Desirable Business/Revenue Model Metrics

We will emphasize time and again that happiness is a positive cash flow! Many small businesses use a checkbook mentality and forget to examine and reexamine the free cash flow characteristic of their business. What were the compelling reasons you first launched your venture? How has the world and your business changed since then? Is the oppor­tunity as exciting as it used to be? How can you shape your business to react to the current status of the opportunity to make it more exciting (read "more exciting" as "increasing cash flow")?

The Role of Ideas

Ideas as Tools

It is worth emphasizing again that a good idea is nothing more than a tool in the hands of an entrepreneur. Finding a good idea is the first step in the task of converting an entrepreneur's creativity into an opportunity.

The importance of the idea is most often overrated, usually at the expense of underemphasizing the need for products or services, or both, which can be sold in enough quantity to real customers. Most small business owners realize this and have real-time market intelligence that gives them a competitive advantage. But they sometimes lack the per­spective on how their knowledge of the products and services translates into scale. We'll talk about that later.

Further, the new business that simply bursts from a flash of brilliance is rare. What is usually necessary is a series of trial-and-error iterations, or repetitions, before a crude and promising product or service fits with what the customer is really willing to pay for. If you have experienced this as a small business owner it's perfectly normal and tends to strengthen your mettle. Consider these examples:

• When 3M chemist Spence Silver invented a new adhesive that would not dry or permanently bond to things, he had no idea what to do with it. It wasn't until another 3M chemist named Arthur Fry needed a bookmark for his choir book that the idea for applying the glue to small pieces of paper was tried, and Post-it Notes were born.5

• Michael Healy founded PC Build in 1993 as a computer "kit" company for the do-it-yourselfer and computer camp industry. By 2003 the company had become Technology Enterprise Network Corporation (TENCorp), the largest computer network installer for public schools in New England.6

• William Steere, CEO of Pfizer, described the discovery of Viagra, the fastest-selling drug in history, as having "a certain serendipity" behind it. The drug was originally developed by Pfizer to treat angina—its real "potency" was discovered as a side effect.7

The Great Mousetrap Fallacy

Perhaps no one did a greater disservice to generations of would-be entrepreneurs than Ralph Waldo Emerson in his oft-quoted line: "If a man can make a better mousetrap than his neighbor, though he builds his house in the woods the world will make a beaten path to his door."

What can be called the great mousetrap fallacy was thus spawned. Indeed, it is often assumed that success is possible if an entrepreneur can just come up with a new idea. In today's changing world, if the idea has anything to do with technology, success is certain—or so it would seem.

The truth of the matter is that ideas are inert and, for all practical purposes, worthless. Further, the flow of ideas is really quite phenom­enal. Venture capital investors during the investing boom of the late 1990s, for instance, received as many as two hundred proposals and business plans each month. Only 2 or 3 percent of these actually received financing.

Yet the fallacy persists despite the lessons of practical experience noted long ago in O. B. Winters's insightful reply to Emerson: "The manufacturer who waits for the world to beat a path to his door is a great optimist. But the manufacturer who shows this 'mousetrap' to the world keeps the smoke coming out his chimney."

The great mousetrap fallacy traps many small-business people. They have a great idea and what seems like a sound business model. Often scale and growth is a channel problem that needs sophisticated attention.

Contributors to the Fallacy

One cannot blame it all on Ralph Waldo Emerson. There are several reasons for the perpetuation of the fallacy. One is the portrayal in over­simplified accounts of the ease and genius with which such ventures as Intel, Microsoft, and eBay made their founders wealthy. Unfortunately, these exceptions do not provide a useful rule to guide small business owners.

Another is that inventors seem particularly prone to mousetrap myopia. Perhaps, like Emerson, they are substantially sheltered in view­point and experience from the tough, competitive realities of the busi­ness world. Consequently, they may underestimate, if not seriously downgrade, the importance of what it takes to make a successful small business grow. Frankly, inventing and brainstorming may be a lot more fun than the careful diligent observation, investigation, and nurturing of customers that are often required to sell a product or service. Con­tributing also to the great mousetrap fallacy is the tremendous psycho­logical ownership attached to an invention or, after, to a new product. This is different from an attachment to a business. While an intense level of psychological ownership and involvement is certainly a prereq­uisite for creating a new business, the fatal flaw in attachment to an invention or product is the narrowness of its focus. The focal point needs to be the building of the business, rather than just one aspect of the idea.

Another source of mousetrap fallacy myopia lies in a technical and scientific orientation—that is, a desire to do it better. A good illustra­tion of this is the experience of a Canadian entrepreneur who founded, with his brother, a company to manufacture truck seats. The entrepre­neur's brother had developed a new seat for trucks that was a definite improvement over other seats. The entrepreneur knew he could prof­itably sell the seat his brother had designed, and they did so. When they needed more manufacturing capacity, the designer was more interested in making further improvements rather than manufacturing more of the first seat. The first brother stated: "If I had listened to him, we prob­ably would be a small custom shop today, or out of business. Instead, we concentrated on making seats that would sell at a profit, rather than just making a better and better seat. Our company has several million dollars of sales today and is profitable."

Related to "doing it better" is the idea of doing it first. It should be noted that having the best idea first is by no means a guarantee of suc­cess. Just ask the creators of the first spreadsheet software, VisiCalc, what being first did for them: sometimes the first ones merely prove to the competition that a market exists to be snared. Therefore, unless hav­ing the best idea also includes the capacity to preempt other competi­tors by capturing a significant share of the market or by erecting insurmountable barriers to entry, first does not necessarily mean most viable. Mark Twain once said, "The best swordsman in the world does not need to fear the second best swordsman in the world, but rather the man ignorant of swords but knowledgeable about gun powder."

Pattern Recognition

The Experience Factor: The Competitive Weapon You Shouldn't Keep Secret

Since ideas are building tools, one cannot build a successful business without them, as one could not build a house without a hammer. In this regard, using your experience is vital in evaluating ideas and growing your business. Those with experience have been there before, know where a lot of landmines are, and can better map the route to a suc­cessful future. The problem is that some small business entrepreneurs don't leverage their experience. Others do.

Time after time we've identified experienced entrepreneurs who exhibit an ability to recognize quickly a pattern—and an opportunity— while it is still taking shape. The late Herbert Simon, Nobel laureate and Richard King Mellon University Professor of Computer Science and Psychology at Carnegie-Mellon University, wrote extensively about pattern recognition. He described a creative process that is not simply logical, linear, and additive but intuitive and inductive as well. It involves the creative linking, or cross-association, of two or more in-depth "chunks" of experience, know-how, and contacts.8 Simon contended that it takes ten years or more for people to accumulate what he called the "50,000 chunks" of experience that enable them to be highly cre­ative and recognize patterns—familiar circumstances that can be trans­lated from one place to another. We have found that growing a company continually adds "chunks of knowledge" on top of these 50,000 to shape the opportunity.

Thus, the process of sorting through ideas and recognizing a pattern can also be compared to the process of fitting pieces into a three-dimensional jigsaw puzzle. It is impossible to assemble such a puzzle by looking at it as a whole unit. Rather, one needs to see the relationships between the pieces, and be able to fit together some that are seemingly unrelated before the whole is visible.

Consider the following examples of the common thread of pattern recognition and creating new businesses by linking knowledge in one field or marketplace with quite different technical, business, or market know-how:

In 1973, Thomas Sternberg worked for Star Market in Boston where he became known for launching the first line of low-priced generic foods. Twelve years later he applied the same low-cost, large volume supermarket business model to office supplies. The result was Staples, the first office superstore and today a multibillion-dollar company.9

During travel throughout Europe, the eventual founders of Crate & Barrel frequently saw stylish and innovative products for the kitchen and home that were not available in the United States. When they returned home, they established Crate & Barrel to offer these prod­ucts for which market research had, in a sense, already been done. In Crate & Barrel, the knowledge of consumer buying habits in one geographical region, Europe, was transferred successfully to another, the United States.

More thematic eBooks are located at : capital management