Chapter 18: Adjust to Takeoff with Limited Cash

Book: Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital
Author: Dileep Rao
ISBN: 978-1-64250-199-5

Previous: Pace to Lead the Industry | Next: The Right Model for You

Chapter 18 opens with a John Kenneth Galbraith quote about forecasters: some do not know, and some do not know they do not know. Rao’s point is that since forecasts are almost always wrong, you need to stay flexible and adjust.

Flexibility over rigid plans

Forecasting is hard, especially for startups and emerging ventures. Do not bet the farm in one direction until the market proves it. Unless you are willing to lose.

Many billion-dollar entrepreneurs changed direction as their industry unfolded. In emerging industries, you cannot see all challenges and opportunities at the start.

Rao highlights three patterns:

• Test and adjust. Sam Walton tested retail growth strategies for twelve years before finding the right one. He hit his stride with big-box stores in rural America.
• Find wedge opportunities. Bill Gates licensed MS-DOS to IBM and made it the PC standard.
• Find better business models. Travis Kalanick shifted Uber from limo rental to ride-sharing and changed the taxi industry.

Predicting the future would be great. Most entrepreneurs cannot. Established corporations use historical data and trend extrapolation. When trends shift, those forecasts fail. New ventures have no history. When initial plans work, it is usually luck.

Your initial business plan should not be sacred. Rao says 99.9% of the time your forecasts will not be accurate. Industries change. Customers change. Technology changes. You need to change too.

The market will not adjust to you

Unless your product is immediately profitable, easily understood, embraced by customers, credible, one-of-a-kind, and fills an unmet need, the market will not bend to your plan. You adjust to the opportunity.

Customers have to change habits and vendors. The timing and nature of that shift is hard to predict. Most forecasts are too optimistic. Most strategies miss the mark. Stay flexible.

Glen Taylor built Taylor Corporation into a giant in wedding invitation cards by adjusting to market needs. He introduced cards based on popular movies and songs, not just religious themes. He added trendy colors from wedding dress fashion. He sped up delivery with adjusted presses and UPS shipping. The market responded.

Strategy is not a straight line

New businesses do not perform logically or predictably. Something always fails to work as expected. Bill Gates, Sam Walton, and Dick Schulze all improvised as they grew.

Earl Bakken started Medtronic to sell and service others’ medical devices. He found dominance when he developed the heart pacemaker and started the medical electronics industry.

Richard Burke at UnitedHealth treated the business plan as a starting point. After his first alliance with a medical group was profitable, he bought out his investor/partner. He frequently looked for revenue outside his primary business until the core matured. His data-processing staff found medical-transcription customers that helped meet payroll for almost a year. He stuck to his vision and built UnitedHealth.

Do not commit before your “aha”

Even in one industry, test various models. The first one may not be the best. In emerging industries, many ventures jockey for position. In established oligopolies, entry is hard unless you ride a new trend. In fragmented industries, entry is easy but getting an edge is hard. Test before committing.

Jill Blashack Strahan started with gift baskets from home, then a mall kiosk, then a storefront where she lived in the back. She experimented with creative names, themes, and designs. At the Holiday Crafter’s Tour she sold out two years running. That was her big “aha” for Tastefully Simple.

She knew what to sell. She did not know how until she read about home-party sales. She connected the dots between her products, the sales strategy, her skills, and her passion. Customers had proved demand by buying twice. Home parties let her sell direct without marketing money or distribution channels she lacked. She launched to great success.

Reality differs from expectations

When reality differs from expectations, adjust. For startups, reality is always different. Often the gap is timing. Industries do not take off when you expect.

Tom Auth at ITI grew organically in wireless security alarms when penetration was low and installation costs were high. At his next venture, Vomela, he faced a mature industry with many small, undercapitalized competitors. He bought six companies over ten years and grew Vomela from $3 million to $81 million in sales.

Change with the market

Change is constant. A strategy that got you here may not keep you there.

Dick Schulze at Best Buy had dominated the Upper Midwest with superstores. Then giants like Circuit City, Sears, and Montgomery Ward moved into his markets and copied his advertising and branded products. Schulze developed Concept II stores that looked like warehouses with boxes on the showroom floor. No pickup dock. Consumers grabbed boxes from the floor.

The biggest innovation was eliminating sales commissions. With the warehouse format, customers needed less help from high-pressure salespeople. Schulze put staff on base salary with bonuses tied to store and company performance. The format succeeded.

Listen to unhappy customers

Customers always want the highest value for the lowest cost. Adjust when technologies, competitors, and trends change their expectations.

Tim Doherty learned this the hard way. A meat-packing client worked through Thanksgiving weekend. When Doherty returned after the holiday, he found a nasty voicemail. The client fired him on the phone. Doherty made sure his offices and phones were open whenever his clients were operating.

Fail small, win big

Startups involve many assumptions. Most are wrong. The most important ones are about sales level, sales timing, and sales cost.

Lloyd Sigel at Lloyd’s BBQ had no direct competitors to benchmark against. He tested different price points and personally called key retailers to check sales rates. He tested packaging by leaving multiple label designs on the lunchroom table. Popular ones with employees became the final package. Cost effective and market based.

Conclusion

Read the future correctly and you succeed. Read it wrong and you become a footnote. Since startup projections are wrong, flexibility pays. Monitor the business and compare reality to projections.

As a military advisor said, when a map differs from the terrain, go with the terrain. Do the same with your venture.

Part IV: Conclusion begins here. The book wraps up with one final chapter on choosing the right model for your situation.