaluate your policy regarding information flow and transparency based upon your venture’s staff, size and other less tangible factors.  The dynamics of the company can change almost overnight based upon a new hire, new client or new vendor.

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In my case, I had a mix of all those factors working to push me out of corporate life and onto the entrepreneurship track.  Even before I had my first full-time job I started keeping a project notebook of all my great concepts.  I have CAD drawings and hand sketches dating back to the mid 90′s when I was around 10 years old.  I knew I was not bound for a long-haul career with a big technology company or defense contractor as some of my friends and colleagues were pursuing.

Testing the waters

This was my first stab at entrepreneurship

My first serious stab at an entrepreneurial venture happened in 2000 when I launched a college textbook resale site.  The core concept was simple: allow college students to resell their textbooks directly to each other and cut out the bookstore middleman.  I put in the hours to develop an entire classified ad system from the ground-up in ASP classic, lined up a graphic artist to assist with themes and logos and recruited friends to help me plaster Ohio State campus with printed advertising.  After investing hundreds of hours of combined time and a decent chunk of change in hosting, advertising and other expenses, the site was a complete and utter failure.

After a few years licking my wounds, I started my second entrepreneurial venture in early 2005.  This company focused on performing home automation and home theater installation and integration projects in the central Ohio region.  We researched new technology and located a thriving young company that was offering one of the first practical solutions for performing home automation installs in existing homes, something that was difficult prior to that time.  Twelve months and several thousand dollars later between travel, trade group membership, advertising and demo equipment, we ended up performing all of one installation in a now-defunct restaurant in Ohio State’s South Campus Gateway.

The problem with running a business like an engineer

So what went wrong with these ventures?  Despite a life-long passion for entrepreneurship, I had zero in the way of practical business experience or education at the time.  I had never held a sales or marketing position.  I’m not even a particularly outgoing person.  All of my prior jobs involved sitting at a desk 8-10 hours per day writing software and only speaking with a client in the context of providing technical support.  My education was in electrical and computer engineering.

First taking a look at the college textbook resale site, I transformed what should have been a very simple, very clean concept into an entire portal site.  We first branched into message boards.  Then we started publishing a bi-weekly comic (and not a good one at that.)  We eventually went so far as to create a movie review section.  That’s right: a movie review section on a textbook resale site.  All of a sudden, the time I should have been devoting to marketing our core concept and making the site as easy to use and powerful as it could be was devoted to creating weekly filler material for the site.  Furthermore, creating an entire portal site really blurred our core concept and made the site difficult to market.

Looking back on the home automation company, I can identify several clear problems with the concept and approach but a few stand out above the rest.  Once again I allowed the concept to blossom into an all-in-one solution rather than focusing on single product or service.  Customers were frequently confused as to whether we were selling home theaters or installing intelligent lighting systems.  I also failed to sell customers on the value of the equipment versus the technical merits of the systems.  Lastly, the equipment was expensive not only as an end user but even as a distributor.  We were required to buy demo systems and attend training sessions before even being able to market our services.

Learn from my mistakes

These days I know better but I hope I can save my fellow engineers-turned-entrepreneurs lots of money, time and frustration by offering the following tips:

1. Determine your core concept and stick to it. Until you’ve started and driven a few ventures into the ground it’s hard to appreciate the value of focus.  Engineers have a tendency to allow their relatively simple ideas to blossom from the clean and simple into an all-in-one, everything you can imagine solution.  Maybe the idea is too complex out of the gate, in which case you need to strip it down.  Either way, keep it simple.
2. Identify barriers and threats. Find out early if your concept involves a huge up-front investment, special licensing or anything that will destroy your momentum before you even manage to get off the ground.  Does your idea involve an inventory or manufacturing overhead?  You better find out before investing significant time and money.  This isn’t to say you should bail at the first sign of trouble but you should always be aware.
3. Sell based on value or return and not merits. A new wireless light switch, solid state media server or mobile gaming device may be everything you’ve ever dreamed of as an engineer but you better be able to justify why a consumer needs these things.  Will it reduce the electric bill?  Will it last three times longer?  Is it significantly more convenient to use than other solutions at no additional cost?  Why should the consumer care?

Network and socialize

I didn’t find this out until the early days of KappaStone, but a necessary part of becoming a successful entrepreneur is constant networking and socializing.  Right or not, engineers have a reputation for being socially awkward and shy.  If this applies to you, start learning to break those habits right away.  Here are some good places to get started:

• College or University Entrepreneurship Clubs. Most business colleges have established entrepreneurship clubs.  These are a great place to interact with not only business students but also fellow engineers with an entrepreneurial bent.  Perhaps more importantly you can have an opportunity to be mentored by seasoned entrepreneurs.
• Local Chamber of Commerce Events. Chamber of commerce events are wonderful networking opportunities and will allow you an opportunity to refine your elevator pitch.  Get comfortable striking up conversations with total strangers and talking about your concept.
• Business Plan Competitions. Every entrepreneur should go through a business plan competition at least once.  It is a great way to face any fears of public speaking, learn how to convey your concept in a concise manner and develop contacts with the very same people who may eventually invest in your concept.
• Social networking-organized events. A relatively recent phenomenon is the organization of regular business and entrepreneurship-focused meetings over platforms such as Meetup and Facebook.  These can be hit-and-miss but you should never pass on an opportunity to make a new contact.

Get out there and do it!

Analytical minds tend to over-think things and either never take action, or by the time they do take action they have become overwhelmed with self doubt.  This shows and is generally a deal-breaker.  Follow the tips above, polish up your social skills and get out there.  There’s no better time to start being an entrepreneur than today.

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The 9 to 9+

During the early days of KappaStone I would find myself waking up at 8:30, grabbing a quick snack and then wandering two rooms over to my workspace.  If I was feeling ambitious I would change into real clothes or sit down for a real breakfast.  Lunch time would come and go and often I wouldn’t leave my workspace except for bathroom breaks, getting water or late in the day when my wife would start yelling up the stairs to come have dinner.  Generally that was the only real break I would have during the day.

At this point I would come downstairs to eat and watch TV with Erin.  This accounted for maybe an hour worth of time off overall.  Was the day over?  Hardly.  At 8 PM I would head back upstairs and continue working until midnight.  Sometimes Erin would still be awake by the time I ended my day.  Most of the time she was long since asleep.  This went on for several months.  Fortunately I have no children or I would have been neglecting them on top of my health, my wife and my friends.

Space

The first big break that came was the decision to move the business out of the house.  We had a couple employees by this point, both of whom were working from the house, and our neighbors were suspecting us of running less than legitimate operations in our quiet residential neighborhood (no joke.)  A couple weeks of hunting on Craigslist for cheap space, cheap office furniture and cheap moving help later, we moved into our current offices on West Fifth Avenue.

Immediately the line between business and personal life was defined again.  No more documents scattered around the kitchen, the living room or the bedroom.  No more makeshift workspace setup on our coffee table from days when the heat was too much to tolerate in our spare bedroom.  No more sitting around in my flannel pajama pants all day long.  No more employees stashing food in our refrigerator or leaving their equipment setup on our kitchen table.

Having a separate, dedicated space outside of the house finally forced me to define clear operating hours and boundaries.  It forced me to have a little bit of faith in the business fending for itself outside of 9 to 5 or days when I’m too sick to go in.  Most importantly, it forced me to have a life again.

Taking that last call

One boundary issue that remained for me even after the move to a dedicated space was that of the cell phone.  During the course of time while the business operated out of my house, my cell phone was my business line.  Our 800-number was just a simple forwarding number to my personal cell phone and many of our customers also had my direct number.  I grew so accustomed to taking calls at all odd hours of the day and being accessible to my customers that business didn’t necessarily end when I left the office.

The problem really became apparent when we began servicing clients outside of the country.  All of a sudden a late call went from 7 pm to 10 pm or later.  After several years of having the same number, I had to make the tough choice of getting a separate personal cell phone number and eventually retired my business cell phone in favor of directing all business calls to dedicated VOIP lines.  Now I can read emails and listen to voicemails at my convenience and decide for myself is something is an emergency.

Remote access

To this day I maintain a remote access portal to gain access to resources on my workstation from home or on the road if absolutely necessary.  This does present a certain temptation to return to my old ways; I could so easily open a project from the house, so easily answer an email that should wait until the next morning, so easily write up a proposal at 1 AM.  Fortunately there’s just enough of an inconvenience factor to working on my laptop versus my workstation that I can resist the urge most of the time.

Nevertheless, it is nice to have the option to work remotely on snow days, days when I’m less than well or times when I just need a change of scenery.  I can choose to unpack the laptop at the house or setup for an afternoon at a coffee shop.

Remain aware

The biggest favor you can do for yourself as a new or seasoned entrepreneur is to constantly and objectively evaluate your life balance.  Sacrifices are necessary at times but you should always take note of these sacrifices and know when it’s time to take a step back and actually enjoy your life, your family and your friends.

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The Three Phases of Entrepreneurial Finance

Typical successful ventures, particularly under the guidance of inexperienced entrepreneurs, will generally go through three distinct phases of financial management:

1. Inadequate Spending. Too often first-time entrepreneurs are afraid to put adequate skin in the game, not only in terms of money but also in time and passion.  They will start their ventures without proper marketing, without the proper tools and unprepared to pull the trigger on critical investments to take that next step.  Many ventures wither and die at this phase as a direct result, or at the very least will never see any growth.
2. Reckless Spending. If a venture escapes phase 1 alive and kicking, the tendency is for an entrepreneur to get a little too comfortable with the idea of business expenses, write-offs and luxuries.  The problem is especially prevalent during times of prosperity and growth as reckless spending is hidden behind profit.  The same risk-taking spirit that drives the entrepreneur can drive a young venture into debt, particularly if there is a sudden drop in sales revenue.  It happened at the end of the dot-com bubble.  It happened at the end of 2008.  Many promising and fast-growing ventures end up vanishing after a string of credit line defaults and maxed out plastic.
3. Justified Spending. To survive the long haul, entrepreneurs and their ventures must adopt a policy of justified spending.  Carefully gauge growth and opportunities and weigh risk appropriately.  Make capital investments in assets with direct returns rather than new couches and desks for the office.  Don’t be afraid to pull the trigger on the tools you need to take you to the next level but don’t automatically upgrade all your workstation displays to 24″ flat panels.  Resist the temptation to loosen your spending habits when there are surpluses.

Change your Habits

While entrepreneurial ventures are especially susceptible to poor financial management, they have one key strength: nimbleness.  Established corporations may be able to ride out smaller financial recessions or bad decisions relatively unscathed, but they have a lot of trouble adapting to longer-term changes in the environment.  If you notice that your venture has bad spending habits (on the low or the high side), don’t be afraid to do something about it.  It’s your skin in the game, after all.

• Focus your Investment. Rather than dumping cash, time and resources into secondary revenue streams, focus on what turns a profit.  If you’re offering your clients the world on a silver platter and only one or two services or products result in take-home profit, consider consolidating or shifting your offerings.  Likewise, your cash cow a year ago might not be as profitable as it once was; perhaps there’s more competition or your clients’ spending habits have changed.
• Project a ROI for All Spending. The concept of justified spending becomes much more tangible when you start projecting a return-on-investment for all spending decisions.  It is healthy to occasionally splurge when times are good, but you better be able to realize a return on the other 90% of your spending.  Unless image is particularly critical for your industry, you can get away with used furniture and you probably don’t need that cappuccino machine.
• Control Growth. Growth is a wonderful thing as long as it is measured and controlled.  Uncontrolled expansion can bury a venture just as easily as reckless spending.  Just because sales are way up this quarter doesn’t mean the trend will continue next quarter.  It is a lot harder to shrink back down gracefully than it is to control growth in the first place.

Make the Tough Choices

Sometimes entrepreneurs can find themselves in a bad position no matter how diligent they have been about their spending or how well they have managed growth.  Competitors can spring up without warning.  Clients can change their spending habits.  Lenders can tighten credit line terms.  Any of these events can put a real dent in your revenue and profits and endanger the venture.  Can you afford to wait out the bad times?  Will revenue ever come back to prior levels?  Unfortunately times like these usually call for unpleasant actions.

• Reduce Monthly Overhead. Are you subscribed to premium-tier internet service?  Do you have monthly or quarterly membership dues in trade associations or chambers of commerce that add little to your bottom line?  Are you subsidizing any non-standard employee expenses?  Reducing or eliminating unnecessary monthly expenses is the first and least painful step in helping your venture stay afloat during tough times.
• Consolidate Space. Do you lease your office space?  Talk to your landlord about scaling back to a smaller unit or subletting portions of your space to a third party.  Chances are they would rather move you into a less costly unit versus losing you as a tenant entirely if you close your doors.
• Liquidate Non-essential Assets. Take stock of your venture’s assets.  Are there underutilized pieces of equipment (particularly ones that are financed or leased) that could be sold or transferred without severely impacting company operations?  You will probably take a net loss but this may outweigh on-going operating costs and loan or lease payments.
• Renegotiate Salaries or Reduce Staff. Sometimes you have no choice but to reduce payroll.  If the alternative is possible unemployment, you may have luck renegotiating employee salaries as a team.  This tends to work better in smaller, newer ventures versus established companies.  If that proves unsuccessful, you may be faced with layoffs.  This is still better than everyone, including you, being out of a job.

Prosper

With all of these tips in mind, don’t forget to enjoy the good times.  You didn’t choose the most risky and stressful possible career path without expecting some kind of reward.  Just remember to enjoy those rewards in moderation.

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• Quoting work for repeat customers and referrals takes us, on average, less than half the time of new customer quotes. We don’t have to sell ourselves.  We merely have to sell the job. Additionally, customers tend to be more forthcoming with information when they know you.
• Our closing rate for repeat customers and referrals is, on average, at least twice as high as other quotes. Customers will always opt for familiarity, even if the business relationship was less than perfect.
• We can focus on high-quality, interesting projects. Whenever dealing with a new customer, there’s a chance you won’t get along.  Personalities can clash.  They can have unrealistic expectations.  They might not pay you on time or at all.  Not only does your customer know you but you know and (hopefully) trust the customer.

All of this adds up to a huge reduction in costs to close a project and boosts overall margin and efficiency.  Bottom line: invest the time and effort in building a quality client base up front.

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