10 Reasons to Consider an Investment in Enable IPC

We get a lot of questions from investors and potential investors.  We do our best to provide both the required info in our periodic filings with the OTC Markets and annual meetings, as well as additional information in our corporate website and this blog. 

As we have worked to answer those investment-related questions and educate people on the Company, I finally decided to summarize those answers.  And guess what?  Yes, we came up with our own “Top Ten” reasons to consider an investment in Enable. 

I have to apologize in advance if this list seems like we are bragging.  But we have been at this a while and are proud of our accomplishments and excited about our future, and to coin an old phrase, if it’s true, is it really bragging?  Well, maybe.

I also have to add a disclaimer that I am not trying to sell you anything, and I am not offering investment advice.  I am simply listing the reasons why I think people might want to consider adding Enable IPC to their portfolio.

Here you go – our “Top Ten”:

1:  Revenues.  Our revenues have grown, quarter-to-quarter, for the past five quarters in a row and we expect to continue this trend.  By the way, revenues are a somewhat rare thing in over-the-counter stocks.

2:  Profits.  Enable is profitable – an even rarer thing in over-the-counter stocks and, sometimes, profitability can even be difficult to find in some Nasdaq-listed entities.

3:  Longevity.  On March 17, 2013, Enable will be 8 years old. The company has been around a while and should no longer be considered a “start up”.  Enable’s longevity could be considered an indicator about its future.

4:  Low overhead.  Enable’s culture is unpretentious.  The Company eschews fancy workstations, cool digs and such.  Its overhead is low and the Company is run with an aim to keep it low.  We are here for the technologies we develop, not fancy offices or stocked kitchens.

5:  Solid market opportunities.  There are some solid market opportunities (yes, plural [opportunities], not singular [opportunity]).  These are in the energy storage and RFID areas, which are solid, stable markets that are not likely to undergo massive reductions in size anytime soon. Both of these market segments appear to be on upward-trends.

6.  Valid, real-world technologies.  Enable’s technologies have been validated by both the markets (e.g., RFID tags that are being sold by major, established distributors that have historical success and existing market paths) and researchers (e.g., the National Science Foundation (NSF), who selected the Company’s technology for funding after the proposal was evaluated by third party, experienced researchers and was part of only 3% of over 1,000 initial proposals).  Our ideas are not pie-in-the-sky stuff; they’re real-world.

7.  Undervaluation?  Maybe.  Enable’s stated projection is that its sales for the fiscal year ending March 31, 2013 will be about $1.4M (as we mentioned in our annual stockholders’ meeting last August) and, as we’ve stated, we should have no problem hitting that goal.  On January 7, 2013, Enable’s market cap was about $1.35M.  It appears the Company might be undervalued based on its current financial matrix.

8.  Experienced staff.  The Company includes a CEO with over 20 years executive management experience with successful start-ups, a Chief Scientist also with 20+ years’ experience in the field and over 30 publications to his credit, a Board populated with an extremely high level of legal, accounting and business expertise and a highly qualified, experienced and degreed staff.  For us, its quality over quantity.

9.   High likelihood of near-term increasing revenues.  In the next 12 to 18 months, the Company plans to expand its RFID product line as it completes the NSF project.  As this success builds, revenues stand a good chance of increasing soon (i.e., within the next one to three years) from the licensing of the new technologies.

10. Great long-term potential.   As the Company finalizes its work with nanoparticles in batteries, and expands into other related areas, its future potential becomes significant.  If one considers just the licensing revenue possible from the lithium ion battery market (at or approaching $10 billion worldwide in 2013), the potential is huge.

We plan to take these topics, one at a time, over the next couple months or so and expand on each.  If we think of other reasons, we’ll add them.  And, if you think of other reasons, we’d like to hear those as well.

Small Business and Entrepreneurship - To Startup or Not to Startup Part XI - Testing and Conclusion

"The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible."
--- Yale professor on Fred Smith's paper proposing overnight delivery service. (Smith went on to found FedEx)

"A cookie store is a bad idea. Besides, the market research reports say America likes crispy cookies, not soft and chewy cookies like you make."
--- Response to Debbi Fields' idea of starting Mrs. Fields' Cookies.

"We don't like their sound, and guitar music is on the way out."
--- Decca Recording Co. rejecting the Beatles, 1962.*

In this final article on the decision of whether or not to start a business, we will discuss testing customers and then conclude the series.

We've spent the last few articles researching our potential company's environment beginning with broad industries and narrowing things down into markets and market segments. Going through the exercise of researching all these areas should give a good idea of what is going on in our chosen market segment and give us an idea of how we want to approach our target customers. The next step is figuring out if our strategy will work.

We want to remember too that one of our goals in conducting this research is that we want to aim to try to get to our first customer, and our first sale, as quickly as possible. In the testing phase we are attempting to really get to know our customer and perhaps in doing so we can even secure an order or even an up-front payment? Either would surely make the decision to start a business an easier one to make.

Based on the information we've already compiled in our research we want to spell out who we think the target customer is, what benefit our product provides for that customer, how the customer decides whether or not to purchase our product, and the means by which we can reach our customer with our product.

Once we have all this information we can begin testing. The purpose of testing is to validate our business concept, verify what we think we know, and try to figure out what we don't know in order to then make adjustments.

Our methods for testing are surveys and interviews but may vary wildly in action depending on the nature of the target customer. If our product is something we are targeting at a very broad consumer market like for example, a new beverage, we can possibly test with surveys and taste tests at popular shopping locations. However, if our product was something like a business consulting service, it may require researching who at a target business makes the "buy decision" and figuring out how to contact some of these specific people for interviews.

We want to design our surveys or construct our interviews to find out first hand from our potential customers whether or not they would buy our product, why they would buy it, what is it that causes them to decide whether or not they would buy it, and how we they could be reached with our product.

Knowledge gained through testing can then be utilized to make adjustments prior to launching, or if the necessary adjustments are significant, perhaps a re-haul of our entire plan, and a later re-testing of the concept.

Once we've tested we want to go back and review all aspects of our research - our  financial projections, our industry and market research, and our testing results - and consider all of these prior to deciding whether or not to move ahead and start the business.

Every idea or product will be unique, some may have more attractive financial potential while others may have more attractive market opportunities, and even after all this work it will likely still be a very difficult decision. But the more we know about what we may expect if we launch, the better prepared we may be, and hopefully the higher our chance of finding a quick success.

* Full credit to "Things People Said - Bad Predictions" for the quotes at the top of this article. 

Small Business and Entrepreneurship - To Startup or Not to Startup Part X - Market Segmentation

"The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself" -- Peter Drucker

"A market is never saturated with a good product, but it is very quickly saturated with a bad one" -- Henry Ford

The last article in this series focused on the difference between industries and markets, and the benefits of focusing on market segments.  For this post we will look at how to segment markets, what bases we should use for our comparisons, and how to select attractive markets.

As we stated in the previous post, studying market segmentation is an important practice for all companies but is especially so for a start-up. With limited resources market segmentation can focus a potential start-up on its most likely avenue of success, and least likely avenue of wasting those limited resources. What we want to do is identify different customer groupings in our market, explore what it is that drives each segment,  pick the most attractive segment and begin testing our product/idea on that group.

Let's begin with how to segment our market. In their book Consumer Behavior, Leon Shiffman and Leslie Kanuk identify four major categories of bases for segmentation[i]. These are Empirical Personal Features, Usage and Purchase Behaviors, Personality Lifestyles and Sociocultural Values, and Attitudes and Preferences Regarding the Product. When trying to decide how to best segment your market try looking at your market from these angles and see if one of them lends itself to your customer groupings:

Empirical Personal Features -- Demographics, age, location, gender, marital status, etc.

Usage and Purchase Behavior -- How and how often the product is used, purchased, etc.

Personality, Lifestyles and Sociocultural Values -- General attitudes and beliefs not related to the product for example, early vs late technology adapters, vegetarians, outdoor enthusiasts, i.e., this can be nearly anything.

Attitudes and Preferences Regarding the Product -- This is attitudes and beliefs specific to the product like benefits desired, attentiveness to and involvement with the product, etc.

Hopefully these give ideas for possible segments for your market. Perhaps you can use a strictly regional mark up of North America, Europe, Asia, etc, maybe it's how the product is used such as for commercial, residential or industrial applications, or maybe you can segment based on benefits desired such as functionality, size, or low cost. 

Once we have our bases for segmentation we need to define each segment. The important things we want to know are:

• Identity - How do you define this segment, what is your separating characteristic?
• Size - How large is this segment?
• Growth - Is the segment growing, shrinking or stable?
• Benefits - What are the key benefits that customers in this segment seek?
• Competition - What is the nature of competing offerings in this segment and what are the competing products strengths or weaknesses?
• Examples - Can we identify specific examples of potential customers in this segment?

After compiling all this information it may be helpful to organize it into a chart for easy comparison. If no segment appears to be clearly more attractive, perhaps the market can be segmented in another way in which will better describe the market from the perspective of our product.

Once we have completed our segmentation we can identify which segment appears to be the strongest or best fit for our product based on our preliminary research. We should understand that all this information is likely to change as we learn more about our customers, and that we may even shift our  focus a few times before deciding to launch our product. 

What this exercise does is give us a direction towards which we can begin testing potential customers. The next article in this series will deal with how to test target customers.

---

[i] Shiffman, Leon G., Kanuk, Leslie Lazar Consumer Behavior, 10th edition Prentice Hall Publishing, 2010, pg 58

Small Business and Entrepreneurship - To Startup or Not to Startup Part IX - Markets

"In marketing I've seen only one strategy that can't miss - and that is to market to your best customers first, your best prospects second and the rest of the world last." -- John Romero


"Marketing is too important to be left to the marketing department." -- David Packard 

We continue our discussion on the decision of whether or not to start a business with a look into product markets and market segmentation. In this article we will examine the difference between industries and markets and the benefits of focusing on market segments. The next article in this series will look at how to segment markets and identify which to target.

Last post we started at the broadest industry our product could fit in and then narrowed industries down until we thought we might begin cutting out potential customers. This led us to the beginning of market segmentation, so we'll start here with a discussion of the differences between industries and markets, as the definitions can get a little hazy and distinctions can blur.

According the Robert M. Grant in Contemporary Strategy Analysis industries are groups of firms that provide products for markets - and industries compete in both product markets and input (supply) markets. Industries are therefore broad while markets refer to more specific products and a company in a specific industry can compete in multiple product markets.[1]

As an example, we could say a company in the automobile industry can compete in multiple markets like the individual consumer market, the rental car fleet market, and maybe golf carts.

 Why are we discussing this? Decades ago there was one primary marketing technique -- mass marketing. Basically, a company would attempt to tout their product at some general level or appealing to a very basic need in order to appeal to as many people as possible. As an example maybe advertising a cereal as satisfying hunger, a very basic need and therefore “food for everyone”, as opposed to a cereal positioned as quickly dissolvable, healthy, and full of all the vitamins needed for an infant just starting on solid foods (therefore satisfying the same need but for a very specific group). The mass marketing approach is still possible today in some industries like commodities where there is little product differentiation.

However, with competition and product differentiation companies can and do focus products on specific groups within the broader market. Today when you look at major companies, they will often have separate products targeted at specific groups or combinations of groups.

Since we've just passed Easter let's take a look at a company like Cadbury. If you look at their product line at their website (here)  you will see dozens of different types of products. They have the cream-filled chocolate eggs always available this time of year, chocolate bars with very colorful, fun wrappers (perhaps to draw the eye of children), chocolate bars with more simple wrapper designs emphasizing the chocolate (perhaps to draw the eye of adults), and even cakes, hot chocolate and coffee creams. This complicated line of products is almost all chocolate based meaning they could theoretically all be targeting the same broad market, but there likely exist many charts in the Cadbury company's marketing department detailing their definition of the different Cadbury customer groups and how each product is positioned relative to the different segments.

Large companies can afford to develop large product lines and target specific groups of customers, they can position products to overlap each other, target multiple segments, they can have broad-targeted products and very specifically targeted products. They can saturate segments for the sole purpose of preventing competitors from targeting that group. However, for someone trying to decide whether or not to launch a product and start a business, it is probably best to focus on what appears to be the best bet at the time.

There is definitely an appeal to targeting the larger number of customers that may be available in the broader market. However, it is often the case that some form of differentiation of a product could yield more success focusing on a smaller segment, then an undifferentiated product unfocused on the broader market.

Let's consider a product that has two potential market segments (A & B) which prefer different features. We can choose one or the other, or both. We can focus our product on segment A by providing A's features, or we can focus our product on B by providing segment B's preferred features. To target the general (A+B) market though, we would need to either provide both A&B's features (which would likely be more costly) or we would need a basic product which provides neither groups features (which would be less appealing).

Failure to focus on one, could lose both as a competitor will come in with an A-targeted product and another with a B-targeted product and they will either have the features your product does not (if you created the featureless version) or their products will be cheaper (if you have created the A+B version).

However, the more immediate concern is that this is a start-up company. A start-up will want successes and self-sustainability as quickly as it can get them. It may also have limited resources preventing it from targeting both markets. Studying the segments, identifying which is the most attractive and then launching one differentiated product focused on either A or B, (whichever is more attractive) will likely yield the greatest chance of success. Ideally, after achieving a bit of success with A, the company can look at offering a product for B as well, but getting to the first customer, and the first dollar, quicker, is often a key to success for a start-up.

Next in this series we will look at how to differentiate between market segments and how to identify which is the most attractive.

---

[1] Grant, Robert M. Competitive Strategy Analyis Blackwell Publishing 2008 pg 85

Small Business and Entrepreneurship - To Startup or Not to Startup Part VIII - Industry Analysis

"There exist limitless opportunities in every industry. Where there is an open mind, there will always be a frontier" - Charles F. Kettering

"The early bird gets the worm but the second mouse gets the cheese" - Willie Nelson

We continue our series on the decision of whether or not to start a business by analyzing industries and markets.

Industries are typically defined according to their product (automobiles, soda, solar panels, etc), and industry participants can include all those companies along the value chain leading to product creation. Since an industry may be defined by its product there are therefore nearly an infinite number of industries. It can therefore be difficult to decide in which industry you are competing.

Let us say we want to start a company making solar power inverters (a device that converts the direct current (DC) received from solar panels into the alternating current (AC) used in our homes). Are we in the inverter industry? The photovoltaic (PV) industry? The solar power industry (Photovoltaics, Solar Thermal (ST), Concentrating Solar Power (CSP))? It can be tough to figure out where to draw the line, but for this section we want to take a pretty broad approach, and narrow things down more when we get into markets and customers (markets are typically defined along customer groupings).

Running with this example, what we can do then is start with a brief look at power generation (gas, coal, nuclear, solar, wind, etc), then look at solar power generation (PV, ST, CSP) when it looks like we will begin excluding potential customers by narrowing further that may be a good time to stop.

For example, inverters would not be used with ST and probably not with CSP, so we concentrate on PV, but if we try to narrow the PV industry down further we may start excluding inverter users.

Now that we’ve got an idea of what our industry is we can move on to what we want to know. We will eventually want to become experts in our industry, to start we can begin with:

• What has happened in our industry in the past?
• What is happening now?
• What changes are coming, what will happen in the future?
• Is the industry growing?

Answering these 4 questions can give us a good grasp and insight into our industry and help us understand changes that are occurring. Change means opportunity and the ability to find a niche for a new company or product in a changing landscape is many an entrepreneur’s key to success.

When trying to understand the dynamic of the industry as it is now, one analysis tool that is helpful (and taught in every business school) is Porter’s 5 Forces. Our list will include more than 5 items but is heavily based on the original Porter’s forces. Analyzing our industry along these lines can greatly contribute to our understanding of the way the industry works.

Substitutes – A substitute product is a competitor that does not directly compete in your industry but which customers may still choose as an alternative. This is best explained with a simple example: in the soda industry where Coke and Pepsi may compete with one another, tap water is a substitute.

Barriers to Entry / Exit – Are there heavy capital requirements to get in our out of this industry? If so it may be a big deterrent. When thinking of high barriers to entry or exit one common example may be the airline industry, where if you decided you wanted to start an airline you may need quite a bit of money to get in, conversely if you felt you were done running your airline company and wanted out, having to sell off your assets in order to exit may be a little difficult.

Suppliers – How common or rare are the supplies you need to create your product, and therefore, how much power over you will your suppliers have, how vulnerable are you to shifts in supply? In 2009 the PV industry saw a major drop in prices (revenues for some companies) due to an overproduction of silicon, an important component of photovoltaic cells. This overproduction was a response to prior years of short supply in which the high cost of silicon made solar installations much more expensive. How vulnerable is our industry to shifts in supply?

Buyers – On the other side, what is the power of the buyers in this industry? If your industry has few buyers then they would seemingly have more power, however if the buyers have limited options available to them, limited competing products or substitutes that would lower the buyer’s relative power.

Complements – Complementary products are those that increase value when combined or used together with other products. If our product has a complementary product, where does the power in that relationship lie? Think of the solar panel example. To the end user, let’s say a homeowner, the solar panel and inverter may be complementary products, in fact, if the homeowner wishes to use a solar panel he needs an inverter to convert the power to useable alternating current. From the perspective of the inverter company, the solar panel is a strong complement, but an extremely powerful complementary product as few customers are likely to buy inverters without also buying the solar panel.  

Rivalry - In this area we are considering what are the established competing companies, how concentrated is the industry, are these companies locked in fierce price-wars (which would make things a little unattractive to a new entry)? Perhaps there is room, if there are large companies locked in fierce competition perhaps a small new entry focusing on one product niche may be tolerated as the larger companies focus on each other?

Considering all these angles, where the industry has been, whether it is growing, the nature of competition in the industry, and where the industry may be headed will hopefully lead to a good idea of the way the industry operates and possibly point out potential problems or potential opportunities for our new venture. In our next section we will narrow things down a little bit and look at analyzing markets. 

Entrepreneurship and Entrepreneurs Part II

"A ship in harbor is safe. But that's not what ships are built for." -- William Shedd


"Ever notice how it's a penny for your thoughts, yet you put in your two cents? Someone is making a penny on the deal." -- Steven Wright


In our last post we looked a little at “what is entrepreneurship” and discussed some aspects of entrepreneurial thinking. Here we will look at some common entrepreneurial traits and behaviors and then take a look at “why” entrepreneurs do what they do.

One major trait that entrepreneurs may have in common is a higher tolerance of risk. There is a definite perception that taking the leap and starting a new business is a risky endeavor. A failed business could potentially result in serious financial problems, strained relationships, and even health problems due to the high levels of stress that can be associated with entrepreneurship. A person deciding to start a business may be walking away from a regular paycheck, a secure job, a career path, and future opportunities derived from their career path. They may be walking into a time of uncertainty and high stress.

Entrepreneurs often need to take additional risks beyond those above by putting themselves on the line, making promises and taking chances. Sometimes these actions are necessary in order to get the business moving forward. Also there is always unpredictability in business, one may never know when their number one customer may leave, or which if any of a myriad of potential problems may be waiting around the next corner. When the responsibilities for the business rest largely one one person’s shoulders, the problems for the business can potentially pose big problems for that person and their personal reputation, credit and relationships.

Many entrepreneurs will try to mitigate these risks as much as possible, perhaps by conducting extensive market research or talking to as many potential customers as they can prior to launch (“testing” the idea). They may attempt to start a business in the cheapest possible manner to mitigate financial stress. Perhaps they can seal a deal with a customer, getting their first order in before they really begin to incur any costs.

There are also others arguing that entrepreneurship isn’t nearly as risky as it is perceived, especially in today’s world where jobs are not as secure as they once were. They also cite the off quoted “90% failure rate” (or something like that) for new businesses that everyone has heard and show why that number is misleading or wrong (in fact, we’ll be writing about the misleading business failure statistics in an upcoming post as well).

Whatever the true level of risk facing the entrepreneur, honest is an important characteristic. Entrepreneurs need to be honest with themselves about the condition and capabilities of their company. They need to be honest to themselves about the real potentials of their products. It is good for them to exude optimism about the company’s future and how great their product is when talking to others but if the entrepreneur buys too much of his own salesmanship they may be headed for unexpected troubles. Finally, and quite importantly, entrepreneurs need to be honest to their spouses and the friends and family. They need to be honest up-front with those people that they will need to rely on when the stress gets very high, or the money gets very low. Hopefully all of these people are aware that such things may be headed their way in the future.

Why then, with these pressures and risks do entrepreneurs choose to start businesses? Of course, with higher risks come higher proportions of rewards. Strictly monetarily, many entrepreneurs have the potential to make far more money starting a business than they may have sticking to their prior career paths. However, money isn’t everything (right?) and entrepreneurs are often quoted saying things like “you have to be passionate about what you’re doing otherwise your business will not survive the low points”. Entrepreneurs often make it sound like the potential money alone could not inspire them enough to get through what they need to go through as they grow a business.

So what does get them through the low points? Inc. Magazine, in their March 2012 issue published the results of a survey they conducted of 2,000 business founders asking why they start businesses. The #1 reason among all groups (males in their 20s, 30s, 40+s, females in their 20s, 30s, 40+s) was – Autonomy. According to the article the only distinction was whether they were seeking independence or whether they were “fiercely” seeking independence.

The next most popular response, for 5 of the 6 groups, was Power and Influence – the desire to be a leader (female entrepreneurs over 40 preferred intellectual challenges over power and influence). Other common responses where desire to manage people, seeking variety, altruism and financial gain.

We asked David Walker, CEO and founder of Enable IPC for his thoughts -  why did he start Enable IPC and other companies. Here is his response: "I think the biggest motivating factor for me to start a new venture was to avoid becoming old and regretting that I never tried". 

This concludes our brief look at entrepreneurs. Next week we will return to our series on deciding whether or not to start a business by beginning to take a look at industries and markets. 

Entrepreneurship and Entrepreneurs

“I have not failed. I’ve just found 10,000 ways that won’t work.” - Thomas Edison 

“My son is now an “entrepreneur.” That’s what you’re called when you don’t have a job.” - Ted Turner

We've decided to take a brief break from our series on deciding whether or not to start a business to take a look at the business starters themselves. We'll begin here with entrepreneurial thinking and "what is entrepreneurship" and then continue next week with a discussion of some common traits and behaviors and a look at "why" entrepreneurs start companies.

First of all, what is entrepreneurship? It is a difficult subject to discuss. According to the Small Business Administration over 600,000 new businesses are started per year in the U.S. alone. The process of forming an organization therefore can take many paths and the people behind the process come from a wide variety of backgrounds. It can be very difficult therefore, to find commonalities and it is probably impossible to say "this is what makes an entrepreneur"! For that reason, in discussing entrepreneurship we will be talking a lot about "tendencies" as opposed to "certainties".

In academia there is even debate about how to study entrepreneurship. Some advocate "behavioral approaches" focusing on the process whereby organizations come into existence. This removes the entrepreneur's personality characteristics from the equation and instead focuses on his/her actions and behaviors. The other approach, the "trait" approach focuses on the personality of the entrepreneur, seeking to identify key qualities and characteristics held in common among entrepreneurs in order to explain entrepreneurship[i]. The basic idea behind this debate is this - how do we define or explain entrepreneurship? Is it  what the entrepreneur does or who the entrepreneur is?

At http://enableipc.blogspot.com/, fortunately, we do not have to answer such questions. Instead, we can look at a wide range of common tendencies, behaviors and attitudes that help explain entrepreneurs and entrepreneurship without having to settle any academic debates (and therefore avoid having to read dozens of journal articles dating back to 1816). 

In a previous article "The Idea" we looked a bit at entrepreneurial thinking, specifically focusing on the "pains" in life and looking for solutions to those pains. In her article "What Makes Entrepreneurs Entrepreneurial", Saras D. Sarasvathy discusses different forms of reasoning - causal, strategic, and effectual:

Causal reasoning - (also called "managerial thinking" by Sarasvathy) a person identifies a goal and their given means, and then identifies paths from their means to their goal.

Strategic reasoning (or "creative causal reasoning") -  a person identifies their goal and their given means, and then identifies paths from their means to their goal, however, they may also identify or imagine new or other means, and new ways to reach the goal provided by these new or other means.

Effectual reasoning (also called "entrepreneurial thinking") - a person identifies their given means and then imagines multiple possible ends that may be reached by these means[ii].

The "pain" focused thinking comes into play more prior to developing a product or idea while effectual reasoning takes place more post-business-launch but what these two modes of thought share is that they are opportunistic. Entrepreneurs tend to benefit from flexibility and adaptability. 


The ability to re-imagine the company or the company's product in order to fit the present opportunity can be an entrepreneur's key to success. Target markets and target customers may need to be very fluid as entrepreneurs adapt to new information and head towards their next (or first) customers. This is exemplified in the "ready, fire, aim" approach -- study, research, decide and launch a company, then adapt that company to market realities.

An important part of entrepreneurial thinking therefore is in their view of the future.  Looking for and attempting to predict change is a way of identifying new opportunities and anticipating obstacles in the road ahead, but entrepreneurs often also try to shape the future. They believe that the future can be controlled by their actions and that "To the extent that we [entrepreneurs] can control the future, we do not need to predict it."[iii]

In our next installment we will look at some more common entrepreneurial traits and behaviors, and also discuss "why" entrepreneurs do what they do.

---

[i] Gartner, William B. "'Who Is an Entrepreneur?' Is the Wrong Question" American Journal of Small Business Spring 1988

[ii] Savarsthy, Savars D. "What Makes Entrepreneurs Entrepreneurial" University of Washington 2001

[iii] Savarsthy, Savars D. "What Makes Entrepreneurs Entrepreneurial" University of Washington 2001

Small Business and Entrepreneurship - To Startup or Not To Startup Part VI - Sensitivity and Scenario Analysis

"Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery." - Charles Dickens David Copperfield

 "A nickel ain't worth a dime anymore." - Yogi Berra

After reviewing costs, sales projections, and compiling our cash flow projections over the previous 3 weeks, we turn this week to analyzing our statements using sensitivity analysis and discussing the use of different financial scenarios.

Now that we have our completed financial projections we can begin playing with the numbers to better understand our company. First we need to think about the figures we just developed and try to determine the key assumptions that were made. Do we think that everything hinges upon the sales price we used? Maybe we think it is our ability to secure a certain cost of materials, or to charge and collect a certain amount of shipping revenue?

If, for example, our figures were created with a sales price of $10.00 per unit, what happens to our cash needs (from Part V of our series, the amount of money needed to get our company to a cash flow positive state) if we can only sell our item for $9.00? We need to understand how vulnerable our company is to changes to our assumed figures. It may be that a change in sales price from $10.00 to $9.00 makes it impossible for this company to ever become profitable. It may be that the change has virtually no effect. If the change is drastic than we know our company is very sensitive to the sales price, but maybe we can find something to alleviate that sensitivity (maybe increasing shipping fees or find an additional source of revenue) or maybe the company is a no-go due to that sensitivity. Either way we would want to know prior to moving forward.

The other thing that sensitivity analysis can do is uncover hidden dangers. Perhaps we are certain about our cost of materials but find out that a slight increase in those costs could be devastating. Once we've studied our company's sensitivity to our assumptions we can make changes to our assumptions, or even modify the company's business model.

In this manner we need to play with our spreadsheet, alter the numbers in our assumptions, or alter combinations of our assumptions (e.g., what happens if we adjust our sales price and our rent?) and see the effect these have on our projections. This helps us to understand the interplay between the components making up our revenues and costs.

Now we can also create separate financial projections for different scenarios. We can make full sets of projections with different assumptions to show what could happen if we have to sell for $9.00, or if our material costs are higher than estimated. This can lead to "optimistic", "pessimistic" and "most likely" scenarios.

After conducting sensitivity anaylsis and compiling different optimistic, pessimistic and most likely scenarios you may begin to wonder just what are your actual cash needs? Well there are a few ways to answer that question. You can simply use your original financial projections and chalk the extra work up to better understanding the key characteristics of your company.

There are also a few methods others have suggested for what to do with your different scenarios. Say you have a pessimistic scenario with cash needs of $25,000, an optimistic scenario with cash needs of $10,000 and a most likely scenario with cash needs of $22,500. Which should you use as the real cash need for your company when considering whether or not to start this business?

One is to simply take the highest number, but this may be the least realistic of any approach as it does not take into account the likelihood that this would be your true need. In our example the highest cash need comes from the pessimistic scenario but how likely is this scenario to happen?

Another method is to take the average of your pessimistic, optimistic and two-times your most likely scenario. So in our example: $25,000 + $10,000 + 2x$22,500 = $80,000 / 4 = $20,000. This method factors in the pessimistic and optimistic scenarios while weighting the final number with the most likely cash need.

Another method we've heard of is to take the greater difference between either your most likely and optimistic, or your most likely and pessimistic, and then add that difference to your most likely number. So $22,500 - $10,000 = $12,500 (most likely minus optimistic); $25,000 - $22,500 = $2,500 (most likely minus pessimistic). The greater of the two is $12,500 and we add that to our most likely number $22,500 + $12,500 = $35,000. This method is designed to provide more of a safety net.

You can also simply weight each scenario based upon your understanding of the true likelihood of each scenario and come up with your figures that way.

This concludes our look into the financial aspects of deciding whether or not to start a company. Beginning next week we will start looking at our industries, markets and customers.

Small Business and Entrepreneurship - To Startup or Not To Startup Part V - Profit Loss and Break-even

"Remind people that profit is the difference between revenue and expense. This makes you look smart." -- Scott Adams

In this section of our look into the decision of whether or not to start a new business, we will look at compiling the results of our financial projections. We've taken a look at collecting our expected costs, and predicting our future sales. Now we will combine the two but first we should note that there are many ways to format a cash flow projection spreadsheet. We will make some general recommendations that may help with analyzing the results but these are by no means the only way to do things.

For your columns, a typical dating format may begin with monthly figures (Month 1, Month 2, etc) for the first year, go quarterly for year two, and yearly for the remainder of the projection. Financial statements will typically be compiled for 3, 5 or 10 year periods.

As far as formatting the rows it is usually helpful to arrange figures categorically, and to help analyze your results later it is best to put in as much detail as you can. Remember, this set of figures is to help you make a decision on starting a business (as opposed to presenting an idea to an investor, or convincing a boss to authorize a project), we are not looking to hide anything from ourselves, we want information and functionality. Typically you would start with revenue figures, then costs, then totals, and it is helpful to try to list your assumption in the first column after your descripion, something like:

If you are able to list your assumption this way and tie your monthly or yearly figures to the assumption using formulas then changing the assumption should update all the fields in the forecast allowing for quick updates or easy sensitivity studies.

When listing your revenue figures it could be helpful later to embed in your projections the process used to determine your numbers. If you are using a salesman/marketing effort based calculation perhaps your revenue section will look something like:

• Number of Sales Staff
• Number of Potential Customers Reached per Staff Member
• Amount of Advertising Budget
• Number of Potential Customers Reached per $10,000 in Advertising
• Total Number of Customers Reached
• Percentage of Reached Customers Converted to Sales
• Total Unit Sales
• Price
• Total Forecasted Sales

Of course we can abbreviate them in our spreadsheet, but laying out all the detail will allow us to play with the assumptions and analyze changes once we are done.

When listing costs it is helpful to be organized by categories perhaps by listing up-front costs first (these may only show up in month 1 but it is nice to have the total easily identified). We can further organize our costs into variable and fixed monthly expenses. Variable would contain things that vary with the level of production (such as materials, shipping, packaging, manufacturing labor, etc); while fixed costs are monthly expenses that are expected to be roughly the same despite the current level of production (such as rent, salaries, insurance, utilities, office supplies, etc).

Now that we've compiled our revenues and costs we will want monthly (or quarterly or yearly depending on your date formatting) totals for:

• Total Cash In
• Total Cash Out
• Net Cash Flow

In addition to this we will want a running total of our cumulative cash flows. Totals should look something like the simplified example below:

Once we've compiled all our figures and totals we can look for some key points. One is the cash-flow positive point. This is the point where your net income exceeds your net outflow, when you have more money coming in than you expend. At this point your company will start making back some of the money it needed to get started. In the simplified example above, this occurs at Month 8 of Year 1, with a Net Cash flow of $2,500 ($7,500 in sales and $5,000 in expenses).

The month prior to that, Month 7 year 1 is significant as well as that is the point where your cumulative losses cease to increase. This figure is thus your "cash need". In the simplified example this company expects to lose a total of $17,500 before it becomes cash-flow positive and therefore this company needs to come up with $17,500 in order to make it to Month 7 of Year 1 at which point it should be okay on its own.

The other significant point is Month 11 Year 1, this is the cash flow breakeven point, the point where the company has made back the money from its cash needs. Next week we will take a more detailed look at our completed financial projections including cash needs, and sensitivity to our assumptions.

Small Business and Entrepreneurship - To Startup or Not To Startup Part IV - Sales Forecasts

"At my lemonade stand I used to give the first glass away free and charge five dollars for the second glass. The refill contained the antidote." -- Anonymous

In this part of our series on the decision of whether or not to start a new business we will look at sales forecasts. The two major parts of our financial projections, costs and sales, are very different entities to predict. Whereas predicting costs can be basically an exercise in brainstorming and collecting quotes, sales projections require a lot of thinking about what exactly is the nature of our business and what is our business model - how are we going to make money?

First off, what are sales projections? Well, they are educated (hopefully) guesses about how much money the company expects to generate over the next few years. They are usually wrong and the farther out the projected figure, the more likely it is to be wrong. They are often shaped something like a hockey stick (see Exhibit 1), and they tell a story. Sales forecasts can say something like "we don't expect to make any money for the first year while we do product development, but then we will start limited sales as we hire a small sales staff. Soon our marketing efforts will begin to pay off as customers realize the superiority of our product and viola! We get a larger sales staff, things take off and we never look back (see Exhibit 1)".

Before we begin to determine some numbers, let us think about the purpose of these projections. In this circumstance the figures are for ourselves. We are not trying to sell a project to ourselves, we are trying to decide whether or not to start a business. This is a potentially serious undertaking, and we want to have as clear an idea as possible of what to expect should we decide to go ahead. For that reason we want to use as much of a sound and realistic basis for our projections as we can.

So a good way to begin is to think about the nature of your product, how you expect to generate revenue, and what the major roadblocks to more significant revenue may be:

• Will your sales be reliant upon the efforts of a direct sales force?
• Is the size of the sales force a limiting factor in your ability to generate additional revenue?
• Do you need the cumulative effect of marketing efforts (i.e., "getting the word out") before you see significant sales?
• Are you limited by manufacturing capabilities - can you only produce X number of units per month?

Consider the following two sound examples of determining initial sales figures:

"I will begin with 3 sales people, and we will spend $50,000 on advertising. I expect my sales people and ads to reach 300,000 people and 5% of those will purchase my product meaning 15,000 units sold. I do not expect to have any difficulty meeting those production demands. With my product priced at $10.00 this gives me $150,000 in sales during the first year".

The second example is:

"My product will take 300 hours to produce and I expect to start with 4 technicians meaning I can produce at a maximum 2 products per month. I don't expect to have difficulty selling the product at $25,000 a piece so I expect initial sales of $50,000 per month".

What both of these examples have in common is that the basis for the sales figures is founded in logic. If all the assumptions (such as "5% will purchase my product", "my product takes 300 hours to produce", or "$25,000 is a good price for my product") are reasonable then the sales projections these methods yield can be just as reasonable.

Both of the above examples identify where the sales come from, and both identify limiting factors. However, it will not always be possible to generate a sales forecast using this "bottom-up" type of method. One common "top-down" method used instead utilizes market share to determine sales figures. This method is to identify the likely size of the market during your time period and identify what percentage of the market you think your product can control, relative to competing products. So if you enter a $150 million per year market and expect to control 0.5% (for the duration of the year) you would generate $750,000 in revenue.

The sales forecasts generated by this "top-down" method are just as reliable as the assumptions used to determine the size of the market and the percentage of market share expected to be captured. The problem is that it can be difficult to make a logic-based prediction of captured market share, and that when compared with "bottom-up"forecasting methods, the "top-down" methods do not take into account as much the nature of the product or business.

Whatever the method we have used to determine our initial sales forecast, it is now time to think about growth. If we've used a "bottom-up" type approach for our initial sales forecast, growth could be determined by adjusting the variables according to the future nature of the company. Looking at the "sales force" first example above, perhaps after a year and $150,000 in revenue you think it would be a good time to expand the sales force and increase your marketing budget. You could then adjust the figures and %s accordingly and calculate your sales figures for the next period.

When using a "top-down" market share approach to predicting sales two things to consider would be the growth in market share of your company (say we moved from 0.5% to 1%) and also the growth in the market itself (maybe the market itself by 10%). Adjusting both figures accordingly will yield your next period's sales forecast.

The bottom line in both forecasting costs and forecasting sales is that the numbers are going to be just as good as the logic and assumptions we used to create them. If we are trying to decide whether or not to start a business we do not want to mislead ourselves with poorly founded figures. The numbers are going to be wrong, it is doubtful that any financial projection ever compiled was 100% accurate; but it is important to get as close an idea as possible to what we can expect should we decide to start this business. Now that we have calculated our expected sales and costs we will take a look next week at compiling and analyzing the results.

Small Business and Entrepreneurship - To Startup or Not To Startup Part III - Costs

"If you would know the value of money, go and try to borrow some." - Benjamin Franklin

"Dogs have no money. Isn't that amazing? They're broke their entire lives. But they get through. You know why dogs have no money? No Pockets." - Jerry Seinfeld

Happy Valentines Day! In the spirit of Valentines Day we've decided to continue our Small Business and Entrepreneurship series with a look at determining the costs of starting a new business. :-)

As we continue our series on examining the decision to start a new business we want to note that while we will cover many topics there is no specific order in which any of this work needs to be conducted. It may be that in researching your target customers you develop a better "idea" and go back to refine your prospective product. Perhaps you complete a set of financial figures only to determine in other research a new set of costs you had not previously considered. The point is the whole work, as anything in life, can be an ever-changing piece. Knowing when to say "enough is enough I've done enough research" may be just as important as understanding anything else in this process.

In our next few articles we will examine financial projections. We will begin here with examining costs, and in the coming weeks we will look at projecting sales, analyzing our results, determining cash needs and then we'll begin to get into marketing with a look at product pricing.

Financial projections consist of two major parts - revenues and costs. When begining to think about starting a new business it is often helpful to do a quick calculation - "I think I can make $X.XX and it will cost $X.XX" (hopefully more like $X,XXX,XXX.XX for the former and $X.XX for the latter of course), but at some point it will be necessary to get into a litter more detail.

We can begin by simply making a list of every cost we can possibly think of. Of course, businesses vary widely in their nature and for that reason no two lists of costs will look the same. There is an equally wide variety of ways to categorize or group these costs together when constructing your financial projections. But for this "brainstorming" type of exercise it can be helpful to look at potential costs in a systematic, organized manner. In other words, to "brainstorm" by category, something like:

Pre-Launch Costs - Are you going to need a functioning prototype of a product prior to launch? Sometimes beginning companies can arrange orders with customers prior to launch (after confirming with manufacturers what it will take to produce a product). Sometimes companies can even secure advanced orders and get cash in house before beginning production, but this is not always the case. Does any additional research or other product development need to be conducted prior to launch? You may not be completely certain your product will work, does any testing need to be conducted first?

Up-front Costs - These up front charges are more specific to operations than the pre-launch "development" type costs discussed above. Will you need manufacturing or other types of equipment? If you need an office or warehouse space, what about rent and security deposits? Also consider office supplies, office equipment, state Business and licensing fees? Are there any other legal or licensing fees for establishing your type of business?

Production costs - What is it going to take to actually produce your product or service? What sort of materials or training will you need? At this point do you believe you will be manufacturing the product yourself or contracting with another company? What about packaging for your product? If this is a service what materials do the service providers consume?

Shipping - Does this item need to be shipped? Do you know what the weight and dimensions of a packaged product may be? What geographical range do you think your customers will inhabit and therefore, what would be the range of your shipping costs to reach them?

Operations Costs - This would be things like monthly rent, phones, utilities, internet, marketing costs, travel, and office supplies, but also make sure to consider insurance. How many employees do you think you will have? How much would it cost to cover workman's compensation insurance? What about general liability and/or product liability insurance?

Employees and Labor - How many people will you need for production of your product or service? What about for support, management, accounting, sales and marketing? What are the current market rates for those types of employees? If you do have employees what about their payroll processing and benefits?

After compiling a good list of potential expenses it is time to come up with some figures for them. As the saying goes "garbage in garbage out"; if the estimated figures you determine for your individual costs are based on nothing, then the results of your financial projections will be just as meaningless. This can be a time-consuming process but it is an important one. Collect quotes for each of the items in your list. People often remark that when starting a business everything "takes twice as long and costs twice as much" as what is expected. The goal here is to come up with as accurate a picture as possible of what you are likely to face. After you start your business if some things come out more expensive than you expected, that is ok and to be expected. However, if everything costs twice as much as you expected you could be in trouble!

Determining costs is an important part of the process of deciding whether or not to start a business. It is important to try to think of everything you can. Many overlook things like general liability, workers compensation or product liability insurance, legal fees, business establishment costs and licensing fees. One large missed expense, or the combined impact of many small missed expense, can seriously hurt a business. Next week we'll take a look at what should (hopefully) be a happier subject, sales!

Small Business and Entrepreneurship - To Startup or Not To Startup Part II - The Idea

"I ain't never had an idea before, how does you know when you has had one?" -- Ali G

In the segment on Da Ali G Show from which this article's opening quote was taken, Ali G explores the commercial prospects of his new invention, the Ice Cream Glove. The Ice Cream Glove is basically a rubber glove designed to be used while eating an ice cream cone in order to protect one's hands from the dangers of melting ice cream. Most of us have had ideas for new products or businesses and most of those were probably superior to the Ice Cream Glove. Ideas do not need to be fully examined before taking the leap and turning them into businesses, but thoroughly examining an idea prior to launching a business can certainly help! This article will examine "the idea" and discuss some important components of, if not a "good" idea, then at least a "fully-fleshed out" idea.

First off, where do ideas come from, and where can I get one? Not surprisingly, many business ideas spring from work experience. As one works in a particular field or in a particular function, one gains increased understanding and expertise. Solutions to particular problems in that field or function are therefore more likely to be generated by someone with that expertise and familiarity than from someone completely detached. A person's "prior knowledge" is important in that it helps to shape the range of available opportunities that they see when considering a problem, but the key is identifying the problem.

Obviously ideas can come from anywhere, and there is no way to guarantee or predict a brilliant new idea, but there are ways to assist in idea generation. One effective way of business idea generation is to be "pain focused". When observing the world, as you go about your life, focus on your pain! Specifically, think about what is the pain, and how can I solve it? Whenever you come across an obstacle, or view others reaching an obstacle, define the problem and try to come up with solutions. For example, picture yourself walking down the street eating an ice cream cone, only to have the ice cream melt and get all over your hands and suit:

Pain - Ice cream melts and becomes messy

Solution - Gloves!

While that particular idea may already be copyrighted it provides a good example of being pain-focused. Constantly looking for pains and their corresponding solutions can, with practice, become an automatic part of one's thinking -a habit - and can perhaps lead to the next brilliant new product or service. All else being equal, an idea or product that is focused on solving a particular pain will be superior to an idea or product that is searching for a pain to solve.

Once we have a business idea it needs to be clearly defined. This is the "what, who and how" part of the idea, and means specifically identifying:

• the product or service (What you will be selling)
• the target customer (Who you will be selling to) and,
• the business model (How you will generate revenue)

It is important to identify all 3 of these components of your idea. Why? If any one of these 3 components are lacking it can severely hamper the business potential of your idea. Let's say you have a great product and customer identified, but no business model, no way to make money - would you still pursue the idea? If you have a customer and a way to make money from them but no product? Perhaps in that situation you have identified a pain and part of a solution but just need to figure out that specific product or service to bring it all together. What if you have a product or service and a way of generating money with it but no one to sell it to - will that business get very far?

In clearly identifying the product or service, much of what we've discussed already in this article applies - what is the pain and what is the solution. This Ice Cream Glove prevents melted ice cream from getting all over people's hands. What we need next is to identify the customer.

Part of understanding our idea is understanding to whom we will be selling this product or service, how can we reach them, and why would they want it? The absolutely essential point in this is examining our idea and identifying the key benefit. Ali G says the target customer is "people who eat ice cream and people who have hands" but the key question is why would those people buy the Ice Cream Glove? What is it about our product that makes it irresistible to customers? What is the key benefit the customer derives in exchange for purchasing our product or service?

For the Ice Cream Glove perhaps the key benefit is cleanliness? Perhaps it is not cleanliness - maybe it is the prestige and self-satisfaction the customer gains in knowing that by wearing this glove in public others around him view him with envy and see him as someone to be reckoned with? Identifying the benefit helps immensely with guaging how we can later test this concept, just how successful this product can be, and helps us to begin thinking about how to market our product. Understanding the key benefit thus helps us to narrow in on and identify who our target customer is, and then we can explore how to reach them. The target customer is a vital part of any business idea. We will be discussing examining markets, targeting customers, and testing customers in more detail in later parts of our series.

Along with the idea and the customer comes the business model. Do you sell a product directly to customers? Do you provide a service and charge membership fees? Do you provide a service to people for free and instead sell advertising to other businesses? A business model in our context means primarily "how do you intend to make money"? There are some examples of companies launching without defined revenue models, especially internet based companies. Some of these have successfully implemented business plans much later in their life (perhaps they started as a hobby site and reached a large number of users and then implemented an advertising or membership-based revenue model). However, most companies are not going to be able to get very far or secure funding without explaining how they plan to generate money.

The idea is the first part of the journey towards starting a business. Clearly defining what that idea is, whom it benefits and why, and how it will become a successful business is an important part of the process of examining the commercial prospects of potential business, but it is also just the beginning!