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Thinking Like An Entrepreneur


Thinking Like An Entrepreneur
Table of Contents


Chapter 3
Men Are Cheaper Than Guns


Chapter 4
Intellectual Capital And Bootstrapping


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"Men Are Cheaper Than Guns"

"Men Are Cheaper Than Guns"
Chapter 3 excerpt from

Thinking Like An Entrepreneur

  I often hear two interesting comments. Both demonstrate a misunderstanding of the role of knowledge and intellect in business, more specifically, the needed knowledge and intellect of the lead entrepreneur in a start-up company.

  The first comment is usually said by relatively bright individuals, or, at least, individuals who feel they are relatively bright! It is something akin to, "Iím smarter than Michael Dell (or Bill Gates or pick your successful entrepreneur), so Iíll be able to build a more successful company than Dell."

  In many cases, these individuals are highly talented in a difficult computer programming language like C++ or Java. Nevertheless, their companies often never really get off the ground, and they go back to computer consulting. Yes, they make a good deal of money consultingómeasured in the low hundreds of thousandsóbut they donít achieve their dream of the multimillion-dollar company. Why is this?

  The answer is simple. How talented you are as a programmer will not determine how successful you will be in building an informational services company that grows to significant worth. In particular, to grow requires doing more. Writing more code. Creating more software. This is especially true in the specialized solutions provider category. By this, I mean companies that are hired by other companies to create specialized custom-written software. What these companies produce is computer programming code. One person, no matter how good a programmer, can only do so much. There are only so many hours in a day, and you can only spend so many of those hours doing any given thing, including programming. This sounds simple, I know. But, many miss the point.

  What is worse, once a business is started, the founder instantly finds that there is a whole slew of other company-related demands that take timeóadministration, sales, and marketing, for exampleówhich donít even involve creating the product to be sold, computer code in our example. So, our ace programmer is left with, maybe, 1,000 hours a year of a 2,000-hour work year in which he can write code. This is a significant limit to the amount of product that can be created by only one person.

  This brings me to the second comment I hear even more frequently. It goes something like this, "I canít possibly start a business. I simply donít know enough." Sometimes, this is true. But, often, the comment comes from someone who has years of experience in a field. A good question for such a person to ask himself is: "When will I know enough?" Then ask, "What more must I learn before I am ready?" Occasionally, there will be a few definite, concrete things you must learn to function in a given industry. Some generalized business study is very useful. By all means go and learn it.

  But what happens most often is the person begins making an all-skills-encompassing list that would take a lifetime or more to master. You think, "How can anyone build a successful company? I will never know enough! All those company founders who created hundred million dollar and billion dollar companies must be geniuses to know so much." SECRET INSIGHT: This is just not so. Many of the founders of even billion dollar companies are not really any brighter than you are. Many of them believe they are brighter! But itís a case of the tail wagging the dog. Most people who build hugely successful companies are quite understandably highly confident and, in time, will start to believe that it is their inherent intelligence that was instrumental to their success. More on this later. The primary question is: How did they build a company that has such vast intellectual capabilities?

  Letís take a simple example of a guy who wants to start a multimedia production company. By this, I mean a company that produces interactive CD-ROMs, maybe, Internet web pages, and, maybe, computer-based training for other companies. If you are not familiar with these areas, donít worry about it. It is not necessary to know exactly what this terminology means in order to fully understand this example. Letís say our entrepreneur is named Henry. Henry does know what the above terminology means. In fact, he also knows just what software can be used to create the above content.

  Henry makes a list of "What I Need To Learn." The list includes Java, JavaScript, C, C++, Director, PhotoShop, Premier, Authorware and Sound Edit. He thinks, "OK, I need to be a good programmer. I need good artistic skills. Iíd better be able to communicate clearly in writing. Iíd better know something about sound and video editing. Some 3D modeling could come in useful. I should probably also know a bit about music scoring, and I will probably need to use some video within the CD-ROMs and computer-based training (CBT), so Iíd better learn basic videography, also."

  Poor old Henry has a big job ahead! But, he persists. He learns it! And, he creates his first complete multimedia piece. And, it sucks! Bummer. Well, Henry was a good programmer, better than most. But his artistic skills sucked, and it showed in his creation. His video was better than he initially expected, but it wasnít really that good, either. Henry simply could not do it all. No matter how hard he tried, he was just not mastering all of the areas he needed. He thought about going back to work for someone else. After all, that seemed so much easier!

  My advice to Henry is to take a break. Heís earned it. Go watch a movie. In fact, make it The Magnificent Seven with Yul Brynner. Itís a great story. This little Mexican town is being pestered by bandits who take what little crops the town can produce. Further, the bandits are just downright rude when they visit. So, the little town collects what little money it has, presumably hidden from the bandits, and it goes to another slightly larger town to buy guns, so that the little town can defend itself. In their search for weaponry, the town representatives meet up with Yul Brynner, who, they hope, might be able to sell them guns. After all, Yul is a pretty tough-looking guy. They go to Yul, and ask him, "Will you help us buy guns?" Yul listens to them, and he responds, "Why buy guns? Why not buy men? Men are cheaper than guns."

  Never forget that line. If Henry really understands this line, he wonít look at things the same way. If Henry wanted to be a consultant and "do it all" himself, then, his list of learning topics would be valid. But, why spend any time trying to master PhotoShop, a graphic arts program, when you are not an artist to begin with? You can find people to hire who are artists and who know it. If you canít justify hiring someone full-time, maybe, you could hire someone part-time. Maybe, you could scout the local technical colleges to see if any students would be interested in an internship. They gain experience and a reasonable entry-level wage, and you get a chance to evaluate their skills. Maybe, you already know someone with the skills you seek. Keep your eyes open and build contacts. Make lists of people who have skills that might be useful to the type of company you want to build.

  Even if Henry learns PhotoShop well, does it really matter? Not if he is interested in growing his company. He can only do so much. Beyond some point, he will need to delegate, even if he is a master of the area under question. When you seek to hire others, you should always look for people who far exceed you in a given area that is important to your company. Even if you arenít putting people on staff, be sure to build contacts with these people, anyway, in case you ever need help.

  I recall reading that, on average, any given person in the world is at most seven steps away from any other person in the world (no, this isnít one of those Stephen Covey things). This means that they know someone who knows someone who knows someoneÖ four steps laterÖwho knows the person. You just need to find the chain! Of course, this will depend upon how many people you know. The more contacts you have, the better. But, who cares about contacting a given person? The fact is that any person is usually only one of many people who can help you. If you need a top-notch person in, say, C++ computer programming, there are many great candidates. If you need a great salesperson, there are many of those also. You just need to be able to identify them. This means your chain of seven people is drastically reduced. Within one or two contacts, you should be able to find someone who suits your needs.

  You, as the founder of your business, identify the skills crucial to your companyís growth. To an extent, you can choose what skills are crucial by varying the type of business you form. If you start a company to write custom software for larger companies, then, yes, software programming is a crucial skill within your business. But, letís say, instead, that you start a matchmaking service (fixing up people with romantic interests, rather than making the matches that burn when struck). Is programming a crucial skill? The answer is: "I donít know enough about the business to tell you for sure, but my guess is no." If you have a dating service, using computer matching of individuals, maybe programming is a crucial skill (after all, itís the computer pairing the people up!), but, if you have a more personal service, matching people based upon personal interviews with someone on your staff, then, I would say the crucial skill is the ability to communicate with and understand your clients. Itís more of a personal psychology skill. I will say more about choosing a business suited to the skills you want to see utilized within your company in the chapter on personality and business choice, but I want to reemphasize that you must identify the skills.

  You cannot just say, "I want to start such-and-such-a-type of company, and I want these skills to be the ones used by my employeesÖ" It doesnít work that way. To an extent, the industry you are in and the type of "work" your company does will determine these skills. If you believe one set of skills is required, when in reality an entirely different set of skills is required, you will run into problems.

  In the ideal case, you will know someone you trust who has successfully built a company similar to the one you contemplate, a mentor, to help you understand what skills are most needed. The best mentor is someone who has not only built a company similar to yours, but who has also grown sick and tired of the industry and has sold his company. This person will not view you as competition. Be aware that not everyone will be interested in helping you or becoming part of your network of resources. Thatís OK. Just move on and seek other contacts. Despite hiring employees, and even if you have a good mentor, you will need to be the one to pass judgement on any business issues that significantly affect your company. You can never delegate that responsibility.

  If your company grows larger, a good Board of Directors, consisting of people knowledgeable in the industry, can be a very valuable resource. You want people who can contribute to your organization. Many people want to hire people like themselves. Some business people hire people who, they feel, are "subordinate" to their own abilities. They want to hire people less talented than they are. Maybe, they have a fear of being outdone, of not looking as good as the employee. This is a good way to sabotage your company. Whenever you make a new hire, ask yourself, "What does this person bring to the company? In what area is this person superior to the people currently on staff?" You should hire people better than you.

  Diversity of ability and skills is a huge benefit of having employees. But, how should you go about hiring? When you start out, there really is no need to post positions in newspaper employment sections and similar places. Donít you already have enough suitable candidates among the people you are currently networked with? This is a big advantage of a small company. As your company grows, you will need to post jobs or make them commonly available, rather than just recruit from you current contacts. That is a difficult area. When and if you reach this size, hire people adept at making good hiring decisions. A good recruiter may be your most valuable employee, especially if your employees have significant contact with your customers or clients.

  Most experienced Human Resources (HR) people tend to be very conservative in terms of whom they will hire. They are aware of the potentially huge cost to the company of making a bad hire. They are especially aware of how the bad hire will reflect upon the judgement of the person doing the hiring! This is a simple example of risk and reward. If the HR person takes a chance and hires a questionable candidate, and the candidate becomes a great employee, there is little benefit to the HR person. It is the hired person who will get all the accolades! But, if the questionable candidate doesnít work out, then everyone, including the HR personís boss, will say, "What were you thinking, hiring this guy? He obviously was a bad hire." As a rule, people donít make decisions that can only lead to little benefit for them, but that could lead to considerable downside risk for them.

  This hiring mentality is exactly what you need in many industries. If you are hiring people to work in a warehouse, there is little benefit to not weeding out people who might be a problem. The HR people look for a reason not to hire the person. If they find one, that person wonít get the job. The chances that the person not hired would have been a stellar employee means little. The difference between a great worker and the average worker is not really that large. So, why take any chance hiring questionable candidates?

  In growing technology companies, this overly conservative approach of HR people can sometimes be a problem. Here, the difference between the most productive employee and the average employee can be huge. And, many of the best hires are a bit unique.

  When I wonder about a given companyís ability to grow through hiring, I am now asking myself, "If good Will Hunting applied for a job with this company, would he get it?" For those of you who donít know who Will Hunting is, you need to relax a bit more. Go rent a video called Good Will Hunting. In many cases, the company would pass on Will. Lack of experience, a dubious history, etcÖwould knock him out of the running for a job. Now, true geniuses are rare, but I know of cases where multiple companies passed upon hiring questionable candidates and the individuals went on to work for other companies and, instantly, became the companiesí best programmers. One person, making $40,000 per year, outdid five experienced programmers, each making $100,000 annually. Was it a risky hire? Maybe. Was it a good hire? Definitely. The personís pay went up considerably, but the person was still a bargain.

  Despite all I said about the value of growth via new employees, some of you might say, "Gosh, I just donít want the hassle of having employees. Iíd rather go it alone." Thatís OK, of course. Iíll say more about it in another chapter. But, what I said about developing a network to rely upon still applies. If you are too cut off, you will have trouble.

  There are some crucial skills you should acquire before starting any business, areas with which you must at least feel somewhat comfortable. First, there is the area of human interaction. You must be comfortable speaking with other people. Enjoying it is best of all. Selling, in one form or another, is really an entrepreneurís best skill. Letís take the case of a company that will do computer consulting. It will send out programmers to help companies write code to manage their business better. The real key to this business is not the programming ability of the lead entrepreneur. In fact, several individuals with relatively few programming skills and little programming knowledge have built such companies. The real key is twofold.

  One, you must find client companies to buy your product. This involves selling. Promotion. Maybe, taking a demo around to companies to show what you can do for them. There was a regular renaissance in this specialized-solutions-computer-consulting-programming field when Visual Basic appeared. Visual Basic made it fast and easy to create simple application programs for businesses. Many people, who were not programmers, saw how quickly a consultant could write code useful to their company. One day a consultant was at their company. The next day, there was a simple prototype of the application program that the company desired. The person assigned to work with the consultant thought to himself, "Hey, our competitors would really like this program. In fact, it would be easy to sell it to them. And, we have lots of competitors." Often the company employee who saw this teamed up with the consultant to build a custom-solutions-programming company serving a specific industry. Some of these companies have grown to have market values in the hundreds of millions of dollars, while other such companies were sold along the way, leaving the founding entrepreneur rich. In most cases, the lead entrepreneur was not even a programmer.

  As demand grew and it was clear the company could sell even more slightly-modified versions of the same solution (application program), often, the computer programmer could no longer keep up. What happened was natural. And, it brings us to the second key in building such a company. That is hiring enough programmers to write the code. This is certainly not a technical skill. You donít need one iota of programming ability in your blood to seek out and hire programmers. Itís more of a human resources job. So, you see, itís very possible for a nontechnical person to build a technical company.

  Incidentally, as long as we are discussing this example of a custom-solutions provider, I should point out that such a company can grow from start-up to millions or tens of millions or even hundreds of millions of dollars in worth very quickly. All it really needs to grow is: 1) selling its product; and 2) hiring programmers to create the product. These are the only two things that can limit the growth rate of such a company. If you can add new clients and if you can produce what the clients want, you can expand quickly, incredibly fast, in fact. This is a great business model. You sell a high-end service; you hire people to perform the service; and you collect a good chunk of the payment for the service as the service is rendered or soon after. As you go, you gain experience and reputation which strengthen your company.

  Most people are used to thinking in terms of manufacturing companies, which have a significant investment in plant and equipment. To produce widgets, you need widget-making machines. And, they cost a lot, $500,000 apiece, in fact. Each machine can only make 10,000 widgets a year. Not that the machines are unionized or anything, but they can only work so fast. You have one machine, and you are selling 9,900 units a year. Next year, you think you can sell 12,000 units. Well, gosh, you need another widget machine. And, maybe, a machine needs its own building. That means you need another building. Now, if the company is making $400,000 a year selling the 9,900 widgets, then, obviously, you canít internally fund the new machine from current one-year earnings. You could seek financing, but that means that the bank from which you borrow has a say in your growth. There wonít be any growth, if they donít lend you the money!

  Maybe, the overall economy is bad, and the bank wonít lend you the money for the new machine. If you are a start-up company to begin with, your chances of getting bank financing are slim. And, even if you got it, you would probably pay a high interest rate. You donít want that. Because the expansion of the industrial company must involve significant capital investments and the growth in added capacity often must exceed the immediately recognizable sales increase, industrial companies have capital barriers to growth which information-based companies do not. Similarly, service companies, such as a dating service firm or a money management firm, are not really capital intensive. They tend to be "people businesses," where the most valuable company asset, next to reputation, consists of the employees and what they can do.

  Because of the large number of businesses that can be started today that are not capital intensive, it really is the age of the entrepreneur. Itís not like I imagine it was in the early 1900ís when capital was the essential ingredient favoring the already rich in building new businesses. I will discuss this in the next chapter.

  One final skill every entrepreneur must know is basic accounting and simple, financial decision making. You must know how to use numbers to not only track how much you are making, but also as input to evaluate possible directions you might take your company. Is Product A or Product B a better product for us at present? Questions like this crop up in every business, no matter what the industry. A few college classes in accounting or some self-study is really essential for all entrepreneurs who wish to attain a reasonably high level of success. Some things just canít be delegated. You must achieve a relative comfort with numerical decision making. This is not at all difficult, but it is essential. The rest of this book will take you far in that direction.

Copyright ã 1999 Peter Hupalo


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