How not to start a business
I could preach about the value of a business plan, but that would be b-o-r-i-n-g, so instead let’s dissect a true, local example of one enthusiastic start-up entrepreneur who jumped into business without one. We’ll call the business owner “Lydia.” I met Lydia when she appeared as a radio guest when I was hosting a nightly business talk radio program for WTDY, and I’ve never forgotten her or her business.
My co-host Joan had met Lydia at a networking function, heard that she had a start-up business, and wanted to give her some advice to help her “take it to the next level,” and so she booked the appearance. Joan knew little about Lydia’s venture, and I knew nothing at all about it, which was the format I preferred so that I could go into interviews with fresh ears and no script.
We were on air less than five minutes when I realized we were in trouble, or rather, that the guest was about to wish she were anywhere else than with me. No way was her business going to be viable, and so I was stuck with two equally sad options: I could try to help her save face, asking her simpler and simpler questions, and not mention her obvious business obstacles, but then I would lose credibility with my true business audience. Or I could endeavor to help her understand her challenges, which would mean that I would have to play “devil’s advocate,” and regardless of how well I phrased it, I probably still would come across as a bully, since she really was a sweet and enthusiastic young woman, passionate about her new “business.”
It honestly was a no-win situation. So I just sighed and asked her three telling questions. First, did she have a business plan? No, “not a written one.” Second, had she talked with a business adviser versus just her mother or best friend? No. And third, had she talked to potential customers – not friends or family or work colleagues – before launching her product and sinking her life savings into the project? No.
Here’s the deal. She was passionate about tea, so she decided to create her own brew. She imported different teas from different countries and came up with her own special blends. She paid someone to design a very nice logo for her tea line and then contracted with a vendor to create beautiful packaging for individual tea servings and also for boxed and tinned tea offerings. And wow, the packaging was indeed beautiful! Then she set out with product samples, visiting coffee shops and restaurants, hoping to share her wonderful tea with an eager, appreciative audience.
On the surface, this probably sounded like a great plan to her and her mom and friends. However, she wasn’t able to garner acceptance in retail settings because her price point was too high – $3.50 a tea bag, due largely to packaging costs. So she developed a website and took the business online. More expense.
Shipping proved too expensive, so she narrowed her target market (“my actual potential customer is anyone who likes tea,” she said) to Madison, WI area tea drinkers. That way, she said, she could deliver the teas herself, by car, and so meet her wonderful customers. “Because,” as she explained, “I’m sure that once they drink my teas, I’ll have a customer for life, because everybody likes to know where their food comes from these days, especially for artisan products, so this fits right in.”
The minimum purchase required for delivery was $10. So for $10, she’d package three individual tea bags (a minimum order, logic follows) and handle all of the ordering and accounting work herself, and then drive the order to the client’s house – a client who may be a legitimate tea lover … or a wacko attracted to the idea of luring someone to their home. And the cost of the gas, her time to verify the sale, schedule the drop-off, find the address, and get there … well. Her break-even point was actually about $15 per $10 transaction before any discussion at all of salary.
It didn’t take long to zero in the fatal flaws of her business assumptions. Price point (caused by packaging rather than goods), target market (should have, given her price point, been a specific wealthy demographic), distribution system … well, I could go on and on, and in fact, I did. During commercial breaks, I kept apologizing profusely to her, because I could tell the discussion was much more difficult for her than she had expected, but the truth was, she lacked a business plan, business advisers, and business sense. Instead, she’d created an interesting money-pit hobby.
So here’s the moral of the story: If your little sister or your uncle wants to start a business and comes to you for encouragement, instead offer something of value -- like the advice to write a business plan. It’s a great exercise whether they intend to fund it using savings, a credit card, third-party funding, or the financial help of family, friends, and fools.
Plans should include a clear and simple description of products and services. Advise them to identify competitors and to zero in on their customer base, sales, and distribution strategy for reaching those customers – and then to double back to their pricing. Does it still make sense, given the cost of bringing their goods or services to market? And also, it’s imperative to create a detailed description of their capital and cash-flow needs (and then double the amount they think they’ll need). Finally, suggest they take that plan and run it up the flagpole with a trusted business adviser.
That is boring, I know, but your sister would do better to be a bored and successful start-up entrepreneur than to have an exciting example of a failed business.