Garrett B Gunderson

Several months back I was on Garrett’s radio program “The Power Hour” and was telling the story of how we took $5,000 to build this million dollar business and prove the concepts in Bootstrap Business. Keeping in mind we are on live radio, Garrett interrupted me and said “NO YOU DID NOT start with just $5,000″ and went on to explain:

The financial capital was the most insignificant part of the success formula. You already had millions of dollars of intellectual capital and relationship capital.

Garrett was right! I loved it and since that time, I have used this formula in EVERY presentation I have done. This is indeed a Bootstraper’s magic formula for success.

Drum roll please, here is the world changing formula dissected:

Intellectual Capital + Relationship Capital = Financial Capital

Intellectual Capital
The number one thing that you need to do is be smart and be intelligent. If you are not smart or intelligent, then you need to study, go to seminars, read, and learn. Incompetence and Competence always show their head and in order to make money, you have to be smart at what you are doing in order to create value. If you are not adding value then anything you do is temporary and … here comes some hard words …. you are a sham. Don’t be a flim flam man, GET SMART!

+ blend it with or add it to

Relationship Capital

Now that you have some grey matter in your head, build relationships and use your intelligence to serve and help people who have influence and are like minded. This is the #1 key that most people miss. I think this is the most important part of the equation. If you serve those around you, solve problems for them and develop relationship capital just like you do money in a bank, when you go to take action you will be able to call on these individuals.

Draining relationship accounts is just like running your bank account into overdraft. But it is longer lasting. People do not like to be around someone who drains their relationship account. It is easier to go get more money than it is to just go get new friends and associates.

Put tons of deposits into the key relationships and you will NEVER go wrong.

= Business is the conduit for financial transactions and it is why we are all entrepreneurs

Financial Capital
Wealth creation and money will naturally come as a by product of combining Intellectual Capital with Relationship Capital in the form of a business.

Cool huh? ….. The best part is it is true and it works.

I remember early in my career staying late one night setting up the computers to perform perfect, then cleaning the floor until midnight for a big demo we were doing. I did this to serve my mentor and make him look good. I did not consciously think through the implications, but indeed I got a raise for this.

Intellectual Capital + Relationship Capital = Financial Capital

I just love this concept and challenge you to now go get smart and go serve people.

PS …. want a bonus learning? Here it is. The way to turn the + (plus) in to a * (multiplier) is to do leverage events such as write a book or speak in public. This adds value and intellectual capital in a multiplication impact rather than a single additive. That is unless it is really crappy work, then it is a / (divider) and that is not a happy thing.

Writing this book has required more effort and patience than either Ron or I thought possible. I now understand why I have never found a volume like it on the shelves. Setting the work aside, it has been an amazing opportunity for reflection and contemplation and has brought me to a conclusion I had already come to: entrepreneurship is truly an art form.

Several months into the writing, Ron suggested we create a company as a test case for the book. This has proved to be an invaluable exercise. As we went through the creation and launch of this company, we forced ourselves to analyze each important action in light of the principles espoused.

I am delighted to report that the fundamental tenets have held fast. Ron and I started the company with a total of $5,000 in March 2007. In seven months we grew the monthly revenue stream from $0 to over $60,000, with a gross net profit of $40,000. As of October 2008 the business is generating monthly revenue of $110,000 at a 65% margin. Has it been easy? No! Were there moments of confusion? Yes! After all, this is entrepreneurship.

Many of the things that haunted me during my first voyage into starting my own company are the same things that keep me awake now. There are no guarantees in life or in business. However, 27 ventures later, my nerves have settled. I have “learned” my way to solid ground. The principles herein will help you learn your way to solid ground much sooner. This learning was achieved through a progressive series of choices, ventures, successes, and failures.

The entrepreneurial path is worth the climb. It has provided countless individuals with financial stability, it has allowed personal freedoms, and it has facilitated an exhilarating and liberating lifestyle. One of the greatest joys I have in my life is helping young entrepreneurs who are facing the same quandaries I encountered early in my career. This has been one of my main motivations for writing this book.

Inevitably, as associates find out about this project they ask me, “What’s the key thing I need to know to be a successful entrepreneur?” Honestly, it isn’t as simple as one thing, but following are three critical attributes I have found are necessary to succeed.

1. Unalterable Determination
I am associated with a young entrepreneur named Mike Proper. When he was in the ninth grade, he was placed in foster care. Under duress he ran away from the foster family, finding safety in another state. Mike dropped out of school in order to support himself. Even though he does not have a formal education, he possesses an intense, relentless drive and an unconquerable spirit. Mike has since founded a company that has grown to a value of over ten million dollars. Mike Proper simply will not be denied.

The single most important factor to success in entrepreneurship and life is unalterable determination. I often say I’m not the smartest, I’m not the fastest, and I’m not the most handsome, but I’m definitely the most determined.

2. An Undeviating Support System
I had a young man in my office the other day who possesses incredible entrepreneurial drive and talent. He stood on the threshold of his first entrepreneurial venture. He was looking for some final advice and encouragement as he jumped from a warm, safe corporate job into the cold, harsh realities of business ownership. As we discussed the required sacrifices ahead of him, his face took on a look of fierce determination. As I looked in his eyes, I knew he had what it takes; however, I still had one remaining question. “How is your wife doing with all this change?” I probed.

At the very mention of his wife, calmness transformed his countenance. He responded, “She is amazingly supportive.” He nervously laughed as he recounted a dream his wife had the night before. She woke him in the middle of the night to share what she called a “hellish nightmare.” In a state of terror, she recounted how she went shopping and bought a vast array of expensive makeup and clothing. In the dream, she felt sick and was worried she had jeopardized her husband’s dream of starting his own company. He commented, “I am so lucky to have a wife like this.” Indeed, he is a lucky man! Some of the most talented and capable individuals I have known simply could not follow the course of their dreams due to the lack of support from their significant others.

Without an undeviating support system, it will be very difficult to succeed. Not only will this type of relationship provide fortitude, but the sharing of all you do will enhance the joy of the ride.

3. A Greater Purpose
The final key to entrepreneurship is having the source of your motivation rooted deeper than the shallow objective of making money. You have to be driven by a purpose greater than owning a BMW, something beyond cashing a big check. Making money will be a natural derivative of achieving a greater purpose. Your motivator must be deep and meaningful. It will make the entrepreneurial journey more purposeful, more enduring, and more valuable. I wake up in the middle of the night dreaming about enabling educational opportunities for disadvantaged girls in third-world countries. It consumes me, it inspires me, and I am drawn to it. This type of motivator is far stronger than making money.

Here is my parting thought: You can do this. You will have family, friends, mentors, professors, and any number of other folks tell you otherwise. Honestly apply the principles of this book, and you will not only survive entrepreneurship, but you will thrive in it! The hardest step for most people is simply taking those first few determined steps toward making something happen.

I’ll never forget a very painful conversation I had with one such business owner who, in a matter of weeks, went from being a multimillionaire to the depths of bankruptcy. Words can’t express the heaviness of his heart and the pain in his soul as he confessed that he had jeopardized his family’s security and his children’s college education.

On the other hand, David McInnis, the founder of PRWeb, had the opportunity to sell his business for twenty-eight million. Everyone was telling him to hold onto his company. He really struggled with the decision. The business had very strong fundamentals, it kept very healthy margins, and it led the market in its segment. He sold in the end, but could it have gone for more? Probably; the market stayed pretty stable. David hit the bank button and stabilized his life. He actually had multiple offers for the company and did not choose the offer with the most upside, but rather the smaller downside risk.

In your first time or two through this process, your priority should be stabilization. I think David got it right.

I had another visit from a young entrepreneur who was in turmoil, hovering around the decision to sell or not for over a year. He asked my opinion, and I shared my first-time philosophy. If given the opportunity, sell. Pay off your home, pay off your debt, and save for a rainy day. After that, you can build back up and do it again. There is no limit to how many times you can step up to bat.

After tremendous torment, this young entrepreneur made the decision to sell the company. From a bootstrap investment he had a seven-digit gain. I saw him again after the sale, and he was happy and full of light. All of his debt was gone. He had paid off his house and cars and stashed some away for his kids’ education. The confidence gained in a first liquidity event that gets you out of the rat race is worth more than the money itself. It will put you in a powerful position for future ventures and give you the satisfaction of success.

One Last Note: The FAQ

I frequently get asked: what multiple can I expect from a sale? The answer to this question is pretty diverse and is based on your industry and how strategic your company value is. A small owner of an income-generating business is typically valued at three times gross annual profits. More strategic acquisitions can sometimes command five to seven times earnings.

There are situations where you get crazy multipliers, too; for example, The New York Times acquired About.com for a double-digit multiplier. In another crazy one, Google acquired YouTube for a billion dollars— and, for crying out loud, YouTube was losing money. These situations are very rare—almost flukes—and should not be your goal.

The safest, most secure way to get an exit event is to get profitable quickly and then stay profitable. Making your mark in the entrepreneurial world has nothing to do with falling into a fortunate fluke; rather, making your mark in the entrepreneurial world has everything to do with making it on your own, starting right, sticking through it, and ending strong.

Porter’s Points – Timing and Greed

• The biggest obstacle to successfully timing your exit is your greed. Everybody wants to make it big, but if you hold out too long, the market may fall out from underneath you.
• When you are new to the entrepreneurship world, sell! Having a good exit event, even if not as huge as you would like, increases your confidence and prepares you for bigger future accomplishments.

Yesterday, CastleWave was formally sold to Imergent. CastleWave will be used as a key infrastructure component in Crexendo which is IMergent’s venture into creating a nationally dominant SEO Marketing Agency.

This was a cradle to grave (hopefully not grave) exit in 2 years 3 months and 10 days. CastleWave was formed on November 1st, 2007.

As all of you know, this business was created with $5,000 to prove the principles in the book. CastleWave indeed was profitable from day one, generated over $1MM the first year at 50% margin and this past year did apx $1.4 MM. We have offices in both NYC and Utah and presently have 23 employees and apx 30 active clients ranging from smaller companies like Bank On Youself to large customers such as OpenTable and IMax.

What an amazing ride the past several years have been. We have built an amazing little team which was initially based on 4 teenagers that we affectionately refer to as our linker boys. The team now has 5 amazing account managers, several project managers, and a whole slug of off the chart smart linker boys.

The main thing I will miss will be the association with this high energy can do little team. I personally thank this rag tag team for their efforts and want to let them know of my confidence and belief in them in their future careers. I expect great things from you guys.

CastleWave Team

I am thrilled that we were not only able to talk about the principles in BootStrap Business, but prove it. Indeed, we ate our own cooking and went through the entire process from chapter 1 to now chapter 19 the exit.

It is really a satisfying feeling to be able to write this post closing both chapter 19 in the book and in the business.

With this exit, I will now be freed up to be much more active in dialog, discussion, and yes posting to the blog. It is perfect timing with the blogs on the book now coming to the end of the book. If you have any specific blog topics or discussion items you want me to cover, please email me and I would be happy to hit them. rich at bootstrapbusiness dot com.

Types of Exits

1. Market Failure or Natural Catastrophe
2. Competition Closing In
3. Selling Your Business
4. Merging
5. Going Public
6. Raising Venture Capital
7. Systemizing and Cash Cows

#1 Market Failure or Natural Catastrophe

These are devastating and almost impossible to predict. Three of my digital businesses collapsed due to 9/11, and I wasn’t alone. Countless ventures tanked as a result of the downshift in economy and morale. One of my associates happened to be running a highly profitable call center at the time. When the tragedy began to unfold, nobody was in the mood to take surveys, respond to customer queries, or engage in any type of telephone interaction.

That mindset persisted for quite some time. What could he do? Between office space and employees, he had a fixed overhead cost. I sympathized with his dilemma. Should he lay everyone off or hang on tight and hope the world would bounce back? In the end, he tried to save his team. It was an honorable thing to do but, regrettably, it was the wrong decision.

Think of emergency exits like you think of going to the dentist with a toothache. Deal with the unsalvageable tooth quickly, and you’ll not only get rid of the pain but save yourself additional damage. Before you start on a venture, remember that catastrophes beyond your control are a possibility. Make rules up front so that you don’t get stuck going down with the ship. If you are sinking, head for the lifeboats sooner than later and then wait out the storm. On a sunnier day, go ahead and try again. Getting out early also gives you and your team a chance to find something more solid while the market is still reeling.

I’ll be the first to tell you that this is an area I have routinely struggled with. I tend to hold on too long. An entrepreneur never wants to give up, but it’s sometimes best to let a dying venture go. Maybe your slant on the market isn’t working out. Diversify! After 9/11, telemarketing plummeted, sure, but it was the perfect time to get into security systems. You can take a market catastrophe and find the next big thing, but it requires hard decisions and, sometimes, having to leave an old and beloved idea behind.

#2 Competition Closing In

The only thing you can do in the face of a monster competitor is to stay out of reach. You have to keep toward the front edge of the wave. As a small business, you have a big advantage. You are flexible and quick, without any corporate drama to bog you down. If you can surf your venture on the front end of that wave, it will take you for a thrilling ride. Just be careful; the only thing that hurts more than a competitor who squashes you is a wave that crashes you right into the rock-hard coral. Don’t ride so far ahead that you can’t stay on the wave you caught.

One of the biggest signs of skilled entrepreneurship is timing. When do you get on the wave? How long will you ride? Most important, when will you get off? Several years ago, I rode a very successful wave in the mortgage market and had the opportunity to sell the company for millions of dollars. I opted to try to stick with it. Sure, I prolonged the joy of the ride, but I ended up standing neck deep in the undertow. Out of necessity, I finally closed the company and laid a number of people off. Timing is everything. Keep your eye on the approaching shoreline.

#3 Selling Your Business

This is a fun and exciting strategy for a quick exit. Like I said about the competitive landscape model, you can quickly determine who your potential acquirers are. If you are filling a smaller hole with lots of borders, you can make it a larger event. Don’t announce your arrival into the space until you’ve built something viable; once you’ve launched, though, get your name out there.

While I was general manager of About.com’s Web Services Division, a second-tier page search provider started reaching out for occasional contact with us and other large competitors in the area. They weren’t divulging anything big, just opening a friendly “I’m here” dialogue. Sure enough, within a year that little company was snapped up for millions of dollars. I had a similar experience with an international sports equipment company I owned. The process let me have fun with the business and come out with some cash in the end.

Selling is not a universal exit strategy, though. Take time to consider the pros and cons before selling your business. While a sale is quick in and out and quick to cash, you and your teams don’t get to stick around very long. Since you target a niche market, it’s possible that the competition could stomp you out before you build to the sale.

At the same time, though, this approach lets you fly under the radar and avoid the public eye. With a bit of anonymity on your side, you can come in quietly, make your money, and leave. Some like that, some don’t; usually, the low-flying outcome is the norm, though. Very few companies sell for the big bucks that will land your name in the Wall Street Journal.

#4 Merging

Merging is a great way to take what you’ve built and double down your bet for resources and stability. Often, opportunities arise to merge with bordering companies that have complementary skills where your strengths can fill each others’ weaknesses. Ron and I went through a merger with our business to increase our probability for success. Going in, our core skills were engineering and SEO. We began in the early stages to have discussions with a New York firm specializing in sales contacts and affiliate marketing. Midway through writing this book, we decided to formally merge.

In essence, a merger is a stabilization mechanism. Merging is a way to diversify the talent. A good merger should stabilize your venture, elevate your chance of success, significantly add to the breadth of your market, and make it more difficult to displace you. However, all this stability comes with some pretty serious cons. A merger will dilute your ownership, introduce partner control issues, and create new concerns over culture. The new company basically steps in as a partner to your company; just as with any new partner, make sure that your priorities line up. Is it a good match? If not, it’ll be a nightmare.

#5 Going Public

Going public is a valid and lucrative option. If you come from a bootstrap model, however, it can take you a number of years to get to this point. There are exceptions, but you generally need a fair amount of capital and some real energy behind you. This is an incredibly significant liquidity event. If you want an exit plan totaling more than just a couple million, this is the way to go. A successful IPO is outrageously labor intensive, however, and your company will be subject to serious scrutiny. Going public is not for the fainthearted. A business needs stamina to make it through the process; I’ve seen many die trying. It requires absolute accountability and an unyielding structure.

#6 Raising Venture Capital

Listing this as an exit event actually makes me laugh. I can hardly believe I’m writing this. Seeing what I’ve seen, however, I know that this issue needs to be discussed. Too many young entrepreneurs build a business plan, get lucky (or wily) enough to receive venture capital, and then treat it like some grand exit. After all, when the millions roll in, you can live the business high life—right?

Think again. Once you cash that check, the work really begins. You may have stabilized your business by securing significant financing, but you have locked yourself down and decreased the probability of a smaller, quicker exit. Why? Read the fine print. Venture capitalists typically require a multiplied return on their investment. If they give you two million dollars, they will not even think about selling the company unless you can do so for an incredibly high multiple—four or six million just won’t cut it.

Let’s talk through this. Say I build the company and things go well. A year and a half into the venture, it has evolved to a point where I can sell for five million dollars. Personally, that sounds pretty good. If I could pick up even three million dollars, I would be inclined to do so. But let’s go back to that contract you signed. If a venture capitalist is invested, it’s not going to happen, baby. Theirs is a bang-or-bust mentality. You don’t even have the freedom to make the choice for yourself.

So, what are the pros of venture capital? You stabilize quickly and, for a period of time, have a steady influx of cash. The cons? The work has just begun, and it’s farther to the next exit than you can imagine. You have dramatically increased your accountability and lost a significant amount of flexibility; a real exit event will have to come at a much higher multiple.

#7 Systemizing and Cash Cows

This is really a great option if you are in a stable, secure marketplace. I have had the most success in this arena when dealing with real estate. I acquire the investment property, pay it off, and leave a manager to run the business while I collect the cash. The insurance industry follows this model as well. However, if you’re entering a more volatile industry (like technology), this is not a really good option for an exit. You need to ensure that your asset doesn’t up and blow away.

If you play your cards just right, cash-cowing your venture can be considered a valid exit event. You retain ownership, you have a cash stream, and you maintain a very flexible lifestyle. On the other hand, there is a certain level of risk with retaining a company that you are not actively involved with. You can let it go, as long as you keep your finger on the pulse. If you feel it slowing, you need to take some action. Also, this sort of cash cow doesn’t come from one big event. These chunks of cash come in small increments over time.

Porter’s Points – Types of Exits

• Decide when you enter how you want to exit. Be sure to have thought through all the possibilities and have backup plans in place. Rarely is a business a straight shot from start to finish.
• Bad exits sometimes happen to good people. If a disaster, market-induced or otherwise, forces your business toward folding, quickly get out. Everybody—you, your team, and your later ventures—does better if they can deal with a hurricane when it’s still hundreds of miles from the coast.
• Keep a close eye on your competition. As a small business, you have to stay at the front of the wave. Pay attention to the environment, too; just because you’ve eluded competition so far doesn’t mean you’ve escaped a changing market trend.
• Building your business to sell works best when you place it in a competition-heavy intersection.
• If you want to ultimately stick with your business, consider merging. A merger gives you the stability needed to hold onto your market footing after you’ve been in the game a while.
• An IPO will make big bucks, but going public doesn’t just happen. To have success, you have to spend the time to be worth the public payout. Venture capital is not a real exit. Don’t let yourself have any delusions about where that couple of millions is going to take you.
• Systemizing a cash cow makes for a long-term exit investment; if you are looking for the big payout, however, this isn’t the way to go.

Drafting an up-front exit strategy uses many of the same startup tools you’ve already employed. Keep in mind, though, that when you plan your business with your exit strategy up front, you aren’t just looking to break into the market. You’re looking to break in, and thinking about how to get out. In this way, one of my favorite exercises is competitive landscape mapping. This kind of mapping obviously gives you an idea of where to put your product in the market, but it also indicates how long and well you can operate and how you ought to exit.

I talked briefly about this model in chapter 3, “Power Tools.” Remember the gourmet root beer? In that example, we plotted out regions and price as we determined just how viable our market opportunity would be. In this chapter, we will plot products and price. Considering your competition, this is what they will be most interested in. Knowing where your competition stands tells you how to best use that for your exit. The energy expended up front gives you power at the end.

As you enter the market, diagram your competitors and the segments they play in. Are they high-cost providers? Low-cost? What breadth of service do they offer? By taking time to draw out the landscape and understand where you operate in relation to your competition, you can deliberately position your company to fit.

This little exercise will also tell you who will be in any fistfight you get into—or, if you play it right, which way you can turn to get away from the fight. The companies that your chosen space runs up against will be your most aggressive competitors. While competition helps them, they will, in some degree, want you out. Buying you might be a viable option. Definitely, the companies that border you are potential acquirers. If, you have a large gap, though, you’ll have a larger market opportunity, which means it could take you longer to have a high-dollar exit event.

Let’s consider a retailer in the outdoor market. We’ll use the vertical axis to plot competitors’ pricing. On the horizontal axis, we’ll label competitors’ specialization through the gamut of outdoor sporting equipment. You should have something that looks like this:

The next step is to identify the key players. Fill in your matrix so that you put these companies where they fit into the market. Make this accurate: bigger market shares need bigger circles. Go through each of the competitors in the context of your competition. Map the coverage and look for the gaps. For example:

• Wal-Mart is a low-cost, low-quality provider that competes mostly in the camper, trailer, and family camping sections.
• Outdoor World competes in the camper and trailer market, but they are a higher-quality, higher cost provider, so you place them in the top left quadrant.
• Sportsman’s Warehouse competes in the family camping and hunting markets, and pushes into the hiking markets, covering a fairly large area. They are a mid-range to higher-cost provider.
• Back Country provides online, mid-range cost, focusing on higher quality but primarily the hiking and high-altitude market.
• REI is very high quality, focusing primarily on the camping, hiking, and climbing market.
• Kirkham’s competes directly with REI but at a much lower cost.

Your matrix is shaping up nicely. It should look something like this by now:

Now that you have the landscape drawn out, examine the holes. Where are the overlaps? Can you compete at potential intersections? The larger the hole, the bigger the opportunity; however, it will take more effort to fill and more time to build to an exit event. If your venture fills a smaller opening, one of two things will happen—one, competitors at your borders could try to acquire you; or, two, they will strike aggressively and
cross the line to compete in your space.

My personality fits best with small holes. I like to fill them and plan for quick-liquidity exit events. In fact, the map we drew above is one that Ron and I used right before we acquired Campman.com. We chose to fill a small hole right at the intersection of Back Country, Sportsman’s Warehouse, and Kirkham’s. We were able to sell the company within a year.

The area you choose to enter determines what type of exit you will have. If we had tried to go nose-to-nose with Wal-Mart, we would have been stomped flat. It takes far more money and time for that kind of fight than what I was willing to invest. I learned a long time ago that you have to look for the niche and fill the space. That brings success.

Porter’s Points – Map It

• Consider your competitive landscape map not only in terms of your potential market presence, but your potential market absence—that is, determine at the outset how you are going to go out.
• Don’t take on the big market players at the heart of their empires. Look for a niche where a few smaller players overlap and build up to a sale.
• Keep in mind all the possible variables in your competitive landscape map. Location may be important for some, but don’t forget product, price, and quality.

In business, one of the first things you need to do is plan the last thing you need to do. No, Rich isn’t going to talk about your last will and testament; what he will talk about is your exit strategy. In your venture, what’s the endgame? How do you want this bright idea of yours to play out? It’s a given that you need to plan the beginning of your venture; in fact, some entrepreneurs are so good at planning the beginning that they forget either to get to work or to remember that it will have an end. The thing is, if you don’t create an exit strategy, the market will
do it for you.

How you want to exit determines how you start. Are you looking at an asset sale in two years? Do you want to create a dynasty? Maybe you are hoping for a cash-out event to a competitor. With any of these options, you don’t need a crystal ball. You just need to make a choice. As market variables change, you may change your strategy along with them. There is no guarantee you’ll get exactly what you want, but knowing where you want to end up points you in the right direction.

Don’t lie awake at night strategizing step-by-step exit plans. Set a goal, make rules, and get back to work. Understanding your exit will help guide you in building, organizing, and establishing your business. Run your venture well—and when the curtain falls, know which side of the stage you’re going to exit on!

At the time, specialty equipment such as medical devices, gaming machines and ATMs faced a problem with the motherboards used in their machines. Federal regulations mandated that an entire machine be approved through an often 12- or 18-month process before it could be used. In the sector that Mitsubishi and its competitors dealt with, keeping up with the latest technology meant a constant swapping in and out of motherboard components. (Obviously, that made us money.)

But these sectors—medicine, gaming, and banking— could not simply swap out a motherboard. For example, any changes at all in an X-ray machine required that the whole product be re-approved. Twelve-month delays for every innovation obviously would not work. As a result, these industries had taken to hiring their own teams of engineers to build motherboards that were more stable. They did not meet the performance of outside motherboards, but there seemed to be no other way to meet the need for stability.

This is where we came in with Mitsubishi. Seeing an opportunity, we began producing a line of motherboards that would outperform the ones these industries had created while still providing the needed stability that kept the approval process from having to be repeated.

Suddenly, these industries were able to cut their transactional costs by laying off engineers and opting for better-performing motherboards in their equipment. At the same time, Mitsubishi could optimize its profit by entering an arena where we could undercut the cost of a 10-person engineer team but make a massive profit relative to the other motherboard sectors we were engaged in. By reducing transactional costs and improving the product and product environment, this one sector opened up a profitable new market.

An even clearer example comes from my 2001 trek through the Himalayas. While hiking in Nepal, I met a young man from the village of Namche Bazaar. Some time before, he had decided to try breaking into the Internet market in his village. Nestled high in the beautiful, snow-capped Himalayas, Namche Bazaar is a frequent traveling stop for trekkers. As hikers pass through this village, it is their last chance to check email, make a quick call home, or get in touch with business contacts.

For a long time, the only telephone option was through expensive satellite communications. So, while trekkers could touch base with home, it was at a cost of several dollars a minute. Doing so took a small fortune, but given that this was the only option, nobody questioned the price—until this young man set up his Internet café.

His desire to break into the Internet market had led him to the United States, where he quickly landed a job at McDonald’s. Saving as much money as he could, he eventually bought four used desktop computers that he brought back to Nepal. Once there, he had to hike up the Himalayas to Namche Bazaar with his computers strapped to his back.

I met him after he had set up shop. His resolve and tenacity had given him a toehold in the Internet café business, but it had also whetted his appetite for something more. You see, while in the U.S., he had learned about Voice-Over IP technology. This piqued his interest as a cheaper option than satellite phone calls (and he knew would expand the potential of his business plan), but he did not know how to set it up. He asked if I did—and I did.

I helped this young man set up his VOIP phone call business and, suddenly, he had not just a toe, but his whole foot, leg, arm, and body thrown right into the middle of the market. The high cost of satellite communication meant that his competitors could not drop their prices without losing their profit margin; for him, though, VOIP cost mere cents each minute. By charging little more than a dollar a minute to the trekkers, his profit margin was insanely higher than his competitors’, and the price tag to the trekkers was insanely lower. Considering the low average daily wage in Nepal, this was almost like me renting out my restroom for five hundred dollars an hour!

I am certain it was harder for him to reduce costs and thereby increase margins than it will be for you. Still, if you do your prep work to cut your transactional costs, you will be able to reduce, improve, and profit.

There are thousands of ways to reduce. Whether through applying technology, finding your niche, or just behaving small (see chapter 14), you can find a way to reduce your transactional costs without traveling the world and hiking the Himalayas. If you can do it cheaper than the competition and protect that price-enabling innovation, you will have flexibility with pricing, marketing strategies, and customer relationships. You simply need to be aware of the competition, the customer’s wants and needs, and the best use of your imagination.

When you do all of this, you will be far more profitable, acquire more customers, and outpace your competition. Dance with the devil for the judges and the audience, yes; but, most important, dance with the devil for yourself and your business.

Porter’s Points – Reduce and Improve

• In order to respond to your competition, examine product innovation, longevity, and quality, as well as associated services, legal and technical requirements, and market trends for places where you can start cutting. Reduce your transactional costs by cutting out the middleman.
• Don’t just cut costs. When you scale something back, take the opportunity to improve the product, the marketing, and all other aspects of your reduction. When you can hit a market niche with lower costs to you, be sure to hit it with the highest profit margin that you can.

I don’t know if Ray Noorda at Novell coined this one or not, but the first time I ever heard the word “co-opetition” was from his mouth. The idea is exactly how it sounds: compete, but cooperate. Competitive relationships can and should be fun, lively, and challenging. Hate relationships (like those unfortunately existing between many competitors) are not a place you want to go. Haters are annoying. They just waste energy.

The amount of energy you can expend in a fit of anger or jealousy can be significant, and even if it was motivated by an idea that popped into your head, that idea is usually gone once the tirade is over. New developments inspired by competitive camaraderie are often longer lasting and more respected. Some try to argue the value of a good dose of angry, negative competition, but it is just a short-lived dead end.

As much as you would like to engage in “coopetition,” you still need to know when your customers or affiliates don’t feel the same way. Some years ago, Ron experienced the tip of this negatively competitive iceberg when caught between two companies that seemed to love hating each other. Here is how he learned about hateful competition:

While employed at a large software company in the early ’90s, I had the direct responsibility to sponsor a customer feedback forum. The forum was held at a location that was neutral to all our customers, as we wanted uninfluenced and uninhibited feedback on how we were doing as a service organization. These customers made up our Customer Advisory Council, and their input was critical to our success. In many cases, they had spent millions of dollars on our software and services. They were highly respected in their particular markets and industries.

About midway through the first day of meetings, break time came around. One of our customers, a representative from a worldwide manufacturer and distributor of soft drinks, made his way to the refreshment table. I was standing nearby, visiting with another customer, when I heard a loud expletive. Turning my head to see what was up, he locked on my eyes and exclaimed something to the effect of, “I see our competitor’s products all over this table, but not a single one of ours. Would someone like to explain to me why the %&*@ that is and what the %*#& I’m supposed to drink?!”

Not knowing the intensity of the competition had led us to commit a cardinal sin. As soon as our customers returned to the meetings, we cleaned out every bit of his competitor’s products and replaced them with his company’s brands.

This kind of competition is abundant. You need to do your homework to be sure that you know what kind of competition to expect. Don’t believe it? Well, of a hundred more that I could pen, here comes another example of a rivalry so intense that the companies did stupid, self-defeating things. Once again, it comes from Ron’s bank of stories. Read it, believe that competition can get brutal, and resolve to do better.

When Ron was building the professional services team for a startup software company, his field sales engineer (FSE) was invited to present at a large hardware and software business based in Texas. He was equipped with the latest laptop technology—albeit from a competing hardware manufacturer—and was prepared to give a sterling presentation. This was a presentation that was important not just for the startup company, but for the long-term IT strategy of the Texas company as well.

The FSE was invited into the conference room and settled in for the presentation. One of the potential client’s high-ranking employees watched the FSE set up for the meeting—laptop out, wires hooked to the projector, everything ready for the dog-and-pony show. The employee waited until the presentation was ready to begin and then stood up, walked around the table, stopped in front of the engineer, and told him to unwire
his laptop, pick it up, and follow him.

He led the FSE out of the room and into the hallway. There he “invited” him to stow his laptop in his bag and hand it to him. He then walked the laptop over to an administrative assistant and instructed her to return the laptop to the FSE after the meeting. Returning to the engineer, he said, “Don’t ever come into our complex again with our competitor’s laptops or any of their products. You will do the presentation without our competitor’s gear or not at all. What’s it going to be?”

Never underestimate or misunderstand how your competitor feels about you. You need to know the appropriate amount of sharing and communicating to do. If you can stay away from this kind of brutality, it will be better for all of you. In some cases, however, it’s best to leave the relationship alone completely. If you run up against negative competition, don’t touch it. This is for the good of both companies and anyone
else foolish enough to wander into the crossfire.

Porter’s Points – Know Your Competition

• After you draw up your Competitive Matrix Model, determine when and how best to approach each of your competitors and then do it. “Co-opetition” does not always mean that you cuddle up with everyone in your market. Be especially careful with the timing of your market entry.
• For those competitors who react harshly to your friendly overtures, figure out how best to observe their work from a distance and then stay away. As a startup, the last thing you need is for an established business to come gunning for you.
• Whenever you interact with competitors or customers, think through every detail— technology, refreshments, location, and especially culture. If there is anything that could offend, eliminate it. In such situations, it’s much easier to be a friend up front than to ask forgiveness later.

Make a concerted effort to create your list. Search online. Go to the mall. Attend conferences or seminars dealing with your market space. Pay attention to advertising you see throughout the day—commercials, newspaper and magazine ads, billboards, anything.

List in hand, it’s time to get to know the guys across the street. What are they doing right? What are they doing wrong? Who are they selling to? Who is their biggest customer? What is their best-selling product? This may require a little espionage. Go stand in line at one of their stores. Eat their food! Call the companies and engage their administrative assistant in an informational conversation. Tell them that you’re doing research and ask about the company’s goals, mottos, and customers. You will be amazed at what you can find out by asking the right questions to the right people.

Open up a line of communication with the owners of the company. Take them out to lunch and have an honest conversation. Make sure you approach this from the right angle, though. For instance, you could say, “I admire you company’s history. I’m interested in a similar industry, and as someone just starting, I wanted to know if I could ask you a few questions.” This comes across much better than, “Tell me what you guys do, because I plan to leave you in the dust in six months’ time.” Be polite and ask honest questions. You’ll get answers.

Just because you know this information about your competitors, you do not necessarily need to model their businesses’ look, feel, and function. If you see weaknesses, for example, you certainly don’t want to let them slide into your company. Don’t just look for holes, though; there may be a thing or two you find valuable and decide to borrow. We’ll go back to Schoolhouse Rock! and affirm that, indeed, “knowledge is power!” Specifically, it is the power to emulate the good, improve the bad, and sail past your competitor on the dance floor.

Porter’s Points – Do Your Homework

• In the planning stage, list all aspects of your business that might run up against competition. Starting with Internet searches and moving into actual legwork (malls, phone books, industry directories, etc.), make a list of all your competitors.
• Draft a series of questions and talking points to use when approaching your competitors’ administrative assistant, managers, and owners. Don’t put them in the awkward position of disclosing proprietary information, but focus instead on their product ideas, customer relationships, advertising techniques, and other useful information.
• Always be courteous when courting your competitors. Don’t push if they refuse some answers. If it really is important, you can find out some other way.