Knowing a Small Business Idea from a Big Business Idea

I have many Engineer friends, many of whom have a business or product idea which they come to me for advice on how or even if they should begin. I always counter with this first key question: Is it intended to be a Small Business or a Big Business. The answer is invariable, BIG, and sadly, the idea is usually SMALL. So why the disconnect? The reason is that a business needs to have certain criteria in order for it to 'grow big'. If it fails one or all of these, your business will either 'be small, like mom&pop store' or 'bust, because its not sustainable'. In fact MANY, MANY Small businesses fail because of competition. This recent article from Bank of America (someone who knows failed businesses), highlights the 7 most overrated businesses http://smallbusinessanswers.yahoo.com/overrated and is a good short read.

My criteria for a big business idea vs. a small one are simple.
1. It must be Scalable - This is the most important! If your business is "regional, only works in Colorado for example", or requires excessive infrastructure (like a building in every region), or requires an excessive workforce (like door-to-door salesmen, or many thousands of workers per factory), than you have a SCALABILITY problem. This kind of problem CAN be overcome, but very rarely by Entrepreneurs... we get too bored with it! The classic example of "not scalable" is that of the 'Gaming Cafe', where people pay by the hour to place games. This is just not a scalable business. You need buildings, infrastructure, people (to manage it), and so on. The only way to make this not a mom&pop is to make it a franchise... [see link above about 7 overrated businesses].

2. It must create Barriers to Entry for Competition - this can be patent protection (not just patents, but ones that protect), a unique advantage (like having done it before), a unique/strong brand, or a significant 'lead' or 'leap' in technology.

3. It must be more than 1 Product - having only 1 product leads to inefficiencies in marketing, sales, and lots of other funcitons. If you can't leverage your workforce for multiple products (even in the same family is ok), then you might be stuck with an idle, overpaid workforce.

4. It must not rely on 1 customer or partner - this one is just too risky. A business CAN be big with this but at great risk. And if a big business relies too heavily on 1 customer or partner, the risk will prevent growth.

I'm sure that there are other criteria, and I didn't really define a Big Business Idea is... but that is intentional. I never judge folks who ask me for this advice. Most "Small Business Ideas" can turn big with enough effort and thought. Lets face it, usually it comes down to raising money! Either from investors or bankers, having the right business idea/business plan is key to getting that first dollar.

One final comment: some people SHOULD consider the Small Business route. Mom & pop style shops and the lifestyle that they can bring can be very rewarding! There is nothing wrong at all with that, its just a problem when people expect 'big business' and are faced with small.

Innovation strikes not in a vacuum.

I live on a ranch in East Texas. It's about 50miles to the nearest city (Austin, TX). Schlepping my butt to town just for a lunch or coffee meeting would seem a huge waste. In reality, it is those lunches and coffees (and sometimes beers) I have with friends that help to congeal my best ideas into much, much better ones.

The reason is simple. Innovation rarely strikes in a vacuum. It can't really. Who would buy it, care about it, or even THINK it is innovative if it only stays in your head or in your personal lab. (yes I have a lab at my home :) )

Anyways, what I've found is that taking the time to TELL someone about your ideas, reveals its complexity, its holes, and hopefully its value. Many Engineers, myself included, worry about people stealing our ideas. It's down-right silly. To get from your brief description of an idea to a business is a LONG road, one that few people are willing to take. So share, learn, and innovate.

By the way, in a future post, I'll explain how to patent protect your best ideas for less than $200 (total). Then you REALLY don't have to worry about talking to people about it, right?

Minimum Viable Product (MVP)... easy to say, hard to do... especially for Engineers.

The whole concept of Minimum Viable Product is so simple, yet so hard for Engineers to follow. Not just engineers, of course, but anyone with a passionate interest in "making something", and a smaller interest in "making money". This Blog: http://startuplessonslearned.blogspot.com/2009/03/minimum-viable-product.html does a fine job of defining it (great video here). However to summarize, its the basic concept of minimizing the time from 'idea' to 'market testing' of any product. Some even think this can be extreme (like pre-orders for foil-ware)... As an engineer, "foil-ware"/"Slide-ware" is the hypocritical Satan worshiped by people who don't know how to build things!

So what is the happy medium? And why is it so hard for we Engineers to "let go" of features/certain aspects of our products in the short term?

The simple answer is, passion. So finding the right mix of "passion" to go along with "business reality" is key to early success and real indicators of future success. Consider, if 0% of 5000 "qualified" customers are willing to sign up for a 'free trial' of a 'basic version of your product', what is to make you think they will be willing to pay $50/month for those 'extra' features in the future?

So, the happy medium is this: build the minimum product that contains the "key" differentiators of your solution... and nothing more. I mean nothing more. Not part 2. Not the part you "think" is needed to make it a 'complete' solution... just they KEY part. Even if the KEY part doesn't itself seem like an MVP. If they key part can't be made into an MVP, maybe you should consider a 'different' idea to build a business on, eh?

More about MVP:
http://venturehacks.com/articles/minimum-viable-product
http://www.sramanamitra.com/2008/02/24/the-iphone-as-a-minimum-viable-product-archetype/
http://www.productdevelopment.com/howitworks/mvp.html

I can spot the Engineers who will go beyond engineering...

It's actually pretty easy to spot engineers who will go beyond engineering and into an adjacent field like management/entrepreneurship/sales/etc. They are NOT sitting at the lunch table. They are out to lunch, with their network.

The great book and sage advice: Never Eat Lunch Alone, contains much good advice, but its title is the best advice of all for engineers on the move.

Why? 3 simple reasons.

1. Engineers MUST get beyond the computer screen and into the wild if they are to learn the socialization skills required to be businessmen. Incidentally, this IS something that I learned to be truth while at U.T. MBA school... antisocial types don't make very good businessmen.

2. Engineers NEED to make friends outside the engineering department. Going to lunch (especially with those not at your company, or even better, not in engineering) is a good way to do that.

3. For anyone, not just engineers, having a good network of friends and colleagues is the only way to really keep job security. Your next job is VERY likely to come as a result of that network. (Incidentally, thanks to my friends/network for helping me with this task right now!).

Now, back to my Google Calendar... I've got lunch meetings almost every day next week!

Engineers don't have a clue what Marketers do... but would be better than Marketers at it.

In fact, most engineers I know have very little respect for marketers, and think that they don't "do" anything.

If anything, engineers, and lets face it, much of the "non-marketing workforce", think Marketers are about 'making advertisements'. You know the TV spots, the Web Banners, and that stuff.

Well Engineers with experience do have a sense that there is another side to marketing that is SUPPOSED to be there, namely the inbound marketing function (or product marketing). However, engineers have been so burned by this concept, so left "dry" and "hanging" by product marketing concepts, that many are left feeling that Marketers don't DO anything...

The funny thing is that if Engineering knew what Product Marketers were supposed to be doing: they would do a VERY fine job of it, and perhaps be better than most marketers at it.

I will explain why Marketers are struggling in a second, but first, here are a few of the functions of "inbound"/product marketing that engineers would knock out of the park and why:

1.) Surveys. Why? Because engineers can learn how to craft unbiased surveys, cull the data into actionable information, and summarize it all in a usuable format... its second nature for engineers.

2.) Customer Interviews. Why? Because engineers are usually less "fake seeming" than marketers, and would take DETAILED notes and then... SHOCKINGLY, cull the data into actionable information.

3.) Product Features & Feature Details. Why? Because engineers KNOW the pain of not having detailed information about a desired feature. Also because they will undoubtedly understand 'realisim' as well as 'what IS possible'... and tie it together in a nice, well documented, fully culled feature set.

So, why are marketers supposedly so bad?

Short answer: "culling the data" into 'actionable information'. This skill takes patience, confidence, and frankly, engineering talent to pull off... and you have to be willing to put in the work, learn statistics, and believe you are right.

Many marketers may "do these things", but fail to deliver the results in any meaningful way.

To my marketing friends (some of whom follow this blog), do not despair. YOU CAN do it. You just have to take the time, and for goodness sakes... if you've done some research... do yourself a favor: present it with the feature set (on the Marketing Requirements Document: MRD), and earn yourself some credibility with the folks that do the REAL work!

Engineers make better models of business.

The reason is simple. Engineers understand not only the idea of a "dependent variable" and an "independent variable", but its practical use.

For example, an engineering business model would undoubtedly have a page full of seemingly "independent" variables which control the actual income statement/cash flows/and so forth. How do I know this? Because I've made dozens of such models myself, and undeniably people are amazed and appreciative that on one page of the spreadsheet they can see all the variables that (when changed) cause an effect to the master model.

But engineers are (hopefully) wise enough to know that just because a "model" has seemingly independent variables... it is likely and almost certain that many of these variables are not independent at all.

A simple example I will use from a business model I crafted recently. By the way, if it doesn't roll into a full set of Income Statement, Cash Flows, and Balance Sheet, then its an incomplete model for Business (this is one of the things engineers often miss, and stop at the revenue/cost model).

Here is the example:
I want to model how I am going to acquire customers. For this, I assume that I will advertise. I assume that my cost to "expose" a customer to my product is A (e.g. Google is about 10cents). I then assume that it takes B exposures to gain an interested lead. I then assume that C% of interested leads become paying customers... yielding the following 'dependent' variable:

"Cost to acquire a customer" = A * B * C

Engineers are fine with this math, and then quickly fill out a line for "Marketing Expense" in the Income Statement, based on the number of customers I wish to acquire, and maybe even get so complex as to write a routine that "balances the budget" for 5% growth of customers... or some-such.

Of course, Engineers also know that this seeming dependency is only as good as the assumptions behind it... and that reality may be far from this. For example, is it true that a % of customers will convert? Is it true that the cost to gain interest are 'fixed'? In fact, having been in management, I can say undoubtedly this model is not at all close to 'reality'...

Nevertheless, it does give a good base starting point (one heck of a good one), especially because with this model, you can see the effect of any changing assumptions in the model. For example, what if it costs $1 to expose a customer!!! EEK!

So, engineers do make better models of business, hopefully know they are wrong... and experienced entrepreneurs know how and when to use these models.

Hint: Don't use these models to 'predict' customer growth, only to estimate Marketing Expense!!! Customer growth has FAR too many variables to rely just on advertising!

Engineers take jobs they think are cool.

It is true. I've hired good engineers and lost good engineers simply because one job was 'cooler' than a different one. Engineers think a cool job is one where there is a big challenge that the engineer thinks he can make a big impact by solving. Pay is not nearly the first consideration (of course within reason).

If you break this down into practice, it can yield to some excellent results in hiring the best engineers in the market. Here's the short answer:
1. Make sure that you clearly state the 'major problem' that is needed to be solved in your engineering department (Engineers like problems).
2. Make sure that during the interview, if this is a hot candidate, you mention how the person who solves this problem will be a hero and make a big impact.
3. To keep your engineers, keep giving them problems and letting them solve them! (not as easy as it sounds!).

In practice, I've been able to hire 5 or 6 engineers with superior qualifications and credentials (heck even the author of some Linux Books), and all at normal pay rates (maybe even a bit low). Then, to keep them around, I keep letting them solve the tough problems. (even though I want to stick my own engineering head into them sometimes, I try very hard not to!).

I only lost 1 engineer (out of maybe 25 that I've hired), to a "cooler job". My only explanation to myself on that one was: I didn't give him hard enough problems... in fact, in retrospect, I realize I should have given him "bigger" harder problems... but hey, can't keep them all.

Why I made this blog...

As an engineer I tend to really try to reduce the world into problems and solutions. When I began my business career at U.T. Austin Evening MBA program, I really hoped to learn the science of business. What I learned was that business is far from a science, more like an art. This disturbed me, since I was really, truly, hoping to learn the "formulas" for business. I hoped to learn how to "talk to people", how to "manage people", how to "get people to buy my stuff"... As anyone who has gotten an MBA, there are no such tricks. It's charisma, you got it or you don't... or so I thought.

This blog is dedicated to those engineers who really do think there might be some "science" to business. It is also a place where I put my experiences working on my own businesses and helping others with their entrepreneurial ventures.

I will tell you this, there are a NUMBER of tricks and "formulas" I've picked up (not really part of MBA schooling) that have and continue to help me in my businesses. I am also always hungry for more learning and knowledge on this subject. Some of the Blogs I read (see left side) are great sources for such information as well (heck I read them every day).

But stay tuned, and learn why: Engineers would make the best Businessmen.