We all forget too easily: the best startup funding is sales. Sure, angel investment, friends and family, SBA loans, all of those options are necessary for most startups. But sales is better.

If you can, find the early customers. Give them a deal, make them important, work with them to optimize their needs; but make a sale.

Even if you need to go out and find investment — and I speak now as an actual angel investor — there’s almost nothing as convincing as actual sales. People are spending money. It makes a new business proposal far more credible.

True, not all businesses can do that. But a lot of them can. And, as we write about business plans and seeking investment and all, we forget the real sweet spot: finance growth by making the sales.

The next big thing is never a repeat of last big thing. It’s always something new and different. It’s an original, not a copy.

What if the next Facebook already happened, and it was Twitter? What if the next Netflix already happened, and it was YouTube.

I see this a lot in business plans: businesses out to become “the next this” or “the next that.” Among the recent ones to cross my desk were “the Netflix of books” and “Facebook for business.” Yawn. Boring. Unrealistic. Copies are so unoriginal.

A tag line referring to some existing big thing (”Netflix for books“) rarely works.

(Image: Stephen Gibson/Shutterstock)

It’s all paradoxical. Bill Cosby once said:

“I don’t know the secret to success, but I do know that the secret to failure is trying to please everybody.”

While driving to the office a few minutes ago, I saw an unusual Fedex truck, like a stunted-growth moving van, with the signage: “Fedex White Glove Service.” I don’t know what that is and I don’t care particularly but it made me think how Fedex has expanded past its initial vision of “it absolutely positively has to be there tomorrow.”

Do you think it’s true that businesses have to stay focused when they’re small but develop peripheral vision as the grow?

What I know about Fedex is what I see on television mostly, but it seems like an example of peripheral vision. From that first “absolutely positively” focus on overnight to two-day, then three-day, then bulk, then Kinkos, international somewhere in the mix, now white glove service (whatever that is, it’s about moving, I can tell by the truck).

So that seems like the opposite of focus: peripheral vision, perhaps? Moving from where you are into nearby markets. Seems like a good thing when it works, but do we hear about it when it doesn’t? When businesses lose focus? When starbucks tries to offer cheap coffee, or McDonalds offers fancy lattes?

There’s a lot to be said for understanding who isn’t your customer. And, on the other hand, not arguing with success.

The displacement principle: everything you do rules out something else that you don’t do. It seems to belong inside this paradox.

(Photo credit: from Expediters Online. Click the picture to link to the page.)

(I posted this yesterday on Small Business Trends. I’m reposting here because this is my main blog, and it belongs here too. Tim )

Last week a group of students interviewed me, as part of a class project, looking for secrets and keys to success. They were asking me because after 22 years of bootstrapping, my wife Vange and I own a business that has 45 employees now, multimillion dollar sales, market leadership in its segment, no outside investors, and no debt. And a second generation is running it now.

Frankly, during that interview I felt bad for not having better answers. Like the classic cobbler’s children example, I analyze lots of other businesses, but not so much my own. As I stumbled through my answers, most of what I was saying sounded trite and self serving, like “giving value to customers” and “treating employees fairly,” things that everybody always says.

I wasn’t happy with platitudes and generalizations, so I went home that day and talked to Vange about it. Together, we came up with these 10 lessons.

And it’s important to us that we’re not saying our way is the right way to do anything in business; all businesses are unique, and what we did might not apply to anybody else. But it worked for us.

1. We made lots of mistakes.

Not that we liked it. At one point, about midway through this journey, Vange looked at me and said: “I’m sick of learning by experience. Let’s just do things right.” And we tried, but we still made lots of mistakes. We’d fuss about them, analyze them, label them and categorize them and save them somewhere to be referred to as necessary. You put them away where you can find them in your mind when you need them again.

2. We built it around ourselves.

Our business was and is a reflection of us, what we like to do, what we do well. It didn’t come off of a list of hot businesses.

3. We offered something other people wanted …

… and in many cases needed, even more than wanted. You don’t just follow your passion unless your passion produces something other people will pay for. In our case it was business planning software.

4. We planned.

We kept a business plan alive and at our fingertips, never finishing it, often changing it, never forgetting it.

5. We spent our own money. We never spent money we didn’t have.

We hate debt. We never got into debt on purpose, and we didn’t go looking for other people’s money until we didn’t need it (in 2000 we took in a minority investment from Silicon Valley venture capitalists; we bought them out again in 2002). We never purposely spent money we didn’t have to make money. (And in this one I have to admit: that was the theory, at least, but not always the practice. We did have three mortgages at one point, and $65,000 in credit card debt at another. Do as we say, not as we did.)

6. We used service revenues to invest in products.

In the formative years, we lived on about half of what I collected as fees for business plan consulting, and invested the other half on the product business.

7. We minded cash flow first, before growth.

This was critical, and we always understood it, and we were always on the same page. See lesson number 5, above. We rejected ways we might have spurred growth by spending first to generate sales later.

8. We put growth ahead of profits.

Profitability wasn’t really the goal. We traded profits for growth, investing in product quality and branding and marketing, when possible, although always as long as the cash flow came first.

9. We hired people slowly and carefully.

We did everything ourselves in the beginning, then hired people to take tasks off of our plate. We hired a bookkeeper who gave us back the time we spent bookkeeping. A technical support person gave us back the time we spent on the phone explaining software products to customers. And so on.

10. We did for employees’ families as we did for ourselves.

Family members — not just our own family, but employee family members too — have always been welcome as long as they’re qualified and they do the work. At different times, aside from our own family members, we’ve had two brother-sister combinations, an aunt and her niece, father and daughter, and husband and wife.

And in conclusion…

Bootstrapping is underrated. It took us longer than it might have, but after having reached critical mass, it’s really good to own our own business outright. It might have taken longer, and maybe it was harder — although who knows if we could have done it with investors as partners — but it seems like a good ending.

Family business is underrated. There are some special problems, but there are also special advantages too.

I was the planning consultant to Apple Computer’s Latin America group from 1982 until 1991 or 1992, the end of the relationship being a bit hard to define as I was called on steadily more by Apple Japan and less by Apple Latin America.

The challenge came in the spring of 1985. The annual business plan was done every spring, turned in to management in June and then discussed and revised and resubmitted and eventually accepted in July. In April of 1985 I had been the consultant for that process for four years running when Hector Saldana, manager of the group, said:

“Tim, yes I want you to do our annual plan for us again this year. But only on two conditions: first, I want you to stop working for other computer companies. Second, I want you to take up a desk in our office, come every day, and sit here and see us implement the plan.”

Happily, he also had some good news related to giving up other competing companies as clients: “And, if you agree to do this, I want to contract you for all of your hours for the next year, and at your regular billing rate.”

The condition of giving up competing clients was difficult for a one-person business. What if Apple had problems, or changed its policy regarding consultants? What if Hector got promoted or fired? Where would I be then, if I had given up other business relationships.

That’s not the real point of the story, although it does relate to planning as you go. That certainly wasn’t part of my business plan for my business, but it was a classic example of changed assumptions. We talked about it at home at length, and decided to go ahead with it. However, we also modified the plan we had going related to efforts to generate new leads and new business: we would focus that effort within Apple itself, different groups that didn’t talk much to each other, to reduce risk of having two many eggs in the single Apple Latin America basket. The plan was modified for cause, to accommodate changed assumptions.

The problem of implementation, however, forced me to consider the difference between the plan and the results of the plan.

There was some history. The previous year or two had been the time of “desktop publishing” for Apple Computer. Desktop publishing, which we now take for granted, started with the first Macintosh laser printer in 1985. It was a huge advantage for Apple in competition against other personal computer systems.

Our plan for fiscal 1985 had been to emphasize desktop publishing in most of our marketing efforts. And it didn’t happen. While we talked about desktop publishing in every meeting, the managers would go back to their desks, take phone calls, put out fires, and forget about it. They didn’t intend to, but they’d had so much emphasis on desktop publishing that it seemed boring, old hat. Multimedia was the thing.

So, faced with the implementation challenge, I created what became the strategy pyramid to manage strategic alignment. We ended up with a relatively simple database of business activities. Collaterals (meaning brochures and such), bundle deals (software included with the hardware at special bundled prices), advertising, trade shows, meetings and events, all were tied into a system that identified what strategy point they impacted, and what tactic.

So during that year, as business went on, we were able to view actual activities, spending and effort, divided by priority. We set more budget money for desktop publishing activities than any other. During the review meetings, we compared actual spending and activities (the beginning of what I talk about as metrics)  to planned spending and activities. And over time, with pie charts and bar charts to help, we were able to build strategic alignment. What was done was what the strategy dictated.

The plan-as-you-go implication was that this didn’t happen just because it was in the plan. It took management. There was a plan review schedule with the meetings on the calendar way in advance, and for every meeting I was able to produce data on progress towards planned goals. The managers discussed results. Plan vs. actual metrics became important.

When things didn’t go according to plan, the meetings would bring that to the surface. Managers would explain how the assumptions turned out wrong, or some unforeseen event — we had good results as well as bad results — and we would on occasion revise the plan.

This is the third of four answers to questions I got in email last week from an MBA student asking my opinion as part of his research. The question is the title: how does innovation fit into a business plan? 

Innovation changes a business plan pretty much as a reflection of how it changes a business. It adds risk, uncertainty, and interest too.

Funny thing about risk: we usually think of it as a negative, but in this case it isn't. Risk has two sides to it: up and down.

• The upside risk in innovation is of course the benefits to a business when innovation leads to a more desirable offering: better product, suitable for a larger market, differentiated from competition, easier to build, and so forth. We get that immediately. It's faster, cheaper, better; higher resolution, longer lasting, lighter, and so forth. 
• The downside risk is there too. Live by innovation, die by innovation. The business that depends on innovation usually positions itself on innovation and loses big time when somebody else comes up with the next new bigger, faster, and better. 

Uncertainty comes along with innovation because, by definition, what's innovative is new; and new means it might not work, might have a fatal flaw, might not be accepted by the market, might never be finished. New also means it could take off very fast — more uncertainty — or not at all. It's uncertainty about when the product (or service) is available, will it work, will enough people like it, are there competitors out there in the bushes where you can't see them yet.

And interest comes with innovation too. Market makers are interested. Opinion leaders are interested. Competitors are interested. And investors are interested. To the investor, innovation means defensibility and market advantage.

So how does all of this fit into a business plan? It's all over the plan. It's in the forecasts, the schedules, the marketing plans, the financial strategy. It's part of the business' DNA.

It starts with strategy, the heart of a business plan. Innovation is part of your company's identity, we would hope one of its strengths, and certainly a key element in business offering. It directly affects the market, both in the higher degree of guessing required (educated guessing, we hope) and in how it affects target market and message. And it affects strategy focus, too, because it turns a company towards it like plants growing towards the sun.

From there it flows easily into the flesh and bones of the plan, all of the concrete, specific, and measurable details about who does what, when, and how much it costs, and how much it brings in as revenue.

Conclusion: it's an oblique question, in a way. Something like asking how courage fits in a novel, or color in a painting. How does direction fit into navigation?

Billionaire Mark Cuban announced his own stimulus plan earlier this week. It's sheer genius.

Here's how he describes it in his blog post, The Mark Cuban stimulus plan:

Rather than trying to be a Venture Capitalist, I was looking for an idea that hopefully could inspire people to create businesses that could quickly become self funding. Businesses that just needed a jump start to get the ball rolling and create jobs. I'm a big believer that entrepreneurs will lead us out of this mess. I just needed a way to help.

Then he lists the rules:

1. It can be an existing business or a start up.
2. It can not be a business that generates any revenue from advertising. Why ? Because I want this to be a business where you sell something and get paid for it. That's the only way to get and stay profitable in such a short period of time.

So far, so good. But now pay attention to these next four rules, as a group:

3. It MUST BE CASH FLOW BREAK EVEN within 60 days
4. It must be profitable within 90 days.
5. Funding will be on a monthly basis. If you don't make your numbers, the funding stops.
6. You must demonstrate as part of your plan that you sell your product or service for more than what it costs you to produce, fully encumbered.

Do you see it with those four rules? He's promising to fund companies only if they don't really need funding; only if they have real value; only if they're perfectly set up for bootstrapping. It's sheer genius. I don't think he's being cynical, or deceptive; I think he's making a point. But we go on…

7. Everyone must work. The organization is completely flat. There are no employees reporting to managers. There is the founder/owners and everyone else.
8. You must post your business plan here, or you can post it on slideshare.com, scribd.com or Google docs, all completely public for anyone to see and/or download.
9. I make no promises that if your business is profitable, that I will invest more money. Once you get the initial funding you are on your own.
10. I will make no promises that I will be available to offer help. If I want to, I will. If not, I won't.
11. If you do get money, it goes into a bank that I specify, and I have the ability to watch the funds flow and the opportunity to require that I cosign any outflows.
12. In your business plan, make sure to specify how much equity I will receive or how I will get a return on my money.
13. No multi-level marketing programs (added 2/10/09 1pm).

So there you have it. This is somebody who's made it, multi-billionaire, showing a whole lot of common sense. He calls it "open source funding," which is apparently a reference to making the business plan transparent.

Not, by the way, that the country doesn't need the full formal stimulus plan as well, for about 300-some million reasons … but let's hear it for old fashioned ideas like making something people need, selling it for more than it costs to make, and minding the cash flow.

It started as a comment at the bottom of my 10 signs you're probably an entrepreneur post on this blog, a few days ago. What are the traits of successful entrepreneurs?

I was quoting a Twitter friend, Andrew Patricio. I hope you saw that list. I identified easily. But I can't help thinking about that comment left by Robert Hacker:

Next post should be a list of the characteristics of successful entrepreneurs If you do not write it I will.

That's quite a challenge. What, besides the obvious, do successful entrepreneurs have in common? I know I'm not sure. But at least I can get the idea started. Maybe you can help. What am I missing?

1. There's a lot of talk about P-words: passion, perseverance, and persistence. I mistrust all three. A lot of unsuccessful entrepreneurs have them just as much. You have to have some variation on these traits, but you can have all three and still fail. You and I both know people who never made it and never stopped trying. My favorite P-word in entrepreneurship is planning, but that's just me. Stubbornness is good too, even without starting with P.
2. I like empathy, as in understanding how other people think and feel about things. Empathy leads to understanding what the people you sell to want, what they need, how they think, and how to best reach them. It's hard to imagine somebody building a company without being able to put themselves in the buyer's state of mind.
3. A sense of fairness. For dealing with vendors, customers, and employees.
4. Transferable values. This is closely related to the sense of fairness. I just don't see people building businesses without believing in what they're doing. 
5. Willingness to work hard, shoulder to shoulder with other people. Cliche, but true: the harder I work, the luckier I get.
6. Knowing what they don't know. To me that's much more important than what you do know.
7. Listening carefully. Shutting up.
8. Vision for what they can build. Imagining a happy future. Dreaming.
9. Making mistakes. You have to deal with failure. Keep pitching.  
10. Jumping viewpoints, like from short- to long-term in an instant, mixing those viewpoints together. That's like dribbling, keeping your eyes up while managing the ball at your feet.

So there's 10. Everybody likes lists of 10. Go ahead. Add some more. Make my day. 

What? No cell phones? No laptops? No tablet computer to take notes? That's crazy!

Last week we had a two-day off-site strategy meeting. Ten people, two days, lots of SWOTs, bullet points, and discussions. It was a good meeting.

I was amazed at the "no devices" rule.  "No cell phones, no laptops, no tablet computers, no other similar devices."

This caused two surprises:

1. I'm seriously addicted to my gadgets keeping me up to date with instant messenger, email, Twitter, Yammer, and so on. It was really hard to do without. The breaks, during which we were allowed to connect, were badly needed. Scant consolation that at least seven of the 10 people there had the same addiction. And the distraction is enormous. I realize (confess) that at most meetings I'm often not paying attention, pretending I can listen and read and write, all at the same time. I can't. Neither can you.
2. Ruling out devices makes for much better meetings and much better discussions.

Note: this is a slight modification of a column I wrote for the Eugene Register-Guard.

My mother used to say: "put yourself in the other person's shoes." She gave a lot of good advice. Nowadays we call this idea empathy, but it's the same thing.

Empathy? That doesn’t sound like business, does it? Sounds more like psychology, and what we used to call “touchy-feely” when I was in business school. And when we called it that, it wasn’t praise.

Lately, however, empathy keeps inserting its touchy-feely self into the middle of business discussions. I’m starting to see how empathy links directly to marketing, sales, product development, management, and, ultimately, business success.

No, I don’t think it’s a flashback to the late 1960s. I think it’s an idea whose time has – no, wait a minute, it’s an idea that was always there, just with different labels.

Wikipedia defines empathy as “The capacity to recognize or understand another's state of mind or emotion.” It adds: “It is often characterized as the ability to ‘put oneself into another's shoes’, or to in some way experience the outlook or emotions of another being within oneself.’”

Empathy Drives Strategy

Consider this example: recently a woman asked me how she might generate money from a website listing service providers, without depending on selling sponsorships or selling ads. I can’t say that I came up with a good answer, but I can say that the best hope of an answer is by putting herself in the place of the browser, first; and the listed provider, second; and figuring out how it feels to be in their shoes. What do they want? What will they pay for? What brings them to that site in the first place?

To me that’s grass roots empathy, and it’s also right at the heart of business strategy. It applies equally to new businesses and growing existing businesses. You figure out what works by walking in that other person’s shoes.

Empathy Drives Marketing

I like to think that marketing starts with understanding what people want from you. For example, it’s not just restaurant or food service: some people want fast and cheap drive-through hamburgers, others want arugula and ahi tuna served at a quiet table. Some people want one thing on a Saturday morning with a car full of kids going to soccer games, and an entirely different thing on a Friday night when they’ve left the kids with a babysitter. That’s where empathy comes into play in marketing. You have to step into the customers shoes. Understand what they want. The menu, the pricing, the service … they all have to match what the customer wants and feels. That’s empathy.

Empathy Drives Sales

And the above reminds me of another thing I’ve learned in 30 years in business: the really good salespeople listen, understand what the customer wants, and either give it to her or send her somewhere else where they think they can get it. That’s empathy again; understanding the customer’s needs. It’s not rocket science.

Empathy Drives Product Development

The best kind of product development starts with understanding a need, then goes from there to filling that need. I’ve seen that in good software, websites, automobiles … and you can go back to that restaurant example, and think about how empathy helps the one restaurant get the kids their hamburgers and fries fast, while it also helps the other restaurant give the parents a pleasant break at a different time.

Which Means, Empathy Drives Success

So there you have it: not quite the standard business school fare, but I’m thinking it’s one of those common-sense concepts that hold up on the long term. You want success in business? Learn how it feels to walk in other people’s shoes.