What to Obsess About as You Grow

(not profit)

Startup is all about proving you will make a profit someday soon. Once you prove it, you need to forget profit and focus on other things. If you don’t, you may stagnate or go out of business, ironically by focusing on profit.

Too often I see business owners who have worked hard to build a profitable business who never get off the treadmill. The problem is that when the business finally makes money, the founder too often hunkers down and protects their profit, when what they really need to do is move to a new stage – forget profit for a time and focus on growth.

At startup, if you don’t focus on proving your product or service can be profitable, you’re employing the Random Hope strategy of business. But once you’re there, if you want to grow, profit will shrink. It almost always does. Growth usually erodes profit significantly. If you’re focusing on profit, you’ll never want to grow, and you’ll never build a sustainable business.

When growing, here’s some things you should focus on instead of profit.

1) Product development – make it better!! Don’t settle for what worked to get you into business. Be relentless in developing an even better product or service. This could cost you some profit. It’s worth it.
2) Great people – great people are not an expense, they are an investment. Forget your profit, take a lower salary yourself, and get a couple great people. They will help you build a sustainable business, and you will grow much faster with a few key people doing things you’re not good at doing anyway. This will sacrifice short-term profits.
3) Logos, website, marketing materials. Too many businesses make the mistake of focusing on these things when they start (see last week’s post on why that’s a bad idea). But once you know you’ve got something, build a consistent face for your business.
4) Infrastructure (software, leased space, conveyor belts, computers, a bigger truck, etc.). When we cripple along and “make due” because we don’t want to hurt our profits, we are not thinking straight.

Focusing on profit, instead of growth, simply mortgages our future for short-term profit. We sacrifice much higher profits in the future because we’re not willing to take a break from profits to build the business.

The profits you were making early on need to be re-invested in the business in the form of a continually improved product, great people to build around, good messaging and marketing to expand the reach of your business, and infrastructure to support the growth.

Principle #1
Ask yourself this question: “Are you making decisions based on where you are, or where you want to be?” If you are making decisions based on where you are, where do you expect to be next year, or five years from now?

Principle #2
Don’t “go” into business, but “grow” into business.

Don’t spend money on the above things until you know you have a product or service that has proven it will be profitable. Don’t take loans out to build something early on that you haven’t proven has legs. But once you have proven it, then it’s time to make the investments that will take you from short-term profit, to a long-term sustainable business that makes money while you’re on vacation.

Prove profit. Then shift from profit to growth, and know that growth will cut the heart out of your short-term profit so you can build a long-term profitable business.

What to Obsess About at Startup

And why

Most business owners obsess over the wrong things at the wrong time, costing time, money and even the business itself. What should you obsess over? When?

At startup we obsess over three things we shouldn’t:

1) The beauty and design of our product.
2) The beauty and design of our marketing (logo, business card, complex website, wrapping our van, etc.).
3) Focus groups, or other outside opinions that don’t involve someone’s wallet.

These are not things to obsess over at startup. They come later (in a future post we’ll discuss when these things become more important).

What should we obsess over at startup?
1) Sales – Are people buying right now, without fancy marketing, fancy packaging, or a fancy logo? Sales is NOT a focus group of people SAYING they would buy it, but cash actually exchanging hands. If this isn’t happening, don’t bother with a logo, website, focus groups or making the product prettier.

Nothing matters if people aren’t willing to buy the product long before it’s perfect. If the basic product isn’t enough to draw people in, then all you’ll be selling once you make it pretty is – “it’s pretty”. Google, Facebook, Basecamp, the automobile, cell phones, printers, TVs, radios, movies, cosmetics, you name it – none of them were very good when they came out, but sold anyway because the basic idea was really good. They got pretty later.

Focus first and foremost on selling a first generation product or service. If it doesn’t sell without the bells and whistles, the bells and whistles are very unlikely to make it sell more.

2) Close Ratios – How many Connections become Buying Conversations become Customers? Do I know the “close ratios” of Connections to Conversations to Customers? If I don’t know these numbers early on, I have no clue how to grow my business. After “Does it sell?”, nothing matters more than your close ratios. Knowing these defines all of your most important activity about how you will find customers in the early stages.

Example: I need 10 new Customers a month, which means I need 30 Buying Conversations (33% closing ratio), which means I need 90 Connections (33% ratio). If you don’t know how many people you need to reach to make a sale, you’re employing the Random Hope strategy of business. Good luck, because luck is all you’ve got.

3) Profitability – not “Am I profitable right now?”, but “Will this product/service be a profitable business?”

I worked with one client who I encouraged to make a few prototypes quickly, and take them out and see if they would sell. Instead they did focus groups, spent tens of thousands on product design, focused on product name, logos and branding, and put together a highly complex integrated marketing program with a great website, email campaigns, social media, etc. The product did not sell.

Marketing is what you do AFTER you have a viable product that sells on it’s own merits. Marketing will not make it sell, or will only make it sell nominally enough to fool you into staying in business.

When I started Crankset Group, for almost the first year I had no business card and a simple billboard website (1/2 page-no scrolling, almost no info, one email address), just to prove that most businesses don’t need marketing at first. They need to sell something.

Marketing is not the key to selling your product. Producing something that people want to buy before it’s beautiful is the key. If they will buy it when it’s slightly rough, they’ll love it when it’s refined.

At Startup, Profit Potential is Good
And don’t be fooled if your product or service sells like hotcakes right out of the gate without good marketing. Check your pricing and make sure this business will be profitable.

A few years ago in the TV series “The Office”, Michael Scott started his own paper company. He was able to pick up a lot of clients very quickly, seemingly proving he had a great business. Then his accountant told him that his pricing was too low and the more clients he landed, the more money he would lose.

Top line revenue is not profit. Profit is the number at the bottom after you pay for everything else. Because you may have startup expenses, you won’t actually see profit right away, but the profit potential must be very clear from the outset. Get outside eyes on this (i.e., accountant). Like Michael Scott, you almost certainly will be clouded, believing you see profit potential where there is none.

Sales, Close Ratios & Profitability Potential
People buy great marketing only once. If your product isn’t sellable without great marketing, it will die quickly. Word of mouth is the most powerful marketing you have. Make something people want, and serve them as they buy it. If it sells and it will make you profitable, then you can employ marketing to expand the reach of a product that is already viable.

Next week we discuss what to obsess over after you begin to grow.

Growth Can Kill Your Startup…

And Profit Can Kill Your Growth

Huh? Aren’t profit and growth both good? Only in the right sequence. Focus on the wrong one at the wrong time and either one of them can drive you out of business.

At Startup, It’s All About Profit
Startups make the mistake of thinking what they need right away is growth. We measure growth in a number of ways, and all of them are largely unhelpful to an early stage business:
1) Revenue (is not profit!)
2) Market Share (lots of new customers)
3) Operational scalability (lots of new people, machines or square footage).
4) More investors (lots of cash being invested early on)

Problem: The ONLY thing that matters in the very early stages is finding something that can and will make us profitable for the life of the company. Why? Amar Bhide says 93% of all businesses leave their prime objective to become profitable. I think it’s even higher. If you focus on growth first, you’re almost certain to grow something that won’t be your long-term profit center, and backing out of it could be disastrous.

In 2006 we started Crankset Group believing our main profit center was something we stopped doing two and a half years later, and will never do again. It took us longer than normal to find our profit center, and I’m very thankful we didn’t invest a lot in making it go. Committing a lot of resources to it early on might have us mucking along trying to keep it alive just because we were too vested to move on.

An emphasis on growth before you’re 100% convinced you’ve found your long-term profit center will drain your resources and drive you out of business, by chasing an idea or a product that hasn’t been tested by your customer’s checkbooks (the only true focus group). Find your REAL prime objective, the one that will create long-term profitability, first. It almost certainly isn’t what you planned.

Found Your Profit Center? Forget Profit!
The game shifts radically once you’ve found what will make you profitable in the long run. Most business owners miss this one. I worked for a company that became profitable, decided to stop investing, and three years later, profited and saved their way right into bankruptcy.

Most small business owners do the same thing. As soon as they become profitable, they have something to protect (profit), and they’ll protect and defend that profit so fiercely that they either never hire anyone else to build the chair (I can do it cheaper myself) and never get off the treadmill, or their business becomes obsolete and just fades away. This is where Ray Kroc’s (founder of McDonalds) terse warning applies, “If you don’t want to take a risk, get the hell out of business.”

After finding your profit center, if you are worried about profit, you will likely never grow.

Growth means one of two things – you grow enough to build a true business that can make money while you’re on vacation. Or if you want to be Giant Corporation, Inc., then growth means figuring out how to capture the most market share. Most business owners will never want to be Giant Corporation, Inc., but all of us should grow our businesses to the point where we are no longer hostages, but can very regularly get away and enjoy the fruit of our business. To do that, focus on profit first, than be willing to take the risk to focus on growth, even at the risk of short-term profit.

It’s Worth the Risk
If you take the risk to grow, you’ll make a lot more money in a lot less time, for a lot longer than if you focus solely on profit.

If you haven’t been arrested in Tanzania…

…you haven’t lived.

Building a business is a lot like my trip to Tanzania. I was supposed to be there for seven hours just to meet a Congolese Chief. Five days later I was still trying to get across the finish line and get home.

The trip seemed to be over at least 20 times.

At the outset, my visa and passport didn’t come back to Denver from the visa processor in NY. The day before I left I set up two one-way flights to NY and DC to get it, and then canceled them as the passport ended up in DC. I got it 30 minutes before they closed the doors for my flight to Africa. I raced through security and walked on as they closed the doors.

I needed to be in Tanzania to honor two chiefs, who were going to do business with us for years to come. Even though we had competent employees there, it would be an insult to not meet an owner for their first export shipment. Two days both directions on an airplane for a few hours with them was well worth it.

The visa snafu was only a warm up. They were supposed to meet me at the airport in Dar es Salaam, Tanzania. When I got there Wednesday I learned they hadn’t been able to get across the border into Uganda from the Congo yet, but would arrive the next day, Thursday. I lost my non-refundable ticket home and bought a one way for the next night.

I had no hotel, no contacts, no knowledge of Tanzania. English is the written language but I was having trouble finding anyone who spoke anything but Swahili. I got a cab, a hotel, dinner, and went to sleep.

The next three days were spent trying to figure out how to get the Chiefs from the DR Congo through Uganda to Tanzania. It was excruciating, and at least twice I had to have the airline call the gate to release my seat with just 90 minutes or so before the flight, so I could get my money back and schedule one the next day. The third day I took a long walk. That was a mistake.

On that walk I took a picture of a street with nice trees and a tall wall down one side, and was quickly faced with three policeman in fancy uniforms who let me know it was the President’s house behind the wall, and I has just taken an illegal picture. As they confiscated my iPhone and were walking me back to the guardhouse I realized my passport was back at the hotel, a big no-no, and my one-day visa had expired three days ago, a bigger no-no.

I was in the country illegally.

I decided to employ the adage “He who makes the rules wins”. So I grabbed my iPhone back from the guard, showed him how I could delete pictures, made small talk with a few simple phrases I’d learned in Swahili, then made a bold move. After asking his name, “Jina lako ni nani?”, I told him mine and said, “Nafurahi kukufahamu” (pleased to meet you). Then with my iPhone in my hand, I turned around and started to walk away.

He let me go and I didn’t turn around to ask why. It could have cost me my iPhone, my computer (which I had in my bag) and a few thousand shillings in my wallet. I slept real good that night.

On Saturday, four days after I was supposed to leave, only one of the Chiefs arrived with our employee. The other one was still stuck in Kampala, Uganda. I changed my flight again at the last minute to leave Sunday. By this time I had frozen up two credit cards with what looked like suspicious activity in Tanzania (the card companies didn’t know I was there). The third and last card worked.

We spent the next 24 hours doing everything we could to get the Chief there. He needed money via Western Union. My third card was now locked up and so was my ATM debit card because I had hit the limit getting cash to buy them hotel rooms, dinner, etc. We had someone wire us money from the states, but when it came two hours before the Chief’s flight, they spelled Marian (our employee), as Marien, and Western Union wouldn’t give us the money. After all this it looked like an ‘e’ was going to wreck the whole five day ordeal. We headed back to the hotel wondering if it was all for nothing.

At the hotel, exhausted and out of options, I tried my ATM card one more time. It had come out of its 24 hour max, and the machine spit just enough money to buy the airline ticket. We raced back to Western Union but learned on the way there that the Chief was 10 kilometers from the airport and needed $6 to get a cab to get there. With only 45 minutes left before his flight, it wasn’t going to happen.

We went back to the hotel and Marian talked to the Chief. He decided we had been honorable in trying to get the other Chief here, so he would sign the papers for both of them. We signed, took pictures, and with 10 minutes before they closed the gate for my flight to the U.S., I walked on the plane. Had I missed it, I wouldn’t have had enough money to even get a hotel.

I got back in Denver at 1pm on Monday, changed in a hotel bathroom and facilitated a workshop from 4pm-6pm. That evening I took my first hot shower since the Monday before and had a great night’s sleep.

The point?
Honestly, this is how you grow a successful business. You have a clear goal in mind, you get moving, and then the world begins to interact with your plan. And from that point on it’s nothing like your fancy business plan said it would be.

It’s like a stream running downhill, winding all over the place to get where it needs to go. Those that get tired of hitting and overcoming beaver dams will quit. Those that are able to clearly keep the goal in mind will keep going, pay the price and push their business over the top to profitability. Those seven days were like a compressed microcosm of what it was like to build the seven businesses I’ve started over the last 25 years.

Want to be successful? It won’t happen because you have a great idea, big financing or slick marketing. It will happen because you know exactly what the goal is, you never lose sight of it, and you become a bulldog, doing whatever you have to in order get across the finish line, even if it means making your own rules.