Dear Jim,

In today's issue I'll show you how to keep your enthusiasm from leading you into costly miscalculations about your startup.

Then, in the Worth Checking Out section, I'm going to connect you with a tool for evaluating new business opportunities.

And we're going to wrap up with my own rule of thumb to a pivotal question: how do you know that your business is too dependent on one customer?

We've packed this issue of Startups After 50 with practical, straight-forward advice. I hope you find it helpful.

Wishing you every success,

Mike

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You Need Enthusiasm: Just Don't Let It Get the Best of You

Dr. Mike Armour

Are you enthusiastic about your startup? Great! Great, that is, if you don't let it get you in trouble!

And how, you ask, can enthusiasm get you into trouble? Well, the same way it almost got me in trouble.

Caught Up in the Thrill

A few years ago two partners came to me with an exciting product. Their fledgling company had already built a working prototype. And testing clearly demonstrated that their basic concept was sound. Now they were ready to move from conceptual design to full production and sales. They wanted my company to help them.

Within minutes of examining their prototype, I was caught up in their enthusiasm. And just as quickly we were at work, sketching plans to bring the product to market.

The plan faced obvious obstacles. For one thing, the prototype was far too bulky. Almost every element of it had to be miniaturized. And the product had to interface seamlessly with a technology that was new to all of us.

Then there was the challenge of capital. The product that was clearly a game-changer in a large niche market where customers have very deep pockets. But investors might hesitate to get behind a product so far out on the cutting edge that the market was still unproven.

Still, we were all confident that we could surmount these obstacles. So we launched our planning with confidence.

The Slip-Up

Then I made a classic mistake. As a business leadership coach, I've helped dozens of startups get underway. Yet, over the next few days I fell into the same trap that I constantly warn others to avoid.

To be specific, I was so enthusiastic about the product that I was making very optimistic projections about how soon it could be ready for market, how readily customers would accept it, and the number of buyers in the first two years.

When I realized what I was doing, I immediately put on the brakes. Later I was glad that I did. As is true with most startups, we indeed ran into obstacles. Ironically, they were not the obstacles that we had originally anticipated.

The miniaturization was accomplished with reasonably little engineering cost. We quickly found two strategic partners who were industry leaders in the technologies on which we depended. And investors loved the concept.

So the things that worried us initially turned out to be needless anxieties. It was things that we never foresaw that developed into nightmares. They delayed the on-boarding of capital. They pushed our development cycle off schedule. And more than once they threatened the very strategic alliances which were vital to our success.

Managing the Unexpected

Had I given in to my initial enthusiasm, and urged my clients to follow suit, it would have been a costly miscalculation. Perhaps a fatal one. Within a year we would have all been up to our ear lobes in frustration. And in all likelihood, investors would have been abandoning ship because they had lost faith in us.

As it was, we managed the setbacks in stride, even the most disruptive ones. Unexpected costs never blew our budget out of the water. And when complications forced us to adjust schedules, the revisions still left us within the margin of variance that we had projected at the outset.

But this resilience was only possible because we held our enthusiasm in check while building the initial budgets and timelines.

Realistic Assumptions

This startup story had a happy ending. Unfortunately, many others do not. And all too often these unfortunate endings are the product of founders listening to their hearts, not their heads in building their business plan.

Every business, yours included, begins with a set of assumptions. Some of them are critical. Get these critical assumptions wrong and your business can quickly be in jeopardy.

You should therefore discipline yourself to be conservative in your most critical assumptions.

• How quickly can you build a customer base?
• How much marketing will it take to gain that base?
• How effectively will you retain customers?
• How profitable you can be in the near term?

Questions like these should always be answered with a generous portion of caution. If you're going to err in your assumptions (and most of us do), cautious estimates will serve you well.

Any entrepreneurial undertaking is risky enough without compounding the risk by making assumptions that are less than judicious.

Inflated Expectations

Conservative assumptions don't come naturally for most encore entrepreneurs. They are usually quite excited or even passionate about their product or service.

This enthusiasm leads them to be overly optimistic in estimating how quickly customers will flock to their business. Or the percentage of customers who will become repeat buyers.

These kinds of inflated expectations have destroyed many a business. Inflated expectations are particularly lethal for a micro-business with thin startup capital and an owner whose very livelihood depends on profits from the company.

For those who are launching their first business venture, it's easy to underestimate how much time and energy it takes to make a business succeed. Even within the smallest business there are far more moving pieces than the uninitiated would anticipate.

It's not a bad idea, therefore, to assume that everything you do in your startup will require more time, cost more money, and yield smaller results than your entrepreneurial enthusiasm leads you to think.

And even after the startup is underway and doing reasonably well, it's equally important to remain conservative in your assumptions. It will be two or three years before you have captured enough data to make reliable forecasts from critical trend lines.

In the meantime you should act as through every uptick in your metrics is tentative and subject to reversal. Resist the temptation to take a few months of experience and extrapolate from them a long-term projection of results.

Some Guidelines

You can't function without making assumptions. The key is to make sound ones. Here are some tips for doing so.

1. Write down the most pivotal assumptions that you are making about your startup. Ideally you would do this in writing a business plan. In the rush to get underway, however, many startups never put a business plan in writing. Whether you develop a plan or not, at least write out the assumptions that are governing your startup.
2. Subject each assumption to the "heart or head" test. That is, ask yourself, "Is this assumption coming from my heart? Or is it coming from my head?" Assumptions from the heart tend to be driven by what we want to be true or what our excitement tells us is possible. Assumptions from the head tend to be more driven by realistic evaluations based on data, research, and interviews with knowledgable people. Where necessary, convert "heart" assumptions to "head" assumptions.
3. Rate each assumption on a confidence scale. Ask yourself how confident you are, realistically, that each assumption is valid. And what evidence gives you this confidence? Identify your level of confidence on an ascending scale from one to ten. The lower your rating, the more likely that the assumption is unduly optimistic.
4. Get the opinion of those who know your line of business. Run your assumptions by people who are not direct competitors, but who have built a successful company in your field or a related one. Ask them for candid feedback on whether your assumptions are truly realistic or need to be scaled back.
5. Periodically re-evaluate your assumptions. Business climates change. The economy ebbs and flows. What you know about your business is constantly increasing. Assumptions that were well-informed six months ago may no longer be valid today. Periodic "reality checks" are therefore in order.

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Worth Checking Out

Goldman Sachs has published a helpful small business opportunity evaluation guide. It's part of the toolkit in their initiative to help 10,000 small businesses become more competitive.

The guide is free and provides a great checklist of key questions to ask when evaluating any opportunity before your business.

In many ways, completing the evaluation is like writing a mini business plan. Even if you do not write out the answers, simply thinking them through will help you make much better decisions.

Keep this two-page guide nearby whenever you are considering a new product, a new service, or a joint venture with another business.

 

Put This To Work For You

I once started a business which exceeded its first year revenue projections by tens of thousands of dollars. How? Largely by securing a high margin account within weeks of startup.

Then, eighteen months into the engagement, the client was forced into massive cost-cutting. He terminated our services without warning. And in short order our total revenue plummeted to a near break-even point.

How do you determine whether you are overly dependent on one or two customers or clients? There's no universal answer to that question, because each industry is different and each customer is unique. But you need to arrive at some answer for yourself.

As for me, I consider my businesses in a precarious position if losing any one customer would cost the business 20% or more of its revenue. Could I survive with that kind of loss? Certainly. Economic downturns have forced me to do so several times.

But I want my business to do more than survive. I want it to thrive. Thus, when I see my dependency on a single client approaching 20%, I'm reminded to redouble my marketing effort. I need more business in the pipeline so that our revenues don't miss a beat, even if this major client goes away.