Entrepreneurship

Is crowdfunding the new tech bubble? Or just a good old-fashioned junk bond?

Originally published on April 10, 2015 as a Guest Column in The Globe and Mail: http://www.theglobeandmail.com/report-on-business/small-business/sb-digital/innovation/is-crowdfunding-the-new-tech-bubble-or-just-a-good-old-fashioned-junk-bond/article23823686/

Despite the headline, I’m a proponent of crowdfunding and believe it can bring innovative ideas to market. Fundamentally, I feel that new forms of financing provide additional access to much-needed capital and bring healthy competition to the lender market, benefits that all entrepreneurs and inventors can appreciate.

So why the negative headline? It’s not meant to be sensational. I have real worries about the mania that seems to strike the markets with every shiny new opportunity. Some would call it systemic greed. Others may be more forgiving, and call it the cost of innovation. Whichever camp you choose, it’ impossible to deny that there’s extreme pressure on everyone in business to return continuous, increasing profits to shareholders – whether the shareholders are ourselves, our families or the public markets.

Crowdfunding, of course, is the rapidly growing practice of funding creative projects or startup ventures by raising small amounts of money from a large number of people, usually via specialty websites like Kickstarter and Indiegogo. Maybe the early days of crowdfunding were the best, when early adopters and other hipsters invested in new projects to receive finished products, T-shirts and other promotional, non-financial “perks.” But that’s the past, not the future.

My fears started to heighten at a recent panel discussion I attended on the emergence of equity crowdfunding – the practice of “mass” funding of opportunities in return for equity. One panelist urged the quick adoption of this new financing frontier because he didn’t want Canadian businesses and investors to fall behind or lose out on this incredible opportunity.

While the parallels are not exact, this rhetoric struck me as reminiscent of the rise of junk bonds, the 1999 Tech Bubble, and yes, the subprime mortgage scandals that drove us into the Great Recession, the economic slough from which many individuals, companies and countries are still just emerging.

I want to remind would-be investors that, on average, about 80 per cent of business startups fail. Even successful companies have a success rate of about 15 per cent on new product ideas. More often than not, new business initiatives just don’t work out the way that we want them to.

If you’re taking fun money from your cookie jar to support a cause you believe in or a new product you love, then crowdfunding provides you a new way to back your convictions that has never existed before. But you should understand the odds.

As securities regulators approve equity crowdfunding – probably by restricting how much investors can invest per year, and how much companies can raise – it seems likely that today’s low-stakes “pin money” culture is going to change. Investors, by definition, want a return on their money. If crowdfunding truly expands beyond the hobbyist market, it will only be because a consistent percentage of issuers actually create incredible value for their shareholders. But how likely is that to happen?

You can say this for “old-school” backers. The professionals, whether they’re banks, venture capitalists or experienced angel investors, push you to truly understand and articulate your project and its potential market. They pressure you to justify the risk and return involved. Without that initial and ongoing demand for due diligence, crowdfunding will likely create a less disciplined marketplace in which success becomes even harder to attain, and failures increase in number.

On the other side of the deal, if you are successful in seeking capital, understand that you will now have to report to “the many.” You’re the custodian of the hopes and dreams and expectations of people whose motivations you don’t know. You have an obligation to keep them in the loop – and can only hope to keep them happy.

Never underestimate the impact of the mob, the Web or social media on your company and its reputation if something goes wrong. Face-to-face funding may have been harder to get, but that was not necessarily a bad thing – for you or the markets.

Bottom-line: Crowdfunding is an exciting new wrinkle in innovation funding. But it won’t change the rules of the marketplace: investors expect value for their money. Nothing comes free. The more expectations you create, the more your crowds will expect you to deliver.

I am a huge proponent of new financing mechanisms, including crowdfunding. I simply don’t believe in the tooth fairy.

I do believe in the notion of ‘buyer beware, seller take care.’ With a little more common sense, and less frenzy, I believe crowdfunding will help to bring a lot of remarkable innovation to market. Without that discipline, I fear we’ll see a speedy series of failures, losses and resentment that will burst crowdfunding’s balloon faster than you can say “count me in”.

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Why entrepreneurship by necessity scares the hell out of me

Originally published on December 4, 2014 as a Guest Column in The Globe and Mail: http://www.theglobeandmail.com/report-on-business/small-business/starting-out/entrepreneurship-by-necessity-scares-the-hell-out-of-me/article21876071/

You won’t often see me get upset over the rise of entrepreneurship in Canada. But this is one time, in my 25 years as an entrepreneur, I feel I have to voice my opinion.

You shouldn’t have to become an entrepreneur because you’ve been downsized. You should want to become an entrepreneur because starting your own business is the one thing that you want or need to do more than anything else in the world. Entrepreneurs should start businesses because they see opportunities to do something different, something better than the competition. They’re in business to leverage new ideas to shake up sleepy markets. The function of an entrepreneur is to disturb the status quo, to blaze a new trail and to make a difference.

Unfortunately, that urge to build a business isn’t what’s driving the many people who have been forced to seek self-employment in the wake of the 2008 recession.

Over the past five years, much has been written on the resurgence of entrepreneurship. I was particularly struck by a recent article published on CNBC.com entitled, “After recession, wave of ‘accidental’ entrepreneurs.” “Last year, almost 13 per cent of the U.S. working-age population was in the process of starting or running a new business, according to the most recent Global Entrepreneurship Monitor study by Babson College – a slight decrease from 2012 but a jump of 67 per cent from 2010,” writes Nancy Mann Jackson. “And more than one in five of those starting a new business in 2013 said they did so out of necessity rather than opportunity.”

I know the old saying, “necessity is the mother of invention,” but necessity in the form of entrepreneurship – starting your own business, finding clients, meeting payroll, and working ridiculously long hours in the process – just shouldn’t be.

Why? Entrepreneurship is not for the faint-hearted, because all too often it leads to stories like the one Ms. Jackson shares in her article. She tells the story of Angela Daidone “who became a freelance writer and marketer after being downsized three times from public relations and marketing jobs.” For Ms. Daidone, self-employment has been an emotional roller coaster. “You go through bouts of depression because you’re always worried about paying the bills,” she said. “When jobs don’t come through, you see it as a failure.””

Ms. Daidone’s concerns should be taken to heart by anyone considering the path of self-employment, and maybe – more importantly – by our political leaders. I’m not a political animal, but I believe we as a society need to step up and provide greater opportunity for retraining, co-op, apprenticeship and related programs to help to reconfigure people’s skill-sets and open up their frame of opportunity – not force them onto a path of ‘necessity’.

We’re not all cut out to be entrepreneurs. I remember one meeting with a very bright, articulate client. She had created a good product that was just beginning to build traction in the marketplace. She was talking to a number of people to find the “easiest” way to take her business to the next level. One option was to raise capital and open her own plant, but she didn’t want the financial risk. The second option was to contract an overseas plant to manufacture the product for her, but she knew this would entail a lot of due diligence, travel and personal time spent overseeing quality control in another country. She did not want to spend that much time abroad. So she asked me, “what do you think I should do?”

I thought about it for a nanosecond. As hard as I searched my instincts and experience, I could only come up with one answer: “Go to bed and get a good night’s sleep. When you wake up, go find a job.”

This may seem glib, even rude. But it isn’t. Business, especially entrepreneurship, is all about attitude and will, the things that drive us to make a difference in the businesses that we build. The truth is – as any entrepreneur knows – that building a business means sacrifice, risk and tremendous uncertainty. This life isn’t for everyone.

Early in my career as an entrepreneur I had the good fortune to sit down to dinner with a gentleman who was nearing retirement from his own 40-year entrepreneurial journey. I asked him one simple question, “when does this get easier?” His reply spoke volumes: “Sorry Ken. I don’t know yet”.

I wish that I had the perfect solution for those that have found themselves necessarily self-employed. I don’t. I do know, however, that we can’t get dazzled by fantastical statistics that promote the near-term rise in entrepreneurship as a completely positive trend. For some people it’s a trap.

How can accidental entrepreneurs escape their circumstances? Stay in touch with friends and colleagues. Tell them the truth about your business. There’s no shame in struggle. Let them know you’re open to all offers. If you’re lucky enough to be offered another job, stress how much you’ve learned and stretched as an entrepreneur. And remember: Your next boss will be lucky to have you.

 

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Why you can’t be all things to all customers

 

Originally published on October 14, 2014 as a Guest Column in The Globe and Mail: http://www.theglobeandmail.com/report-on-business/small-business/sb-marketing/customer-service/you-cant-be-all-things-to-all-customers/article21016160

When you first start your business, the ideal customer is simple – she’s anyone who walks through the proverbial door with money in their pocket. How do you decide what services to offer her? Usually, you’ll take on anything that sounds even remotely close to what you think that you can do.

This is what I might call the “yes, absolutely we can do that” phase. Of course, once the client is out the door, “yes absolutely” is quickly followed by, “who do we know that actually knows how to do what the customer is asking for?”

Saying yes to customer requests is a very exciting phase of building a business (or a new business division). And, frankly, that excitement should never completely go away.

Customer requests do two things: they identify market needs, and they push entrepreneurs to think about their next product or service offer.

As your company matures, you tend to realize that you can’t be all things to all people.

But that’s okay. As you figure out what it is you do best, there may even be some existing customers that you have to let go – and that’s okay, too. The key to sustained business success is to identify a substantial, pre-qualified group of customers who are willing to purchase your products or services at a profitable price-point.

Identifying your core clients – so that you speak their language, support their interests, and listen to their feedback – is the most important job in business. Here are three steps I like to suggest:

1. Generate a comprehensive list of both your current and the potential target customers that you have in mind.

2. Once you have that universal customer list, identify the target groups that you think have the highest potential. Study the wide range of attributes that you believe are important for a prospect to become a customer of your company. You need a cross-section of criteria that include demographics (characteristics such as business sector, title, age, gender), psychographics (psychological factors such attitudes, values, likes and dislikes) and geographic attributes (proximity to your business or its distribution network). To be clear, you must go deeper than simply describing where your customers live or how old they are. You need to work across all the ranking areas to create a useful customer profile. For example, simply specifying adults aged 18 to 49 who live in Washington D.C. is too broad. Create profiles of your various target groups based on what they like and don’t like, and on what they think, watch, eat, wear, visit, experience, and so on. Essentially, you need to think of your customers not as points on a graph, but as people.

3. Create a ranking system to measure the quality of the leads (potential customers) that you are trying to sell to. At my company, we use a tool we created called the Lead Quality Index™ (LQI). Essentially, it’s a grid. We list potential customers down the left-hand side and our ranking criteria across the top. We use categories such as corporate sector (e.g. retail, consumer goods, services), title (co-ordinator versus CEO), location (Toronto, rest of Ontario, rest of Canada, or beyond) and mindset (forward-thinking, pioneering versus market follower). The LQI is no guarantee of success, but it helps us think through and stay focused on our highest potential opportunities.

We only have so much time in a day. Staying focused on who we are selling to and what we can offer them is all-important in establishing long-term, mutually beneficial relationships.

The voice of the customer needs to be heard throughout your business. Remember, you don’t buy what you make — you create your products and services to sell to other people, so it’s their vote that counts.

I was once on a conference call to plan the relaunch of a national store brand for a leading retail chain. Because many of the client’s products required explanation to shoppers, a member of the chain’s merchandising team asked if they should set up the stores’ ‘help’ section to suit the needs of the company, or the shopping behaviour of the customer. One of the owners piped in to say, “set up the section to the liking of the customer, and I’ll adapt.” He had it right.

As Wal-Mart founder Sam Walton famously said: “There is only one boss; the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”

Bottom-line: Know your customer. Think like a customer. Delight the customer. In return, they will delight your bottom line. And they’ll point you in the right direction for the future.

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