Project: Liftoff

I just got back from a lovely trip to France with my even lovelier wife. We hear a lot about how different France is – 35-hour workweeks, socialized medicine, government-sponsored retirement at 60 – but the fact is that there are a ton of small businesses in that country. Wherever I go, I find it really interesting to see how businesses work and how different situations and different systems result in different outcomes. After all, what could be a more fun way to learn than by traveling around, seeing the sights, and eating great food? Here’s what I learned from many of the businesses I interacted with in France. What’s Your Exit? One thing you always hear about countries like France is that you can find little cafés everywhere. That’s certainly true, and, the smaller and the more off the beaten path, the better the food, coffee, and service. But why should there be so many little places that have been there for decades, when we’re just now getting a place you can plop yourself down, in the form of Starbucks? My theory is that it principally comes down to retirement. France has long had a fairly generous government-provided retirement, so most French don’t need to save much. Social Security in the US doesn’t provide nearly as much. When you don’t need to worry about retirement, you can start a business that’s a nice job, rather than a complex, comparatively risky entrepreneurial venture that will grow and provide you a shot at a nice exit. Many people in the US who start small businesses – especially professional services ones like mine (oops!) – are surprised by how little they can sell them for. These cafés wouldn’t offer enough of an exit to be worth the capital investment in the US, but, in France, they don’t need a big exit to have a comfortable retirement. What’s your exit? Do you have one that provides for your retirement, or do you just own your own job? What’s the Customer Expectation? If you’ve sat in one of those cafés in France, you’ve probably been shocked by how few waitstaff they have. There’s often no busboy, maybe one runner for the whole place, and then a server or two with a section 3-4 times the size anybody would be expected to cover in the US. The result: things move much, much more slowly than they would around here, and good luck if you need a refill on your drink! But then, there are different customer expectations. We regularly took 90 minutes or more for a relaxing meal, and, even when we met French friends for lunch on a workdsy, they never rushed through their meal. When the customer doesn’t expect fast turn-arounds, then slower service isn’t a problem. Heck, it seems like the French didn’t even expect a refill on their waters anyway, so who cares if somebody comes along with a pitcher or not? There was a comparable change in the employee expectation – since they aren’t counting on a tip to make their income, there’s no push-back from servers on having more tables and providing less service. And, I’m sure, as a result of having less waitstaff, the café was able to be more profitable. What’s your customer’s actual expectation of service? What does your employee expect to provide? Can you take advantage of those to be more profitable? The Small Player Can Compete on Cost – In the Right Niche One of our favorite things to drink at meals was the pitcher de vin – a bottle-sized ceramic pitcher of the local wine, for about 6€. The wine was always unique and delicious, if not great, and, best of all, it varied by city and even by restaurant. A lot of start-ups try to compete on price, but it’s hard to do that unless you have a really unique product or process that gives you a cost lower than the big players. These local producers clearly knew how to keep their costs down; they probably operated in a low-capital-investment manner, running older vineyards without a ton of expansion or use of new techniques. They didn’t have to spend on packaging, because their wine was just being served in a pitcher. Distribution is easy, since the wine travels no more than a couple of dozen miles. Would the winery be able to compete on a national basis? Probably the investments required to increase volume would be prohibitive, and their quality – fun at the price and as a local tipple – wouldn’t be notable at any higher price, so no. But locally? It seems like every table had a pitcher on it, just like ours! Can you use your unique cost structure and niche to survive in a world with larger players, like these wineries do? Don’t Overvalue Your Big Investments (Don’t Undervalue Them Either) After we left Paris, we went to the Loire Valley. Countless wars have been fought in this part of the country, and practically every hilltop found itself home to a fortified town or castle. As time passed, and the Kings of France became powerful enough to protect the whole country, the need for the fortifications passed. So the castles were torn down and turned into luxurious châteaux – beautiful centers of local administration that showed off the noble’s wealth and power. When the power of the nobles was broken in the Revolution, the châteaux were sold off by the state and fell into disrepair. But, today, the owners – or the local government, which has taken many châteaux over – have invested money into restoring them, and turning them into jam-packed, cash-generating centers of tourism. Every big investment will eventually turn into an obsolete asset. Are you prepared to tear it down, or repurpose it, to end up with what you need today? You Can Own It Even If You Don’t Own It We finished our trip with an incredible stay on an island off of the south of France. This island is famous for its sandy beaches, but none of those beaches are private. Nonetheless, our hotel had basically taken ownership of one of the best beaches on the island, by offering free umbrellas, cushions, and towels for its guests there. So all of that hotel’s guests spend their time at that beach, and, in fact, many of the TripAdvisor reviews mention just that beach. People from other hotels aren’t blocked or kept away – but, by providing exceptional service, that beach has become identified with that hotel. They own the idea of that beach, even if they don’t physically own the land. Can you own a market by being the most strongly-identified with it? It was great to get out of the country and see how things are elsewhere. But maybe now I’ll have to see what I can learn about business from Los Angeles’s best fine dining restaurants.

I think I mentioned that I recently took a vacation – a great trip around France, if you’re interested in the details. Of course, to get there, we flew. The way there we took Air France, but, on the way back, we flew Delta and saved a lot of money. Along the way, I saw several business lessons. Air France is pretty well-known as a premium airline. They offer good food and their in-flight entertainment deservedly gets high marks. Delta is the biggest airline in the world and offers your standard US airline experience – older equipment, bad food, and cranky flight attendants. Of course, that Air France ticket is a lot more expensive than that Delta ticket. Air France offers a premium, distinctive product that I can’t get elsewhere; does it  at a premium price; and hasn’t recently been tremendously profitable, because of relatively higher costs. That’s OK; they couldn’t be lower-cost and still offer the level of service that makes them distinct. Delta is low-price provider of commodity service that I can duplicate by flying any other airline, but they’re profitable because of their low costs. I can switch to anybody else and get at least the same experience, but, because Delta is so large, they have economies of scale and can offer that return ticket a lot cheaper than their competitors. You need to pick: cost or quality. Delta and Air France did. Even if you can do both, like Virgin America, your customers will talk about one, just as everyone always talks about the great experience of flying Virgin America with its food, in-flight entertainment, and distinctive cabin lighting. And you need to pick one and stick with it; the other won’t be sustainable for you. For instance, Delta put fancy wood floors in their bathrooms. I could tell they were nice, but we were flying older equipment and, years after these expensive floors were installed, they just looked dirty. Easy-to-clean plastic would’ve been better. It’s not a bad thing to be a commodity provider, undistinguished by quality. There will always be many customers who are price-motivated. If your exit is to be acquired, it may be smart to be a commodity. For instance, Northwest was a commodity provider. Initially, they had a defensible position because they served unique geography. Recently, Delta was able to buy them because Northwest offered exactly the same kind of commodity Delta did. Delta couldn’t acquire, for instance, Southwest, because that company is run too differently from Delta’s model to be integrated into their service. If you can imitate Northwest’s strategy, being a commodity may offer a unique benefit to you in the long term. But remember: few start-ups are actually low-cost. Southwest was a low-cost startup, but that airline is an exception because they have very unique business practices. Usually a startup appears to be low-cost because it’s small and can make low-cost, low-volume choices. When you increase the volume in which you provide your product or service, you suddenly find yourself buying the same expensive equipment that your larger competitors are spending their money on – and that is keeping their prices high. It takes practice and diligence to be low-cost. For many start-ups, going the premium route is more sustainable. And it can last too: just look at Air France.

I had the good fortune – and good fun – to sit in as a judge and hear the pitches from the entrepreneurs in this year’s Knight Digital Media Center News Entrepreneur Boot Camp. These professional journalists were all working on new ways to create successful news- and information-based businesses, and many of them came up with exceptional ideas. I’m excited to see how big they can grow – because I’m confident that many of them can succeed. Their big problem was: none of them were planning to get rich off of it. And that’s a little sad. They all brought immense expertise and know-how to the business, and, for all of those hard-earned skills, were charging their clients nothing. Or, next to nothing at any rate. I see that a lot: passionate entrepreneurs, with real, important knowledge, who relentlessly underprice themselves. (As my wife would say, I’m one of them!) There are a million reasons to underprice yourself, including:

• Lack of confidence in the market, so you try to price down to what you believe the market will bear
• Being used to making a salary, rather than running a business, and thinking of charging in terms of making a salary, not in terms of making a profit
• Close identification with a philosophy or idea, and wanting to make sure you don’t take resources away from others with that philosophy or idea
• A warm heart that just makes you want to be able to help everyone

I have all of those problems, in spades. Especially the last one. But there is a way out. The first step is to realize that greed, really, is good. Not in the Michael-Douglas-in-Wall-Street way, but in the keep-your-business-running way. A good dose of greed is the surest path to a viable business. At the end of the day, only a lucrative, prosperous business that gives you and your family the life you strive for is a viable business. If you aren’t making enough money, then:

• Eventually you’ll leave for a better opportunity – no matter how much you love what you’re doing.
• You don’t have the resources to help those you want to help.
• It’s hard to grow and hire others. If you do hire talented staff members, you’ll be unlikely to be able to pay them and give them the job stability they deserve.
• Somebody else who enters the same market, making enough money to support themselves and grow, will eventually develop more resources than you and gobble up the whole market, even if you are priced lower.

So be greedy, charge that higher price. Instead of having a business in which you struggle to meet expenses every month, have one in which you:

• Have specialist employees who do what they’re good at, so you can do the things you’re good at. I’m particularly talking about administrative assistants, bookkeepers, and the other kinds of detail-oriented tradespeople who do the crucial jobs that entrepreneurs usually hate.
• Grow and hire new employees who share your values and goals.
• Serve and work with a constantly growing group of consumers.
• Get to go on a great vacation every year!

So what price should you pick? Well, that’s another blog entry for another time.

The big news for business this week is obviously healthcare reform. What it means obviously differs between various businesses; but, for the true start-up, the bill is clearly a very good thing. Healthcare reform will help startups in two specific ways: 1. Cash Flow 2. Enabling the start Cash Flow Startups are unique beasts – their problems virtually always come down to two factors, cash flow and time. While those two are substitutable for most businesses, they aren’t at startups. Anything a startup can do to minimize costs and take them out of the company is a good thing Healthcare reform will help startups improve cash flow by ensuring that the individual insurance market is affordable, or at least predictable, enough for founders to carry insurance on their own dime, rather than buying a corporate plan from day one. Enabling the Start As much as this blog will always be about “cash is king,” the freedom to start a business is by far the most important thing healthcare reform will bring to startups. Right now, that first step out of a “real job” is a doozy – losing your healthcare is a big part of that. These days, I see a lot of laid-off clients who have COBRA coverage, but, in other economic times, we want to enable individuals to choose when to start a company. Ensuring access to insurance could potentially allow many people who are worried about starting a business to get out there and do it. Economists have found a lot of evidence that labor market mobility is important to a healthy economy. Startups create jobs, and help American industry to evolve and respond to market changes. We need to make it as easy as is reasonable for people to move from a less-than-ideal job to starting their dream company. Healthcare reform does that. In the end, that’s good for all of us.

We just got new business cards… so many new cards. And that made me think.

There are few TV shows that actually pass out good business lessons today – by my estimation, only Fox’s Kitchen Nightmares and Bravo’s Tabatha’s Salon Takeover really teach useful, practical, everyday things. (I’m holding my breath on Undercover Boss.) Last week’s Kitchen Nightmares was a great example of how much business information is hidden in this show. If you’re running a small company, you could use to watch and learn. If you haven’t seen Kitchen Nightmares, celeb chef Gordon Ramsay stops by a new, failing restaurant each episode. There’s a first act, in which Gordon discovers how bad things are and why they’re broken; a second act, in which he tries to get the owners’ and staff’s buy-in to his changes; and a third act, in which they re-launch the restaurant with a new menu, new décor, and new attitude. Presumably, the big changes lead to success. Last week, Gordon visited a local restaurant, Lido de Manhattan, in pretty, sunny Manhattan Beach. The restaurant’s revenue is off and customers are not returning. Ramsay comes in and uncovers a litany of problems. The one that stood out from a business point of view was an early revelation: the décor and menus hadn’t been updated in more than five years. This is more than an operational problem: it’s a problem of not being in touch with customer needs. That’s something I see with a lot of clients that have had their revenues stall: they’re competing on what they think is important, not on what their customer thinks is important. In this case, customer tastes in atmosphere, ingredients, flavor profiles, and portion sizes have all changed over the last five years. Ramsay responded by identifying a particular need within Lido’s customer base: a trendy wine bar, which, surprisingly enough, isn’t available in the area. Ramsay made over the menu to better fit this market and changed the restaurant’s look to complement as well. This is exactly the right approach. I actually ate lunch at Lido di Manhattan about two weeks after Ramsay came by, and had a great meal at a place that looked trendy and seemed to run like clockwork. If you’re looking to do the same thing for your company, you just need to reconnect with your customer. What are the trends in the industry – not from your point of view, but from theirs? How are they responding to them? How are your competitors responding to them, and how does this affect your customers? What gaps does this leave? Look particularly at what your customer can afford to spend and how they prefer to spend it. This is just one of the business lessons I’ve seen in Kitchen Nightmares. I wouldn’t be surprised if I write about them here soon.

There’s a series of questions I ask every new client. A lot of it is background stuff, like “what are your goals” and “do you have specific financial or personal challenges at this time,” so that I can make sure that we’re on track to create something meaningful for their lives. But some of it is about the little things, the things you have to do to get and keep your business running. And there’s one box that, so far, not a single client has checked. That box is “do you have your city business license?” Almost nobody has one – and that can cost you. The City of Los Angeles sweeps business rolls every year and seeks out businesses that don’t have licenses, then collects licensing fees and fines. Some cities – Torrance, for instance – set a cap on the number of years of back fees they can go after; others may not. Many businesses, particularly those in the food industry, also need to have industry-specific permits. Even if you’re renting a certified commercial kitchen, your state may require a staff member certified in food handling to be on-site while you operate. Specialized packaging methods may require specialized permits as well. A good attorney can help you take care of permitting during your start-up phase. If the lawyer who is doing your business organization doesn’t know anything about permits, ask them for a referral to an industry specialist; there’s probably a lawyer in your area who works just with people like you. You can do a lot of the work yourself online, too; a great place to start at is Business.gov’s Permit Me Web site. Just enter your zip and select your industry from a list and they’ll come up with a step-by-step list of permits you may require, taking you from incorporation through business launch.