From the Ash's

For the past two weeks I have immersed myself in the entrepreneurial gatherings and seminars on MIT's campus.  In particular, I attended The Nuts and Bolts of Business Plans and Starting and Building Successful Tech Companies.  Both are great courses and very educational, comprised of a plethora of guest speakers covering entrepreneurship topics from finance to marketing to team building, and everything in between.  What follows is a multi-part series on the basics of entrepreneurship broken down by discipline.

Team

It's a common phrase - almost a cliche - in the venture capital industry that investors "would rather have a great team and a mediocre idea than a mediocre team and a great idea".  The team is the basic unit of the startup, and while people may come and go as the company develops, a competent, committed team is critical to the success of the venture.  There are a number of elements that contribute to the selection of team members, complementary skill sets, startup experience, industry experience, and common culture being but a few.

Team dynamics are one of the most common reasons startups fail.  When the going gets tough, it's critical that the founders rally the team to make it through the crisis.  Strife and dissention will occur in time of crisis, but by understanding the culture of the company, not sending mixed messages, and rallying around a common mission, good teams can pull through even the toughest of times.  Many managers report spending 90% of their time managing people issues and the rest managing everything else.  Even at MIT, known for its abundance of talented individuals, building lasting teams is a difficult endeavour.

Putting together a strong team with industry experience and a common culture is one of the greatest steps towards success that a founding entrepreneur can take.  Later in this series, I will dive into team building in greater depth and discuss many of the considerations one must make in selecting a team.

Mission

A successful startup venture has a well-defined mission statement that expresses the goal of the company and the team to the world.  This statement provides a rallying cry for the team, the company's champions and customers, and strategic partners.  For example, Google's mission statement is "to organize the world's information" and CASHFLOW Technologies', the producer of Rich Dad, Poor Dad, mission statement is to teach people to become financially independent.  These mission statements provide important guidance for the decisions of everyone involved in the company.

A mission can change over time, and often does, however the critical element is that everyone in the company, from the janitor to the CEO, knows what the mission of the company is.  For example, Bob Jones, in a recent guest lecture at MIT, said that every person in one of his past startup companies had made at least one sale - including the janitor and the receptionist.  He used customer interaction as a tool with which to bring everyone in the company closer in line with its mission statement.

Marketing

Marketing is an important part of any company's success.  A successful company must be able to generate steady, and hopefully steadily increasing, revenues, which requires developing a base of satisfied, returning customers, as well as continuing to win new customers in order to ensure the growth of the company.

A successful marketing campaign is an integrated blitz using a variety of media targeted at a specific customer to achieve a specific goal.  The message in the blitz is continued through ensuing marketing efforts to create a "drip" that reinforces the message and builds an association in customers' minds. 

Intimately knowing one's customer and achieving a specific goal are critical components to a successful marketing campaign.  An understanding of the customer and his needs comes from meeting and getting to know the customers in order to understand their "pain", or what keeps them awake at night.  The specific goal may be something like "our website will be the first place people turn to when they want to know about x" or "we will be the leading provider of office supplies to businesses with between 1 and 10 employees".

By understanding the importance of knowing one's customer and understanding the goal of the marketing campaign, one can construct a solid campaign that achieves its goal and generates returns in spades.

Sales

I have separated sales and marketing because, while related, the act of selling and the act of marketing are two different things.  Good marketing supports sales but the sale itself is still another beast.  One must intimately understand the customer before selecting the method of sales, such as direct sales, mail order, telephone, internet, or retail.  Each method suits a different type of customer, and often one might combine a few methods that work in synergy.  For example, many retailers also maintain an internet presence in order to capture sales from customers who prefer to shop from home.

Thomas Watson, founder of IBM, is famed for the phrase, "nothing happens until somebody sells something".  The phrase is simple but understanding the axiom is a must for entrepreneurs.  In its essence it serves as a reminder that the company serves customers and without the revenue generated from sales to those customers, the company cannot exist.

Cash Flow

Cash flow is the foundation of any business.  The flow of cash through a company - from its receipt as revenue to its spending as expense, investment, or dividend to shareholders - is the lifeblood of any company.  From day one of the enterprise it is important to keep diligent records of all transactions, collect revenues, pay creditors on time, and file tax returns.  Without competent accounting, the foundation of the company will fail and slowly but surely the financial stability of the business will erode.

Examples of companies that suffered from poor accounting include Enron and Worldcom - two of the biggest failures of corporate governance of the last twenty years.  These companies constituted a failure in the entire accounting system in place in the U.S., which includes an independent auditor that is supposed to check the company's books to ensure their accuracy.  These failures led to the creation of Sarbanes-Oxley, which, while only affecting companies that are public or intend to become public, is a major cost to those companies and a large impediment to their ability to competitively conduct business.

Business Systems

Business systems are the underlying systems that govern the functioning of the company and enable it to efficiently provide the goods and services it is supposed to provide.  These systems don't need to be complex - and probably shouldn't be - in order to function, but well thought out processes enable a company to beat its competition without having to cut margins.  Systems reduce the time, effort, and resources required to complete a task.  For example, Thomas Edison's mass-production approach to research and development enabled him to create the light bulb: by developing an efficient method for testing light bulb filaments, Edison was able to test over one thousand different filaments before finding one that burned long enough to be useful to consumers.

While Edison was not the first one to invent the light bulb, he was the first one to apply a system of research and development to the light bulb to improve it enough to make it ready for the consumer market.  In addition, Edison's company developed power systems which enabled him to provide the support structure for his product, something that none of his competitors could offer.  The result of Edison's genius is General Electric, one of the largest companies in the world.

Product

The product is, of course, an important part of the company.  Without a functional product that fulfills the company's value proposition, there won't be anything to sell.  However, that said, perfect is the enemy of good and one must balance the importance of developing a revenue stream with the need to work out the bugs in a product.  For example, the Blue Screen of Death used to be a very common occurence on early Microsoft Windows products, but by the release of Windows XP, these screens have become few and far between.

The early versions of Windows still fulfilled the value proposition of improved productivity.  However, over time Microsoft was able to improve the functionality of the software to reduce the amount it crashes.  In fact, Windows is a great example of the trade-offs between a revenue stream and a perfect product (even now it's not perfect).

Legal

The legal aspects to a company are very important, and are also overlooked.  There are two main categories of law that are most important for an entrepreneur to observe in the early stages of a startup: corporate formalities and intellectual property.

Corporate formalities are things like holding and documenting an annual shareholders meeting, signing contracts using your official company title, and filing annual documents with the federal and state governments that enable the entrepreneur to remain protected from the liabilities of the startup company.  These liabilities include legislative liabilities, such as prosecution for a broken bone due to a fall down a flight of stairs in the company's offices, and debt liabilities, such as loans and credit card bills.  Observing these formalities enables the legal creation of a "corporate veil" that protects the owners and managers from a lot of the risks of running a company.

Intellectual property (IP) drives the competitive advantage of the company.  Whether its the secret recipe for the Chef's Specialty, or it's the patent to a new, world-changing device, intellectual property enables its owners and creators to retain an advantage against their competition by encouraging the creation of new technologies and practices.  IP is especially important to entrepreneurs because they need the leverage granted by IP in order to compete with large companies that have a lot of money to throw into creating competing products.

Financing

There are startup costs for a new company that must be financed before it can take in any revenue.  These costs include things like incorporation fees, stationery, office space, and other costs that you need to set up the business.  This financing can come from a number of places, but usually is derived from the founders, perhaps their friends and family, and bank loans.  Additional funds must often be raised before the company can take in revenue or make a profit and these needs are usually funded through venture capital or bank loans.

There are a number of ways to finance a company and they can be very complex due to multiple strategies and multiple stages of funding.  For example, many tech companies get multiple rounds of venture capital funding based on meeting development milestones.  The exchange is that the amount of the company owned by the founders successively diminishes as the funding rounds progress.  It is important for an entrepreneur to understand various methods of funding in order to choose which one is right for his company.