BERKONOMICS – Business insights from Dave Berkus

Archive for October, 2009

3. Trade secrets + customer lists = company gold.

by on Oct.28, 2009, under Ignition! Starting up

Don’t take from others and don’t let others take yours.

                We must pause in this journey toward building an overwhelmingly successful business with an admonition that may seem obvious to some and completely sail over the heads of others.  Most entrepreneurs arrive at the starting line of a new business with a vision for the future and some degree of experience from the past.  Often, that experience comes from being employed within a business that was similar, but whose senior management may have missed or deliberately ignored what the entrepreneur sees as a great opportunity.

                And most senior and middle level managers will understand when a subordinate comes to them to resign and begin a new business.  But all will immediately question whether the new business will compete in any way with their enterprise, and react to the future entrepreneur in either of two very distinct ways based upon those fears.

[Email readers continue here...]      If the employee who is about to resign is off to conquer the world in a completely new arena, there is almost always the unspoken sigh of relief and a cooperative attitude that flows from the senior manager  from that point on in the conversation.

                But if the employee is even a little bit reticent to tell of the plan envisioned,  the result is the first stage of what could become an outright war between the present employer and a newly separated past employee, sent away that day with an escort out the door. 

                The same attitudes from past employers can be expected if a past employee resurfaces after a layoff, resignation or after being fired, with a plan for a competitive business.  Most employers have all their employees sign non-disclosure and confidentiality agreements to protect the company’s trade secrets, customer lists and business plans.  Many states recognize the right of a former employee to work, even if in direct competition with a past employer.  But that right clearly stops when the entrepreneur uses any trade secret data from the past employer, especially customer lists for contacts and confidential business plans as bases for new businesses. 

                Anyone can be sued even if without merit, and responding to a suit can be traumatic in many ways – from expenditure of cash and valuable time to emotional drain from worry over a negative outcome, to loss of industry goodwill by an entrepreneur perceived to have stepped over the line.

                This is especially true for someone who has sold a business only to surface later to compete in some way with the buyer.  Never underestimate the venomous response from such a threat.  

                So no matter what your circumstance, never, ever be guilty of using trade secret materials or ideas from your past employer, especially customer lists.

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2. Management quality trumps a quality plan.

by on Oct.22, 2009, under Ignition! Starting up

Great management teams mean more to investors than even greater business plans. 

If flexibility and coachability are first in the list of traits investors value in an entrepreneur, then the quality of the proposed or actual management team come in a close second, even before the attractiveness of the business plan itself.  The quest for a great management team is not a fluke, but rather a result of backward looks at the failure rate from past investments by angel investors and venture capitalists.

It is true that at least half of the businesses backed by professional early stage investors will die within three years or less. That reality is a tough one for the professional investor, almost as tough as for those entrepreneurs who lose their businesses.  The latter can start new businesses, flush with the experiences gained from the previous effort and much the better for it.  The investor’s cash is lost forever, and the experience gained usually is just another increment in a list of similar experiences from the past.

[Email readers continue here...]  It is the management team, most often led by a passionate entrepreneur with experience in the industry, which makes the biggest difference between success and failure, even for businesses built upon less than sterling basic ideas.  Among professional investors, almost all would rather back a great team with an average idea before a great idea and inexperienced team.  It comes back to coachability and flexibility, our first insight.  Great teams are flexible and have the advantage of experience in seeing the pitfalls before them from their past.  They are coachable in that they have taken advantage of the vast experience of others in overcoming obstacles and finding ways to speed a product to market faster or create a service whose quality exceeds that of the competition.

None of this is to say that an inexperienced entrepreneur cannot lead a great new business.  But it would be foolish to try without surrounding himself with as many experienced co-leaders as possible from the outset.   As a start, such an entrepreneur will soon “know what he (she) doesn’t know”, an important qualifier for success in any business endeavor, when combined with the willingness to fill gaps in knowledge with help from those who have the experience to do so.

                Ask any professional investor, and you should hear that they value the quality of the team above the attractiveness of the early drafts of the business plan.  Even without taking in money from professional investors, that advice would serve you well in protecting your own monetary investment.

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1. Be flexible. Be coachable.

by on Oct.15, 2009, under Ignition! Starting up

If you missed last week’s launch, you can read the introduction to this blog under “Introduction to this blog” above and catch up.  Each week, I’ll start with a numbered insight, such as the very first one below.  These are divided into eleven stages of an enterprise’s life.  We begin with “IGNITION”, stage one.   As always, I look forward to your comments posted at the end of any blog posting on the site…

                As an early stage investor, the first test for me is whether the entrepreneur is flexible in both the plan and execution of his or her vision (since from experience almost everything about a business plan changes over time), and whether the entrepreneur, no matter what age or experience, is coachable.

                Doctoral theses have been written on this subject.  Early stage investor groups often list these traits at or near the top of their list when filtering opportunities for investment.  And I have numerous stories from personal experience that reinforce these two traits as the most positive indicators of future success in business. 

                In my book, “Extending the Runway” (Aspatore Press, 2006), I explore the thesis that there are five basic types of resources an entrepreneur must exploit in growing a successful business: time, money, process, relationships and context.  Understanding the effects of each upon an entrepreneur and early stage business plan is critical.  Being able to adapt to the realities and changes in the fast-moving environment is essential.  

 [Email readers, continue from here...]    Flexibility: the context in which a business plan envisions the enterprise in its marketplace is constantly changing as new products and services challenge competitors to innovate and adapt.  A plan written last month may easily need tweaking this month to recognize changes in the marketplace, the central context of the plan itself.  Everything happens faster these days than even a few years ago, especially in the arena of technology, where many new businesses are developed each month to solve problems or take advantage of opportunities that existed at the moment of an entrepreneur’s vision for the future.

                And the money and time required to bring the young company from idea to market extends out as changes require rethinking the plan.  We’ll explore this reality in later insights as we explore the stages of business development. 

                One of the best indicators of future success for an entrepreneur and an early stage idea is the quality and depth of great relationships with industry veterans or technology gurus, or experienced successful business leaders.  Those relationships would be impressive but worthless if the entrepreneur was not coachable, open to suggestion and criticism from those who have experience enough to surface the issues unspoken but obvious to the coach. 

                And finally, there are always ways to improve the process of design, test, roll-out and marketing a new idea.  And many potential coaches out there have made mistakes in these processes at the expense of their employers or even their personal savings.  Since we all learn from our mistakes, it seems reasonable that we should learn from the mistakes of others, particularly those who freely offer their experiences as lessons for our enterprise.

                I’ve seen entrepreneurs go through the complete process of raising money for a business from investors, many of whom were experienced and well beyond just friends and family, only to ignore all advice and execute a flawed business plan to death, ignoring the pleas and attempts at coaching by others including those investors. 

                Don’t be one of those.  Be flexible and be coachable.

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