Your success must be based upon data that is solid and sometimes flexible enough to pass several critical tests if it is to guide a business enterprise to greatness. Here in brief are ten tests for your successful vision. Try these on for size, and test yourself for attractiveness to the marketplace, to investors and to history.
Ten tests for your business success:
- Is your market identifiable and accessible? Test yourself as to whether you can identify the size of your market niche, and whether you can overcome the many barriers to access customers within your niche.
- Where in industry life cycle? If your vision is for a product or service that fills a need in a mature industry, you may be flying against the prevailing winds as a market shrinks over time, taking your business with it. Conversely, a fast-growing industry lifts most all good participants, making excellent companies excel even more and grow even faster, like a small plane flying at 150 knots with a 75-knot tailwind.
- How large is your total market? If the total market for your niche is under $100 million per year, it is going to be difficult to build a $50 million business, even if not impossible. If the market is ten times that size, there is probably room for competitors to fight for dominance and still succeed if you are not number one.
- Can you dominate that market? The dominant player in any niche controls pricing for all those under it, and often sets the risk profile for new entrants into the niche if the dominant player’s products or services fill the needs of customers at reasonable prices and quality.
- [ Email readers, continue here…] Have you created high barriers to entry? If your business is a “me too” entrant into any market niche, even the smallest success will soon attract competitors that will sap some degree of your potential growth. What can you prove as a barrier to entry for competitors? Is it the advantage of time – years of development ahead of any competitor? A core patent or “thicket” of patents protecting your offering? A strategic relationship with one or more of the largest customers?
- Are margins high enough? Some great ideas just can’t make money and ultimately die for lack of profit potential. Profit margins are higher for unique products or services early in the life of an industry niche, or for products protected by patents that prevent others from undercutting you simply by releasing a cheaper product. High profit margins are a sign of high barriers to entry and attract investors and ultimately good buyers for your business.
- Can this business grow to above $20MM to $50MM in annual revenues? This is a basic test for investors, separating your business from those with smaller visions. There is nothing wrong with a vision for a smaller enterprise if not in need of professional investors to make it a reality.
- Do you have a world-class management team? The best way to protect against failure is to attract a team with members who have experienced success and failure and
can recognize the ways to manage toward success and avoid the pitfalls previously experienced from past failures. From a professional investor’s perspective, the team should be able to be flexible, coachable and experienced enough to get a business through breakeven and beyond the next level of outside investment, greatly reducing execution risk. - Can you translate an idea into a compelling product? Some great ideas just cannot be made into a product at a reasonable enough price to attract customers. And some attract early adopters but cannot pass into the mass market. Sometimes, an idea is just too early for the available technology to make it attractive. Early cell phones were large bricks that required a large carrying case and cost up to a dollar a minute to use. As technology caught up, allowing miniaturization and light weight, mass adoption drove the price down and allowed the building of infrastructures everywhere to support the use of inexpensive minutes. Do anything you can to develop compelling products or early prototypes as proof of ability to reduce your technology risk.
- Is there an exit strategy for the investor(s) over time? There are many professional services businesses that make fine lifestyle opportunities for architects, doctors and dentists. But these types of businesses are not attractive to potential buyers willing to pay a premium for businesses that are worth millions more than their asset value. Building a great business to create wealth for the entrepreneur at exit, means thinking of the exit strategies from the beginning. Who or what type of buyer would be attracted to this business if successful? Great wealth is made from selling great businesses at immense profit for the entrepreneurs and investors who took the journey.
Note: All images created for this blog by Dave using AI prompts with Microsoft Designer (DALL-E).
which I sit, over 25 years ago. It made an impact and stuck with me through the years. I have repeated it often to boards deliberating action and to individual board members seeking to get their hands dirty inside the corporation by giving advice and helping at levels beneath the CEO. (And it is interesting to hear it returned from various unrelated sources, even quoted as “Noses in; hands out.”)
anymore?’ What I took for unusual silence was a complete disruption of the normal give and take of the management group because of my presence. The chairmanship carries unstated power even if not overtly demonstrated, since the CEO reports to and is accountable to the board, and of course its chair. I learned from this that there are times when members of the board are appropriately brought into an operating group, and certainly times when the board should hear from vice presidents presenting their issues in a board meeting. But the position of CEO is absolutely to be reinforced at all costs, never to be undermined by any member or by the board as an entity.
proposed budget, it is the board that controls with its votes the execution of strategy, the expenditure of cash, the taking on of debt or new equity, the very direction of the company as well as its ultimate health. Surprised?
For non-profit boards, the two most important duties under the duty of loyalty and care are the oversight and eventual replacement of the CEO, and maintenance of the entity over its infinitely long lifetime. I have been a member and even chair of presidential search committees and can attest that board members (and other designated stakeholders) spend hundreds of hours in the recruiting process, all without pay.
annually and for some reason aggressively change members, you will experience the steep learning curve required to get the newest board members up to speed to contribute with deep knowledge of the company and of your management style. And that’s not good. Re-electing board members again and again is not a problem – if those re-elected members contribute effectively as they fill their seats. But annual re-elections signal to all that a board seat is not permanent or even long-term.
For non-profits, this allows for the creation of a board development committee to find and recruit outstanding new board members and find ways to unseat those who are no longer contributing or even attending board meetings. Such a policy further reinforces the duty of care for the corporation by its board. Unseated board members with longevity and a history of participation can be invited to become “emeriti” members of the board with observation rights but no vote.
Sometimes, as in one board where I sit today, there are so many classes of investors, each with one or more seats, that a seven-person board is not enough.
bring it to a vote. The corporate attorney was present, recommending this as a relatively safe move for the CEO. I called the question after a drifting discussion. You can guess that the three friends voted down the measure, perhaps as a sign of unison, since this was the first vote by the two new members. It was the final nail for me. I engineered the extraction of the outside investors, even at a near total loss. At least the investors could then take the loss against ordinary income under rule 1244 of the IRS code, worth something to each, rather than being locked into what was a slowly failing lifestyle business with no effective oversight.
forget this point. They write in their investment documents that they will occupy a seat on the board for as long as they are invested in the company, thinking of this as a protection for their investment and tool for them to influence growth.
corporation comes first. Some investor board members are also member of boards for companies that may overlap in markets or even compete directly, although rare. Either way, I have seen many instances over the years of my board service with VC’s on the board, which the VC’s have had information about other firms that would be classified as confidential – that they offered at least piecemeal in a board meeting of another company where they serve. There are issues that stress the loyalty of board members such as placement of employees or recruiting of executives from firms where the VC or board member has inside knowledge. These are rare, but each stresses the duty of loyalty to the corporation on whose board they sit.
years ago, we were hired by one of the largest companies in the industry (yet another Fortune 50) to perform a top-to-bottom audit of their processes across 27 facilities, and recommend measures to increase efficiency, increase income, better the customer experience, and of course, decrease costs while also increasing the quality of service. We were quite confident that our services would yield great, measurable results. The work continued for about eight weeks between the two of us as we visited the 27 locations and worked with employees in departments across all disciplines within each location and at central offices that performed services for all locations.
“I want you to all imagine that it is tomorrow morning, looking back upon today’s reporting of these past months of work by your consultants. Imagine that today I build for you a beautiful sandcastle exactly at the water line of the ocean nearby. Tomorrow, we both will visit that beach and look at the water line, and find not a beautiful castle, but just smooth sand, just as it had been the day before building our beautiful sandcastle. In other words, I would not be surprised if you accept our report today with enthusiasm, but then in the overwhelming rush of daily business, fail to implement few if any of these recommendations that you so enthusiastically received.”
expenses are accounted for as earned, not when the cash is received. (You, on the other hand, account for your individual income on a cash-accounting basis, counting the cash not the date of your earning or accrued expense.) The difference: If you earn pay due December 31st and it is paid January second, you pay income tax on those earnings in the following year. But the corporation that pays you accrues the expense and takes the deduction in the year in which the income was earned or expense actually incurred.)
creating and reviewing data. Bookkeepers are often trained on the job although sometimes more formally and handle the physical work of accounting for the transactions. To expect a bookkeeper to provide analytical planning is to ask for something they often cannot provide, except in a cursory way.
Many early-stage CEOs are not trained and ready for such tools even if available. The lesson here is twofold. There is a benefit to using a good accountant to help devise critical reports for a corporation; and CEO’s must quickly become financially savvy in the analysis of financial statements and metrics that measure the health of a business. To fail to have this skill is to reduce the corporation’s capability to discover problems early and take advantage of growth opportunities.
