Up and Running Blog

November 2010

The Real Data on Small Business Failures

by Tim Berry on November 30, 2010

Have you heard the way-too-familiar numbers on small business failures? Supposedly there’s a study somewhere that says seven out of every 10 new businesses started in the US fail within three years. I’ve seen it referred to dozens of times. But is it true? And does it matter to you?

If you’re curious about the research and business failures, do a good web search. You can start with this Google search on statistics on small business failures. You’ll see there that what we tend to take for granted isn’t necessarily so. What you won’t see there — at least I couldn’t find it — was the supposed definitive study that’s so often referred to.

The truth is that nobody knows. Because business existences and business fates have so many tax implications, statistics are distorted. Lots of businesses exist for tax reports only. Lots of businesses are born and die as statistics only, not real people with real hopes. Some businesses are doing fine but cease to exist because they were sold or absorbed, meaning there was a successful exit. Some businesses move or change their name. It’s really hard to see what really happened.

For some healthy published skepticism on these small business statistics, I recommend Mark Hendricks’ Why the Small Business Failure Rate is 90 Percent Smoke and Mirrors on BNET a couple of months ago. The title describes it pretty well, and so does Mark’s subtext as “the debunker.” Here’s an important quote:

According to well-supported studies by reputable researchers, 70 percent of new firms that have at least one employee survive for at least two years. Roughly half go on for five years. That comes from the SBA, but other studies reached similar conclusions.

And even the 30 percent failure rate after one year may overstate the real risk of starting a small business. That’s because other studies have shown that most firms that close their doors were profitable at the time. They may have closed because the owner had health concerns or decided to do something else more personally interesting. They didn’t, most of the time, go broke.

My conclusion for today is: put down that article. Step away from those statistics. The small business failure that matters is only the one that affects you. Do your homework first, Break your uncertainty down into pieces. Your business isn’t a statistic. Do people want what you’re selling? Will they pay enough to cover your costs? Will your numbers work? Is it real? Are you kidding yourself?

(Image: mac steve, Flickr cc)

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Who Says You Can’t Do It All? I Do.

by Tim Berry on November 23, 2010

On reflection, I’m glad I can’t guess which company and I assume I don’t know who the CEO was. I ‘m very impressed by Rand Fishkin’s A Cautionary Tale from the Startup World posted on his blog over the weekend. First, because the story echoes one of my top 10 planning mistakes. Second, because because you rarely run into a post-mortem analysis so roundly blaming the CEO. Third, because you can learn a lot from failure.

Rand keeps it anonymous, which is just as well; a piece like this would be really hard to do with specific names and faces. It starts with establishing a deep dive failure of an unnamed-but-real company:

Their trajectory was incredible, growing from $0-$75+ million dollars in their first 4 years and becoming a recognized brand name in the process. At its height, the company employed more than 130 people and their products reached customers in dozens of countries. But, tragically, 3 years after their apex, this firm sold for less than their annual revenue, laid off nearly the entire staff, and left common stock shareholders, my friends included, with nothing.

What happened? Obviously you should read Rand’s post. But here’s a bit of a summary.

First: doing too much.

First, my favorite factor,  is the attempt to do too much, which Rand describes with these quotes:

  • The CEO wanted to take things “to the next level” – seek another round of venture investment (though they’d recently become independently profitable) and use the money to expand into new fields and dominate not just their industry, but the entire sector. An analogy might be a company like the Netflix of 6-7 years ago moving into movie production, television programming and hardware manufacturing.
  • Expanding quickly into new sectors can be a good move, but growing too fast without the security of capital and profit from other parts of the business is a dangerous game, especially when you’re growing off the back of invested or loaned capital.

It’s an interesting paradox. Too much focus and you’re too narrow, missing opportunities, failing to see the new markets. Too little focus and you fall to pieces, doing nothing well, spending too much, and losing your identity. That – trying to do too much – qualified as Doing it All, which is #5 in my recent top 10 business planning mistakes on my main blog.

Second: not even faint praise for this CEO

Like I said, it’s good the identity is disguised, because Rand lays a whole lot of blame on the unnamed CEO, and his behavior after a co-founder left the company. For example (all direct quotes):

  • the CEO was gaining prominence in the entrepreneurial community and the media. . This prominence appeared (to my friends) to have a peculiar, adverse effect.
  • Curiously, the CEO hired an exceptionally attractive young woman to be his executive assistant, despite questionable qualifications (no familiarity with MS Office, no history in the field).
  • He bought a new, luxury sportscar that, according to another friend, “didn’t fit with the image I had of him.”
  • The CEO also began micro-managing more than he had historically. Tiny decisions like colors and layout design had to get his approval.

Do you think perhaps he didn’t like that CEO? Maybe it’s just me. He goes on to list explicitly lessons learned, several of them CEO-intensive (quoting):

  • The minute you start believing that you’re something special – that you’re the smartest, most talented guy in every room – is the minute things start to fall apart.
  • A CEO, more so than any other employee, needs to live the company’s culture. Core values are set at the top, and they flow from the top. When the CEO doesn’t live up to the expectations created for the rest of the company, everyone’s in trouble.
  • Those values you set for the company must be reflected not only in your professional life, but in your personal life, too. Don’t create a scenario where your employees can’t respect you because of poor personal choices.

And apparently this CEO made got a good sum of money out of the company while it declined. Rand said he gets credit for a successful exit, but the exit didn’t include any of the employees who had stock options. And I’ve seen second-hand some of these instances where some of the leaders make money while option holders don’t, and that’s ugly. Rand’s comment, Specifically:

If your stock or option-holding employees don’t come out positively in an exit, that exit IS NOT a success.

Third: lessons from failure

Rand offers several interesting lessons. Four of them are in my points above. He has more, too. Read the post. 

I said in my opening paragraph I was interested in Rand’s post because we don’t get enough stories of failure. I think they make good reading. For the record, I seem to have established a theme of failure stories on this blog recently. Check out Learn Business From Failure, Lessons From Defeat, and There’s no Success like Failure.

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Question and Answer time with Tim Berry

by Chelle Parmele on November 19, 2010

As promised, here are the questions asked during the “The Lies You’ve Been Told About Business Planning” webinar that we did not have time to address.


Q: Hello. We are a small manufacturing company in business for 3 years producing a few products for 2 separate companies. We are currently branding two of our own products, both entering very different markets: One for hardware store sales, another for precision rifle sales. For the hardware sales we are wondering how best to market. Try the Tommy Boy face to face, use distributors, or sell outright to a large brand manufacturer? I would like to keep control of the product; my partner is more for outright sales to a large brand manufacturer. If it is a good, useful, inexpensive addition to commonly-used tools, how do you decide? This is our first attempt for our own branded products.

Tim Berry: I’m sorry, but this is a serious question, requiring a serious answer. It depends on who you are, your strategy, your resources, strengths and weaknesses, and a lot of other considerations. No way to generalize or conjecture from the basic situation description here.

Q: What is the impact a business would make when applying for a business loan?
Tim Berry: Assuming you meant “business plan” and not just “business,” then start with realizing that regardless of what the bank has to say, you don’t want to apply for any kind of a loan without a business plan to help you evaluate what you’re using the money for, what you need it for, your returns, the risks, the interest and repayment expenses, and so on. Never borrow money without looking at projected results and risks and so on first. Aside from that, although some banks will make a loan based on collateral alone, good banks want to see your business plan because they don’t want to make a bad loan. Even if they are protected, they want the plan to make sense for you as well as for them. Relatively few banks will even review a loan application without a business plan to go with it.

Q: How do you know when you have reached the point of diminishing returns with respect to research and ferreting out data? What are indices?

Tim Berry: Yes, that’s one of those critical questions that everybody tries to answer. We’ve all seen people with analysis paralysis, and we’ve all seen people who just wing it without trying to get decent information, and neither extreme is very attractive. Somewhere in the middle there’s a judgment call on what’s enough information to guide decisions.

One thing that helps is realizing that you’re dealing with uncertainty about the future, and no amount of research and data is going to eliminate uncertainty. The past doesn’t predict the future, at least not always, and not very well. Get enough information to guard against just making a wild guess.

Some people will never have enough information. Some people will have enough information immediately, even though they have none. Be somewhere in between.

Q: When you have a great business plan for a high-end service, how do you find investors?

Tim Berry: “Service” is a bad word for investors. Although there are exceptions, services are harder to scale up to the kind of volume that gives investors reasonable hope of exits with money. Services can be great businesses for the owners, but without a good shot at a lucrative exit to liquidity, they aren’t so great for investors. Investors like products. And yes, you might have the exception to the rule. It happens.

I had some friends who took a high-end service and productized it by building installation and customization into the price, which made it into a service that looked like an expensive product, both to its customers, and to the investors. They made money with it.

Finding investors is a huge topic, book length, in fact. If you search the categories “angel investment” and “venture capital” on my timberry.bplans.com blog, and those two categories plus “startup financing” on my upandrunning.entrepreneur.com blog, you’ll get more of my input than you’ll ever want.

Q: When you sell your service, do you advertise the service you have or the perception you want your client to see?

Tim Berry: Not sure. Do you want the client to see something different than what you’re actually delivering? Would it help to understand the perception you want your client to see and then make sure you deliver that, so you get delivery and marketing messages in alignment? I don’t think I understand the question.

Q: What is your opinion of Ronstadt’s Financials?

Tim Berry: I don’t feel comfortable sharing my evaluations of products that compete with my own. When I developed Business Plan Pro back in the middle 90s, Ronstadt’s had a lot of market awareness, but I haven’t seen it in 15 years or even heard of it in 10. In the meantime, we’ve done 12 new versions of Business Plan Pro during that same timeframe. If I didn’t think Business Plan Pro were the best tool available, I wouldn’t go into the office every morning

Q: I need a bank loan for my startup business. Is it essential to have a business plan to do this?

Tim Berry: Very similar question answered above. To elaborate, while it is possible to get a bank loan without a business plan, it’s a lot harder. Banks that do that tend to be less professional, and it’s not a good idea for you either, because there should be a plan to make sure you need it, want it, can repay it, and will put it to good use. The misunderstanding, though, is that the business plan you do for the bank has to be the huge,formal, scary business plan. That’s not so. Keep it short, summarized, concise, and easier to do. Do just what you need, not the whole thing.

Q: Can you repeat the last statement?  The plan is useless, but the planning ….

Tim Berry: It’s from Dwight D. Eisenhower, former president, leader of the allied forces in the invasion of Europe that ended World War II: “The plan is useless, but planning is essential.”

Did you miss the webinar? Check the video out here!

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The Lies You've Been Told About Business Planning

by Chelle Parmele on November 19, 2010

The 3rd annual  Global Entrepreneurship Week at UnleashingIdeas.org is ending today. Palo Alto Software was pleased to participate once again in this event. As in years past, we added to the conversation about entrepreneurship by offering some one-on-one time with our President and founder, Tim Berry.

On Wednesday, Tim spent an hour going over the lies and myths that are out there about business plans and business planning. He also took some time to answer some questions from the audience. We didn’t get to all the questions asked, but Tim addressed them later in the day and we’ve posted them in a separate blog post here.

Honestly, I think he could have talked more to that subject, but an hour was all we had time for.

If you missed the event, don’t worry. We recorded it and we’re posting it here for people to re-watch or enjoy for the first time.  If you like it, tell us. We want to know if there are other topics you’re interested in hearing about.

For more information on the Global Entrepreneurship Week and Unleashingideas.org check out their website and see how you can participate.

‘Chelle Parmele
Social Media Marketing Manager

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Online Video on Lies About Business Planning

by Tim Berry on November 19, 2010

Business plans are a waste of time? Don’t bother? Nobody’s going to read it anyhow? Do you think setting goals and steps to implement them are a waste of time? What about establishing how to measure progress and performance, setting it down, and then tracking it, so you can optimize your management? Do you think focusing resources on priorities is good for business? Do you want to control your own destiny, or are you okay with just taking things as they come, and reacting?

November 14-20 was the third annual Global Entrepreneurship Week. This year, for the third year in a row, we offered a webinar, now an online video, on business planning. The theme this year is the top 10 lies about business planning.  Here’s the recording:

Some of the lies are worth a bit of scorn: Waste of time, ha! As if managing were a waste of time. Just do a pitch? More important, it gives me a chance to get into business planning for the rest of us; the plan-as-you-go business planning technique, just a bit at a time, just enough to manage your business, not a big document, but a plan.

Would you take a trip without planning it? Would the plan be a big honking document? Would it matter to you whether anybody else read it? Would having a plan mean you couldn’t change it when a flight got cancelled?

Does the term "free webinar" worry you? I promise: no selling. It’s about business planning. No product is mentioned. Yes, it’s sponsored by bplans.com (an entirely free site) and Palo Alto Software, publisher of Business Plan Pro.

(If you don’t see the video here, you can click this link for the original on Youtube.)

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How Can You Dare Start A Business?

by Tim Berry on November 18, 2010

I like this a lot: Seth Godin on How can you do it? First he quotes a question he’s received …

“It’s like, how does anyone start their own business? How is it even possible? How do they deal with the crippling fear and harsh economic realities?”

And he answers:

The people who successfully start independent businesses (franchises, I think are a different thing) do it because we have no real choice in the matter. The voice in our heads won’t shut up until we discover if we’re right, if we can do it, if we can make something happen. This is an art, our art, and to leave it bottled up is a crime.

I guess the real question is, “How can you not do it?”

To be honest, Seth’s description doesn’t exactly match my specific experience, but it’s close; and the difference doesn’t matter. It’s a thought worth sharing.

But then I also get that other nagging thought: what about the people who have that voice, and they move ahead to discover whether or not they’re right, and then they’re wrong? Who speaks for that side of reality? Not as much fun, not nearly as inspiring, but also true.

I hate to be predictable, but: don’t trust that voice all by itself. Do a business plan first. Some of those voices are wrong, or ill-advised, or over simplifying.

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People May Not See What You Show Them

by Tim Berry on November 17, 2010

I’m hoping you saw my post here yesterday, and that you took the test I gave you, and passed it. I failed the first time through. If you haven’t done that already, then maybe you should click here to go back and do that before you read the rest of this.

The point of it is what’s called “inattention blindness.”  I got it from Susan Weinschenk, Ph.D. in Psychology, who put it as number one in her fascinating list of 100 things you should know about people on her very interesting blog called What Makes Them Click. She says:

So what does this mean if you are designing a website or something on a computer screen? It means that you can’t assume that just because something is on the screen means that people see it. This is especially true when you refresh a screen and make one change on it. People may not realize they are even looking at a different screen. Remember, just because something happens in the visual field doesn’t mean that people are consciously aware of it.

I was in a large group when I went through that test from yesterday’s post, and I was fascinated by my own blindness. I was the classic case, so busy diligently counting passes that I missed a gorilla (I know, the one I linked to was a bear, but this one was a gorilla) walking right through the scene.

True story: In the early days of Palo Alto Software we had a website demo of Business Plan Pro that gave people an experience related to the interface of the software, but wasn’t a full implementation. It didn’t save the work. You couldn’t get into it without clicking through two different warnings: they said something like this is a demo only, and your work here won’t be saved, and you could not get to the demo without clicking a button to indicate that you understood your work wouldn’t be saved.

Years later, I’m still amazed at how many people clicked the right buttons but never read the words they said. And, much to our chagrin, they ended up very angry at having typed paragraphs that got lost. Of course we took the demo down, and quickly. But I still remember the lesson we learned.

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I Failed This Test. Will You?

by Tim Berry on November 16, 2010

I’m going to post more about this piece on this blog tomorrow; but first, before we go there, take this test. See how you do with it.

More on this tomorrow. And if you don’t see the video here, it’s at http://www.youtube.com/watch?v=Ahg6qcgoay4&feature=player_embedded

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drstrangelove

How I Learned to Stop Worrying and Love the Business Plan—With apologies to Stanley Kubrick

by Chelle Parmele on November 12, 2010

Tim Berry is a very smart man. I remember when I first started working at Palo Alto Software, Tim would occasionally walk through the sales department and listen to our conversations on the phone with customers and give advice here and there. I learned quickly to incorporate Tim’s advice into my everyday explanations about what our software did and how it could help people needing to create a plan for their business.

When I listen to people talk about how unimportant a business plan is, I often go back to Tim’s “root canal” theory and wonder just how many other aspects of their business they are  ignoring because it’s boring or too hard to accomplish.

Our customer care department receives a lot of calls from people asking if we have a very specific business plan. One for a pizza and beer restaurant in Colorado or a “green” car wash in Maryland or a hand-made kite store in Minnesota.

And to each one of these queries the answer is basically the same, “We don’t sell sample business plans. You need to write your own plan, not use an existing one.”

People who want the quick fix, who want us to give a pre-made, ready-to-go, fill-in-the-blank solution to their business planning are fooling themselves into thinking this running a business thing is going to be a snap.

I can get you in touch with a lot of people who would be happy to explain how hard it really is.

But here’s the thing. I also hear from entrepreneurs everywhere about how thankful they were that they delved into their business and learned as much about it as possible. How they were better prepared for the challenges ahead than if they’d just opened up shop without a clear strategy in place beforehand.

I actually once read a competition business plan entry where the final summary contained the statement: “We’ve realized during the course of writing this business plan that this isn’t actually a good business to start. Good thing we figured this out before we spent serious money.”

So when you’re tempted to go the easy route, to skip the review of your sales forecasting, or disregard your cash flow because you know you “have money in the bank and that’s the same thing”… stop and think of your sore tooth.

And how it’s better to have a little bit of pain now to save you from a LOT of pain down the road.

‘Chelle Parmele
Social Media Marketing Manager

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3 Worries on Social Media and Business …

by Tim Berry on November 12, 2010

I keep running into people who insist that every business, every business owner, every manager, every job seeker and everybody else should be developing his or her web presence. You should have a blog. You have to be on Facebook. You have to be on Twitter. You know what I mean.

Yes, I agree that reputation is important, and that the online world provides a wonderful opportunity to share and validate expertise and build a reputation. I’ve known some and read about many businesses that do very well in online reputation and social media. What worries me, though, are the half truths and lies that so often come with the advice. So, with that in mind, here’s my reality check:

  1. I worry about people underestimating the time and effort it takes to do it well. It’s not a part-time or occasional kind of an activity. You dedicate time to it, or it doesn’t work. And few people really out there running a small business have that kind of time left over.
  2. As you start planning, start with a good estimate of resources. And if you have no idea, I’d start by saying that the absolute minimum time budget for managing a small company’s social media face is half time.
  3. I think that if you’re going to do it today or in the near future, you should try to lever off of existing opportunities, like Facebook, Twitter and LinkedIn, rather than build something new. I’m sure there are still some opportunities for new community sites. There always are. But develop your presence around existing sites first. It’s a lot easier, and a lot more likely to succeed. It takes critical mass to make a social site, aka community, work.

And here’s a final thought: Do you think that online reputation, alias social media, is one of those things you have to either do well or not at all? Don’t throw your reputation into dabbling in social media. And do you think that thought applies to business and professionals, as a business thought, and not to your personal online self, alias (ugh) personal branding? I’m just asking; I don’t know.

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