Remember when your father used to say “If you want something done right, do it yourself?” It was those times that his mowing the lawn for you because you did it wrong was a good deal. However, we all grow up and learn that there was wisdom there, and when it’s time to get a job, creating your own can seem an enticing opportunity

Bootstrapping a business is a perfectly viable (maybe even preferable) path to take, but bootstrapped financing comes with limitations.  You don’t have the money to hire the help you need, so you get into the habit of doing it yourself.  In fact, in the early days it’s not even an option - you MUST do it yourself.  But, there’s danger in learning this lesson too well and thinking that what works for a small business will work for a not-small business.

If you want to grow, you have rely on other people to do important things.  It’s a mistake to think you can accomplish big things by hiring only low-level people to do the grunt work while you fill all the valuable roles.  There are too many different skills required and you don’t possess them all.

What Do You Do Well?

The first step is to be brutally honest with yourself; what is it that you truly excel at? Is it sales? operations? strategy? Next, identify those important roles that require skills you don’t have.  If you’re an ace business developer, you probably need an operations wizard.  If you’re a big thinker you’ll need someone who’s good with details.  Choose the work for yourself that will play off of your own strengths - offload your weaknesses.

What About The Things You Don’t

Now that you’ve decided to concentrate on what you do best, how do you make sure the other important stuff gets done?

1) Look at your current employees.  Do any of them have the raw material to step up?  Since you’ve been keeping them under wraps up to this point, they probably need training - but don’t assume that just because they haven’t been doing something they’re incapable.

2) If you don’t have someone in house that can be brought up to speed you might want to recruit someone new.  Make sure you fully understand what role you’re recruiting for and looks for those skills.

3) Outsource - especially when a role needs very specific experience but you don’t need it full time.  Only very large companies have lawyers, and PR people, and the like on staff - most businesses outsource these on an as-needed basis.  You can do the same with a multitude of roles: marketing, HR, accounting, etc.  Many highly qualified professionals are out of work these days, so hiring a savvy consultant in any number of fields is much easier now than it used to be. Take full advantage of this opportunity to receive quality help from able professionals.

4) Partner up with another company - one that has complementary strengths to yours.  This is a common approach for companies with strong technical or product abilities and weak marketing or distribution.

An Investment That Pays Off

Keep in mind that starting and growing a business is going to cost money.  There are times to be frugal, and there are times to be bold so choose wisely.  Concentrating on your strengths and investing in shoring up your weaknesses is a bold move that will pay dividends in growth and profits.

As the owner and manager of your business you earn income from two sources: the salary you make as an employee of your business and the profit you make as the owner.  Conflating the two leads to inaccurate conclusions about the success of your business.

Payroll Is Not Reality

The smart business owner manipulates his or her salary to minimize taxes.  One of the most common methods is to keep salary low and profit high(er) and thereby lower FICA taxes.  A common opposite strategy is to keep salary high, thereby lowering the “real” profit, in order to maximize 401(k) contributions.

There is no absolute right or wrong approach to setting your salary.  Every situation is unique, with lots of moving parts, and you should work with you advisors to craft a strategy that works for you.  The mistake that occurs is assuming the salary you pay yourself accurately reflects the true value of your contribution as an employee.

Neither Is Your P&L Reality

If your salary is over or under the true value of your work, then your net income is overstated or understated by the same amount in the opposite direction.

If you want to know the real profit of your business you can do this simple calculation:  Actual Salary + Actual Net Income - True Salary = True Profit.  Where True Salary is the amount you would have to pay in the open market for someone else to do the job you do.

The True Profit is the number you use to evaluate the success of your business as if you were an outside investor.

An Example

John has owned and managed his distribution business for 10 years.  In the last year, the business had $3 million in revenue, a net income before taxes of $300,000, and John paid himself a salary of $75,000 for being the CEO of the company.

A net income before taxes of 10% for a company of this size, age, and industry is OK, but not stellar, and John is relatively pleased with how things are going.

However, John determines that the market value for a CEO of a company in his industry and of his size is $150,000 a year - $75,000 more than he pays himself.  His company’s True Profit is: $75,000 + $300,000 - $150,000 = $225,000.  Or 7.5% of revenue before taxes.  Not so great and John has some work to do.

What Does It Mean?

You can only evaluate the success of your business if you use accurate information.  The first step is to stop thinking of your salary and your profit as one pot of money.

In my previous post on Unbundling Business I said that product innovation was probably best left to “two guys in a garage.”  It was a bit of a throw-away line, and I’ve received some off-line feedback to explain myself.

A concept that applies to any investment, whether in your business, in the stock market, or Las Vegas,  is Risk of Ruin.  This is a statistical concept with lots of math involved and you can read more about it at these two Wiki pages (Kelly Criterion, Gambler’s Ruin) if you’re interested.

In brief, Risk of Ruin is a methodology for calculating how much of your available funds to invest in an endeavor with a positive expectation.  A positive expectation being one in which the return is greater than the odds.  If you were to bet $1 on a 50/50 coin flip and receive $2.05 (your original bet plus $1.05 in “profit”) when you won, that would be a positive expectation.  If you received $1.95 (a $0.95 profit) upon winning, that would be a negative expectation.

Even long odds can have a positive expectation if the return is big enough: a 2000-1 payoff on 1000-1 odds is positive.  The trick in this situation is to stay in the game long enough to take advantage of the positive expectation.  If you risked every thing you own, you’d go broke most of the time.

Guard Your Capital With Your Life

And that’s the lesson for entrepreneurs.  Even if the payoff is large, if the odds against success are long, don’t risk all or most of your available capital.

We read all the time in the business press about the entrepreneur who risked everything, beat the odds, and reaped the rewards of money and fame.  But we don’t read about the other thousand who didn’t win and went bankrupt.  It’s called Survivor Bias.

You can read more about Survivor Bias and how it applies to entrepreneurs in my post on Luck and Success.

Experiment, Evaluate, Repeat

A better approach would be to risk a little on a lot of opportunities, discard the ones that don’t work, and then invest more in those that look promising.  When you have something that’s clicking and starting to pay off, that’s the time to dedicate your all to the project.

If brevity is the soul of wit, I can think of no better example than Pick Two.  This little tool is as powerful as it is underused, so I’m doing my part correct that oversight.

Who Knew Software Geeks Were So Smart

Way back in the mists of time, maybe 30 years ago or so, software developers then, like today, were struggling with the unreasonable demands of their customers - both internal and external.  The customers wanted a solution tomorrow, that was bug-free, and didn’t cost an arm-and-a-leg.

Someone very smart came up with a simple solution to communicating the problem to customers and getting them to make tough choices.  It was called “Pick Two”, and did more to crystallize the problem than any lengthy whitepaper could dream of.

• You can have it Good.
• You can have it Fast.
• You can have it Cheap.

          Pick Two.

Just 17 words.  Even shorter than the Gettysburg Address, and just as effective.

Pick Two Applied to Healthcare

Not too long ago, Arnold Kling of EconLog posted his version of a “Pick Two” on healthcare:

• You can have the best quality healthcare.
• You can have unrestricted access to healthcare.
• You can have someone else pay for it.

          Pick Two.

I think this does a great job of summarizing the debate on healthcare in just 23 words.

Delegation and the Business Owner

So, in the spirit of experimentation, I am going to attempt an occasional series of Pick Twos.  Maybe we can create a new Meme together.

Today’s inaugural contribution:

• You can grow your business.
• You can do everything yourself.
• You can have a life.

          Pick Two! 

(To be honest, if you pick the second option, you’re probably stuck with Pick One.)

Think about it.  Agree? Disagree?  If you think you can have all three, prove it.

Have any Pick Twos you’d like to share?  Comments are open.

Joe Pulizzi of Junta42 and Newt Barrett of Content Marketing Today have teamed up to write "Get Content.  Get Customers.", a guide for content marketing.

They’ve put up a companion blog for the book and will give you a free sample.  Check it out.

Next, Conversation Starter has advice on How to Reward (and Retain) People When Money Is Tight.  Here’s a snippet:

• Responsibility along with empowerment is the best motivator
• Recognition inspires, not only the recipient but also others
• Different people see value in different things, so one should strive to understand what is important to individuals working for you. This is especially critical when working in an unfamiliar cultural environment.

Lastly, Jeff Cornwall of The Entrepreneurial Mind says: "Turn Your Competitors into Your Sales Force."

What seems like crumbs to them can become your feast.

Read the whole thing to see what he means.

I came across an article on Forbes.com about the role serendipity plays in careers called "A Pinch of Luck," and it got me thinking about how luck influences business success.  Often, maybe even most of the time, it is a vital ingredient in creating those successes we read about in business publications.

To illustrate my point, here’s a classic thought experiment, with a twist, using a two-sided coin with a 50/50 chance of landing on heads or tails on any one flip.

Imagine that 2,097,152 people "invest" $1,000 each to enter a coin flipping contest.  The rules are simple: on each round of flipping, those who flip heads get to continue and those who flip tails are out of the contest.  This continues until one person is left - the person who has flipped all heads, however many in a row it takes. (It will take 21 rounds.)

All that money that was invested by the participants becomes the prize pool and it is awarded thusly:

• 9th through 64th place finishers receive $10,000,000 each.
• 2nd through 8th place finishers receive $100,000,000 each.
• The sole survivor, and winner, receives the balance of $837,152,000.

Because of the size of the prizes, this contest would receive a great deal of publicity.  Everyone would comment on how lucky the winners were, because everyone knows that you can’t control which way a flipped coin lands.

However, let’s change the scenario from flipping coins to starting up a business. 

Read the rest of this entry »

Chip and Dan Heath, writing in Fast Company, show us "How to sway people’s decisions with the gentlest of nudges."

The basic premise is that people can be influenced to make a decision by how the default position is crafted.

Because inertia is so crucial, world-class nudgers recognize that the default option is critical. Chances are, you weren’t craving the USA Today that came with your last hotel stay, but you just couldn’t be bothered to call the front desk and reclaim your $0.75. (Notice that if the default option were reversed, and you had to call to get your copy, there’d be more trees and fewer infographics in the world.)

Ethics Alert:  if you become one of the "world-class nudgers", remember to use your powers only for good, never evil.

Next, Newt Barrett of Content Marketing Today expands on the recent trend of the internet lengthening the buying process.

This is horrendous news for you if:

• You have no web presence.
• Your website does not make it easy for visitors to find exactly the solution they are seeking.
• Your website does not contain intrinsically valuable content that will put you at the top of the list of potential suppliers.
• Your only e-mail communications with your buyers are self-promoting and irrelevant to their information needs.

Finally, John Jantsch of Duct Tape Marketing says that public speaking is a competetive marketing skill for any and all entrepreneurs.

When you have to get your thoughts down into a concise 30 minute talk and then go out and get instant, sometimes too truthful, feedback it develops character and poise along with an improved message.

Be sure to follow the link to the podcast interview with Tom Antion.

Firstly, Michael Roberto in Conversation Starter gives his take on Growth During a Recession.

He has 4 dead-on points, and here’s one I didn’t think of for my series on Surviving and Thriving in a Recession:

…identify your most critical suppliers and distributors, and determine if any face the possibility of severe impairment to their business due to the economic downturn.

Next, Peter Paul Roosen and Tatsuya Nakagawa offer us "Give Yourself a Productivity Boost: Learn from Kodak’s Transformation" in Lifehack.

They interviewed Jeff Hayzlett and David Lanzillo of Kodak about their F.A.S.T program.  "A" is for Accountability and "S" is for Simplicity - and in my view Simplicity makes Accountability a whole lot easier.  It’s to easy to dodge responsibility when you can hide behind complexity.

Finally, BusinessPundit tells us how entrepreneurs can use social media in The Entrepreneur’s Guide to Social Media.  The post has links to a number of resources, so you might want to save a copy to your desktop.

This is the first of what I plan to be weekly links of interest - posted every Tuesday.  So, for our inaugural Tuesday links…

Jeff Cornwall, of Belmont University’s Center for Entrepreneurship and blogger at The Entrepreneurial Mind, posts on the importance of microbusinesses in the American economy.

Don’t misunderstand my point. I like high growth. high potential businesses. We get a few coming through our program and they are challenging, interesting, and fun to watch. I hope we get more.

But, they are not the heroes of our entrepreneurial economy. That title belongs to the average entrepreneur who will never get a dollar from a venture capitalist — who builds a successful business seemingly out of almost nothing.

Next, Dawn Rivers Baker of The Journal Blog points out the phenomenon of microbusinesses with big revenue. 

Now, here is my question: now that people are starting to notice that it really is no longer necessary to enlarge your organization in order to make a lot of money, will they stop sneering at microbusinesses for long enough to support the microbusiness way of growth?

Be sure to follow the link to the Information Week article as well.

Lastly, Ben Yoskovitz of Instigator Blog offer us How to Use Perks and Rewards in Startups to Get the Best Talent.

And for the most part what this really means is that it’s very difficult to motivate people.

It’s very hard to truly motivate employees. Yes, working at startups can be hugely rewarding. But ultimately, most of the motivation has to come from within.

But all is not lost!  Read the rest for some good ideas from Ben.

From Seth,

“If you work in an urgent-only culture, the only solution is to make the right things urgent.”

Amen!