I was one of those lucky students who loved my chosen subject at University; Economics. (Whilst on this subject my advice to anyone going to University is to always choose a subject you love rather than one which you think will enhance your career prospects – unless the subject is Media Studies – we all enjoy watching TV. I am not worried about Media students writing in to complain as they only do texting!)

One of the subjects which I really enjoyed covering was Marxist Economics. If you have not studied Marxism, I would really recommend it. I disagree with the conclusions, but the analysis tools are seriously first rate. One of the main thoughts in Marxism was about the accumulation of wealth. To generate wealth, labour has to be exploited.

This argument which is now about 150 years old is still compellingly relevant. Other ways of explaining this have come to pass and are more widely accepted because they seem less ‘offensive’ or stark. However, the truth remains exactly that.

Whatever field you are in, your pay or level of remuneration will ultimately depend on two things. The value you can add to your employer and your bargaining power. If an organisation decides to pay someone £1m a year, it will because they believe that the employee will add considerably more value than that and their bargaining power will get them to that level of pay.

The development of the trade union movement can be explained as thus. The bargaining power of individuals was a lot less than that of a group and they were engaged in ensuring that more of the value ‘created’ would go to their members rather than to the employer.

The interesting thing to note from Marxist Economics was that they believe that it was in the interests of capitalism to maintain high levels of unemployment. The rationale for this being that the bargaining power of individuals is not that strong when there is mass unemployment. Statistically this does hold true.

What is the relevance of this to the Entrepreneur?

Firstly, many entrepreneurs fall into the trap of paying too much money for ‘talent’. They feel that because of the insecurity of working for a start up, they have to offer a higher salary. Secondly, they also think that as a small business they are in a weaker bargaining position.

A further point is that salaries should only be offered at a level which means that the employee is adding value to at least three times the level of their salary. In sales, it is common to expect a sales person to generate sales at a level which is at least ten times their salary.

If a sales person generates £1m of sales, that would probably equate to around £300,000 of gross profit – and therefore a salary of £100,000 would still hold this equation.

However, many start ups feel compelled to offer very attractive sales packages. And here another bit of economics comes in handy. You have to remember your marginal cost. Revenue is not the same as profit. There are many deals I know of where the better a sales person does, the greater a loss the company will suffer.

I was working for a start up in 2000. I was a good sales person and was one of the companies top earners. However, the company fired me (a story for another time) and the real reason was that they wanted to replace the first set of sales people with another set who were on very different packages.

Anyway – back to the main point of the blog. Always remember that wealth creation is based on being able to sell at a greater price than you pay – and that is also true of labour.

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As I mentioned in a recent blog, I ran a three day course in Halifax recently from St Mary’s University called From Mind to Market. Given the last blog was all about looking for an idea – it seems to be appropriate to talk about what to do next.

Thank you for the emails requesting more information about the course, given the interest, I thought it made sense for me to write a blog. I would appreciate your feedback on this blog as I am seriously thinking about writing a book called “From Mind to market” – if your feedback is positive, I will start writing it, if it is not so good, perhaps the book can wait! Furthermore, I am running the course again at the end of March and am thinking of filming it. If you are interested, please do let me know if you would like a DVD or web access to the course.

The course was split into five courses over three days;

1. Is the Market Ready?
2. Writing and Financing a Business Plan
3. Sales
4. Planning for High Growth
5. Planning for the very long term

I trust the sequence of the courses makes sense. The first stage is to ensure your idea is validated. There are many ways of doing this and electronic media makes it possible to dry run an idea at a very cheap cost. Twitter/ Facebook and especially Linked-In, make it very easy for you to test out the appetite of your idea at a fraction of the cost associated with proving old ideas. I am very sceptical about market research – be careful that the results do not tell you what you effectively were paying someone to come back and tell you. We have all seen episodes of Dragons Den where we all know the idea is stupid. However, someone else has convinced, the would be entrepreneur that they have a good idea!

Once you have established that there is a market for your product/ solution, you will probably need some sort of financing. There are lots of sources to consider. Depending on the nature of your business, different sources may be more or less attractive. Remember that as a general rule, debt is cheaper than equity. Debt though is hard to get and especially in the current business climate. Make sure you clearly understand what the different providers of finance are looking for.

Sales is the lifeline of any business and once you have raised the money the best thing you can do is make sure you get selling and get selling quickly. If everything is not quite ready, let the customers be the ones to tell you what further hoops you have to jump through to get their business; let them co-author your final offering. Too many times I see companies develop solutions which are perfect for them but not the customer! You don’t get a second chance to make a first impression – so really put a lot of work into your sales process and execution.

High Growth sounds great, but it brings with it a whole heap of issues that you need to plan for. Critical to this is your ability to manage cashflow. As a high growth coach and as a manager of a turnaround fund, I see many businesses run into predictable problems – that could easily be avoided by managing cash.

Finally, once you are at a stage where you are confident that you have a good business in shape, you need to ensure that the business is equipped to deal with long term issues. For example, global warming means that weather extremes are more likely to occur with greater frequency. Does your business have a plan to cope with at this? (I was recently surprised to learn that some cheques I had paid into a HSBC branch were delayed by a week for clearing because the snow had meant that the cheques were not picked up by the delivery van on time! I am amazed to see even now how many retail businesses in the UK, don’t have plans to clear the entrance to their store when there is snow!

I hope this snapshot – and it is just that is useful. The course went for a full three days – so of course is much, much more. You can help me conduct my own cheap market research and let me know if yes you are interested in either

1. Attending such a course if it was run near you
2. Buying access to a video of the course
3. Buying a book

It is good to practice what you preach!

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Thanks to the guys over at wooshii for sending me this one.

Love it

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If you had read one of my first few blogs, you will know that I am extremely critical of the huge (billion dollar plus) self help industry. (By the way a billion is one thousand million in the UK and a million million in the US – a trillion is one thousand billion in the UK and a very large number in the US!)

It is amazing when you go to any shop at any type of travel terminal, the books that are most prominently displayed are the ones belonging to the self-help genre. They only help the authors!

By definition, if the books worked you would only ever need to buy them once to solve each problem. I really would like to meet the ‘sixty second manager’ or the ‘reawakened giant’. Buying more than one book on effectiveness implies that the books don’t quite deliver. The book that has really made it big in the last couple of decades has been “The seven habits of highly effective people”. I know many people who have that book on their shelf and yet very few that have read it. I like the audio version that tells people to focus and to have narrow vision – not the best thing to pay attention to when you are driving I guess.

I am not disagreeing with what some of these books say – or the bolt of energy they may give you from time to time. I just really doubt their power to actually make you feel better or transform you. I was therefore heartened when two weeks ago, a report from my new adopted country, Canada, seemed to show that self-help books can actually lower your self-esteem.

The crucial ingredient of any self-help formula is the self-affirming mantra. This is where you are encouraged to say to yourself “I am brilliant/ effective/ funny/ charismatic/generous” (enough about myself – let me get back to the blog). These affirmations said with enough conviction and over enough time, will lead to you becoming that person you want to be. There is something sinister in this. If you do not end up becoming that person (and trust me you wont through this exercise) you are made to feel that it is because you do not believe enough. You cannot become funny just because you will it. And all the money in the world will not make Peter Jones (from Dragons Den in the UK) funny or charismatic.

I am always nervous about self-affirming types. I have always believed that if you want to be effective or anything else – just do things that demonstrate you are effective! If you want to be thought of as generous – behave generously! To me it really is as simple as that.

So, save your money – and wait till next year when in a complete turn around I will be releasing my own self-help book!

Pre-orders will be accepted from now.

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pareto

Pareto discovered that 80% of wealth was held by 20% of the population across most countries across most time periods. He was then able to find that this rule held true over most things.

Today, retailers know for example that 80% of their sales come from the top 20% of their product range. Or that just the top 20% of their top customers account for 80% of their sales. This ‘rule’ tends to hold true across most businesses and most fields. You may conclude from this that because of the huge cost of carrying stock – why not only stock the top 20% of items. There is a danger in this which a real life example may help illuminate.

It is known in the sandwich retail business that most customers will only ever buy one of three sandwiches (is this true for you?). However, customers like to choose from at least 10! (again is this true for you?). Customers feel very annoyed when they can only choose from a few – even if the ones available for selection are the ones they would choose from!

Customers need variety so there is a danger in cutting back to much, but nonetheless, Pareto optimality is useful in determining a business strategy. I would urge you to use this rule as much as you can. Focus your marketing spend on the 20% of your customers that generate the most profit, focus your stock availability on the top 20% of items. Focus most of your processes on the areas that generate most of the output.

Recalling Pareto always makes me smile as it brings back an anecdote which occurred in the first six months of my post university career. I was working for Mr. Kipling cakes and I went with my arrogant know-it all boss (Mr. S) to see a customer who was stocking our range of products. He explained to us that he needed to look at the range he was stocking.

Customer “I need to look at the range I am stocking. Pareto runs this shop”

Mr. S “And where is Mr. Pareto today?”

I got a telling off for laughing (I know you should not laugh – but it was funny because my boss thought he knew everything)

It was also nice to be able to apply something I learnt at University to my job selling cakes!

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One of the highlights for me of last year was to successfully start up a fund management business – www.flightandpartners.com The company is now managing over £12m and is doing well (very well if you consider the way the markets are performing). In the process of doing this though, I realized how much I enjoy setting something up.

Since December I have been working on another start up business. It is so exciting – it reminded me why I got into this area of business in the first place.

I went to see my first potential customer in Manchester on Friday last week and when he said yes – the feeling of utter joy was marred with my nerves jangling because I realized I now had to deliver!

Starting a business is one of the best feelings you can experience (along with jumping out of an aeroplane – but that is for another day!) You realize that entrepreneurs don’t do these things just for money but for the sheer thrill. I have met many would be entrepreneurs seeking investment from me in the last few years. I do get turned off immediately if I suspect the only desire driving the team is money. It simply is not enough to keep you going.

I also remembered a quote from an entrepreneur that I had worked with on a project a few years ago. She said that you do not have a business until you have a customer. The events of last week brought that to life for me.

Many of us come up with great business ideas and some of us may do something with this idea (like form a company) but very few take the critical step of turning that idea into a business. That is truly the scary bit – but it is about emotions rather than money.

I will not invest in a business that cannot prove strong customer demand. Sometimes all you need is a letter of intent or pre-orders and you have transformed your idea into a business.

My advice in this blog is to all of those of you who have a great idea but have not done something with it….

Go for it – make it happen. I promise you that even if you crash and burn – the thrill of having gone for it will give you a smile that will last for eternity. To misquote Dickens “Better to have loved and failed, than not to have loved at all”

All the best, and as always, I am happy to help.

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A Great Entrepreneurial Read

I would like to stress that I do read more than just business books! A great book which I read recently was The God Delusion by Richard Dawkins. It was extremely thought provoking and a very well argued and passionate book. I have always believed that religion is a profoundly private matter and I think that whatever your viewpoint, you should read and understand the opposing view. Simply denouncing a book is too lazy.

In terms of a great entrepreneurial read – can you really better The Adventures of Tom Sawyer (Penguin Classics) ? It remains one of my favourite books of all time. And for a truly inspiring read, if you have not yet read Jonathan Livingston Seagull: A Story – you must, absolutely must read that book. It will take you no more than 30 minutes but it never fails to inspire in a meaningful way. Another great book which is over 2000 years old is Meditations (Penguin Classics) , written by Emperor Marcus Aurelius. He was the emperor played by the late Richard Harris in Gladiator (yes it was based on true events!) The book is a great guide to living a good life and it is amazing to think that most of the values we hold true today were true before organized religion took hold.

A book which I managed to read in just 48 hours as I could not put it down is the latest book from Malcolm Gladwell (author of two books already featured in my list, Blink and The Tipping point). In Outliers: The Story of Success , Malcolm looks at what causes people to be successful. He goes well beyond the personal ‘hero’ story to analyse in detail what is required to be successful.

I remember meeting a successful entrepreneur who had a rather large ego. I overheard someone else describe him. The description is rather apt. “of course, he is a self made man and he is in awe of his creator”. The entrepreneur in this case needs to read this book. It recognizes that it takes talent and lots of hard work (about 10,000 hours worth) to become good in a field of your choosing. But is also suggests that the ability to exploit opportunities is a lot to do with timing and your social circle and cultural value system.

In keeping with the themes of other books, the author does make you keep checking your intuition. Making you think for example about how working in rice fields might give you an advantage in math or why certain cultures are more predisposed to having air crashes!

It is a seriously great book and I would wholeheartedly recommend it. The fact that I read the book in one weekend also tells you something about how easy it was too read.

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The most challenging aspect of being in a start up position is that the management team will be under constant pressure to think both strategically and tactically. In my experience, few people are good at both.

A good way to think about the difference is in terms of the time horizon the thinking has an impact on. Strategic thinking is very much about what the future direction of the business is and how it is best suited to make the most of an ever changing environment.

As a member of a board, the expertise that you should bring to play is to be informing the company of how you expect the environment that the business is operating in to change over the next few months and years and how it can gear up to either exploit the changes or to defend itself.

This is where the boards of many major banks were found wanting. Although hindsight is a great tool to have, I find it amazing to think that no one at the board of these banks asked the question “what if we can no longer get hold of funds from wholesale markets?” or “What if people default on the loan payments?” or even more obviously “what if the assets we are lending against (such as houses) drop in value?”. Surely, the answer could not have been “Don’t worry – we are too big to go down and the government will rescue us!”

I do feel let down by some of the non-executive directors of the companies that I have invested in. They have been great at taking the money but not too good at asking difficult questions. Sometimes, I do think that people confuse putting someone under pressure with asking difficult questions.

This is perhaps best defined by tactical thinking. In this thinking, it is more about operational delivery and ensuring that the strategy you have laid out to meet the challenges ahead are executed well. But it should be up to management at an operational level to deliver this. Of course a board should ask when KPI are not being met. But their role needs to be wider than this.

Tactical thinking is a skill that is hard to define and to spot. You only see evidence of it once it has been delivered. On the other hand, you can see strategic thinking being displayed in case studies and through academia.

Sales people tend to be good at thinking tactically, but appalling at thinking through the strategic consequences of their actions. By definition, a sales person will be fixated on the achievement of short term goals to deliver x in revenue or y in volume.

Giving a large discount to a customer may help deliver the operational need you have today but may scupper your plans to position yourself as a premium brand.

That is the challenge of managing a business and the conflicts between managing in the short term and managing for the long term.

Great companies tend to employ a blend of good strategic thinkers and good tactical doers. The worst thing is when tactical people move into strategic positions or you have someone who is strategic performing a role which requires tactical ability!

Which one are you better at?

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In a recent business angel blog, I suggested that now was actually a good time to start a business. I do though have some general words of advice for managing through the current turmoil.

My advice for businesses would be

1)     Have a great relationship with your bank manager. Banks have contracted balance sheets at the moment and will be cutting down on their lending and will be looking to offload loans to any business that looks uncertain. (My fund is certainly benefiting from this!). You really do need to try and have a great relationship with your bank. Keep them in the picture at all times. Ask for advice, explain your plans (but be cautious not to reveal bad news without having solutions to offer) and make them feel ultra comfortable. On the commercial side of banking, you will be amazed at how much authority individual managers still have.

2)     Preserve cash. Cash is always king - but at the moment it is the Emperor! Really hold on to as much cash as you can. Manage your outflows and cut down on anything other than vital spending.

3)     Do not cut back on sales or marketing spend. Customers need to know that you are out there. Advertising makes a bold statement about your belief in your business and the future. I consider it a vital spend for any small business. What you do have to do is be certain of the return on investment on marketing activities. This is what I like about Google advertising. Because of the downturn you can also get great deals on placing adverts.

4)     Make sure your service is as close to a mandatory spend as possible. The items that will be cut back on over the next few months will be discretionary spend. There are simple exercises you can carry out (email me for them) to get your service moving away from a pure discretionary spend towards a mandatory spend.

5)      If it is a discretionary item or service, make sure it is really clearly defined. What exactly is the consumer getting through purchasing your service? Clarity is what you need to sell easily. I am amazed at how complicated so many businesses make it to understand what they are selling and who they are aiming at.

6)     Develop nerves of steel!

Best of luck!

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I wrote a review of some books that I read and was happy to recommend. There were two notable omissions that I should have included as they are great books that really do make you stop and check this thing we call common-sense.

As a cheeky aside - if you do like the books that I suggest, if you purchase from the link below, I do earn a small commission. Irrespective of that, only books that I really rate will appear on this list. I will also review books that I have read and thought were really bad. Again, I would like to hear from you about books you rate or equally important books that you have read and thought - what a waste that effort was!

Unusually for a non-fiction genre, both of these great books have been written by the same author; Malcolm Gladwell. As a journalist, he is surprisingly good at writing a book (my own experience is that journalists tend to write bad books!). He also comes across as a very curious person who softly challenges deeply held assumptions.

The Tipping Point is a book that asks the question - “what does it take for something to reach a tipping point?” A tipping point could be described as when something breaks into the mainstream or suddenly goes big. He also talks about why certain things despite heavy spend do not make it big.

It has lots of lessons for anyone who is interested in effective marketing. I really enjoyed the classifications of people into connectors, salespeople and maverns. It is interesting to find out which one you are! I realized after reading this book that I was a connector rather than a salesperson. Also worth reading is why certain campaigns such as give up smoking - don’t work.

Blink is a bit more of a cerebral book. It explores how we make decisions and how experts acquire that ‘sixth sense’ in their particular field. Again, I found it helpful to analyse how people arrive at instant decisions and to learn from that on how you can really powerfully forge a strong first impression.

I find books that tell you ‘How to…’ on the whole rather poor. They tend to be patronizing and make the mistake of believing a panacea to all business ills exists. What I find so riveting about business is the fact that there is no such thing as a right answer (although wrong answers do exist!). Books like Blink and The Tipping point, trigger thoughts but leave it to you to think about how (if at all) those points are relevant to you and to apply them. This is what I liked about the other books on the reading list - although some of them are what I would call positively prescriptive.

Happy reading!

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