Want to really focus your team and get amazing results?

Set a really big goal and then form a Catalyzing Statement around this goal.

Catalyzing statements hook people emotionally and are the driver that propels individuals towards a challenging goal.

About a month ago I heard  Rick Sapio give several examples.   I would like to share his and then give a fun one that I ran across in Japan this week.

Fed Ex – When It Absolutely Positively Has To Be There Overnight —  If you want a GREAT laugh, watch this FedEx Commercial
Microsoft Bill Gates – I picture a world with a PC  on every desktop and in every home – 1975
President Kennedy – We will put a man on the moon and return him safely to earth before the end of the century.

These catalyzing statements go FAR beyond placing a goal. They emotionally charge us and align us. They emotionally allow us to seek and believe and go forward.

A good example of this is Bill Gates. Prior to making the  unifying statement the goal was clearly set to have Microsoft be the largest software company in the world. Great goal, but where is the emotion and the emotional buy in.  It came when he stated  ” I picture a world with a PC on every desk and in every home.” That inspired us, we visualized this and indeed it enabled the goal.

This past week I have been in Asia. I was able to spend a bit of time in Japan and visited a company in Tokyo called Fujita. From the instant I entered this business I knew it was different. The tone, the conduct of the staff, and the presentation of the board room was simply different. They were focused and clearly were on a mission.  There was not the usual motion that I frequently experience in Japan.   Indeed the meeting I had was successful and at the end of the communication I could not help but poke a bit. I asked the individual I was meeting with to explain more about the company, the founder, and the history. His answer gave it all away. With out a second of hesitation here was his response:

“Fujita’s vision is to bring American culture to Japan”.

Wow, now that is powerful.  That is a hairy, big, audacious, and crazy goal.   “Bring American culture to Japan!”

You see they are not in the hamburger or movie business.  They are not selling clothing. They are not in the import / export business. Those things are simply vehicles.

They are going to change Japan from eating sushi to Big Macs, and guess what…they did.

What I did not tell you earlier is Fujita’s founder  Den Fujita is responsible for bringing McDonalds to Japan. He was also responsible for bringing Toys R Us and BlockBuster to Japan.

As I have considered this, I realized that this type of statement not only motivates us and inspires us, but also allows the company to change and extract us from the weeds when necessary.

Next time you set a big goal, create a catalyzing statement!   Hang on because it will rock your world with what happens if done properly.

In 1989 I helped make my first $2MM business mistake.  I keep this box on my life-trophy shelf to remind me never to make this mistake again.

So what was it we did?

Rich Christiansen $2MM Channel Lesson

We did what so many eager engineering types do–we built a way cool, exciting,  leading-edge technology (digital power line transmission) and then tried to sell it.

We just knew the customers would buy these by the bucket loads.  We would go to the trade shows and got mobbed, so certainly this was going to be a barn burner. Everyone told us we were so smart and this was the coooooolest technology ever.

NOT! Cool technology does not necessarily mean purchasing customers. In 1990 the company went belly up!

I would rather have purchasing customers and profit than some cool little box sitting on my shelf reminding me not to be stupid again.

Better to sell it first and build it second, than to build it first and then try to sell it.

Today I did a BootStrap Business lecture at an Entrepreneurial Launch Pad event.

I love meeting with eager individuals who are on those tender first steps of venturing out into the brave cold and exciting world of creating a business.   However, there is one thing that makes me want to scream every time I see it and indeed I saw it today.

Make sure someone is going to buy it before you build it.

Its All about the channel!

Build It and they will come…NOT!

Save yourself a couple of million $ and let my box be the reminder. Don’t build your own.

For me, the choice to fund or bootstrap isn’t a matter of right or wrong. It’s just a matter of preference (and, granted, I have strong preferences). There are plenty of pros and cons for each approach. If you choose funding, whether you find an angel, family member, credit card, or VC, you must be cognizant of one potential roadblock: distraction.

This past year I have been working with a brilliant young entrepreneur. I watched with great interest as he reported to me every several weeks the marked and smooth progress he was making with his selected VC. Knowing my own living hell in dealing with snakes, his optimism piqued my interest. I truly hoped to witness a positive experience. Knowing that his required funding event was two million dollars, I was horrified and confused when the VCs convinced him that he needed ten million, not two.

One day he walked into my office, and instantly I knew what had happened. Emotionally bloodied and bruised, he explained the waste of the last three months of his life. He was sure the funding would execute based on a completed term sheet. He had stopped doing the side engineering work that covered his personal expenses. It was right then that the VC turned out to be disreputable. The deal fell apart at the due diligence phase—no gigs…no funding…no fun!

At one time, Ron worked in a building with a sister company in a thriving, high-demand industry. The sister company operated both on a bridge loan and on revenue generated by sales of services and products. It started taking off, and its executives decided that with additional funding, they could scale the business rapidly to make a nice return in a short period of time.

The process to secure the funds was at once grueling and exciting. The entire company got caught up in the pursuit of funding; as a result, other vital parts of the business were ignored. The executive team spent countless hours building pro formas, gathering data, and presenting to VCs. Then the executives, based on the anticipated funding, decided it was time to start building a new facility. They used their existing funds to get the construction started. Heady and exciting times, right? Well, they forgot a minor detail: running the business. You can’t neglect day-to-day operations pursuing funding.

You know the outcome of the story. The funding fell through, the company could no longer make payroll, and, instead of growing, it downsized. No need for a brand new building now! The only highlight was that the company Ron worked for watched and learned from the process while preparing for its own funding event. It was during one of the executive team’s planning sessions that they heard the sad tale. Then and there, they adopted a plan to assign a “tiger team” of executives to go after funding, while the rest of the executive team ensured that day-to-day business operations moved forward. And what happened to the new office building that was under construction? The company Ron worked for got to move in.

The major risk with pursuing venture capital is that you can easily end up doing crazy things, things completely at odds with your rules, objectives, and dreams. I have watched colleagues change their entire business model to adapt to venture capitalists who didn’t even understand the market they were in. If that works for you, work it—but remember to manage emotion with logic and to keep your numbers in line, making sure that everything falls into place.

Porter’s Points: Fund the Runway

• Once you have worked out your pro forma and set some ground rules, look into how you will get your funding. Do you need an initial funding event? How large?
• Never discount bootstrapping in favor of more traditional methods. Remember that the unconventional, slower route may be more rewarding in the end.
• Always know who and what you are dealing with. Weigh the pros and cons for your specific venture before taking action, and be sure to learn from other ventures around you.

With that, we wrap up Chapter 4: Got Gas.  Chapter 5: The Rules, is up next!

#5 Angels and Snakes

Angel investors typically are wealthy individuals who provide capital for startups. They might contract for convertible debt or equity in the business as a return on their money. Some angel investors have begun to organize angel networks in an effort to share their pool of investment dollars.

Venture capitalists (called VCs, though we unaffectionately refer to them as “snakes”) are institutions that manage a pool of wealthy, qualified investors’ money. It is not uncommon for them to be the face of a trust, business, investment fund, or other entity. They have a responsibility to the members of that group to ensure the success of the businesses their money is invested in, which results in a very active involvement.

My experience has been that dealing with angel investors is far better for your blood pressure than dealing with VCs. That can be good or it can be bad. If you have the discipline to execute on all aspects of your entrepreneurial climb, you may benefit from the more hands-off approach the angels take. However, if you need structure, leadership, and occasional bullying, the snakes may be the right solution for you.

Many businesses simply require VC funding to start. If you are after the grand slam, you will want to consider it. If you do, then this book will give you some great guidance, but you will want to browse around for an additional entrepreneurial bible. In fact, it might be best to have an entrepreneurial clergyman. When you work with snakes, a critical resource to have among your senior staff or advisors is an individual who has had a successful VC exit. Having this experienced person will help you navigate the maze of VC demands. The attitude that a VC brings to the table is all or nothing. If a VC invests a million, they want ten million out of it.

Some have done well with VCs, but I have never had a good experience with venture capital funding in my entire career. Traditional venture capitalists can be very difficult. Management gets restructured and goals get realigned. With VCs, you will do it their way, not yours. So why the bad taste in my mouth? Hmm—let me count the ways.

I worked as the CEO of a small company, making repeated attempts to get funding. I cannot count the number of times that venture capitalists led us down the rosy path, wasted our time and resources, jerked us around, and then proclaimed, “We’re out.” The truth of the matter is that many VCs don’t want to be first in. Because they have money to protect, they often hold off on commitment. But once you get one in on the deal, others clamor to climb aboard.

Angel’s Pros:

§  They are less threatening than a snake.

§  They tend to leave you alone.

§  They are friendlier on the ownership terms.

Angel’s Cons:

§  Legal costs can get high.

§  No pressure from them can cause laziness in your team.

§  Typically, you’ll need more than one angel.

§  Usually, an angel is someone you know.  You don’t want to risk the friendship.

Snake’s Pros:

§  A massive infusion of funds allows you to quickly get to market.

§  The financial oversight keeps pressure on and momentum high.

§  Potential board contacts and cross-relationships with other funded ventures can open more doors.

§  You get visibility with funding from a notable VC.

Snake’s Cons:

§  You lose some control.

§  You build product for the capital rather than the market.

§  It seems like a VC’s job is to make your life difficult.

§  If you don’t like audits, you had better cultivate that taste!

We’ve now learned about the five main funding options for entrepreneurs: debt financing, credit cards, bootstrapping, family and friends, and angels and snakes.  Be thinking about which fits best with your needs and situation.  Tomorrow we’ll finish up Rich’s thoughts on the various options.

#4 Friends & Family

“Hey Dad, you got ten dollars you can loan me?”

When attempting to finance your business, the thought of funding with a loan from friends or family members may cross your mind. If it does, take a minute to think it through. What happens if the business fails and you can’t pay back the loan? What happens if the business finds the sweet spot and becomes wildly successful? Will your “banker” expect a percentage of the gain in addition to repayment of the principle and interest? Think for a moment about your next family Christmas get-together. Santa—or Grandpa—just might bring a hefty load of coal.

You need to recognize the serious nature of these kinds of commitments. Be careful and thoughtful in accepting funding from family and friends, who are sometimes as willing to provide it as you are to receive it (with neither side thinking it through carefully). In any partnership or business relationship, you should ensure that everything is clearly understood and delineated in writing.

I have never had the luxury or curse of borrowing from family and friends, but multiple business associates of mine have utilized this form of financing. Through marriage, I have some relatives who are extremely well-off. They created one of the largest construction companies in the western United States, a cash cow for the whole family. Each member of their extended family has the opportunity to leverage off of this success. As a result, many have developed successful companies ranging from sand and gravel outfits to road sign businesses. If this option is available to you, consider using it. Just remember that borrowing money from your family and friends is not the same as bootstrapping. You are still accountable to an outside source: you are putting your relationship up as collateral.

Pros:

§  Wealthy relative can support each other.

§  Friends and family are quick to your aid.

§  Success and failure, if handled right, both make for fond memories.

Cons:

§  If you can’t repay your financier, things can get ugly – and it’s easier to avoid seeing your banker than your father.

§  Even with a carefully drawn-up contract from the outset, success can be hard for a family to deal with.

We’ll finish up tomorrow with the last of the funding options Rich discusses: angels and snakes. 

# 2 Credit Cards

As crazy as it sounds, I have seen credit cards work financing wonders in the entrepreneurial world. I have an associate who was working for a company when it went defunct. He saw a quick path to cash, and, understanding the company’s business model, decided to roll the dice. He had no equity, but he had a credit card with a $12,000 limit. He drew out the money, took several team members with him, and started a new company. Off to the races they went!

Within two months, they were profitable. He put his team members and himself on full salary. One year later, he had purchased a fleet of BMWs and Mercedes, allowing his employees to drive them. Two years later he purchased a complete office complex for his business, and within three years sold the company for $20 million dollars—all from a $12,000 credit card.

As for me and my house, I don’t have the nerve. I personally don’t believe in exposing my family to that level of risk. However, my associate was in his late twenties when he did this. He had a small family, and his risk of failing and having to start over was not overly significant. He was bright and capable.

You have to assess your own risk threshold. Although a fun story, this is not a financial model I would recommend to most people.

Pros:

§  Credit cards are quick to cash.

§  You maintain ultimate decision-making power.

§  You retain ownership.

Cons:

§  There are high interest rates and merciless deadlines.

§  Long startup times make for heavy debt (and the servicing of that heavy debt).

§  There is an increased risk to family and dependents.

#3 Bootstrapping

You know by now that bootstrapping is my favorite method of funding. It’s critical to remember that to get your venture started, you have to chase cash. This won’t get you rich quick—the pie in the sky often has to be postponed while you build up your fuel reserve—but it makes up for its zigzag approach by giving you full autonomy and stability. Simply stated, you sacrifice your rate of ascent, but it’s your flight, Captain!

To bootstrap, many people dip into their own funds: retirement, emergency savings, or a 401K. Wherever you get the money, set your limit of risk and stick with it. (Remember those rules?) When you bootstrap, your initial efforts are often measured as opportunity versus strategy.

Our most recent venture is a perfect example. Ron and I came up with three venture ideas: SEO work, engineer outsourcing, and link building. We wanted to pursue link building, because we knew that it would be the most scalable, profitable, and successful; however, starting our venture with only $5,000 required us to get quick to cash. We knew the SEO idea would give us just that. With my contacts and skill in search engine optimization, we put a simple plan together and proceeded toward building a service business.

Although our SEO business required intense lifting and was neither strategic nor scalable, we knew it was quick to cash. A few calls and a well-timed trip to New York landed us several large SEO accounts. We got gas in the tank. As we built that business, we kept an optimistic eye out to transition into our other two desired opportunities. We zigzagged our way to our ultimate goal: the cash from SEO allowed us to engage engineers, which bridged to link building, which has now led us to where we create our own assets. It took nine months to make our move to where we are now.

Bootstrapping requires more patience and more brain power, but the pros outweigh the cons. You force yourself to literally watch every dollar and make sound decisions. Those attitudes are powerful allies. Additionally, chasing cash makes you zig and zag to the final destination. That slows down the whole process, but exposes more opportunities and allows more time for the analysis of your perceived ultimate destination.

Pros:

§  You dictate all of the rules.

§  The need to zigzag opens unforeseen opportunities.

§  Whatever your initial level of discipline, you come out that much stronger.

Cons:

§  Bootstrapping can be stressful.  It requires intense personal effort, firm commitment, and a high level of discipline to get the ball rolling.

§  You can’t go directly for the big opportunity.

§  You have to slow down.

Tomorrow we’ll talk about the fourth funding option, friends and family. 

There are a variety of methods you can pursue when funding your venture. I’ve seen associates use each of these methods, and I have used a number of them myself. It is interesting to note that I’ve experienced and seen both success and failure on each of these tracks. In many cases, the type of venture you embark on determines the type of funding you’ll need. Lengthy technology buildups take venture capital; but family businesses can be kick started with family funds, and quick-to-cash service businesses can be bootstrapped.

I’ll set forth several alternatives and discuss the pros and cons of each. There is no right or wrong answer on how to fund a company. It frequently depends on your present financial circumstances, what type of business it is, and your preference. Of course, I prefer to bootstrap, and my bias will come out—but remember to consider your specific situation.

Potential Funding Sources:

§  Debt Financing

§  Credit Cards

§  Bootstrapping

§  Friends and Family

§  Angels and Snakes

#1 Debt Financing

Debt financing is a classic: simply get a loan from your local bank. Banks require collateral. Often, they choose to tie up your house. This may not be a bad option if you have equity in your home and don’t mind losing it if things fail. Of course, you want your venture to be successful, but if you put something on the line, you must be emotionally prepared to lose it. Don’t risk what you can’t afford—and really, truly don’t want—to lose.

I’m sure that debt financing has its place, but I hate it because I have to go sit in front of some stodgy banker who pretends that he understands what I am setting out to do. I remember one business I created that required a line of credit. The business was growing so fast that I needed gas to fuel the rapid growth. Online sales was our model; I would get paid thirty days after the end of the month, but I had to pay for the advertising up front.

At one point during the term of the line of credit, the bank called me in for a formal discussion about their little $100,000 loan. They proceeded to express concerns. I proceeded to erupt into laughter. See, their biggest concern was that I had only one company paying me. Banks are used to seeing businesses collect only from most of their customers most of the time. To them, it looked like I had all of my eggs in one basket. They were right, it was only one company—but it was Google! After an hour of attempting to explain the business model to them, the president finally came in and vouched for me. Forty pages of terms and conditions later, I had received my line of credit. Needless to say, we never missed getting paid by Google.

So what was the value of that debt financing? Well, I did not have to give up ownership in the company, and I instantly had funds to draw on for uninterrupted business growth. Outside of calculating the risk, the cost of such capital is very low. If you choose debt financing to fund your company, use a Small Business Loan (SBA). Interest rates are nominal, and these loans are fairly easy to obtain with a structured business plan. Of course, you have to provide a personal guarantee (in the form of collateral) and are obligated to make payments on the loan. If things go wrong, there is a chance you could end up paying for a dead dog.

Pros:

§  SBAs are relatively easy to obtain.

§  You maintain ownership.

§  There is a low initial cost.

Cons:

§  You have ultimate responsibility to pay back the loan with or without success.

§  The loan requires material and emotional collateral.

§  You account to a banker who may or may not know your market.

We’ll begin next time with discussing credit cards as a means to fund your small business.

In the next chapter I’ll talk about making and living with rules. Include rules in your personal guidebook for dealing with numbers scenarios. Rules do not smother your creativity or stall your drive. You create them to guide you past the cliffs and landslides along the entrepreneurial path. For me, then, the answer—which has come the hard way—is threefold.

The first rule I have added to my guidebook is: don’t tweak the numbers to fit your emotional needs. Some people call that discipline. Believe what the numbers say and act accordingly.

Second, articulate the rules to your partner. If you don’t have a partner, then share your rules with your significant other, attorney, accountant, advisor, or somebody. This emphasizes the need not for a friend or a yes-man, but a partner! Articulate the rules to a person who will be up-front, frank, and direct, who will maintain a clear perspective when you start to chase rats down holes. Rehearse the rules with him or her. Your “rules partner” must be unafraid to ask the tough questions at the critical moment. And he or she must be willing to point out your departures from the established rules.

In a moment of cloudy temptation, you must be able to say, “Hey, didn’t we agree to not…?” and then stick with it. You made the rules when the temptation didn’t exist. Your partner will remind you that you made the rules when your heads were clear. You made the rules by considering situations just like the one that now tempts you. These exchanges with your partner are vital sanity checks.

With all of those hard-nosed rules, remember this third point: sometimes, things change. You may need to change the guidebook. If things do change, rework the rules based on fact, not emotion. Do it only when absolutely necessary. This is the tricky one of the three. You cannot change the rules to accommodate your emotional needs. No whims are allowed if you want the rules to guide you to the summit. Take time when changing any rules; there can be nothing haphazard here—and always, always remember, some rules should never be changed. Don’t ignore reality. The numbers may be telling you to look into other opportunities.

Porter’s Points: Numbers Don’t Lie

• An honest pro forma is as much of a crystal ball as you will get. Make the effort to build it on accurate data. If the numbers don’t add up to a viable venture, it’s time to do the math: go after something else.
• Set rules that specifically tie back to numbers. Make sure you and your partner hold each other accountable. Don’t let pride get in the way.
• Set rules to govern your rules. If you have to, set rules to talk about your rules. This may seem tedious at first, but touching base in the beginning helps train your bootstrapping attitude for the end.

Tomorrow we begin a discussion of the various options for funding your small business.

At the end of 2006, my successful mortgage company was reaching the end of its wave. My partner and I were extremely fond of the team we had assembled, and we wanted to keep it together. In a desperate attempt to hang onto this talented, rag-tag team, we created a company named Everest Web Design.

We built a sophisticated pro forma model around the new business. As we reviewed the numbers, it became evident that this business was going to be a long shot, but we just couldn’t accept that. Because we were so emotionally tied to this little team, we ignored what the analysis told us. The team set about tweaking the numbers until the model showed us what we wanted to see. We began testing the business idea, knowing full well the numbers did not support success. The numbers were right: the tests failed. So did we shut down the business? No. We threw more money down the rat’s hole and tweaked the numbers some more.

The initial numbers told me the venture would not work unless we cut expense and reduced the size of the team or infused capital into the project to get it off the ground with the entire team’s weight. After a substantial financial loss, we ended up shutting down the entire project and letting the team go. We had become too emotionally invested in the team to accept the reality of the numbers. When the numbers tell you your bright idea won’t work, trust the numbers. Remember: logic has to manage emotion. If you have that mindset, your first step is to get used to the fact that the numbers don’t lie.

You may be considering how this reconciles with my mantra to “damn the torpedoes!” or “burn the bridges!” The answer is that you have to find the balance between persistence and reality. In the example above, I could have let half the team go, burned the bridges behind us, and perhaps made a run at success. I didn’t. I stuck with my emotions and persisted through insurmountable odds, but that wasn’t enough.

I love persistent, determined people. However, persistent, determined people who chase down rat holes amuse me—and, yes, I have amused myself more than once. So how do you avoid rat holes? How do you strike the balance between persistence and reality?

To be honest, this is an area I’ve failed at from time to time, and the cost has been more than financial. Usually, my failures came because we broke with our original intentions.

In order to strike a balance between persistence and reality, Rich uses three basic rules, which we’ll learn tomorrow. 

Emotion, one of the greatest sources of success for an entrepreneur, can also seriously hinder performance. As excited as you are to take off on your new adventure, you have to do the logical things first. Starting a well-fueled venture requires three steps. You have to file the flight plan, make sure the runway is long enough, and, most important, check your gas tank.

I recall speaking with a young entrepreneur who planned to launch a new, progressive technology. Talk about excited—he was like caffeine on steroids! On the verge of quitting his current job, he had convinced one of his best friends to do the same and jump on a plane ride to…well, where was unknown. This new technology needed a year to eighteen months of development time, followed by an intensive, costly marketing effort. I listened patiently, admiring his passion for this venture, and then started poking at him a bit.

“What funding do you have available?”

“How are you going to pay your salaries?”

“How much have you allocated for market penetration?”

My questions came like a dagger to his heart. He had not made the effort to measure the required runway, check his gas tank, or even file a flight plan. He and his would-be parachute pal had earnestly worked themselves into an emotional lather, saying, “Let’s do this thing,” and left logic behind. Sadly, the dagger was neither sharp nor penetrating enough. He disregarded my counsel to create even a simple pro forma, figure the cash requirements, or take a quicker path to profitability. Three and a half months later, I received a call from him:

“Rich, my family is starving. What can I do?”

It was one of the saddest things I have ever heard.

Let’s take a moment and pick this story apart. What, specifically, is the flight plan? What is the gas? And what is the runway?

• The flight plan—your basic business plan—includes your pro forma, or your financial projections of what you expect to happen. (This does not need to be a six-month exercise in futility, but a document that fleshes out the basics.)
• The gas is your cash reserve, used to execute your business plan.
• The runway is the time needed to realize your business plan, to get profitable, or, at the very least, to stabilize.

The flight plan, the gas, and the runway are interrelated and equally important.

The pro forma seems to scare the most people. A pro forma is a simple document that projects cash flow, balances, and income statements. You do not need a CPA to create one. Use a basic Excel spreadsheet and simply begin outlining your monthly projected incomes and expenses. Keep it simple, but make sure it is thorough.

Here is a sample of a pro forma I have found incredibly useful in my ventures. Generally, I draft three versions: a conservative, a realistic, and an aggressive model of my cash flow. I then operate based on the conservative model. Once you have written a one-year pro forma, do the same thing for three years. You don’t need to spend too much time on this exercise, just enough to get a sense of where you can and want to go financially. Focus on your cash flow. Income statements and balance sheets come in handy for later reviews, but cash is your gas. Track it carefully. Once you begin operating the business, compare your performance against the projections of the pro forma each month (or each week, if necessary) and adjust accordingly.

Once you have gone through this exercise, you will have a better idea of how much gas and how much runway you actually need. After all, even the best logic doesn’t do much good without a solid cash reserve and financial plan.

Porter’s Points: Logic Must Manage Emotion

• The same drive you need to start your business can run you right into a wall if you forget to meet the requirements of logic.
• A pro forma is a simple statement that predicts cash flow for one to three years. It doesn’t have to be very in-depth, but it should cover your bases and give you a good overview of your income statements, balances, and cash flow.
• Draft the pro forma and direct your drive toward that. Rather than a fluffy goal, shoot for something tangible and hold yourself to it.

The next principle is “numbers don’t lie” – we’ll start next week with that concept.