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.

You’ve probably heard about the exit strategy. Sure, a few years ago, only professional investors asked about them; these days, everybody’s pitching the exit strategy. The good news is that most of my clients come to me and ask about their exit strategy. The bad news is that my clients don’t need an exit strategy: what they, and all entrepreneurs, need is a life strategy. The problem is that having an exit strategy, per se, doesn’t directly help anyone. Well, it may help your investors, if you have investors, and if you picked an exit strategy specifically for them. But other than that, an exit strategy is only a means to an end. The end is: getting what you want. That’s the beauty of being an entrepreneur, really – you are finally the one in charge of picking how everything gets to end up for you. Take advantage of that mighty power. My friend Freddy reminded me of a great blog entry he wrote last year: “Why Exit Strategies are Bad for Business.” His basic message is that you need to be committed to your start-up, not leave it. Well, that’s true for some people, and not true for others. Don’t build your company around your exit strategy: build your company and your exit around your life strategy. Let’s take an example: do you want a guaranteed job for the rest of your life? Then you need what the pros call  a “walking harvest” – a plan that has you drawing a salary and perhaps dividends from a company that operates for years – rather than focusing on getting a single chunk of money. Do your investors want something different? Don’t change your whole plan to make them happy, realize that your exit strategy differs from theirs. If you can’t put yourself in a position to stay while they get their exit, then you need to accept that you need a premium on your exit to make ending up with no job worthwhile. Want to get out in a few years to spend more time with your family? Plan now to put yourself in a position to either sell your company or have it run without you – both are equally acceptable exits from the point of view of your life strategy. How do you develop your life strategy? Well, that’s the big challenge, but it’s worth confronting that from the launch of your business. After all, you shouldn’t just have the exit you want; you should have the work you want, too, every day. So take a step back and take the time to articulate your preferences, beliefs, and goals, because you may need to think bigger, strategy-wise: you may need to think about your whole life.