5. A niche is the foundation for every new business
First-timers get so much bad advice that I sometimes wonder how startups survive.
For example, you often hear that to be successful you need a unique product or service,
something that no one else offers.
Or you should choose a business with as few competitors as possible,
and preferably have your own market.
But my advice is the exact opposite of that.
I never wanted to be a market pioneer,
and I always wanted a lot of competition.
Yes, I want to be different from them,
but the more people make money in the industry,
the more I’d love to get in.
There are actually three criteria that I use to measure all of my new businesses.
I think they work for about 80% of first-timers.
First, I wanted an idea that was at least a hundred years old.
The important thing is that it’s a pre-existing concept,
one that people have understood and instilled.
It is nothing new and revolutionary.
Why do I want that?
Because, nothing is more expensive than “educate” a new perspective on the market.
I discovered it bitterly when I expanded my mail business to Atlanta in the early 1980s.
At that time, Atlanta companies handled the delivery
by sending secretaries to deliver the mail parcels by on the transport cars.
Secretaries don’t want our services,
they love having time out of the office
and companies don’t know they need it.
We sent out open letters, advertised,
and developed a public relations campaign.
It’s that we’re just teaching people about the mail service, not some new technology.
I want to tell you,
it was very,
and we failed.
I would rather enter the biggest,
most competitive market in the world and go head-to-head
with hundreds of other companies than to start building a new market.
Of course, if you’re competing,
you must be able to show off and make your customers aware of your difference.
This again relates to my second criterion:
I want to enter an old market.
I don’t mean “old-fashioned” here.
I am talking about a business in which most companies do not satisfy customers.
Perhaps customer needs have changed
and suppliers have not noticed and failed to realize it.
Or maybe they are not up to date with the latest technology.
In all cases, there has certainly been a change in some respect,
and the industry has not kept up with it.
My hosting company, CitiStorage,
is a prime example.
When I first researched this business,
I realized that, except for a few large companies,
most of the other record keeping companies were “sleeping”.
They have old, “old-fashioned” warehouses designed to store dead records for customers.
Meanwhile, the industry has completely changed.
Real estate gets expensive in big cities so clients need to find a way to store their active documents, that is,
documents they can access over and over again externally.
Record keeping has become a record retrieval business,
and almost no one realizes it except Iron Mountain and Pierce Leahy.
Later, these two giant companies merged.
They recognized this change and built state of the art record retrieval facilities outside the city.
In the process, they become the dominant market players of this business.
I realize there’s an opportunity here,
but there’s something I still don’t understand.
Why are other companies still sleeping in that situation?
Why do they still exist?
Why don’t they lose customers?
In the end, I discovered that it was because the big clients didn’t want to migrate their records.
They don’t want to move their documents out of town.
Because if they did, what if they needed a document within an hour?
That makes up the third standard of a successful business: a niche.
I will build a huge, state of the art data storage facility in the city.
I set myself apart from the old record keeping companies by using state-of-the-art technology,
designing the means to retrieve records.
I set myself apart from the giants in terms of location.
Customers always want to be close to their profile.
In fact, a niche is the foundation for every new business,
but not in the way people usually think.
It involves the high gross margin needed
to ensure that the initial capital lasts long enough until your business is viable.
If you are a new entrant in the market,
you cannot compete on price with your competitors
because that will make you bankrupt.
Moreover, your important task when it is win customers,
that means you have to offer them value plus the current price.
But how can you add value to your customers
without increasing your direct costs,
cutting your gross margin, and not using up your startup capital?
The answer always lies in the niche you choose.
For example, I realized that the latest record-keeping technology allows me
to cut costs directly by building warehouses with higher ceilings than competitors.
I can fit more than 150k boxes in 3 thousand square meters,
while they can only fit 40 or 50 thousand on the same area.
Those are the three criteria for a successful startup:
an established concept,
an established business,
and a niche.
I know there are people who think,
“If everyone applied these standards,
we would never have new reforms and advancements.”
This is of course true.
I don’t mean to discourage talented visionaries.
If you’re a Thomas Edison, Fred Smith,
or Bill Gates,
forget my standards.
Go ahead and change the world.
But most of us do business with simpler goals.
We are satisfied with building a company that can survive and thrive.
If you are one of these people, listen to me:
Don’t try to revolutionize business.
Instead, find an old but great business idea.
BUY OR BUILD NEW?
Here’s one more piece of advice you should ignore:
you’re better off buying an existing business than starting a new one.
Many people say that it will help you reduce risks,
and achieve your goals fast.
Don’t believe that.
For most people just starting out, especially those who have never run a company,
the chances of sustaining and growing the business are greater if they build everything from scratch.
There are many causes for that problem.
One of them is that if you don’t start your own business,
it will be harder for you
to learn the lessons and experiences in business.
You will miss the lessons of trial,
and bounce back in the early stages.
You won’t understand the basics of business relationships
and won’t know what to do in an emergency.
Therefore, when the company is big,
if you make a mistake, that mistake will cost you more
and risk more than when the company was small.
Also, no matter how fast you are able to learn,
you will find that the challenges of negotiating to buy a business are really great.
Acquiring a company requires great ingenuity.
You can appraise as much as you want,
but either way you won’t know exactly
what you’ll get until you’ve completed the transaction
but often it’s too late for you to decide. can return.
Even seasoned entrepreneurs can make mistakes when buying businesses.
For customers who have no experience in buying and selling,
they often expect the kindness of the seller, or the sales representative,
or the business broker (if any),
but all of these people are only focused on to one goal,
that is: closing the deal.
If you are not careful, you can easily buy a shadow buffalo.
This happened to Josh, a young 30 year old colleague of mine.
A few years ago he asked my opinion about buying a company,
he said he was ready to do it and he needed my help.
He has an appointment in the next few days to sign the contract
and deposit $100,000, 60% non-refundable.
His father, a Canadian business owner,
said he would probably make a mistake
but could continue with the deal if an experienced person approved the deal.
Josh asked if I’d be willing to take a look and give him my opinion and I agreed.
The company he plans to buy is a small company
that packages herbal skin care products
and sells them to boutiques and chain stores through independent sales representatives.
The current owner is running the company from home.
She’d been in business for about three or four years and doing pretty well,
or so it seemed on the financial statements.
Now she is pregnant and wants to sell the company.
She valued it at $250,000.
The company seemed to be exactly what Josh was looking for.
It is within Josh’s purchasing power and it has a lot of growth potential.
And even though it’s relatively new, its returns are pretty good.
According to the financial statements he received,
the company had a pre-tax profit of $40,000 on $200,000 in sales,
a profit of almost 20%.
That’s a huge improvement from the year before,
when profits were $17,000 on $175k in sales.
The year before, it lost $10,000 on $79,000 in sales.
So the revenue seems to be on the right track.
Josh realized he could continue to grow and build a sustainable business,
something he had wanted for a long time and he couldn’t wait to get started.
He sent me a copy of all the documents the seller provided,
and a few days later he showed up at my office
with a confidential draft contract he had received from the seller’s attorney.
He said he had an appointment to sign the contract,
and pay the deposit the next morning.
I told him I thought he should call his lawyer and cancel the appointment.
“What do you mean?” he asked.
“They want to close this deal quickly.
And there is still another buyer waiting for their reply.”
I said, “Josh, you’re not ready to sign anything.
You can tell your lawyer that you will respond in the next 48 hours.”
The problem is that you still don’t have enough information
to answer the most important question in this purchase,
specifically what are you buying?
He thought he was buying a company with a good product line.
But the document didn’t say how good the product line was
or whether the price he was paying was the average in the market,
because he didn’t have any information on the market situation of the line.
For example, he doesn’t know who the company’s ten largest customers are,
or the percentage of each customer’s sales.
He did not know how their purchasing power changed over the years.
Will old customers return,
or is the company always looking for new customers to replace those that have left?
Are there one or two customers
who “capture” hundreds of company revenues, and if so, why?
And what’s going on with the company’s salespeople?
The company is said to be paying them a 15% commission on sales.
Then why is the total commission in the first year 15% of sales,
12% in the following year,
7% in the following year as well?
Are the sales reps leaving, enticing customers to follow them,
or are there other reasons?
How many sales representatives does the company have?
How much revenue does each one bring in,
and how much does the largest producer make?
Of course, that’s just the beginning.
There are still dozens of other questions Josh needs to answer before committing
to buying the company.
But I didn’t see any possibility until we got the sales by customer
and by sales rep for the last two or three years.
These numbers will tell us if the company really has a good line of products
that customers want to buy and sales reps want to sell.
Without that information,
Josh shouldn’t waste time investing in signing,
let alone losing money on it.
Josh contacted the owner of the company,
asking for more information.
She replied that she would not give him the identity
of the customer and the sales representative until the contract was signed.
I said to him, “All right. She can call customers 1,2,3,4
and sales reps A, B, C, D, but you need to get the numbers before you sign anything.”
I also suggest that you ask your attorney to amend the contract so that your deposit can be refunded within three weeks.
Why can’t you change your mind freely?
The lawyer agreed and revised the contract,
but it turned out that the change was unnecessary.
A few days later, Josh received the additional information he requested.
It paints a completely different picture of the company.
One of them is that only 15% of customers,
accounting for about 30% of revenue,
are old customers.
In other words, Josh has to replace 85% of customers,
and 70% of sales just to break even.
Also, he had to do it with a new sales force:
the sales rep turnover rate was about 50% a year.
It’s hard to know what Josh will get when he buys the company.
The products may not be as good as the original information,
or it is possible that more customers will continue to purchase.
Will you get a reputable company?
It doesn’t sound very convincing.
A dedicated sales team?
Either way, he still had to build his own sales team.
As for the recipes needed to make herbal skin care products,
you can hire a lab to make the products for a lot less than $250,000.
The truth is, if you really want a company that sells herbal skin care products,
it makes more sense for you to start your own.
In the end, Josh decided he was fed up with herbal skin care products.
He told the seller that he no longer wanted to continue with the contract.
Although he wasn’t happy to miss the opportunity,
he couldn’t argue with the numbers.
The last time I saw him was when he was looking for another company to buy.
I don’t know if you’ll find the right company,
or if you’ll eventually find that it’s best to build your own.
About a year ago, I moved to Florida from the Northeast,
where I own several photo manipulation stores.
In Florida, I bought a printing company.
I work 80 hours a week, learning the basics.
Now I’m ready to advertise, but I’m worried I’ll make a big mistake,
especially on the price point.
Should I hire an advisor?
If I were you, I wouldn’t do that.
He had business experience,
and his instincts were better than any mentor he could find.
Besides, he wouldn’t and shouldn’t take his mentor’s advice,
if he didn’t feel like it.
Then why pay someone to give you advice that you won’t then apply
if it’s different from what you think.
Instead, I would do my own market research,
find out the competitors,
the quality and service they provide and so on.
Then do all the work myself.
WRONG TYPE OF BUSINESS PLAN
Next is the common confusion with business plans,
most people assume they are used for fundraising purposes.
Let’s say you need money to build and run a business,
and you may need a business plan to raise capital.
But money isn’t the first thing you need,
and you’re making a mistake
by focusing on raising capital
before you know how to use it wisely.
Unfortunately, a lot of people make this mistake.
I realize this through the business plans I receive on a regular basis.
I’m talking about 100-page, polished,
four-color business plans printed on high-quality paper,
with lots of pictures,
and everything in between necessary number.
I mean, these blueprints are just too grand,
except for one problem: the numbers don’t make sense.
No real business can achieve those numbers.
I remember a professional-looking blueprint I received
from a couple who were trying to raise $50,000 to start a cookie company.
According to the plan, they will use
that money to push the company’s sales from zero to $2.9 million in just two years.
They should understand that reaching that level of growth in any business is extremely difficult.
This is nearly impossible for a biscuit business with a $50,000 external loan.
You will quickly run out of capital before reaching your target revenue.
But the numbers still hold true on black and white paper,
and they are so perfectly calculated that it makes me doubt.
I assume the plan was written by the husband,
who has very little business experience,
using a complex business planning software package.
Looking closely at the numbers,
I understood how he was able to come up with such an extraordinary project.
One of them was that he calculated the collection period to be ridiculously short,
about 20 days, while thinking he could extend the time to pay the seller to 60 days.
He also underestimated the amount of equipment needed
and assumed that he could rent whatever he wanted to his own terms,
no further guarantees required.
All of these assumptions are unreliable.
If you replace them with more realistic assumptions,
you’ll find that the couple needs at least another $200,000 in outside funding
to hopefully boost the company’s revenue by $2, $9 million in the first two years.
I don’t mean to imply that the husband is trying to deceive people.
Frankly, I wondered if he knew what he was doing.
My guess is that, like most people who have their own business ideas and aspirations,
he was only thinking about the money he needed to start the business.
So how can you raise capital?
With a business plan right?
He went to buy a software that helps him create a step-by-step business plan.
Then he tweaked the parameters until he came up with a plan
that showed the company would hit its target in two years
with the exact amount of capital he thought he could raise.
It’s all neat and clear, and the final plan could hardly have been more impressive.
I’ve been in business for almost 30 years,
and I’ve never seen such a detailed plan.
However, what it represents is not a recipe for a successful cookie company.
It is a recipe for business disaster.
I strongly believe that the first business plan should be written for you,
not anyone else, and that you don’t need any special software to write it.
You just need to answer the following four questions, as honestly as possible:
(1) What is your business idea?
(2) How can you commercialize it?
(3) How much do you think it will cost to produce
and distribute what you are going to sell?
(4) What do you expect to happen when you actually start looking for revenue?
The key is to define as clearly as possible how it will go, what you will sell,
how much will it cost, who your customers are,
how you will reach them, how long it will take you to get there closing a deal etc.
You have to be completely honest with yourself.
You shouldn’t let your economic circumstances dictate your thinking.
For now, put aside any concerns about making a living or raising capital.
You can deal with those problems when the time comes.
First, it’s important to write down your assumptions.
Why? Because you need to test those assumptions
before raising capital, not after.
While there is still a chance to correct,
you need to recognize as many mistakes as possible.
And, believe me, everyone makes mistakes in their first business plan.
No matter how smart or careful you are,
there will be major shortcomings.
For example, when I started my mail business,
I thought I could collect my debt within 30 days.
Then I found out that the collection period is actually 50 days.
When I started a record-keeping business,
I thought I could charge a monthly storage fee of 35 cents per box.
In fact, we realized we couldn’t get a steady stream of customers
unless we charged 22 cents per box, almost 40% less than we planned.
The point is that you need to give yourself time to spot these mistakes.
You can’t detect all of them in the first place,
but you can minimize them.
How? Through research.
By finding out how much time it takes for companies in the industry
to pay suppliers, and collect debts.
By making a few deals.
By finding cheap offices and furniture for rent.
By visiting a rental company to see their terms.
Until then, and only then, will you be ready to beat the drums to raise capital.
In the long run, this research will turn out to be the best investment you can make in your business. Study hard,
you will increase your ability to raise capital.
More importantly, you will get a better use of capital.
And you will greatly increase your ability to maintain capital
until it is no longer needed that is,
until the business can support itself on its own cash flow.
After all, that is your goal.
MOST IMPORTANT RESOURCES
As with maintaining capital raising,
the risk of losing the raised capital is worth considering,
although it is not the biggest risk that entrepreneurs can face.
After all, if you work hard enough,
you will be well rewarded.
There is another resource that when you lose it,
you will never see it again.
It is even more important and valuable than money.
Losing it will cost you the chance to realize your dream.
The resource I am talking about here is time.
I’m in the process of building an education center,
but I can’t find students. I promote information at all fairs and festivals.
I advertise in newspapers and organize teacher-student meetings,
as well as exhibitions for parents to tour the center’s infrastructure.
Our prices are lower than the competition and we don’t charge a subscription fee,
but still no students. What else can I do?
Never think that your business will not be successful just
because your first marketing efforts didn’t work.
I started a mailing company with mass open lettering,
accepting free shipping the first five times.
And I got no response.
I failed until a manager told me,
“We do dozens of deliveries in a day.
Five times means nothing.
How about 50 more times?”
So the market was there.
It’s just that I’m approaching the customer the wrong way.
In your case, price is not the primary concern of the parent.
If they send you children,
they must know you well,
trust you, and think well of you.
If I were you,
I would build a reputation through community clubs,
Print flyers with comments from locals about how wonderful you are with children.
After that, communication with parents and students will be very important.
Price can be an issue, but build trust first.
Let me tell you about Rob Levin, who asked me about building a magazine.
He plans to name it The New York Enterprise Report
and sell it to managers of small businesses in the New York midtown area,
providing interviews with successful entrepreneurs
and skillsets by experts specialists in charge.
I agreed to meet him, although I don’t know why.
I think building a business magazine is a really big idea.
The business has been in a slump for years,
and still shows no sign of progress.
Setting up a business journal is inherently difficult,
but I know it can be even more difficult for a new business,
who not only has to contend with large companies,
but also has to compete with sources of free information on the Internet.
On the other hand, there are still many businesses in the market
that are easier to survive and profitable.
But like I said, I have an immutable principle that never discourages others in pursuing their dreams.
What I do is let them know what I think about how they approach the problem.
Usually, I believe, based on business experience,
your choices will lead to failure.
In that case, I would suggest them another option.
But what works for one person may be a recipe for failure for another.
Therefore, I always try to find out as much as possible about the person I will be mentoring.
For someone who is just starting out,
Rob Levin is a pretty good businessman.
After graduating from college in 1991,
he worked as an accountant for Arthur Andersen for four years,
then returned to school to pursue a Master of Business Administration.
He eventually became CFO and CEO for three small companies
with $1 to $25 million in annual sales.
He left his old company a year ago when he contacted me
and asked for advice while looking for a new business to start.
Although he has $300,000 in savings to invest and his wife has a good job,
he cannot pursue the business indefinitely without a steady source of income:
because his wife just give birth to your first child.
Rob believes that starting a new journal will be his ticket to success.
Not only is he passionate about it, but every plan he makes is focused on it.
He had just spent $75,000 setting up a website,
and without the magazine,
the website wouldn’t be viable,
let alone make a profit.
He also plans to monetize seminars and business groups,
but this will be difficult to do without the magazine as a foundation.
The question is,
how successful can he be to release this publication?
After looking at the numbers,
I concluded that this possibility is not much.
Like every entrepreneur starting a business, myself included,
Rob is too optimistic about the revenue he can achieve,
the time it takes to get there,
and also underestimates the cost he will incur must invest.
I pay special attention to one number.
He plans to sell the magazine long-term by direct mail with a 10% response rate.
I don’t know much about direct mail,
but certainly no one can get a 10% response to a new magazine.
Sales letters with a 1 to 2% response rate are considered successful.
As a result, it took him more time and more money than he expected
to get the number of premium magazines he expected.
“This approach won’t work,” I told him.
“You will spend all your capital before you know
if the business is viable or not.
You have to use another way.
Have you thought about giving or giving away magazines
to certain foundations,
I could easily see his anger,
he thought I had insulted him.
He later told me that the offer broke his heart.
It was a blow to his personal ego.
However, the logic of the problem is quite simple.
Rob can’t survive without ad revenue,
and the first question of any potential advertiser should be:
“How many subscribers do you have?”
You won’t get any revenue until you can give the client a convincing number of ads.
The fastest way to get to that number
and to build a long-term customer base is to donate the magazine
to business organizations and trade groups.
Advertisers will still carefully calculate every dollar
of advertising costs on an unverified publication,
but if they have a number of readers,
it will be easier for them to do business with the magazine.
If Rob decides to pursue long-term subscriptions,
he can’t just sit back and pray to get the revenue he needs.
It will take him a long time, which will haunt him
and possibly cause him to give up even before the funds are exhausted.
Surely he would have to find work, and return to the starting line.
I will take a year or more to get back to where he left off.
However, he will also learn a few important lessons,
and may be able to raise enough money to continue experimenting
with the magazine business later on.
But under the current conditions,
it will take him three to four years of wasted effort
to return to the starting point with empty hands.
By giving the magazine away,
he could at least be one step closer to success.
That’s not what he wanted to hear.
He got angry and left.
I tried to make peace with him by noting that he could later charge a fee
for the magazines donated to those businesses.
That makes perfect sense,
but I know if you successfully built that magazine out of the free magazines
I suggested you would never charge for the magazines.
From a business perspective, this is completely unnecessary.
I think you will waste time and money simply to inflate your ego,
but not to benefit the company.
In any case, the decision is still entirely up to you.
“You have to do what your instincts tell you
because it’s your money and your time,”
I said as he walked away.
“I have experience, but that doesn’t mean I’m always right.”
A few days later, he called me
and said that he decided to take my advice.
He did some research and realized
that I was right about the sales letter response rate.
He couldn’t help but believe the numbers.
Therefore, he will change his plan, making plans based on the foundation
of giving long-term magazines to businesses.
I wish you luck.
A few months later, he called me back
and asked if I would be willing to do an interview
for a column in the first issue of the magazine.
Of course I agree.
Perhaps starting a magazine business in New York wasn’t such a bad idea after all.
The New York Enterprise Report was a huge success,
and business is thriving today.
While certainly Rob could have made more money by running a different business,
he followed his passion and did what he loved,
which was more important than earning a perfect rate
of return in the highest possible investment.
Moreover, in the end,
Rob also had to admit that he could not achieve his goal
if he stuck to the old plan.
“In retrospect, I was too optimistic about everything,” he said.
“I will definitely run out of money. I didn’t realize it then, but it’s different now.
I was too delusional to focus on later periods.”
Most importantly, Rob saved three years or more by tweaking his project.
Instead of wasting time, he used them to lay the groundwork
for a business that had a great chance of success,
and that could help him achieve any goal he wanted.
First: Having many competitors is a good thing
because “education” the market is a very expensive matter.
Second: If you are a first-time entrepreneur,
it is always better to build your own business than to buy an existing business.
Third: The business plan should be simple,
and you should create it for yourself, not for any potential investors.
Fourth: Your time is more valuable than money,
and you should be careful not to waste it.