Category Archives: Karen Utgoff

Searching for Product-Market Fit? Four Common Pitfalls and Ways to Avoid Them

By Karen Utgoff

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Death Valley (© Dan VanHassel. All rights reserved)

Finding product-market fit before investing in full-fledged product or venture development can save money, prevent missteps, reduce risk, and execute effectively. An effective search for product-market fit is essential to realize these benefits. This process involves identifying, testing, and adjusting key assumptions to find the right product for the right market. In my experience four common pitfalls can undermine that search and the resulting outcomes.

Overlooking key assumptions

It is all too easy to overlook key assumptions for future success and thus generally better to start with too many than to miss critical ones. If need be, separate the wheat from the chafe by asking “How would it impact our business if X is not true?” It is also important to recognize and test additional key assumptions that arise during the search process.

Designing hypotheses that aren’t testable

Many searches start with vague hypotheses, often because that is the best that can be done based on current information. As more is learned, hypotheses should quickly become more substantial and measurable. For example, “Clean drinking water is needed in disaster areas” becomes “Lack of clean drinking water causes two or more days of illness in more than 25% of the people living in disaster zones.”

Pivoting too much or not enough

It’s easy to overreact or underreact as you gain evidence to support or refute key assumptions. Pivots should happen when one or more key assumptions are invalidated based on an accumulation of evidence and insight. How much evidence is enough can be tough to gauge. Resist the urge to pivot based on a single or very few data points. Conversely, resist the urge to cling to assumptions for which there is little or no confirming information despite your best efforts.

Fooling yourself

It is easy for entrepreneurs and product champions to misread information gathered in the search for product-market fit. Thick-skinned optimists may be too mindful of how hard they have worked hard on their idea and draw strength when friends and colleagues express casual interest. They may dismiss potential customers’ difficult questions with “they just don’t get it.” Worriers and overly sensitive souls may fool themselves in the opposite direction; hearing every constructive question as a rejection. If either of these sounds familiar, consider that you may be turning a blind-eye to the very evidence that could lead you to product-market fit and future success.

Minimizing missteps

Be aware of blind spots and biases that can interfere with your seeing the situation clearly. We all have them; being mindful of these weaknesses will make you stronger.

Use a team approach to the search for product-market fit. Assemble a team with different perspectives to work together on the search. Be sure to include people with different skills and outlooks to reduce the risk of group think. Empower each team member to disagree without being disagreeable. Whether you are defining key assumptions, designing hypotheses or deciding on a pivot, consider assigning devil’s advocate duties to a team member or adviser who will ask tough questions and doubt conventional wisdom.

Don’t depend on your team or yourself to instinctively sense product-market fit. Instead, define it based on meaningful and measurable metrics in advance so that everyone on the team agrees on what success will look like and be able to recognize it if and when it happens. As you learn more through your search efforts, these indicators will change but this will be grounded in an informed business decision made after thorough discussion rather than a seat-of-the-pants change that slips through unnoticed.

 

© Copyright 2017 Karen Utgoff. All rights reserved.

Focus Early on the Value Proposition to Help Manage New Market and New Product Risks

By Karen Utgoff

Savvy small business owners and startup teams take time to develop, test, and validate assumed value proposition(s) before making a significant investment in a new market or new product. This is a cost effective way to learn whether — and how — to best pursue opportunities. Be smart. Include this step early in your new product development and/or market launch planning efforts.

Is this really necessary? The further a new market or new product is from your current business, the more value-proposition-based, hypothesis-driven approaches are likely to increase your probability of success, help avoid missteps, and minimize the cost of failure. It’s better to recognize a gap between what you think and what your market needs while you have the flexibility to improve product-market fit; if there is an incurable mismatch, it’s better to “fail fast and cheap,” especially if there would have been a big investment. Concerned that this just adds to your costs? Consider the wasted resources and employee demotivation associated with failure of a new product, especially when better alignment between product and customer needs might have led to success.

Before sinking dollars and employee time into a new market or product/service offering, develop a hypothetical value proposition. Use this as your starting assumption as you test, revise, and pivot to achieve the best possible fit between product/services, new target customers/markets and your business goals. Many believe this type of effort is just for startups but it’s very useful for any company ambitious to grow beyond familiar territory. This is different from the process Laurie Breitner describes to take advantage of the existing customer relationships and knowledge a team accumulates over time to clarify and confirm value propositions for established products in well understood markets.

Test your hypothetical value proposition to corroborate, refute, revise, and reinvent before making a big commitment. While methods for doing this aren’t foolproof, you will be amazed at what you can learn. The fundamental idea is to get feedback from customers and influencers early in the process. While this may reveal painful truths, it’s much better than discovering them after building the wrong inventory, focusing on disinterested customers, or setting prices too high or too low.

Three low-cost methods are within reach of most small businesses and new ventures. Each has its strengths. They are not mutually exclusive and are most effective when customized to apply to the particulars of each situation. In all cases, focus on learning not selling.

  • Observe potential users going about their daily routines. See how potential customers currently solve a problem and why they might value your alternative solution. These opportunities take some finesse to structure but cost little and — with the right frame of mind — can deepen your understanding of customers, improve your product, and clarify the value proposition. If you are contemplating entering a new market with an existing (or new) product, this method may work best as a next step with your interviewees (see below). If you are developing a new product for existing customers, it can build on established relationships.
  • Interview potential customers, influencers, distributors, and partners to gauge their attitudes and get their input. Your hypothetical value proposition embodies assumptions about what problems are important to potential customers and what they value in a new solution. One-on-one interviewing lets you test those assumptions and make changes to the value proposition, change the product design, and/or redefine the target market. Plan on devoting significant effort to interviews and to processing what you hear from each interviewee. These videos provide a good general guidance on planning, conducting and learning from interviews as a starting point; different situations, products, industries and customer segments require variations on this approach.
  • Test a pre-commercial (prototype) product by putting it in the hands of potential customers. Recruit a small group of thought leaders, early adopters, and (if you have them) interested customers to individually give you feedback on a prototype. There is nothing like getting an early version into customers’ hands to learn if the form factor, instructions, and performance meet their needs and it’s much better to improve the product before investing in inventory, advertising, and other expensive aspects of a product launch. Interviewing and observing this group maximizes learning — there is no survey that can follow up on interesting remarks or probe for more detail the way a skilled, well-prepared, objective, and curious interviewer can.

Who says you never get a second chance to make a first impression? All three of the above methods enable you to test your ideas, assumptions and decisions. To make the most of them and to preserve your chance for future “first” impressions, follow two rules:

  • Don’t argue with or disparage the expertise of interviewees or others with whom you engage. Be sure not to insist your assumptions are correct or preach that your product is “better.” Instead, acknowledge that you don’t have all the answers and appreciate the opportunity to learn from them. If you need to drill down for more detail, resist the urge to dissect the details in favor of asking open ended questions such as: “Why?” “How?” or “Can you tell me more?”
  • Be considerate. If interviewees are interested in spending more time with you than planned, be encouraged; but do not stay past your allotted time unless invited to do so. Be sure to thank everyone for their time and help. Ask if you may come back to clarify, ask more questions, or share future progress. An enthusiastic “yes” is a good indicator that you are on the right track.

When to begin? It is essential to begin early in the product or market definition/development process while you still have the flexibility, time, and resources to pivot. When well done, using hypothesis-based methods to craft, test, and refine an initially assumed value proposition can help to assure that product development and market development efforts are well-aligned and attuned to customers in initiatives that move forward. This increases the likelihood of success while reducing the risk that further investment will be off target.

 

 

© Copyright 2017 Karen Utgoff. All rights reserved.

When Better Isn’t Good Enough: An Entrepreneur’s Tale

By Karen Utgoff

2017-06-04 Mousetrap_patent_model_3_-_National_Museum_of_American_History_-_DSC00350

By Daderot (Own work) [CC0], via Wikimedia Commons. Exhibit in the National Museum of American History, Washington, DC, USA. Photography was permitted in the museum without restriction.

Many believe that if they build a better mousetrap customers will beat a path to their door, but it isn’t necessarily so. Inventors, small business owners, or startup teams confident that their vision of a better product, service, or technology will automatically lead to business success should balance that confidence with healthy skepticism. Testing product-market fit with potential customers, users, partners, influencers, and others could make the difference between success and failure. Consider this (made-up) cautionary tale.

Howie Ketchum, inventor and CEO of Ketchum Mousetraps, was in a somber mood after reviewing disappointing revenue numbers and similarly troubling web and mobile traffic statistics. Unique first-time visitors were plentiful and many made their way through all of the technical information detailing the advantages of his Internet-of-Things (IOT) enabled mousetrap with smartphone apps to enable monitoring from anywhere in the world. However, pitifully few signed up for more information, or even returned for a second visit let alone ordered the product.

The patented Ketchum IOT Mousetrap added an accelerometer and Wi-Fi connectivity to a traditional mousetrap. When a mouse triggered the trap the accelerometer determined its “status” and notified the owner via the IOT Mousetrap app. The company’s primary target market were home owners, who could buy traps directly from Ketchum. Companies with sensitive facilities could buy traps in bulk and monitor them with the app to provide a system that would be easily monitored by the maintenance staff. In this way, Ketchum planned to disrupt the pest control industry. Apps were available for all smartphones. In addition to notifications, apps kept statistics on all traps in use, allowed users to order new traps, and provided value-added tips on mouse control. If you find Howie Ketchum and his Internet-enabled, Wi-Fi connected mousetrap preposterous, check out this article or this one or this service.

Ketchum’s national product launch had been received with great fanfare including write-ups in top tech magazines and a national tour but did not result in sales. Efforts to improve the marketing and sales process had resulted in more visitors navigating through to the order page but nothing seemed to prompt more lookers to become buyers.

Six months later, Ketchum Mousetraps was out of money and closed for good; the 99,950 of the original 100,000 units of inventory Howie had stocked in anticipation of the product launch sold for 2% of the manufacturing cost. In his final act as CEO, Howie took down the “Build a better mousetrap and the world will beat a path to our door” banner from the reception area and left the office for the last time.

This fictional story illustrates what can happen when “better” isn’t good enough in the real world. Here are some of the (nonfiction) reasons “better” falls short:

Not “better” in the eyes of the customer:  A product or service is only better when it’s better in the eyes of enough customers to support a financially healthy business. Could Ketchum have been successful by offering a somewhat different product packages to the target customers? Or by targeting industrial customers directly? Or by concentrating exclusively on sales through established providers of pest control services? Or by aiming to be a rodent control business rather than mouse control solution?

Contrary to current practices, perceptions, or culture: When “better” involves a change in habits or violates the current culture, it raises rational and emotional objections that may have little to do with the problem the “better” solution solves. For the example of an IOT mousetrap, concerns might include users preferring not to have a phone app declaring they had a mouse problem.

Not invented here: When a customer has a homegrown solution that is already in place, there can be considerable resistance to adopting a new one, especially from a stranger. Whether this resistance is the result of ego or a more objective reason, it’s often impossible to overcome. If Ketchum had talked to  pest control companies, he might have found they already offered low-tech versions mouse control services that allowed for routine operations with well planned, efficient servicing schedules and routes rather than creating a need for immediate, unpredictable service calls as the app might have.

Not a high priority: When the problem is relatively unimportant compared to other issues and/or current situations are pretty good, users often will not take the time to seriously consider “better” offerings. In Ketchum’s situation, most potential customers may see their problem as the occasional mouse rather than a serious infestation.

Switching cost: Any additional burden — even a short term one — imposed by a new solution can easily derail consideration of a “better” product, especially for a low priority situation or where “better” does not result in a measurable financial improvement. For the cautionary case, Ketchum’s app adds a number of costs to the low-tech mousetraps, including giving up personal information, time spent on initial configuration, and the cost of buying new traps.

Switching risk: An unproven solution always carries with it the risk of disappointment. Perhaps it will not work or lead to unintended consequences that cause harm. Will an IOT mousetrap be plagued with false positives or false negatives? Will the app distract users from more important matters? What happens to pest control companies using their system if Ketchum goes out of business?

Too far ahead of its time: One of the most frustrating reasons for “better” falling short is when the improvement is too far ahead of its time. It may be that the time will be right for an IOT-enabled mousetrap when home automation systems controlled by smartphone apps become common.

Refusing to be seduced by the myth of the better mousetrap does not guarantee success but can help both established small businesses and new ventures minimize the cost of failure and live to try another way. My next post will offer thoughts on testing and validating assumed value propositions as a way to do this.

Related links:

Listen to the NPR interview with Professor Bill Hammack of the University of Illinois on “When technology bets fail” and watch his  videos on “How the Sony the Betamax lost to JVC’s VHS recorder” and on “Why the DVORAK keyboard didn’t take over the world.”

Read Nicholas Jackson’s March 28, 2011 article in The Atlantic on “Mousetraps: A Symbol of the American Entrepreneurial Experience

 

© Copyright 2017 Karen Utgoff. All rights reserved.

Want to Have Your Cake and Equity Too? Consider Non-dilutive Funding

By Karen Utgoff

2016-08-24 Non-dilutive fundingRather than taking a piece of your pie, non-dilutive funding sources offer outside funding and/or in-kind resources that let you have your cake and equity too. While it will never take the place of equity investment, secured debt, or bootstrapping, the right non-dilutive resource can be a great precursor, gap filler, supplement, or complement at critical stages. It’s easy to overlook this category of funding but it’s worth considering whether and how it can add value your new or established business.

The right non-dilutive funding at the right time can help finish a product, validate a market, prepare employees for new challenges, or otherwise advance your efforts.

Non-dilutive resources include:

  • Highly competitive grants programs for technology-driven ventures;
  • Small grants open to any business located in a specific state, city or business district;
  • Crowdfunding to build an initial customer-base complete with pre-orders;
  • Training or internship grants to strengthen the workforce;
  • Innovative foundations with grant programs open to for-profit companies with (or occasionally without) non-profit partners;
  • Accelerators, incubators, and competitions; and
  • In-kind resources that provide expertise, tools or connections that would have otherwise required funding.

Non-dilutive resources aren’t free and come with non-financial burdens similar to equity and debt financing.

  • Resources that don’t meet your needs can take your business seriously off course.
  • Non-financial obligations such as administrative, performance, recognition, audit or reporting requirements may apply.
  • Non-dilutive funding takes time and effort to find and use effectively.

Non-dilutive sources offer benefits beyond immediate support.

  • Success with competitive grants or crowdfunding can help you build the technical and business credibility necessary to secure the right investors.
  • Crowdfunding can prime the pump for future interest in your products.
  • Participation may position you for other opportunities in the future.

This post was inspired by my recent MassChallenge talk on the subject. A big thank you to the MC team for inviting me! See the slides from this talk for web links and additional ideas.

© Copyright Karen Utgoff. All rights reserved.

Keep Your Business on Track and Growing: Measure What Matters

By Laurie Breitner and Karen Utgoff

There is more to keeping your business going in the right direction than looking at standard reports from QuickBooks or other accounting tools on a regular basis. While these reports can give you numbers, determining and appropriately tracking what matters — which numbers are important, how they are derived and what else you need to watch — is an essential responsibility of the owner(s) and management team.

In assessing current operations, it’s often useful to compare today’s results with past performance — prior period (year, quarter, month, or week) or effort (job run, project, or program) depending on your industry and particulars of your business. While this isn’t always possible for newer ventures, be assured that if you are diligent, ultimately these measurements will help reveal your company’s strengths and weaknesses, opportunities and threats, as well as performance.

For example, after one year in business you can only guess how seasonal factors will affect your cash flow. However, if you keep track, with five years experience you will be confident in anticipating how seasonal ups and downs might impact your business. When you hire a second employee in a particular role, you have some idea of how long it will take them to come up to speed; by the time you make your fifth such hire, you have a much better idea of how long it should take, as well as what it takes, to be productive.

For new initiatives, measuring is tied closely to looking forward (planning) for likely and intended outcomes. What will initial success look like? What events (milestones) are critical to track progress? How much will it likely cost? Are there gaps in your capabilities or resources that need to be filled before you can realize the potential of the new initiative? How much revenue and/or profit is the project expected to add and when?

What initial operational measures should be monitored? Here’s where it’s helpful to look at assumptions you made in making predictions. Did you assume that if you opened a second location in a nearby town that your strong positive reputation would automatically give a boost to the new site? Did your plan hinge on getting speedy municipal approval for a larger parking lot at the next planning board meeting? What key assumptions do you need to track?

Add to the standard routine of just reviewing (daily, weekly, monthly, quarterly, and annual) results with the following specific approaches that are critically important to measuring what matters:

Assess profitability and the fully allocated cost of goods sold from an operational perspective: For background review pages 8 and 9 of Laurie’s Thriving: Get and keep your business on track. Also, check out Karen’s Succeeding in Small Business post on Four tips for putting your business plan to work for your small business.

Project results for new initiatives with limited or no experience: For background, read Four steps to help small business owners evaluate the financial wisdom of new business-building initiatives and Small business management and entrepreneurship: Two key ingredients for sustaining success.

For additional information read Josh Patrick’s article on Every Business Has a Special Number, or Metric. Do You Know Yours? in the NY Times’ “You’re the Boss” blog and A Winning Culture Keeps Score by John Case and Bill Fotsch in the HBR Blog Network.

Here’s how to get started: On a single page, document the (up to) five most important measures, metrics, milestones, and/or numbers that you follow (or plan to track) to gauge whether you are on the right road, moving into the fast lane, or facing an unwanted detour. Review these metrics with your management team, board of advisers, mentors, and/or appropriate professional services providers. Evaluate them regularly to make sure they remain relevant guides for growing your business. Plan to fine tune them over time as your needs and business landscape change and you learn more.

© 2015 Laurie Breitner and Karen Utgoff. All rights reserved.

Put More Value into Your Product’s Value Proposition

By Karen Utgoff

Many business owners, entrepreneurs, executives, marketers, and product managers are hard pressed to express a value proposition crisply or craft one that holds up well in the real world.

Can you? If you aren’t sure, read on.

What is a value proposition? In short, it’s the answer to why customers buy and why they buy from you. Strong value propositions reflect a deep understanding of your customers and serve to unify and align marketing — promotion, packaging, pricing, distribution, product, etc. — efforts.

Sound value propositions address customers’ operational, economic, or emotional concerns.

Operational value propositions appeal to customers who need to solve, ease, or prevent problems, that is, change the conditions under which they operate. For example, a new drug might cure a previously incurable disease, slow its progress better than existing treatments, or prevent those at risk from contracting it. When a breakthrough technology is at the core of the product, an operational value proposition typically appeals to visionaries — early adopters who are most likely to be open to and excited by the promise of a new, relatively unproven offering.

Economic value propositions resonate with customers who are cost-driven. But cost can be measured in a number of ways. Customers may seek the lowest purchase price, more predictable total cost of ownership, or some other cost-related benefit. Economic value propositions can be powerful or painful depending on how low-cost is defined and achieved. Wal-Mart achieves every day low prices through superior logistics and supply chain management forcing others to lower prices or find some other way to compete.

Emotional value propositions appeal to customers’ feelings, attitudes, ethics, and/or self-image. Designer labels command a premium price from customers who see themselves as fashionable and perhaps affluent, even as others fail to see any significant difference with a no-name version that may be from the same contract manufacturer. Products branded as “all natural” or “low fat” may draw the interest of health conscious customers even when the only change is relabeling to accentuate product attributes that were already present. Fad products such as the legendary pet rock may offer fun, frivolity, or the cool factor to customers. Clothing associated with a school, club, or team offers a sense of belonging.

Multidimensional value propositions mix operational, economic, and emotional appeals and are especially powerful. Customers buy for different reasons in response to evolving conditions, public opinion, marketplace developments, and even modes. One-dimensional value propositions can lose their relevance in the face of short-term changes and it can be very challenging to adjust without abandoning long-term focus. By recognizing the inevitability of evolving customer needs and market uncertainty, multidimensional value propositions enable leaders in product, marketing, and sales to effectively maneuver while maintaining long-term focus. In addition, such value propositions can more easily address the needs of different individuals involved in product selection and purchase decisions.

Hybrid and electric car manufacturers put forth an economic value proposition based upon their lower long-term operating costs and strong value on the used car market. In addition, they include an emotional element that aligns with owners’ self-image as environmentally responsible as well as an operational element based upon the distance that can be traveled between fill-ups. Recently, the drop in gasoline prices has devalued their economic benefits which may cause marketers to put more emphasis on emotional components of their value propositions and/or their vehicles’ potential to go further on a single tank than conventional models.

As products and markets mature, competition often intensifies pressure to focus on an economic value proposition and commoditization leads to a complete focus on lowest price. Businesses that commit to operational and/or emotional elements as part of their overall value proposition create potent tools to resist commoditization. Apple is an example of a company that uses this approach effectively in the personal computer market.

Organizations that take a nuanced approach to defining value propositions are better able to use them to maneuver in the marketplace while maintaining strategic focus for the long run and providing a benchmark for alignment of product development, pricing, marketing communication, sales and other key market/customer-related activities.

In a future post, I’ll get into some good practices for crafting multidimensional value propositions.

© Copyright 2015 Karen Utgoff. All rights reserved.

Six Misunderstandings about the Lean Startup

By Karen Utgoff

Use of Lean Startup techniques is becoming ubiquitous in entrepreneurship circles these days and rightly so. Along with the closely related Lean Launchpad methodology, this highly effective approach puts one essential success factor — fit between customers, markets, products and company — front and center for founders who might previously have defaulted to “If we build it they will come.”

In late 2012 I was privileged to serve as a mentor for a National Science Foundation Innovation Corps team and to be immersed in the Lean Launchpad method first-hand as part of that program. For more information on the team experience and methodology, visit Steve Blank’s blog; the link is in the list of resources at the bottom of this post. Recently, in preparation for a workshop I’m giving, I reread Eric Ries’ The Lean Startup and noted his observation that:

“Throughout our celebration of the success of the Lean Startup movement, a note of caution is essential. We cannot afford to have our success breed a new pseudoscience around pivots, MVPs, and the like.” (Eric Ries. The Lean Startup, p. 279)

This rang true to me and prompted me to write here about several significant misunderstandings that I’ve observed.

Misunderstanding One: Lean Launchpad methodology avoids failure. Actually the Lean Launchpad method and the Lean Startup movement focus on failing faster, at lower cost, and under controlled conditions that enable the team to learn rapidly and pivot effectively.

Misunderstanding Two: The tools and techniques are only for brand new startup ventures. Confusion on this point seems to be around the definition of a startup. I’ve written before about the need for entrepreneurial activity in established businesses and I was glad to rediscover Ries addressing the issue:

“Entrepreneurs who operate inside an established organization sometimes are called “intrapreneurs” because of the special circumstances that attend building a startup within a larger company. As I have applied Lean Startup ideas in an ever-widening variety of companies and industries, I have come to believe that intrapreneurs have much more in common with the rest of the community of entrepreneurs than most people believe.” (Eric Ries. The Lean Startup, pp. 26-27)

That said it’s important to recognize that a new external venture is different from an internal venture within a successfully operating business. Here is an interesting post by Henry Chesborough and my take on the subject as well.

Misunderstanding Three: We’re already customer focused and therefore in sync with the philosophy even if we don’t talk about minimal viable products (MVPs) and pivots. Perhaps, but it isn’t necessarily so; the key is the organization’s capacity to systematically learn. Are activities designed so that customer and market response will lead to insights? Is the team aware of leap-of-faith assumptions? Are your entrepreneurial teams truly cross-functional? Is your culture tolerant of setbacks and supportive of learning?

Misunderstanding Four: It’s about product development. This sells the methodology short. Sure, product development is one aspect but equally important is identifying receptive customer segments (customer discovery/development) and business model development. All three may be subject to change as the team learns.

Misunderstanding Five: It’s about iteration. Iteration is necessary but not sufficient. If you don’t organize and measure in a way that allows you to learn, iteration is just spinning your wheels.

Misunderstanding Six: The Lean Startup approach frees us from needing to worry about mission, vision, competition, intellectual property and so forth. Not so! Your initial hypothesis and pivots will be informed by and inform the evolution of each of these.

I hope this blog serves to clarify the Lean Startup and that it encourages you to try, and then embrace, it. It has a lot to offer ambitious entrepreneurs and intrapreneurs.

Books

  • Steve Blank and Bob Dorf, The Startup Owner’s Manual
  • Alexander Osterwalder et al, Business Model Generation (72 page preview available)
  • Eric Ries, The Lean Startup

Web Resources

© Copyright Karen Utgoff. All rights reserved.

Find Funding That Fits Your Needs

By Karen Utgoff

2014-09-01 Bags on MoneyDoes external funding appear to be an attractive approach for fueling the growth of your business? Before you leap to a particular funding option, consider four possible types — debt, equity, grants, and crowdfunding. I have written about the first three here and the last here. Each of these can come from a number of sources — for example banks, venture capitalists, or family — and, of course, you may want to mix and match.

In addition to considering which types and sources of funding are accessible given your situation, it’s important to take into account the risks associated with each. Below are some general thoughts; be sure to evaluate terms and conditions associated with each specific deal that you may be offered.

What financial risks are you willing to accept? Debt and equity — borrowing or sharing ownership — have different uses, benefits, and risks.

Banks and other commercial lenders may expect you to commit personal assets (homes, possessions and savings) in addition to company assets as collateral. If your business fails, the obligation to repay lives on. Even when businesses do well, they are often subject to unpredictable cash flows that may interfere with the ability to service debt. Using debt to purchase equipment, finance inventory, or bridge the gap between making a sale and collecting the revenue can work well unless there is concern about slow inventory turnover and/or customers stretching the time they take to pay — both common occurrences in a weakened economy or in the face of intensifying competition.

Angel and venture capital investors put their money at risk for the opportunity to financially benefit from ownership of part of your business, which they hope will significantly increase in value. Their initial investment may be in the form of convertible debt. To protect their position, investors may expect to participate in key decisions and serve on your board of directors. It’s important to understand the obligations that will result if the business fails; ideally investors will agree to take cash and remaining assets but not expect to get their original investment back. Be sure you understand when investors will want to realize a return on their investment. They may expect you to sell the company or to raise the cash to buy them out.

The risks associated with grants and crowdfunding are usually less daunting but can require some specific result such as delivery of a product, recognition of the funder, execution of a proposed project, and/or a report. Grant givers may also have specific accounting requirements or other standard terms you will need to satisfy.

What personal risks are you willing to take on? Even (or especially) when your friends and families are enthusiastic to help your business and spare you financial risks that come with borrowing from a bank or alternative lender, don’t underestimate possible damage to friendships, marriages, and parent-child relationships that could result. Whether you take a loan or offer them equity, they may have naïve and overconfident assumptions about future success.

Consider how you and they would get along if the business falls short of their expectations. Even if you were not obligated to repay in the event of a business failure, how would you feel if your parents or siblings lost their retirement funds?

Even when the business thrives, dealing with family/friend investors/lenders can become awkward. Some may want to help even when they lack the expertise to do so. Others may feel entitled to participate in operating decisions, suggest potential employees or drop in to “see how things are going.” What’s the plan to provide a return on their investment? To avoid awkwardness, or complicating future rounds of funding, clarify expectations and boundaries in advance. A sophisticated investor will welcome this too and may even take the lead on designing an arrangement that makes sense from both business and personal perspectives.

Can you mitigate the risks of and/or reduce your need for funding? While risks associated with external financing are significant, rewards can be substantial. Be sure you are ready to put the funds to work effectively and to make the most of every dollar. Will your team be prepared to make the most of the new opportunities to which the funding will be directed? Could you improve your cash flow to minimize the risk of problematic surprises? Is it possible to reduce the cash tied up in inventory? Is there a contingency plan to manage setbacks and unexpected obstacles?

Do you have evidence, or merely hope, that you will succeed? Whether the funding you seek is to purchase equipment that will increase the efficiency and profitability, to support the launch of a new product/service/location, or to provide stability over a tough period, you should do your homework. Since all forms of funding come with real costs, it’s important that you have evidence that the expected results will be worth the added burden. Will the changes you anticipate make your business stronger? Will they increase its value?

The right financing at the right time can fuel success. The above points are not intended to discourage you from seeking external funding. If they have, ask yourself why? Resolving those concerns can make for a stronger future business.

 

Related articles:

 

 

© Copyright Karen Utgoff. All rights reserved.

What Do G.M. and the V.A. Have to Do with Your Organization?

By Karen Utgoff

Public domain

Public domain

I have been keeping my eye on the disturbing news about General Motors and the U.S. Department of Veterans Affairs. Recent reports describe deep dysfunction that appears to have resulted from failing to both acknowledge and then address systemic problems — some of life-and-death significance. While both organizations are huge and complex with many layers of bureaucracy, leaders of smaller, simpler businesses or nonprofits should not assume such problems are entirely a result of size and scope. Here are some thoughts on spotting and preventing such situations in your own business:

Recognize that no one is immune. Individual weaknesses differ but we all have them. Understanding your individual (and team) susceptibilities can help you to nip a potentially alarming systemic problem in the bud rather than assuming it away as an aberration.

Watch for symptoms of trouble brewing. Most business problems are made worse by ignoring them. Be alert to early warning signs of problems in general. This will help you prevent difficulties of titanic proportions as well as smaller ones that can interfere with routine operations and performance.

Create a quality-focused, high integrity-based culture. A culture that values honesty and questioning assures employees that they will be listened to — and not punished — for calling management’s attention to potentially significant problems. A culture of “see no evil, hear no evil, speak no evil” is dangerously disrespectful of your employees and their moral compasses. If you are not sure how to characterize your culture, here is one approach you can use to get a fresh perspective on it.

Manage by walking around. The leader who regularly walks among, talks with, and listens to employees throughout the organization is more likely to learn about problems individuals on the frontlines are seeing. Don’t stop there. Follow up on the information, demonstrate that you want to know about and will act to solve problems. Then, communicate with employees about what you’re doing and why; consider publicly thanking the individual(s) who brought the issue to your attention.

Encourage individuals to do the right thing. Do job descriptions, financial incentives, and other recognition motivate employees to bring such issues into the light of day or to sweep them under the rug?

Lead by example. None of the above will make a difference if your actions don’t match your words. This is as true day-to-day as it is when a crisis hits. If your employees see you cutting corners with products or product safety, they will get the message that they can — and perhaps should — do the same.

Start now. If you are concerned that significant problems are being overlooked, start to address them now. Ask questions and show that you would rather have accurate but unsettling answers than false comfort. It will take time and effort to overcome the status quo but keep at it.

Learn from the mistakes of others. To start, check out “Top Investigator Has Blistering Criticism for V.A. Response to Whistle-Blowers” (NYTimes, June 23, 2104) and “GM Recalls: How General Motors Silenced a Whistle-Blower” (BusinessWeek, June 18, 2014). Two key takeaways:

  • Problems take time to develop. In both cases, there were multiple warning signs over many years with many missed opportunities along the way.
  • People were trying to do the right thing but couldn’t.

 

If you do all of the above will you be immune from the sorts of crises that G.M. and the V.A. are now experiencing? No (remember item one), but you will be more likely to catch and fix significant problems with a minimum of injury and expense.

 

© Copyright 2014 Karen Utgoff. All rights reserved.

About Crowdfunding: Advice from the Experts and the Experienced

By Karen Utgoff

Courtesy of Wild Rumpus New Music Collective

Courtesy of Wild Rumpus New Music Collective

Crowdfunding is a tantalizing vehicle for overcoming the funding gap for a wide variety of endeavors including arts organizations, new products/services and entire companies. The Kauffman Foundation offers two highly informative videos that give the 50,000-foot summary as well as the view from the trenches.

The first video is 90-minutes long crowdfunding primer (you won’t miss a thing if you fast forward through the first 4 minutes and 30 seconds) and includes:

  • An overview of the crowdfunding space from Jase Wilson, founder of Neighbor.ly
  • The story of their successful Kickstarter campaign from Trellie co-founders Jason Reid and Claude Aldridge
  • Data-driven insights on Kickstarter project practices from Nate Allen, founder and CEO, at the data visualization studio 4 First Names

Key takeaways:

  • The money is a bonus. The opportunity to build awareness and visibility as well as to engage with fans and/or customers is equally or more valuable.
  • Effective marketing is crucial. You need a plan to bring the crowd to your project. It will be hard work.
  • Conducting a crowdfunding campaign will take more time and work than you expect.
  • Pick the platform based on your project, needs, and target crowd.
  • Be mindful of the work that will be required and costs that will be incurred to fulfill incentives, meet obligations, and communicate with backers if your campaign is successful.

The second video on “How to Raise $1 Million in 30 Days” features Indiegogo founder Slava Rubin. He describes elements that are believed to be important in building successful crowdfunding campaigns based on Indiegogo data.

(c) Copyright Sarah Concannon. All rights reserved. Used with permission.

(c) Copyright Sarah Concannon. All rights reserved. Used with permission.

I’m very appreciative that the Kauffman Foundation has posted both of these. They shed more light than heat on crowdfunding as a potentially valuable resource for bridging the funding and awareness gaps that so many emerging businesses, arts organizations and non-profits face. As such, they are must-see material for anyone considering going the crowdfunding route on the innovation trail.

Finally, a big shout out to two of my favorite Kickstarter campaigns:

Congratulations to both on their successful campaigns.

Gap Files 2

© Copyright 2014 Karen Utgoff. All rights reserved.