Greatest Hits: For Entrepreneurs

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The Legacy Of William B. Stout: William Bushnell Stout was a prodigious engineer and inventor. Aviation historians know him as the builder of the 1919 Batwing, which was the first commercial American monoplane and as the father of the Ford Trimotor airplane. The Trimotor was the first production passenger airplane designed with a metal skin instead of cloth, wire and wood. In a way, Bill Stout helped to create commercial air travel by developing a reliable commercial aircraft made with durable materials.

Automobile buffs may remember the Stout Scarab of the early 1930s. This unique vehicle is the grandfather of today's modern minivan. Bill Stout's Scarab had many futuristic features not seen in other '30s cars such as four wheel independent suspension, hidden door hinges, push button door locks, flush glass, fully enclosed wheels, no running boards, and flush aero headlights.

As an inventor and small business owner, Bill Stout offered some words that are applicable to today's entrepreneurs. Bill said, "Never resort to mathematics until you have exhausted all the possibilities of a couple of toothpicks and a piece of string." What Bill meant is you don't need to analyze a new idea to death; frequently, you can try some low budget experiments to test your idea.

If you're in the restaurant business and you want to add some ethnic food items to your menu but you're not sure if your customers are interested, you can print up a small run of special item menus and clip them to your regular menus. Then you can measure what people order and determine the popularity of these dishes. You can keep experimenting until you find a combination that works. Cactus Ya Ya, a well-known restaurant in Vancouver, specializes in Mexican and Southwestern cuisine. They also offer eclectic fare such as garlic mashed potatoes, Southern cuisine and Philadelphia cheese steaks. It works for them.

In the wholesale segment of my plastics business, we decided to try a price-cutting tactic to see if we would gain more business. We registered a fictitious name, placed a small ad in the yellow pages and put in an extra phone line with its own number. Then we placed a small ad in the yellow pages. Our slogan was "Before you buy, call us for a quote!" We were disappointed in the results of the campaign and axed it a few months later. Nevertheless, it was an economical experiment, costing less than $700, that didn't sully the name of our regular business. We moved on to more promising programs, but at least we had tried another tactic.

Mail order experts say you can't accurately test the statistical pull of a mailing list or an offer unless you mail at least 5,000 pieces. That's true, but if you send, say, 500 pieces and you get some response then, by all means, scale up and do a full-blown test. If you get absolutely no response, the market is telling you something. Shut down your direct mail program and re-think it. Is there a problem with the offer in your mailing? Or maybe you've got a bad mailing list. Think about it before you spend more money.

If you've got a new product idea, you don't need to fly all over the nation to try it out. Chances are there's someone within easy driving distance of your office who's a potential customer for your idea. Buy them lunch and solicit their opinion. They'll probably be flattered you asked and will likely provide you with valuable feedback.

Before we ever embarked on filling a production order for point-of-purchase displays in our plastics business, we made a hand-made plastic prototype to get the OK from our customer. Before we did that, we made a "quick and dirty" sample out of cardboard and masking tape, using a box knife. It only took us a few minutes but it told us whether the proportions were right, the size made sense and whether the part was stable enough so it wouldn't tip over. These were all things you couldn't tell from a two dimensional sketch. While we were using cardboard and masking tape instead of toothpicks and string, we were following the philosophy of the legendary Mr. Stout.

Bill Stout's lesson is very applicable to running your own business. Don't be afraid to experiment, especially if it doesn't cost much to do so. Don't wait and vacillate. Try something new ... now. (posted 11/18/09, permalink)

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Entrepreneurs & Money: Gregory Sullivan at Sippican Cottage has written, "The world is rather a harsh place for true entrepreneurs just now, much more so than for people that are gaming some system for money, which has become the Holy Grail of angel investors. I've learned everything in this life the hard way, and the hardest lesson to learn is to only borrow money - which includes accepting capital for a piece of the action - to expand on something that already makes money."

Here's what I learned from owning my business: you'll make the smartest decisions when it's your money at risk. You'll buy garage sale office furniture and put the money you saved into promotional activities to snag more customers so you can someday buy a better desk.

On a cold, foggy late-Fall Oregon morning in 1978, we watched as our first plastic vacuum-forming machine was delivered. It had traveled cross-country from the manufacturer in North Carolina and was our first major equipment investment. Within a month, it was generating cash, producing electronics cases. One of our earliest customers was a start-up firm, Flir Systems. This manufacturer of infared devices is now a publicly traded S&P 500 company with annual sales exceeding $1 billion.

Since it's your money, you'll quickly learn that cash flow is King. Real money now - even if you have to offer a discount to get it - is much better than pie-in-the-sky monetary promises that may never materialize. Or unpaid, past-due invoices thanks to recalcitrant, deadbeat or ungrateful customers.

Matt Blalock at 37 Signals has written, "Most of the people I know who are money-making-machines got started really early. Lemonade stands, car washes, lawn mowing, baseball card trading. I think the reason they are money-making-machines today is because they started early. They learned the skills of negotiation, pricing, selling, and market-reading early. They have more practice selling than most people. That's one of the reasons they're better at it than most people."

Makes sense to me. I had my own lawn-cutting customer route by the time I was 12. I also support the "have more practice selling" comment. When you have a really small business, you are the salesperson. You can't hire someone to do it for you; no good sales rep would ever work for your miniscule, risky firm. A sales type with any talent can easily find good-paying work at a larger, more stable business. If you can't sell, your chances of success in a small business are very low. I've seen hundreds of small businesses fail due to lack of sales, caused by the owner's inability to sell. Or his/her aversion to selling.

Scott Shane, Professor of Entrepreneurial Studies at Case Western Reserve, has noted sadly that too many small businesses "are started by unemployed or underemployed individuals who are motivated to do so partly by government incentives (e.g., government small business loans, grants, training and other encouragement) and by the relatively low opportunity costs for them of starting a small business, due to their current employment status."

Such people don't have their life savings and souls invested in their venture and have neither the motivation nor tenacity to hang on and keep trying until something works.

Every year, my business partner and I would write an annual business plan for our manufacturing company. We'd begin by writing a narrative, listing all the things we wanted to accomplish in the next 12 months. Then we'd start running the numbers, projecting income and expenses for the next year.

That gave us a reality dose - there was never enough money to meet all those goals in the narrative section. We were forced to prioritize, choosing only those affordable items which we thought would provide us with the best return. We'd then rewrite the Narrative Section to reflect our financial reality and match up with the Numbers Section of our business plan. This forced us to be smarter entrepreneurs and made our company more profitable.

Gregory Sullivan also wrote about using money to "expand on something that already makes money." That's an important point. I think our financially-forced prioritizing did that. We had so many pretty-much proven business segments to expand that we were unwilling to spend much on unpredictable dreams.

For every Bill Gates or Steve Jobs who succeeds by doing something which hasn't been done before, there are 100,000 poor souls who have tried to open the world's first combination gourmet restaurant and radiator repair shop or a beauty salon for iguanas. If your business concept is really viable, somebody else somewhere is probably already doing it and making money at it. If you can't find such people, it probably means your idea sucks.

I've seen a lot of companies that were funded by Other People's Money (venture capital, outside passive investors, etc.) that wasted money on trivia - fancy lobbies, poofy, expensive but ineffective brochures, fees paid to consultants to develop mission statements, etc.

Whenever I'd visit a start-up company which had a great-looking lobby, I'd get very nervous about doing business with them. I've seen too many companies where their scarce funds had been spent on a buffed-up waiting room - trendy paint schemes, expensive leather couches, marble accents and such - instead of spending it on product development or service infrastructure. This was a signal that the owners were making foolish financial decisions. In most cases, the company failed in a relatively short period of time.

If you're dumb enough to hire a decorator to 'do' your lobby while you're starving the rest of your company, you're probably doing a lot of other stupid things, too.

Use your own money. You'll spend it wisely. Because you have to.

PS: Here are six things you should do before you start a business. (posted 11/11/09, permalink)