Get Backed, Get Big, Get Bought E-Book

Colin Barrow

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 337

Veröffentlichungsjahr: 2009

Beschreibung

"Bebo sale to AOL nets founders a £290m fortune in 3 years." - March 2008 "Foxtons sale nets founder £370m." - May 2007 "L'Oréal buys Body Shop for £652m." - March 2006 For entrepreneurs and business owners alike, this is your ticket to serious money. Fact 1: Business is all about making money. Fact 2: Personal satisfaction is great, but it doesn't pay the bills. If your main ambition is to make big money from your business, you're already on the right track. Over 4 million people start up businesses in the UK each y ear but only 1% become millionaires. Start with the end in mind and you could be one of them. Colin Barrow, bestselling start-up author and business investment specialist, shows you how to shape up for a sale right from the world go: Get Backed - secure big investment Get Big - create real value and strong growth Get Bought - dress the business and negotiate a killer deal With practical advice, tools and stories from those who have done it, you'll find out how to guide your start-up business towards the payday of your dreams.

Leseprobe

Table of Contents

Title Page

Copyright Page

Introduction

AIM HIGH

GET BACKED

Chapter 1 - Problems over passion - the real characteristics of winning ...

WHAT MAKES AN ENTREPRENEUR?

THE BUILDING BLOCKS OF SUCCESS

THE MAGIC FORMULA

IDENTIFYING A PROBLEM

SCALE AND THE NEED FOR FINANCE

WHY MONEY MATTERS

KEEPING THE COMPETITION AT BAY - BARRIERS TO ENTRY

COST VERSUS PRICE

A GOOD BEGINNING - GETTING IT RIGHT FROM THE START

IF AT FIRST YOU DON’T SUCCEED

THE FAILURE MYTH

Chapter 2 - The traits of the entrepreneur - it’s all in the mindset

ENTREPRENEUR vs SMALL BUSINESS OWNER

VISIONARIES AND LEADERS

THE ENTREPRENEUR AS INNOVATOR AND CREATIVE DESTROYER

ACCEPTANCE OF UNCERTAINTY

OTHER TYPES OF ENTREPRENEUR

Chapter 3 - Nothing new under the sun - the same old problems, some brand new solutions

KNOWING THE CUSTOMER

THE MARKETING MISSION AND WHY IT MATTERS

FULFILLING CUSTOMER NEED

BENEFIT CULTURE - WHAT’S IN IT FOR THE CUSTOMER?

GENERIC MARKETING STRATEGIES

THE FIVE FORCES THAT DRIVE COMPETITION

Chapter 4 - Research, research, research

THE EDGE - SHOWING INVESTORS YOU KNOW MORE THAN THEY DO

THE BASICS OF BUSINESS RESEARCH

THE SEVEN STEPS TO SUPERIOR BUSINESS KNOWLEDGE

DESK RESEARCH

USING THE INTERNET

GETTING OUT THERE - THE IMPORTANCE OF FIELD RESEARCH

TESTING THE MARKET

Chapter 5 - Mastering the ‘master plan’ - business plans are templates, not straitjackets

SO WHY DON’T ENTREPRENEURS PLAN?

MANY ENTREPRENEURS PREFER ACTION TO WORDS - BUT YOU REALLY NEED BOTH

WHAT GOES INTO THE PLAN?

MAKING YOUR BUSINESS PLAN STAND OUT

TIPS ON COMMUNICATING THE PLAN

PRESENTATION TECHNIQUES

THE ELEVATOR PITCH - WHEN EVERY WORD COUNTS

USING A NON-DISCLOSURE AGREEMENT (NDA) - KEEPING YOUR IDEA SAFE

BUSINESS PLANNING SOFTWARE

Chapter 6 - The money - who has it and why you might just get your hands on ...

EVERY SUCCESSFUL BUSINESS NEEDS OUTSIDE MONEY SOMETIME

WHAT DO INVESTORS WANT?

SOLE TRADERS AND PARTNERSHIPS

LIMITED PARTNERSHIPS

LIMITED COMPANIES

SHARING OUT THE SPOILS

FINDING YOUR INVESTOR

PRIVATE CAPITAL PRELIMINARIES

AFTER THE INVESTMENT, WHAT WILL YOUR BACKERS EXPECT?

Chapter 7 - Another day over and deeper in debt - leveraging the investment

THE UBIQUITOUS BANKS

ASSET-BACKED FINANCE

BONDS, DEBENTURES AND MORTGAGES

GET BIG

Chapter 8 - You must be this high to go on the ride - why babies can’t swim

VALUE ON EXIT

WHY SIZE MEANS SAFETY

BUILDING A TEAM AS THE BUSINESS GROWS

Chapter 9 - The path to growth - and riches too

SEGMENTING YOUR MARKET

MASTERING THE MATRIX

LIVING WITH LIFE CYCLES

UNDERSTANDING ADOPTERS - WHO BUYS YOUR PRODUCTS AND WHEN

MIXING WITH THE MARKET - WHAT DOES YOUR COMPANY BRING TO THE PARTY?

GOING GLOBAL

BUYING YOUR COMPETITORS - THE ACQUSITION TRAIL

Chapter 10 - Selling fivers for a tenner - why margins matter most

UNDERSTANDING THE NUMBERS

RATIOS RULE

GROWING PROFITABLE

CONTROL YOUR WORKING CAPITAL

GETTING EXTRA HELP

Chapter 11 - Taking charge - good management’s a simple yet rare commodity

PEOPLE PAY

MAXIMISING EMPLOYEE PERFORMANCE

RECRUITMENT - FINDING THE RIGHT STAFF

THE IMPORTANCE OF TEAMWORK

MOTIVATING? JUST AVOID DEMOTIVATING

RELEVANT REWARDS

DELEGATE, DON’T DUMP

WELCOME CHANGE

MOVING ON

GET BOUGHT

Chapter 12 - What’s it to you? Calculating value

PRICE/EARNINGS RATIO

DISCOUNTING FUTURE EARNINGS

INTERNAL RATE OF RETURN (IRR)

RULES OF THUMB

MULTIPLE MODELS

VALUING MINORITY SHAREHOLDINGS

EASY VALUE CALCULATIONS

BE PREPARED TO NEGOTIATE

Chapter 13 - Dressing to kill - preparing your business for sale and getting ...

CLEANING UP THE BOOKS

PRODUCING THE SALES MEMORANDUM

GETTING THE TIMING RIGHT

WATCHING THE BUSINESS CYCLE

Chapter 14 - Pay day - selling up

TRADE SALE

MANAGEMENT BUY-IN (MBI)

MANAGEMENT BUY-OUT (MBO)

BIMBOS

FAMILY TAKEOVER

EMPLOYEE BUY-OUT

GETTING ADVICE

NEGOTIATING STRATEGIES

PASSING THE DUE DILIGENCE PROCESS

CHECK OUT THE ALTERNATIVES

Chapter 15 - Floating off

WHY FLOAT?

GOING TO MARKET

THE RULES OF THE GAME

FLOTATION OPTIONS

TIMETABLE TO A FLOAT

ACCOUNTING RULES

WHY FLOAT?

Chapter 16 - Getting a second life

LIVING WITH AN EARN-OUT

BECOMING AN ANGEL

STARTING OVER - THE PATH OF THE SERIAL ENTREPRENEUR

VOLUNTEERING YOUR SKILLS

References

Resource list

About the Author

Other titles by Colin Barrow:

Acknowledgements

Index

This edition first published 2009

© 2009 Colin Barrow

Registered office

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The right of Colin Barrow to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.

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Library of Congress Cataloging-in-Publication Data

Barrow, Colin.

Get backed, get big, get bought : plan your start-up with the end in mind / Colin Barrow. p. cm.

Includes index.

eISBN : 978-1-906-46589-6

1. Business planning. 2. New business enterprises. 3. Entrepreneurship. 4. Success in business. I. Title.

HD30.28.B36852 2006

658.1′1-dc22

2009009706

A catalogue record for this book is available from the British Library.

Set in 11 on 12.5 pt Adobe Garamond by SNP Best-set Typesetter Ltd., Hong Kong

Introduction: Be careful what you wish for

Every year, millions of people start their own business. They come from every walk of life and social group. As many over-50s as under-25s launch out on their own. The same is true for women and men, immigrants and natives, the educated and the barely literate, the brave and the timid, those with creative genius or the self-confessed plodders. The triggers that unleash their desire to go into business are equally eclectic. Legacy, redundancy, boredom and relocation vie with insight and inspiration in the lexicon of sources of their business ideas.

They do, however, all have one common thread, one that is often unspoken but none the less present. They hope they will ‘make it’. By that they usually mean make it rich, become super successful and build a business empire. They rarely mention this ambition to the armies of researchers who are continuously trying to unravel entrepreneurial motivators. All these people hear are phrases such as ‘personal satisfaction’, ‘for fun’, ‘being able to do my own thing’, ‘working without having to rely on others’, ‘reducing stress and anxiety’, and ‘creating employment’. All worthy goals no doubt, but they could all be achieved a whole lot more easily with a few million in the bank.

True, North Americans and many Asians are less ambivalent about being upfront about their desire to be successful in business and make a pile of dough, but there is still a certain nervousness about admitting to having serious wealth creation as a primary goal.

But here’s the thing. The majority of businesses start small and stay small. There’s nothing much wrong with that, although if that’s the limit of your ambition, this book is not for you. This book is for people who want the chance to be seriously rich rather than just seriously busy.

AIM HIGH

Unsurprisingly, only a few tens of thousands of the millions who start up in business each year will become millionaires. And the rest? Well, many of these businesses will indeed make a living for their founder, sometimes even a comfortable one, and they may even be fun to run. But one thing you can reasonably sure about - these founders won’t get rich. Instead, they will be embarking on a regime of long hours, sleepless nights and short holidays, and for a significant minority, the bankruptcy courts.

It doesn’t have to be this way, but unfortunately most business founders start out with the wrong goals, and so begin businesses that don’t have even the potential to make them rich. Aim low and you are almost certain to end up there. Starting a business with the potential to be extremely valuable can take no more overall effort than starting an also-ran. It just requires a different kind of effort and a strategy that will enable you to find investment, grow and ultimately sell up for a big payout.

This is the way of the successful entrepreneur. In a nutshell, the name of the game is get backed, get big and get bought - and that’s what this book is all about.

GET BACKED

Chapter 1

Problems over passion - the real characteristics of winning business ideas

What are the fundamental differences between the great business that will make you seriously rich and the also-ran that does little more than tick over?

That’s an important question. A successful business that grows rapidly and establishes a sustainable position in the market will secure your future when the time comes to sell. An under-performing business, on the other hand, will mean long hours of work, often for very little reward. And the truth is that launching a new venture will require a huge amount of energy, commitment and time on your part, so before you fire the starting gun, it’s vital to think long and hard about whether your idea has what it takes to deliver the outcome you’re seeking.

It’s a question that other people will be asking too. Unless you already have considerable personal wealth, at some stage you are going to need to raise the capital that will enable your business idea to blossom and grow. That money might come from wealthy private investors - called business angels - venture capitalists or even family members. All will want to know that your idea has the potential to thrive and provide them with a good return on their cash.

So what should you and your backers be looking for as you assess your business plan? Well, while there are no guarantees in the business world, there are certainly factors that make success more likely. Almost anyone can start a business with great wealth-generating prospects if they plan from the outset to do just that.

But here’s the caveat - you have to start with the right formula. There is no mystery to running a successful business. It’s been done countless times before and the script has been well and truly written. Put simply, businesses owners who bring together the right ingredients have a fighting chance of creating real wealth. Those who miss out on vital ingredients are almost inevitably doomed to struggle.

The purpose of this book is to map out a journey that will see you creating an business that can be scaled up and ultimately sold. Our first step on that journey is to look at the fundamentals of success. Or to put it another way, we’ll be examining the crucial formula that every ambitious business owner should adhere to.

WHAT MAKES AN ENTREPRENEUR?

The first thing that has to be said is that you don’t need to be a genius to apply this formula. Entrepreneurs tend to share particular personality traits - a certain quirkiness in the way you think is helpful, as is the ability to put yourself in someone else’s shoes - but super intelligence is not essential. Indeed, it has been proven that you don’t necessarily need a great education to be a whiz at business. It’s a well-known fact that many successful entrepreneurs didn’t go to university, or even spend that much time at school. Sir Richard Branson (Virgin) dropped out of full-time education at 16. Sir Alan Sugar (Amstrad), Sir Philip Green (BHS and Arcadia, the group that includes Topshop and Miss Selfridge), Sir Bernie Ecclestone (Formula One - and Britain’s tenth richest man) and Charles Dunstone (Carphone Warehouse) all bypassed university education. Many entrepreneurs who went to university didn’t stay. Steve Jobs (Apple) and Bill Gates (Microsoft) left after a semester or two; Bruce D. Henderson, founder of world-class management consulting firm the Boston Consulting Group, left Harvard Business School 90 days before graduation, so eager was he to get to work.

Even if your business idea is based on technology or specific knowledge, you can bypass all of the detail, cut to the chase and still make your pile, as the Money Supermarket story shows.

MoneySupermarket.com - a high-tech company with a tried-and-tested business plan

Founded in a bedroom by university opt-outs Simon Nixon and Duncan Cameron in 1999, Money Supermarket grew to have revenues in excess of £100 million barely a decade later. Nixon bailed out of an accounting course at Nottingham University halfway through the second year. He initially worked as a self-employed financial consultant and pursuaded Cameron, a computer geek and his girlfriend’s brother, to give up a computer studies course at Liverpool University to write the software programs that were crucial to the launch of the venture.

By the summer of 2007 on the eve of its stock market float Money Supermarket was valued at £1 billion, more than 30 times its previous year’s profits. As the name would suggest, the business is an Internet-based price comparator that started out in the financial services sector and now covers a myriad of other sectors including utilities, travel and general shopping. The value proposition is that Money Supermarket saves you hours surfing the net yourself. But despite some fairly complicated technology, the business model is little more than the tried-and-tested role of the intermediary or broker doing the sums for their client that Nixon started out with when he began his first business, Mortgage 2000.

On the other hand, you shouldn’t worry too much if you do happen to have a university degree. Education is no bar to success in entrepreneurship. Stelios Haji-Iannou, founder of easyJet, graduated from London School of Economics with a BSc in Economics in 1987, following that up with an MSc in Shipping, Trade and Finance from Cass Business School at City University, London. He also has four honorary doctorates from Liverpool John Moores University, Cass Business School, Newcastle Business School and Cranfield University. Tony Wheeler, who together with his wife Maureen founded Lonely Planet Publishing, has degrees from Warwick University and the London Business School. Jeff Bezos (Amazon) is an alumnus of Princeton, Pierre Omidyar (eBay) of Tufts and Google’s founders, Sergey Brin and Larry Page, graduated from Stanford.

THE BUILDING BLOCKS OF SUCCESS

So if there is no one template for a successful entrepreneur, what about the business itself? What are the essential building blocks of a world-beating venture?

Some people will tell you that it is helpful to be first into a market with an innovative product or service. Gaining ‘first-mover advantage’ is often suggested as a proven formula to justify high expenditure and a headlong rush into new markets, the theory being that if you’re first in, you can clean up before your competitors get a look in.

This concept is one of the most enduring in business theory and practice. Entrepreneurs and established giants are always in a race to be first. Research from the 1980s claiming to show that market pioneers have enduring advantages in distribution, product-line breadth, product quality and, especially, market share underscores this principle.

Beguiling though the theory of first-mover advantage is, it is almost invariably a mistake to be first. As Gerard Tellis, of the University of Southern California, and Peter Golder, of New York University’s Stern Business School, argue in their book Will and Vision: How Latecomers Grow to Dominate Markets, it’s often those who arrive late to a market who reap the biggest benefits. Early research studies on this subject were based on surveys of surviving companies and brands, excluding all the pioneers that failed. This helps some companies to look as though they were first to market even when they were not. Procter & Gamble (P&G) boasts that it created America’s disposable-nappy (diaper) business. In fact, a company called Chux launched its product a quarter of a century before P&G entered the market in 1961.

Also, the questions used to gather much of the data in earlier research were at best ambiguous, and perhaps dangerously so. For example, the term ‘one of the pioneers in first developing such products or services’ was used as a proxy for ‘first to market’. Tellis and Golder emphasise their point by listing popular misconceptions of who were the real pioneers across the 66 markets they analysed. Copiers: Xerox (wrong), IBM (right); PCs: IBM/Apple (both wrong), since Micro Instrumentation Telemetry Systems (MITS) introduced a $400 PC, the Altair, in 1974, followed by Tandy Corporation (Radio Shack) in 1977. Nor is the Internet world immune from the benefits of being later to market: Books.com was first into online book sales, but latecomer Amazon was the clear winner.

In fact, the most compelling evidence from all the research is that nearly half of all firms pursuing a first-to-market strategy are fated to fail, while those following fairly close behind are three times as likely to succeed. Tellis and Golder claim that the best strategy is to enter the market after the pioneers, learn from their mistakes, benefit from their product and market development and be more certain about customer preferences.

THE MAGIC FORMULA

So if being first to market is to say the least underrated, what is the magic recipe? Well, you may be surprised to hear that there is one, and that the formula for creating and harvesting a valuable business is not very complicated:

Think of it this way. Businesses solve problems for their customers. The bigger the problem, the easier it is to replicate solutions; and the more finance applied, the greater the potential to generate value. A glance at the formula shows why most new ventures are intrinsically valueless. Business starters tend to launch businesses that need few resources, £35,000 is the average start-up investment; rely entirely on the founder, over half of all businesses employ no one other than the founder, a proportion that rises to 80 per cent if employees are capped at 9; and are concentrated on what the business’s starter enjoys doing or ‘feels a passion for’ rather than on solving market problems. If those entrepreneurs wanted to be rich they certainly never listed it as a reason for going into business or gave that subject any thought when choosing which type of business to start or how to go about starting it.

Let’s break down each of the components of the magic formula and look at them more closely. We will use a single case example, Tim Waterstone and his eponymous bookstore. This is a neat low-technology venture that has netted Waterstone both a fortune and a place in business history as someone who has changed the way an entire sector works, very much for the better. The book business itself is a useful illustration of the way a product and its distribution systems endure in principle while changing in method over the centuries. From 1403 when the earliest known book was printed from movable type in Korea through to Gutenberg’s 42-line Bible printed in 1450, which in turn laid the foundation for the mass book market, the product, at least from a reader’s perspective, has changed very little. Even the latest developments of in-store print-on-demand and e-book delivery such as Amazon’s Kindle look like leaving the reader holding much the same product.

IDENTIFYING A PROBLEM

Whatever business you are in, look out for problems of sufficient stature to constitute a big P.

When Tim Waterstone was fired from WH Smith’s US operation, he was already half way to rethinking the way in which books were to be sold. In the UK the business model comprised rows of books stacked on shelves, spine out in alphabetical order, sectioned off by subject. Bookshops were drab and operated a leisurely 9 to 5 existence, Monday to Friday and only mornings on Saturdays, staffed by assistants with no real understanding of books. In contrast, Manhattan bookshops around where Waterstone lived were brilliant places: lively and consumer led, with huge stock, accessible and knowledgeable staff and long opening hours. The American model addressed several major problems for customers. In the first place, book buyers are usually in a job; were they not they would use a library. So not being open evenings or weekends effectively constrained customers to a quick visit in their lunch break. The second problem concerned the way people browse for books.

Research showed that nearly two thirds of book purchases were unplanned, in the sense that the customer either had no firm idea of what they were looking for or they simply stumbled across an appealing title while in the shop. With this in mind, books had to be distributed around the store to maximise the opportunities for customers to stumble across an interesting title. While the spine-out bookshelf layout was highly economic in terms of floor space and stockholding, it was both unappealing and a further factor limiting sales prospects. The third problem that Waterstone set out to address was to staff his bookshops with people who could offer advice and information on authors and their books. He set out to create an environment that would appeal to literate young graduates rather than to barely articulate shop assistants.

So all in all, Waterstone had identified a number of issues that in combination were big enough to constitute a big P.

SCALE AND THE NEED FOR FINANCE

Big problems require big solutions and this brings us neatly to the question of finance. Had Waterstone simply wanted to open a bookshop, he could have started straightaway. The equity in his house would have been more than enough to finance the venture. But his bookshop concept called for a fundamental change in the way books were to be sold in the UK, which in turn meant, in his opinion, opening a chain of 100 shops. Despite having a comprehensive business plan he found it impossible to get backing. High-street banks turned him down in droves.

But Waterstone had never run a bookshop and he didn’t want to. His talent and experience lay in running a business and as such would have been underutilised at best and wasted at worst in trying to set up a single outlet. In any event, the success or otherwise of a single outlet would not prove his business concept conclusively one way or another.

In many ways Waterstone was following a path trodden nearly half a century earlier by Ray Kroc, a milkshake salesman who had first tried his hand at selling paper cups and even worked as a pianist for a while.

McDonald’s - scaling up through duplication

Ray Kroc’s business travels led him to brothers Richard and Maurice McDonald, who in 1948 had opened the first McDonald’s restaurant in San Bernardino, California. Kroc saw that he could fine-tune their restaurant so that it ran like a factory and produced hot food, fast service and with consistent quality no matter where it was located. This could be achieved by breaking food preparation as a process into steps that could be duplicated in any McDonald’s restaurant. Kroc wasn’t first in the field. Burger King (known then as InstaBurger King) had just opened in Miami. The difference between Kroc and his rivals was one of scale. He took a world-view that saw his franchisees as business partners to be sought out everywhere and not simply as customers to be sold to. His belief was, ‘I had to help the individual operator succeed in every way I could. His success would ensure my success. But I couldn’t do that and, at the same time, treat him as a customer.’ Kroc sold his new partners an operating system rather than just a licence to use the McDonalds’s name, so building a system with near limitless potential. When Kroc died aged 81 ten months before the chain sold its 50 billionth hamburger, he was worth an estimated $500 million.

WHY MONEY MATTERS

Finance can be the defining difference between creating big value and little or no value. Waterstone knew that without investment he could never hope to get his business off the ground. The trick was to find a way of raising enough money to prove the concept, while leaving the door open to raising more once success was in sight. He wrote a detailed business plan and took it round numerous financial institutions. There was little enthusiasm for backing his plan for 100 shops, but with a mixture of money from a finance company, pledging his house, personal savings and borrowings from his father-in-law, and making use of the government’s loan guarantee scheme, he raised enough funds to test his strategy. Within three months the first Waterstone’s opened, based on a simple store plan that an art student sketched out for £25.

Why the Internet Bookshop was eclipsed by Amazon

UK entrepreneur Darryl Mattocks, a software engineer and computer enthusiast, entered the online bookselling market in 1994, a year ahead of Amazon, but his approach was profoundly different.

Mattocks went into a bookshop in Oxford and picked up a book he had ordered a few days before. He paid for it, walked a few doors down to the Post Office and dispatched it to the customer who had e-mailed his order the previous week. He was constrained initially to financing the business using credit cards, though later a friend introduced him to James Blackwell, a member of the family behind the Oxford booksellers, who put up £50,000 for a 50 per cent stake in the venture.

In contrast, Jeff Bezos, a former investment banker, raised $11 million from Silicon Valley venture capitalists before starting Amazon, and invested $8 million of that in marketing.

Mattocks Internet Bookshop had a database of 16,000 books, while Amazon was selling nearly $16 million worth of books at startup. In 1988, just around the time it was buying Waterstone’s, WH Smith bought out bookshop.co.uk, parent company of the Internet Bookshop, for £9.4 million. Amazon was then valued at $10.1 billion.

KEEPING THE COMPETITION AT BAY - BARRIERS TO ENTRY

Once you’ve found a solution to an important problem and developed a scalable business model to solve that problem, one thing you don’t want is to leave the door wide open for others to follow your lead. Sure, they will get there eventually, but it helps if you can recoup some of your investment, catch your second wind and be ready to move on to new, improved versions before they get on your tail. Luckily, the utopian world of perfect competition in which there are many suppliers of identical products or services, with equal access to all the necessary resources such as money, materials, technology and people, doesn’t exist except in economics textbooks. You simply need to have a product or service with sufficient unique advantage to make it stand out from others in the market and a barrier to entry preventing others from following the same path to riches. The advantage can be anything - the business name (The Body Shop), a catchy slogan (‘Never knowingly undersold’, John Lewis), a patented innovation (Dolby Noise Reduction), an instantly recognisable logo (Google) or something similar to Apple’s attempts to keep a tight grip on iTunes and the related technology.

Barriers to entry don’t have to be high tech or high cost. Midnight hours, Sunday trading (where possible) and bonus schemes for staff were the barriers that Waterstone raised to prohibit the current market leader, WH Smith, from competing head on with his new strategy. Smith’s unionised workforce built around retail outlets with a diverse product range made it all but impossible for that company to tread the same path. Waterstone achieved scale quickly, as opening new branches was a well-planned and simple procedure. A handful of head office staff found new locations, bought stock and hired shop managers. Soon the company was employing 500 people in 40 branches, with a turnover of £35 million a year. The ultimate achievement was to sell back the company to WH Smith for £50 million barely a decade after starting up.

COST VERSUS PRICE

One strategy that many would-be new business starters use as their differentiator is low price. The misconception that new firms can undercut established competitors is usually based on ignorance of the true costs of a product or service, a misunderstanding of the meaning and characteristics of overheads and a failure to appreciate that ‘unit’ costs fall in proportion to experience. This last point is easy to appreciate if you compare the time needed to perform a task for the first time with that required when you are much more experienced (e.g. changing a fuse, replacing a Hoover bag).

The overheads argument usually runs like this: ‘They (the competition) are big, have a plush office in Mayfair and lots of overpaid marketing executives, spending the company’s money on expense account lunches, and I don’t. Ergo I must be able to undercut them.’ The errors with this type of argument are, first, that the Mayfair office, far from being an ‘overhead’ in the derogatory sense of the word, may over time be an appreciating asset, perhaps even generating more profit than the company’s main products (department stores, restaurants and hotels typically fit into this category); and second, the marketing executives may be paid more than the entrepreneur, but if they don’t deliver a constant stream of profit growth they’ll be replaced with people who can.

Cost leadership arises through factors such as operating efficiencies and product or service redesign. Ryanair and easyJet are examples where analysing every component of the business made it possible to strip out major elements of cost - meals, free baggage and allocated seating, for example - while leaving the essential proposition - we will fly you from A to B - intact. You don’t have to pass on any of the money saved by having cost leadership. Clearly, however, you do have to take account of what your competitors charge, so being unreasonably high will limit your growth prospects. But remember, price is the easiest element of the marketing mix for an established company to vary. It could follow you down the price curve, forcing you into bankruptcy, far more easily than you could capture its customers with a lower price.

A GOOD BEGINNING - GETTING IT RIGHT FROM THE START

Let’s be absolutely clear. The magic formula is not intended to produce a result such as Douglas Adams’ numeric answer to the ultimate question on the meaning of life, the universe and everything, as posed in The Hitchhiker’s Guide to the Galaxy. In Adams’ story, Deep Thought, a computer built specifically for this purpose, takes 7.5 million years to compute and check the answer, which turns out to be 42.

Applying the magic formula certainly won’t require a giant computer, nor will it take anything like 7.5 million years to work through. You may also be slightly disappointed, though hopefully not too much so, to learn that the formula doesn’t produce a single numeric answer. In fact, the answer may well not have any numbers in it all. The formula’s sole purpose is to make sure you set off on the right track from the outset. That is, by starting a venture that at least has the potential to make you seriously rich rather than just seriously busy. Being busy is the ultimate goal of managers and bureaucrats rather than of entrepreneurs.

Neither does the formula give you ‘the answer to everything’. Launching the right business is an essential first step to wealth creation, but though necessary it is not sufficient on its own. A business plan has to be written, money raised, markets entered and management teams built and motivated. The business has to be sold, wholly or partially, and the money banked. Until that point any value created is purely notional, which, though in itself a comfort, is not yours to spend as you will. Finally, you need to find something to do with the rest of your life, other than play golf or sail your yacht. Unfortunately, the characteristics of successful entrepreneurs include a low boredom threshold and the need to be involved in new challenges. These are all topics addressed in later chapters of this book.

IF AT FIRST YOU DON’T SUCCEED

If you are one of the tens of millions of people already running their own business and have discovered that you are running the wrong business or can see that you are not on track to creating serious value, don’t despair. Just because you got the formula wrong this time doesn’t mean you won’t go on to greater things. Henry Ford had a couple of shots at business before he got his value formula right. Milton Hershey started three unsuccessful candy companies in Philadelphia, Chicago and New York before founding the Hershey Company, which brought milk chocolate - previously a Swiss delicacy - to the masses. Walt Disney’s first business, Laugh-O-Gram, was so unsuccessful that at one point he resorted to eating dog food to stay alive. Thomas Edison filed 1093 patents, mostly for unsuccessful ventures, before striking gold with the light bulb. His statement ‘I have not failed. I’ve just found 10,000 ways that won’t work’ is the stuff of legend.

THE FAILURE MYTH

Another useful fact to know is that the rumour of calamities awaiting most new ventures is just that - an unfounded and incorrect piece of oft-repeated misinformation. An exhaustive study of the eight-year destinations of all 814,000 US firms founded in a particular year by Bruce A. Kirchoff, professor of management at New Jersey Institute of Technology, revealed that just 18 per cent actually failed, meaning that the entrepreneurs were put out of business by their financial backers, lack of demand or competitive pressures. True, some 28 per cent of businesses closed their doors voluntarily, their founders having decided for a variety of reasons that either working for themselves or this particular type of business was just not for them. But the majority of the businesses studied in Kirchoff’s mammoth and representative study survived and in many cases prospered.

With a degree of preparation, a fair amount of perspiration and a modicum of luck you can get started and may even, as in many of the case examples described throughout this book, end up with a substantial, successful and growing enterprise. To begin well, as they say, is to end well. Read on.

Chapter 2

The traits of the entrepreneur - it’s all in the mindset

ENTREPRENEUR vs SMALL BUSINESS OWNER

The terms ‘entrepreneur’ and ‘small business owner’ are often used interchangeably in the lexicon of commerce, but there are some very real differences between the two groups.

It was eighteenth-century French economist Jean-Baptiste Say who first coined the term entrepreneur as a means of distinguishing between the majority of people owning and running small businesses and the smaller but much more important group who contributed significantly to the well-being of economies at large. As he defined it, an entrepreneur could be characterised as a creative, risk-taking forecaster: someone who projected and appraised future opportunities. In his view, ‘an entrepreneur possessed the moral qualities of judgment and perseverance, while also having knowledge of the world’.

To some extent you could say the same about anyone who starts and runs a company and it’s true that entrepreneurs and other business people have some traits in common. However, not everyone will take a business and grow from relatively small beginnings into a multimillion-pound enterprise. That tends to be the province of those with an entrepreneurial approach to commerce. But what does that mean in practice?

VISIONARIES AND LEADERS

The first thing that has to be said is that ambition and vision are hugely important. For instance, Bill Gates, Microsoft’s founder, stated from the outset that he wanted to see a computer in every home when barely a handful of major offices had one. It was only a decade earlier that IBM had estimated the entire world demand for its computers as seven! Apple Computer’s founder, Steve Jobs, wanted to make computers ‘fun’ in an era when DOS prevailed and the whole subject of business was serious. Exploiting the mouse and the graphical user interface (GUI), Jobs found a way to get information into a computer that was both intuitive and fun for users. Neither of these were his inventions, but like many entrepreneurs, he recognised an opportunity when he spotted it.

But the approach isn’t simply about vision. Entrepreneurs can only release value if they can both lead and manage. Dozens of catchy terms such as bottom up, top down, management by objectives and crisis management have been used to describe the many and various theories on how to manage. There is no single way to lead and manage a company and much will depend on the owner’s personality and style. However, what you are aiming to create is a situation where you can harness the skills of others to achieve your goals. That means working towards building a team of motivated people. We’ll be looking at this in detail later in the book.

THE ENTREPRENEUR AS INNOVATOR AND CREATIVE DESTROYER

Entrepreneurs may not always be first to market with a new invention or technology, as we saw in Chapter 1, but inevitably they are innovators, a word that embodies both the creation of new models and ways of doing things along with the destruction of the old.

Creative destruction is a term attributed to Joseph Schumpeter. Born in 1883, at 26 he became the youngest professor in the Austrian empire and finance minister at 36, only to be dismissed after presiding over a period of hyperinflation. A brief spell as president of a small Viennese bank was followed, after its failure, by a return to academia, first in Bonn then in 1932 at Harvard. He is remembered for two books in particular, The Theory of Economic Development (1911), where he first outlined his thoughts on entrepreneurship, and Capitalism, Socialism and Democracy (1942), in which he detailed how the entrepreneurial process worked and why it mattered. His view was that the fundamental impulse that sets and keeps the capitalist engine in motion comes from ‘the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates’. He pointed out that entrepreneurs innovate and develop new products, services or ways of doing business, and in the process destroy those organisations that can’t adapt or that have effectively been made redundant.

Schumpeter believed that capitalism has to create short-term losers alongside its short- and long-term winners in order for the economy to grow and prosper: ‘Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist … propulsion. The atmosphere of industrial revolutions… is the only one in which capitalism can survive.’ He went rather further than this by arguing that the more countries tried to mitigate the possibilities of business failing, the worse their economic performance would be. Picking up the pieces through social insurance is fine; propping up failing businesses or declining business sectors is not. Perhaps it’s just as well that he was not around to see the Northern Rock, Bear Stearns or AIG bailouts.

ACCEPTANCE OF UNCERTAINTY