The Cheapest Way to Start a Business

There’s a concept in business known as the “opportunity cost”. For those unfamiliar let me explain quickly. The opportunity cost of something is what you are giving up in its place, the next most valuable alternative. For instance, the cost of my college education was the $100,000 I spent on tuition, but the “opportunity cost” of that education was the 4 years of income I gave up to go to school. If I could have earned $35,000 a year for 4 years, the opportunity cost was the $140,000 I could have earned over those 4 years. I can think of my college education of costing me $240,000 (the cost of tuition and the lost income for my time). Had I not gone to college I would have the $140,000 I earned working those 4 years plus the $100,000 I spent on my education during those 4 years. That means I need to earn $240,000 more because of my college education over my life to make this a wise investment.

Now let’s consider the cost of starting a business. Most of the time the only cost I see considered is the capital invested (the money we come up with out of our pockets). Just look at how many books claim to teach us how to start a business without any money? How about the number of times people use the cliché “sweat equity”. These can be misleading ideas because all the time we invest in starting a business is time we could be using elsewhere. Think of the opportunity cost of all that time!

If our business (or a new product line) earns us zero money until its up and running, and it takes us 12 months to start a business, that’s 12 months we are not earning any income from it. What happens if we can get our business going in just 6 months? The opportunity cost of taking 12 months to start a business is the income we could have earned in the last 6 months if it was up and running. If our business could earn $3000 a month, we would earn $18,000 in the last 6 months our business was operational. The opportunity cost of taking a full 12 months is $18,000!

In the example above, what happens if our entrepreneur spends 12 months learning all they need to know to start a business? They miss out on $18,000 in lost income! If they were able to take a class in business, or hire a consultant, or find a mentor already in business or some other creative way to cut that time down by 6 months, they would be financially better off and we could say their business was less expensive to start. As long as they spend less than $18,000 they would theoretically be better off.

The cheapest way to start a business is the way finds a balance between the amount of cash investment and time investment or opportunity cost.

If we are teaching the cheapest way to start a business is to take lots of your time and massive amounts of your sweat equity than we are assuming your time and the income from your future business are not worth very much at the end of the day. When calculating the investment of your time and money we need to also consider the opportunity cost.

It took me three years to research and develop a business plan for our garage. It took a further two years of being in business to figure out some big lessons. What if I had found some independent garage owners that were in a different market (so they weren’t in direct competition with me) and I offered to work at their shop on my days off for free? How much could I have learned in just 1 month from someone who was already doing what I wanted to do? It would have saved me 8 months of research and probably a year of trial and error. That month of free work would have probably been worth $10,000 or more to me in the end. What if I went and found a mentor who could teach me to write a good business plan. I could have saved 8 months of trial and error and research. Could I have purchased an existing business that would have got me up and running faster than it would taken me to start my own from scratch?

I sold cars at a dealership before opening my automotive garage, and I was pretty good at it. A year before I started my business, I transferred into the service department so that I could get some practical experience in our industry. For 6 months I learned how the dealership service department worked and made about ½ what I did selling cars. For me, the experience was far more valuable than the lost income and helped me get a head start in my own business. Once our business was up and running we made a $50,000 investment in coaching. We looked at the opportunity cost and realized that it would have cost us a lot more to find the answers ourselves than it would have cost to buy them from a coach that already knew them. Our goal was always to free ourselves from the day to day running of our business and we estimated it would have taken us 8 years to build up the company to that point. With our coaching investment, that process took just 4 years and freed us up to pursue other sources of income.

If you’re still in the early stages of starting a business, look for creative ways to shorten your learning curve. Find people already in business and borrow ideas from them. Take a class or find a mentor. Hire a coach with a proven track record or find a way to start right away with less risk. Instead of quitting your day job and going in to consulting, start with a client or two on the side and get some experience before diving all the way in. If you’re getting into an unknown industry, go work for someone else first to get some experience. The key is to find ways to lower the opportunity cost without jumping in unprepared. The cheapest way to start a business is to consider BOTH the upfront and the opportunity costs when making decisions.

Why my Cat Will Never Start a Business

My cat is pretty awesome but I’ve come to the conclusion that she will never have what it takes to start a business. I promise I’m not crazy here, just stick with me on this analogy.

Last week she decided to let herself out of our bedroom by jumping up and grabbing the handle. She’s learned she can grab door handles and pop them open but she still isn’t able to come and go as she pleases around the house. If she’s lucky, the door swings open enough that she can stick her head in and get out. Sometimes though, the door will unlatch but there will be a very tiny gap that she can’t get through. This is what happened last week. The gap was big enough for her to put her paw in and pull the door open but instead she just patted at it half-heartedly with her paws and meowed loudly in protest. She tried jumping up and grabbing the handle a few more times, paced back and forth, then finally just gave up, walked away and sat in the nearby window. This is probably why I’m more of a dog person…

As I watched this unfold I realized that my cat is capable, but she isn’t committed. She has the idea, she’s even tried a few things to get to her goal, but she isn’t willing to do what it takes to get the task completed. In the end, she’s a lot like many people I know. She’d rather just go sit in the window sill and watch the world go by than work hard to gain her freedom.

I’ve got an old college friend that I will call Mike. Mike has been talking about his idea for an invention for years now. He would mention it in passing at first but refused to give any details when I would ask him about it, like he was protecting his secret weapon for freedom. A few months ago Mike finally explained what he has been working on. He even had a working prototype but as we spoke and I asked him more questions I could tell he wasn’t “all-in” with his desire to produce and market this product. He had the idea, he got the door unlatched, but he wasn’t pushing through! Last month I came across a Kickstarter campaign from another inventor marketing the exact same product as Mike. This guy had pushed forward where Mike had not.

I’ve been in the same boat myself. When I was 12 years old I came up with an idea for something I called TabSYS. This was a system of locators (Tabs) that you could stick to remotes, key chains, cordless phones (at the time cell phones didn’t exist) and you could push a button on the base station and they would beep so you could find your keys, remotes, or anything else you’ve lost. I never got any further than the name and basic design but a few years ago I found a company called StickNFind that is basically the modern day version of what I came up with 20 years ago.

So my cat will never start a business because she lacks the perseverance to push through (see what I did there?). Mike was beat to market because he spent years dreaming about a project but wouldn’t get past the “safe” stages and take the risk of the next step. I missed out on a good product because at the age of 12, I lacked the vision, goals, and belief in myself to make it happen.

The point of all this is ideas are not enough. The best idea in the world gets you no closer to your goals unless you’re willing to push through and see it to the end. We come up with a great idea and we hold onto it like a “Get out of Jail Free” card that will rescue us from our mundane lives when in reality we’re too scared of failure or hard work to see it through. If you’re sitting on the fence what is really stopping you from the next step? Are you too afraid to ask for financial support? Do you need to find an expert to guide you to your next step? Are you too afraid of failure to step off the sidelines and try? Identify what is holding you back and find a way to overcome it!

The Best Idea for Starting a Business

I have a section of my computer’s desktop dedicated to small business. There’s a file with over 60 ideas for future articles to write. There’s another file filled with ideas on businesses I want to start in the future. There’s a folder with half-finished concepts and links to things I might find useful someday, even though I’m not sure how yet. There’s a list of books that I want to read, a list of my goals over the next year in our current businesses, links to legal issues and business plans, you get the idea.

Just when I thought I was the only one all over the place I met a woman today that is in the middle of starting three businesses and mentioned she has ideas for about 10 more. She doesn’t seem to be gaining a lot of traction in any of them because her focus is split in so many different directions. My conclusion is that most people with a sense of business acumen have no shortage of good ideas to choose from…

Where we, as small business owners run into trouble, is filtering out the good ideas from the bad ideas, and then developing the right ideas from what’s left.  

Before I started my first business I wrote over a dozen business plans and considered over 30 possible business ideas. In fact, the whole process from the day I decided to start a business to the day we opened our doors took more than 3 years of planning, research and development. The process was both very interesting and incredibly boring!

The earlier steps, taking more than 30 ideas down to a dozen, weren’t so bad really. Some were good ideas but not ones that I would be able to, or likely to put together successfully. Others were in saturated markets or declining markets and just didn’t offer enough opportunity to justify the intense effort required to start a new business. Other businesses did seem to make enough sense on the surface to warrant digging much deeper.

I considered the economics of owning several types of real estate (apartments, rental homes, and commercial properties), commercial and residential construction along with other construction related businesses, as well as several automotive based options including luxury/high performance modification, motorsports, and automotive repair. With a list of about 12 possible choices I researched the industries; the costs involved, how to acquire customers, and considered the scalability of the businesses as well as how they fit into my future goals. Through this process I found the “right idea” was in the auto repair industry and we opened our garage a little over 3 years after starting this journey.

Interestingly this process never seems to stop once the business is up and running. In the opening paragraph I mentioned a list of goals in our current business. The file actually contains a list of ideas and specific things we want to implement into the company as we grow and we use it to filter out the right ideas in the right order, and then accomplish them one at a time or in small manageable chunks.

What I have discovered through this process in the importance of finding and developing the “right ideas”. This means we need to have a clear vision of what we desire and what we want to accomplish in the big picture so that we can develop the best ideas to move us in that direction. Once we have discovered the right idea we need to develop the plan and stick to it, not letting ourselves get pulled off course by other “good ideas”. As Jim Collins says, “Good is the enemy of great!”

How does this apply in your business/life? Do you have a vision for where you want to go? Are you filtering out the “right ideas” to get you there? Remember, you only have a limited amount of resources to invest and we don’t want a “good idea”, we want the “right idea” that gets us to where we really want to be.

How to Start a Business and Survive!

Starting a business requires a lot of work, both physical and mental. I believe in the planning stages many entrepreneurs underestimate the toll a new business venture will take on them and fail to adequately prepare for that. When we hit major resistance, our lack of knowledge means we flounder and make mistakes or worse, give up. We need to have a sense of what will be in store, but how can we prepare for what we don’t know?

Entrepreneurs by definition are venturing out into new territory and new things always involve some type of learning curve. With our businesses we are creating massively complex, dynamic entities that are impossible to truly understand until we experience them in action. I realized early on into my first business that three years of planning and research, and a Bachelor’s degree in Management still hadn’t prepared me for what I would encounter. Two years in I had trouble shaking the thought that I would never have gone down this path in the first place if I know the amount of work it would have really taken.

We had seen continuous growth in our first two years and our core customers continued to let us know that our business model was exactly what they were looking for. We knew we had a successful concept if we could just keep going, however we weren’t sure that was going to be possible. Money was very tight and we were in a lot of debt. In order to stay in business and pay our vendors we were way behind on our taxes. We also had realized that our strategy of hiring employees was a miserable failure and that 3 of our 4 employees were completely bad hires. Within a month they had either quit or were fired and we had gone from 4 employees to just 1. Further complicating that was the knowledge that almost 1/3 of our customer base didn’t fit our target market and they would likely leave as we refined our business model. This was a scary prospect when you are having trouble paying your bills in the first place.

Personal stress was at an all-time high for us. Every time we had a little traction something would derail our momentum and take us a step back. A good week of profits would be followed by a week of loss, or something would happen and we would face a large unexpected expense. We would be on track to hire a new employee only to have it fall apart at the last minute. The knowledge that I could earn twice as much income working for someone else, with 90% less stress was constantly running through my mind. I went home many nights wondering when I would be smart enough to just call it quits. Two things got us through those moments in our business and allowed us to emerge years later on a much stronger footing.

One was a clear vision of why I started a business in the first place. My goal from day one was to build something for our family that would afford us financial freedom and time flexibility to enjoy our lives as we chose. My wife and I agreed that 5 years of working our butts off was well worth the lifetime of benefits owning our own business would afford. When things got really tough, I was able to cling onto that vision and remember what all the hard work and stress was leading to in the future. That gave us the strength to push through!

The other blessing in our business was the relationship with had with our coaching company. We signed up for business coaching several months before and worked with our coach to come up with a strategic plan for our business. Our coach kept us on track and we made changes little by little in our business that supported our long term goals for what we wanted the business to become. When the monotony set in and we couldn’t see any results, we stuck to our plan knowing that sooner or later, we would get to where we wanted to be. When our conventional logic said “money is tight” and we were tempted to react out of a place of fear, our logical plan kept us making smart decisions that lead us through in the end. This gave us the strategy to push through!

The reason starting a business is hard is because we don’t really know what we are getting ourselves into at the start so we inevitably walk in unprepared. We plan for the things we understand but as the saying goes, you don’t know what you don’t know. This means however difficult you can imagine it’s going to be, it will probably be much worse!

Well now that the depressing stuff is out of the way, here is some advice from someone who has walked through and emerged on the other side. These are two important things you need to start a business and survive!

Develop a strong vision for why you want to be in business in the first place. Entrepreneurs have chosen to buck the system, forgo the security of working for someone else in order to achieve something that only your own business can offer. Have a clear understanding of what that looks like for yourself and cling to it when things get difficult. I could picture how amazing it would be when I didn’t have to go to work every day to earn a pay check, what taking off for a month to travel with my family would be like. For me, those images were far more powerful than the difficulties that were facing me at that moment.

Second, work on a proven strategy for success. Develop it with a coach that has a proven track record or a non-competing company in another market. Find books written on the subject or do some online research. Starting a business is hard, but there are thousands of people who have succeeded that are no more capable than you are. Stick to your plan and chip away little by little. Modify it as needed but make sure you keep it focused on your long term goals. By the end of this process you’ll find you have the ability to handle all kinds of situations you never even knew about before you started.

Marsmallows and Soap: Why failure is a great thing!

There’s a great team exercise I heard about years ago. Take teams of 4 people and give them the following items:

  • a regular marshmallow
  • 20 pieces of uncooked spaghetti
  • 36” of string
  • 36” of scotch tape

Now give them 18 minutes to build the tallest freestanding structure they can with the marshmallow being on the very top. At the end, measure the results and award the winning team!

What happens when you give this task to different groups of people is very interesting and teaches us a lot about business principles. For starters, the group of people that consistently perform the worst are recent business school graduates! It turns out they spend the first minutes acclimating themselves to the process, figuring out who is in charge and what role everyone will play on the team. They spend a good deal of time coming up with a plan and design and then, finally start to build. Usually they find that when they go to put the marshmallow on top, CRASH!  Now they are short on time and find themselves in a panic!

One of the best performing groups turns out to be Kindergarteners. Not only do they produce some of the tallest structures, but they have the most creative designs. Tom Wujec, who has run hundreds of these challenges, says that instead of the kids trying to figure out who gets to be CEO of Spaghetti INC, they jump right in and start building prototypes. By the time our business graduates have come up with a “solid plan” our 5 year olds have been through multiple designs and have a much better understanding of what it takes to succeed. They end up building structures nearly two and a half times larger than our business graduates simply through “trial and error” and revisions of their designs.

Years ago, Unilever was developing a process for making powdered soap. Spray liquid detergent through a nozzle at high pressure and it will dry into a powder than can be boxed and sold. The design of that nozzle ends up being very critical to the process so Unilever hired experts in fluid dynamics and mathematics to design the nozzle. After lots of work and calculations they figured out the magic formula and built the perfect nozzle, only it didn’t work!

The complexity of the nozzle was so high the experts were unable to come up with a design no matter how hard they tried. What Unilever did to solve their problem was to create 10 random nozzles and test them all. They took the best one and made 10 variations on that one, tested them, and then took 10 variations of the best of those. 45 generations later they had a nozzle design that worked perfectly and no one had the slightest idea why!

Unilever created a systematic process of trial and error. It turns out top companies do this all the time. Global sales companies experiment with the colors on their websites and measure total sales to find out what colors patterns are more likely to get you to buy online. Retail stores test different layouts to see which ones increase the chances of impulse buys. Marketing companies use different advertising language in different markets and measure success rates to craft the perfect campaign. These companies don’t know why these things work, only that they do.

A lot of emphasis is put into the planning stage of a business or new project but don’t overlook the importance of trying ideas and letting them fail. Too many “entrepreneurs” never get off the ground because they can’t get out of the planning stages. What if we can find ways to start smaller, test our ideas and refine our designs? Maybe we need to jump into things even before we feel “ready” and learn some lessons along the way. They key is to actually LEARN from your failures and make adjustments that offer improvement!

Sources:
The Marshmallow Challenge – http://marshmallowchallenge.com/Welcome.html
Tim Hartman’s TED talk on the God Complex and the importance of trial and error – https://www.ted.com/talks/tim_harford