How to grow up your business

Businesses often have a life cycle similar to people. In my last post I described this life cycle and gave some tips on how to know if it’s time for your business to grow up from high-growth but awkward teenager to more stable adult.

Some teenagers never grow up. Uncle Rico is stuck in 1984 (although I heard the Broncos may be giving him a second chance…). But due to biology and societal expectations, most teenagers find their way into adulthood.


Businesses don’t have the same outside influences. It’s up to you to intentionally grow it up. Growing up often means turning some attention to the boring stuff you neglected while focusing on sales growth.

You know it’s time to grow up, but how do you do it?

You shouldn’t try to do it all yourself. In fact, you shouldn’t try to do much of it. But you need to make sure it’s getting done.

Task someone on your team who is capable of taking the lead, or hire someone to help. An experienced, full-time person might be expensive, but you can hire a consultant to whip you into shape and inexpensively monitor your business going forward.

Not that I’m biased, but an experienced, part-time CFO would often be a good choice for this role.

Here are some areas to consider.


Are you legally structured correctly? Are there things you can do to increase liability protection?

Would it be better to move real estate to a separate legal entity? Similarly, do you have unrelated business units that can be spun out separately? Structuring like this can prevent lawsuits against one part of your business from affecting other parts.

Unfortunately, lawsuits are a part of doing business. I don’t think I’ve been involved in a business that hasn’t been involved in some kind of lawsuit.


Have your auto, property, general/product liability, director/officer liability, workers compensation, and/or professional liability insurance policies kept up with your growth?

Are the limits and coverage adequate and correctly structured?


Hopefully you’ve been handling taxes correctly from the beginning, but part of growing up is making sure. Have an accountant review income tax, sales tax, payroll tax, and property tax filings and processes to make sure its all being done correctly.

When you’re not making much money, tax penalties and interest caused by mistakes may be minor, and you’re less likely to be audited. This changes as you grow.

Believe me, you don’t want to be audited before you’ve grown up.


Cleaning up your books is part of growing up. Can you rely on your books to make good, timely decisions?

If you don’t choose to clean up, you’ll eventually be forced to clean up by government agencies or capital sources like banks or investors.

Like many other messes in life, messy books are much less expensive to avoid than to clean up, so the earlier you grow up your accounting the better.


Startups usually hire based on desperation. Stuff to do is piling up, and they quickly throw bodies at the piles.

You need to be more intentional as you grow up, especially when you’ve grown past the point of being involved in every step of every hire. Those handling the hiring need to pay more attention to cultural fit, on-boarding, and a host of other HR and payroll issues.

This is not an exhaustive list, but it gives you an idea of things to think about as you try to grow up.

You or your person overseeing the growing up doesn’t need to be an expert in all of these areas, but they do need to know enough to communicate effectively with experts like outside attorneys, insurance brokers, tax accountants, etc.

Just a final thought. In this post I’m observing typical juvenile business behavior and giving advice on how to grow up. Typically, startups wait until after a period of high growth to start worry about these less exciting issues.

However, I’m not recommending they wait. As long as you don’t let it stifle your growth (and not have a business to grow up with), the sooner you grow up the smoother your growth will be. When it comes to legal, insurance, tax, accounting, and HR, an ounce of prevention is worth a pound of cure.

The trick is to prevent business-killing problems without preventing business-making growth.

Question: What other areas are involved in help a business grow up? 

It’s time for your business to grow up

Businesses often have a life cycle similar to people. Starting up is like infancy. Clean slate. Innocent. Impressionable. Learning rapidly but not accomplishing much. Lots of messes.

Thank goodness the mortality rate is much lower in humans than startups!


If a business survives infancy and makes to toddler, it starts moving forward, albeit a bit shakily. Through the tween years growth is slow and steady. It still has some innocence without full exposure to the big bad world.

The inflection point where sales start to take off is like hitting puberty. It’s a time of rapid growth, rapid change, and a lot of uncertainty. In those teenage years it can get away with being a bit wild and crazy. It can do dumb things because it doesn't know any better. It defies conventional wisdom. It can focus on the fun stuff and sluff the boring stuff.

Growing sales like crazy is fun. Putting systems and processes in place is not fun.

In business, the teenage stage is a good thing. There won’t be much of an exciting business without that period of wild and crazy growth.

However, if the business wants to make it in the world, it eventually has to grow up. It needs systems and processes to catch up to the growth.

Otherwise, the business may implode on itself. At the very least, the business will struggle to continue its growth trajectory.

It’s a common theme in any businesses I look at. The entrepreneur is focused on growing sales and doesn’t want to be bothered with the boring details. He will use minimal processes to get the job done, but will hesitate to make the investment of time, money, and attention to put robust systems in place.

But how do you know when it’s time to get serious?  Here are some signs to watch for:

Waste becomes painful. When you’re small, mistakes don’t cost very much and are easy to catch and fix. A mistaken shipment, some missing inventory, or a billing discrepancy might not be a big deal when you’re selling $1000 per month. Waste is compounded when you’re selling $1 million per month.

Customers satisfaction drops. A small number of customers are easy to keep happy. You can personally make sure 10 customers are all well taken care of. It takes good systems to keep 1000 customers happy.

Employee satisfaction drops. This is similar to customers. When the team is small, you hire and work closely with each team member. You need good systems to maintain employee satisfaction when the team grows too big for you to personally manage.

You don’t know what’s going on. When you first start up, you know everything about everything going on in the business. You know about every order. You are involved in every new hire. You know what customers are complaining about. As you grow, you can’t and shouldn’t know everything. You need good systems to be confident everything is going okay.

Now you know it’s time to grow up, but what do you do about it?

Stay tuned to find out in my next post!

Question: How do you know when it’s time for your business to grow up? 

Business Lessons from Disneyland

I spent the last week at Disneyland with my family. I tried to unplug from work as much as possible, but I couldn’t help but notice aspects of my experience that I could apply to the businesses I am helping to build. Disney gets a lot of attention from business writers for good reason. At the risk of tackling a cliche topic, here are five lessons I learned about building a business from my Disneyland experience:


1. Stand out from the competition Traditionally, my wife and daughters spend five days in Disneyland, and my son and I take one of those days to do something else. Last time we went to Legoland, and this time we went to Universal Studios.

Those would be incredible parks when experienced on their own, but they don’t measure up when experienced during the same week as Disneyland. Even though we had fun, we wondered if we would have preferred an extra day at Disneyland.

Businesses have to stand out from their competition in a significant way to attract loyal customers.

2. Be present with people Disney characters are masters at being fully present with the one child at a time. Meeting their favorite characters creates much of the Disney magic that kids experience, and the characters make sure each interaction is memorable.

Meeting Elsa and Anna from Frozen is one of the most popular attractions. It requires waiting in line to get an assigned time to wait in line again later in the day. Only one family at a time is allowed in the small room with Elsa and Anna. The interaction only lasts for a few minutes, but the characters are fully present. They make kids feel like they are the only people in the world at that moment.

3. Enforce the rules In most cases, Disney “cast members” are extremely friendly, kind, and accommodating. However, they are not afraid to enforce the rules when a guest’s behavior infringes on the experience of others. We watched as someone cut to the front of the Disneyland Railroad line and jumped on the train. The conductor loudly called him out as a line cutter and ordered him off the train. The one man was probably offended, but it enhanced the experience for the many people watching.

To build a high-performance business, some rules need to be strictly enforced. Of course, unethical or illegal behavior can’t be tolerated. Lackluster performance by one member can also bring down an entire team. It’s often better to deal firmly and swiftly with one person that let an entire team suffer.

4. Bend the rules On the flip side, rules should be bent when they don’t infringe on others experience.

At the Haunted Mansion a person appeared to be cutting in line before approaching the nearest cast member. At the first the cast member good-naturedly called her a line cutter, but he let her through as she explained that she had been separated from her family who were now further ahead in line.

5. Get out of the comfortable routine This last point is not directly related to Disney, but it’s something I learned on the trip.

My family’s default is to find a hotel when we travel. There are many options, we know what to expect with the brand we choose, and it’s easy to book and cancel as needed.

We had a hotel booked for this trip, but someone mentioned they found a vacation rental through VRBO for their last Disneyland trip. My wife and I settled on a townhouse that is over 50% bigger and 60% cheaper than the hotel we had booked. It was immaculately clean and nicely decorated with Disneyland themes.

I also tried Uber for the first time. Our townhouse was about 1.5 miles from the Disneyland gates. I would drop them off every morning and pick them up every evening, which added 3 miles to my daily walking distance.

After one particularly tiring day, I wasn’t looking forward to walking back. I could have tried to figure out the bus routes or paid for an expensive taxi. Instead, I decided to try Uber. The app showed a few drivers in the area, so I requested a pickup. Within a few seconds a driver called me from across the street. I was back to our townhouse within 5 minutes, and the app automatically charged me $4 so I didn’t have to worry about payment or tip.

We often get stuck in our comfortable routine. There are many ways to rethink conventional wisdom. Consider virtual assistants instead of full-time employees for some roles. Build a virtual team to save on office space and find the best talent regardless of location. Use VRBO or Airbnb instead of a hotel. Take Uber or Lyft instead of a taxi or bus.


It’s important to take time off and unplug from work. During these times our minds can be freed from the usual distractions, making us more open to lessons we can apply to our careers and other areas of our lives.

Expect the Unexpected

What a wild start to the year it’s been already! I’m writing this 3 weeks into 2016. The markets are in turmoil. The Dow Jones Industrial Average, a good indicator of the stock market as a whole, finished 2015 at 17,603.87, down 2.2%. Yesterday it closed at 15,766.74, down 10% in just 3 weeks.


Oil has dropped more than 50% in 6 months, which has contributed to the Canadian dollar dropping over 20% against the US dollar in that same time period.

Obviously oil companies have been hit hard by the drop in oil, which hurts local and regional economies dependent on the oil industry. Those who buy US goods and services with Canadian dollars, like a business I’m involved in, have seen their costs go up by 20% over 6 months and 50% over about 3 years.

No one can consistently predict shocks to the market like this, but there is one thing we can always expect: the unexpected.

Unexpected events are a part of life. Our success and happiness depends on how well we plan for and then deal with the unexpected.

I’m reading Pour Your Heart Into It: How Starbucks Build a Company One Cup at a Time by Howard Schultz, the Starbucks founder. It has many great lessons about the challenges of building a business that is now ubiquitous throughout the world.

In 1994 the price of green coffee, which closely tracks the price of their raw materials, went from $0.80 to $2.74 in a short time. The price increase was caused by an unexpected freeze in Brazil, the largest supplier of green coffee. Starbucks' stock price tanked, threatening its ability to continue its expansion and even survive.

Schultz and his management team struggled for months with when to raise prices and by how much, how much inventory to buy and when to hedge against continued price increases, how to manage shareholder expectations, etc. They made mistakes, such as buying millions of dollars in inventory right at the peak price, but they had built so much goodwill with their customers, suppliers, investors, and employees that they were able to survive the crisis and continue thriving.

By definition, we don’t know what unexpected events will be and when they will happen. But we can design our lives and our businesses to be ready for the unexpected.

Expect it

The first step is to simply expect the unexpected. You won’t get too comfortable if you always acknowledge that the unexpected will happen.

By nature we think that the status quo will continue. If our business is thriving, we tend to think the good times will never end (talk to anyone involved in the housing industry in 2006). If we’re going through a struggle, it’s hard to imagine life without that struggle (ask them how they were feeling in 2009).

However, we need to fight against our natures and remind ourselves that anything can rapidly change.

Scenario plan

Although we never know exactly what is going to come, we can think through the possible scenarios. It may help to consider both likelihood and impact.

It's not very likely that you will die young, but if you do, it will probably have a huge impact on your family and business. The solution is cheap and simple: life insurance.

It's likely that the various financial and commodity markets will experience periodic shocks. What impact will that have on you? How can you prepare? Minimizing debt, diversifying, keeping a cash reserve, and hedging all help prepare for financial shocks.

Leave plenty of margin 

We usually think of margin in terms of the money left over from selling a product. It’s important to have margins as high as possible in business so we can cover our fixed costs and leave cushion fluctuation in sales and costs.

Margin is a helpful concept for many other applications. Don’t plan your schedule so tightly that you have no room for health challenges, family crises, etc.

Don’t give up

Do be shocked and discouraged by unexpected events. Don’t give up. As Winston Churchill said, “if you’re going through hell, keep going” and “never, never, never give up.”

Our character is strengthened more in hard times than good times. People who achieve their dreams are the ones who persevere through challenges. The businesses that thrive are ones who survive the lean times.

Unexpected events will happen. Your success and character will be defined by how you plan for and react to these events.

Question: What helps you prepare for and react to unexpected events?

How Declining Marginal Costs Will Affect Your Future 

How many products and services do we use for free (legally) that cost others a significant amount to develop? Look at your phone. Free apps probably far outnumber paid apps. How much do you pay for your personal email service? How many websites do you pay to access? What was your long distance phone bill last month?


Compare this to 25 or 50 years ago. Not much was free except a neighbor doing a good deed. I’m not aware of free software that long ago. Over the holidays my extended family brought up memories of long distance phone bills in the hundreds of dollars per month.

What has changed?

The difference is marginal cost. Technology has driven the marginal cost of many products to zero or near zero. The marginal cost is the cost of providing one additional unit (not taking into account fixed costs).

Software as a Service (SaaS), or software delivered over the Internet, is a perfect example of a near-zero marginal cost product. Good software can take many millions of dollars to develop and support (fixed cost), but the cost of providing that software to one additional person is almost zero.

Declining marginal costs have significantly impacted our society. Overall, I believe the impact has been positive, but it has upended entire industries.

Consider the music industry. The zero marginal cost nature of digital music decimated artists and music labels who profited from selling CD’s. In the days of Napster, many argued that free music didn't hurt anyone because downloading a song didn’t cost the artist any extra. The industry has adapted, but it is forever changed.

None of this is news to you. Even if you didn’t think of the changes in terms of marginal cost, you can see how it affects your life now.

But have you thought about how zero marginal costs might affect your future? Investors need to consider what industries may decline and what opportunities will rise in their wake. Business owners and managers need to consider how this trend will affect the industry they operate in. Students need to consider what career paths will be in highest demand and what will become obsolete.

I have been thinking about this concept since reading the book, The Zero Marginal Cost Society, by Jeremy Rifkin. The author extrapolates the trends toward zero marginal cost to other industries. He argues that almost every aspect of our lives is trending this direction. Over time, almost everything we need will have a near-zero marginal cost.

He even argues that zero marginal costs will eventually relegate capitalism to a small niche. Capitalists won’t be willing to invest in significant fixed costs when the investment can’t be recouped through free or near-free products.

It almost sounds socialist, but the author isn't arguing that government needs to take over and provide the fixed costs for everything we need. Rather, he argues that the abundance made possible by zero marginal costs will lead to collaboration and cooperation between groups of people to provide for the fixed costs.

Consider the following examples of how near-zero marginal costs are changing society:

Open source software projects like Linux and Mozilla have brought together thousands of people, in a remarkable unstructured way, who donate their time and expertise to build great products that millions can enjoy for free.

Online education is being provided inexpensively and free by the same organizations that charge tens of thousands of dollars per semester for the same education in a classroom. I recently took a massive open online course (MOOC) on scaling startups taught by two Stanford business school professors. The class was free for thousands of students. It could be free because the online delivery platform and class curriculum was already developed. Providing the class to one extra student has no cost.

3D printers are barely beginning to show their potential. 3D printers can create body parts, houses, cars, and almost anything you can think of with minimal raw material cost. Why pay up front for a container of trinkets from China and wait weeks for delivery when you can print only what you need right from your office?

Solar energy is basically free after the equipment cost. The high equipment costs make for a long payback period, which has limited adoption. However, the speed of technology improvement and price decrease is rivaling what we have seen with computing power.

The sharing economy provides access to expensive assets for a small marginal cost. In urban areas, services like Uber and Zipcar meet personalized transportation needs for a small cost per ride. Airbnb and VRBO provide convenient access to a wide variety of properties. My family just went in with two other families on renting a house near Disneyland. We have access to a good-sized house with a bed for every person for less than half of what we each would have had to pay for a small hotel room. Access is becoming more important that ownership

I don’t know if the radical societal changes will come to pass as completely and as quickly as the author predicts. However, there is no question that many aspects of society have changed and will continue to change because of declining marginal costs. It would be wise to consider how these changes will affect our investments, our careers, and our daily lives.

Question: In what ways do you think zero marginal costs will affect our future? 

Use Hedging to Save your Business Bundles on Foreign Exchange

Most businesses deal with foreign currency exchange to some extent. It could be as simple as travel to foreign countries for conferences or as significant as paying millions of dollars to overseas suppliers. In my last post I introduced some terminology, warned about the outrageous foreign exchange rates that banks charge, and recommended you set up a foreign exchange service for your business.

In this post, I’ll give one more transaction cost tip, and then I’ll move on to a practice that can save you much more than a few percent on transaction costs.


Where possible, use foreign currency bank accounts and debit/credit cards 

If you frequently travel to or make purchases from a foreign country, I recommend opening a bank account denominated in that currency. This allows you to minimize transaction costs by periodically buying the foreign currency to deposit into that account.

Having a debit card on that account, or a credit card linked to it, allows you to make routine purchases, such as meals while traveling, without paying transaction costs each time.

Using your local debit or card or credit card for foreign currency transactions comes with terrible exchange rates and sometimes additional fees for each transaction.

The bank in your country might offer accounts in different currencies. For example, most Canadian banks offer accounts in both CAD and USD. Some banks also allow foreign citizens to open accounts. For example, Wells Fargo in the US allows Canadian citizens to open accounts.

Rules and conditions vary across banks, currencies, and countries, so this may not be possible in all situations.

Hedging is not just for gamblers and big businesses

Having a foreign currency bank account is an example of a simple hedge.

Hedging is basically a way to protect yourself from changing values of foreign currencies by locking in the current rate for future transactions. While minimizing transaction costs can save you a few percentage points, hedging can save you much more than that.

Foreign currency values fluctuate wildly. The Canadian dollar has lost about 30% of its value against the US dollar in the last year (late 2014 to late 2015).

If you need to purchase $100,000 USD with CAD, it would cost you $30,000 CAD more now compared to a year ago.

Using the bank account example, if you had bought USD with CAD a year ago and kept it in a USD bank account, you would have saved yourself $30,000.

In hindsight that would have been a good idea, but there are two problems. First, you tied up $100,000 for a year. Second, the USD could have declined against the CAD instead of the other way around.

A better way to hedge is to purchase a hedging instrument.

I have been involved in small businesses with cross-border money movement for almost 10 years. I didn’t even consider hedging for the first few years because I thought the costs and complexity wouldn’t be worth the benefits.

However, our foreign exchange service showed me how inexpensive and simple foreign exchange hedging can be. They approved the company for a given credit limit and suggested I hedge about half of my expected needs over the next 90 days. I simply told them how much I wanted to hedge, and they created a contract allowing me to exchange funds at a given rate at any time over the next 90 days (called a forward contract).

The only cost was the exchange rate would be a fraction of a percentage higher than the spot rate. This is a small price to pay given the potentially huge swings in exchange rates.

Over the first few months the Canadian dollar weakened, and the hedge saved us several thousand dollars.

You can save your business bundles by being intentional about foreign exchange through minimizing transaction costs and hedging against future fluctuation.

Question: How have you used hedging to protect your business against foreign exchange fluctuation? 

The Building Materials Industry is Ripe for Disruption

If you’re reading this, chances are you own a smartphone and can’t remember the last time you rented a DVD from a store (i.e. not Redbox). You may not have a landline, and if you do, you may only keep it because it’s free when bundled with Internet and TV service. The telephone and movie rental industries are just two examples of the countless industries that have been disrupted by newcomers with new technology, better products, and/or better methods of delivery.


Value gained, value lost

Think of the value gained and lost with each disruption. Since 2007, the year iPhone was released, Blackberry has lost 94% of its market value (from about $67 billion to $4 billion). During that same time, Apple's market value has increased by about 850% (from about $70 billion to $650 billion). That’s almost $600 billion of value created in only 8 years!

Investors who correctly predict (1) the industries that will be disrupted and (2) the companies who lead the disruption realize the bulk of the value created. Of course, on the flip side, investors and management stand to have their value destroyed if they fail to see the disruptors coming and adapt accordingly.

Industries ripe for disruption

Two industries I’m involved in are ripe for disruption. Both generate 95-97% of sales from brick and mortar stores. End consumers pay inflated prices due to the costs of physical locations and layers of middlemen who each take their cut.

Startups have just begun entering both industries with disruptive business models. They are using technology and other innovations to reduce the layers of cost between the manufacturer and the end consumer. They are making the customer experience better AND cheaper.

Building materials industry

In my last post  I wrote about the mattress industry. In this post I’ll write about the building materials industry.

Due to high mark-ups at each distribution level, consumers typically pay more than four times the cost of materials and labor to assemble a mattress.

The building materials industry doesn’t have quite the same margins, but participants make up for it with volume. Compared to the $14 billion US mattress industry, US home improvement is a many times larger $520 billion industry.

The buying process hasn't changed much for a very long time. The industry has maintained the status quo largely due to the size and weight of most materials and the perceived need by consumers to spend time choosing products from showrooms.

Startups are disrupting the building materials industry

However, new startups are now figuring out how to disrupt this entrenched industry. They are finding that they can match buyers and manufacturers online, quickly ship samples for review, and painlessly arrange the delivery logistics.

Build Direct is a leader is this disruption. Late last year they raised $50 million to build out their Home Marketplace platform, which they are now launching.

This platform is doing for building products what Amazon has done to other products like books, music, and electronics.

This platform allows homeowners and contractors to buy directly from manufacturers at wholesale prices. Build Direct ships free samples to aid the buyer decision, and then its proprietary logistics platforms figures out the fastest and cheapest way to ship the product to the buyer’s door. Buyers can do all this from the comfort of their own homes.

The platform gives manufacturers direct access to customers throughout North America and even the world. It provides analytics to help the seller with pricing and warehouse location decisions.

Traditionally, building product manufacturers don’t have access to the people who actually use their products. They can’t gather data about who they are, where they are, and what feedback they have. Any information is filtered through retailers who have no incentive to facilitate this contact.

Build Direct is leading the way, but like the Blackberry’s and LG's of the cell phone market, there is potential for further disruption by innovative new entrants.

What does this mean for you?

There’s a good chance that you’ll be looking for home-related products in the near future. You can be aware of cheaper and easier ways to buy.

If you’re an investor, you can look for opportunities to invest in this new trend and share in the value creation.

If you’re an entrepreneur, you may see opportunities to contribute to the disruption.

If you’re involved in any other industry, you can recognize that your industry will be disrupted. You can adapt and be part of the disruption, or you can be one of the value-losing stories. Be a student of your industry. Be aware of the history and the newest developments. It’s not easy to predict which trends will be fads and which will be disruptive, but at least be aware of what’s out there.

Look for significant value to be created by new startups and significant value to be lost by incumbents that don’t adapt. This is the world we live in, and it’s an exciting time to be alive!

Question: What other industries are ripe for disruption? 

The Mattress Industry is Ripe for Disruption

If you’re reading this, chances are you own a smartphone and can’t remember the last time you rented a DVD from a store (i.e. not Redbox). You may not have a landline, and if you do, you may only keep it because it’s free when bundled with Internet and TV service. The telephone and movie rental industries are just two examples of the countless industries that have been disrupted by newcomers with new technology, better products, and/or better methods of delivery.


Value gained, value lost

Think of the value gained and lost with each disruption. Since 2007, the year iPhone was released, Blackberry has lost 94% of its market value (from about $67 billion to $4 billion). During that same time, Apple's market value has increased by about 850% (from about $70 billion to $650 billion). That’s almost $600 billion of value created in only 8 years!

Investors who correctly predict (1) the industries that will be disrupted and (2) the companies who lead the disruption realize the bulk of the value created. Of course, on the flip side, investors and management stand to have their value destroyed if they fail to see the disruptors coming and adapt accordingly.

Industries ripe for disruption

Two industries I’m involved in are ripe for disruption. Both generate 95-97% of sales from brick and mortar stores. End consumers pay inflated prices due to the costs of physical locations and layers of middlemen who each take their cut.

Startups have just begun entering both industries with disruptive business models. They are using technology and other innovations to reduce the layers of cost between the manufacturer and the end consumer. They are making the customer experience better AND cheaper.

Mattress industry

In this post I’ll write about the mattress industry, and in my next post I’ll write about the building materials industry.

The mattress industry has long been lucrative. Manufacturers typically earn a 50% gross margin, and then retailers require up to a 55% margin on top of the wholesale price. This means, for example, consumers pay over $2200 for a mattress that costs $500 in material and labor to assemble.

The industry has maintained the status quo through tactics such as creating complex product lines, often customized for each retailer to make comparison shopping difficult. Often mattresses with the same materials are branded differently and sold at different price points.

Further, mattresses are big and heavy, requiring delivery by trucks rather than courier. This adds to the costs and requires consumers go to a retail showroom to try before they buy.

Startups are disrupting the mattress industry

However, new startups are now figuring out how to disrupt this entrenched industry. They are finding that they can make a mattress from the same high quality materials, compress the mattress to fit in a box that can be shipped by courier, and sell online direct to the consumer.

Through effective marketing they are convincing consumers that they don’t need to try before they buy. They can rely on website descriptions and reviews. If they’re not happy, they have between three and six months to return the mattress for a full refund, no questions asked. The seller will even arrange for free pickup of the unwanted mattress.

The so-called bed-in-a-box sellers are doing extremely well. They are paving the way with new technology and spending millions on marketing to gain acceptance for the concept in the consumer mind. They are in the process of pushing online mattress sales from 3% to potentially 20% or more of all sales. With a $14 billion US mattress market, this is opening a new 2.4B online channel.

Room for further disruption

However, like the Blackberry’s and LG's of the cell phone market, they have flaws that can be improved upon by new entrants, such as:

  • Limited selection. Casper, the leader in this disruption, sells exactly one model, as do most of their competitors.
  • Average materials. Most use average foam and/or latex much like mid-range conventional mattresses.
  • Antiquated compression techniques. The bed-in-a-box concept is not new. It’s simply being legitimized by startups innovating marketing and customer service, not materials and superior compression. The boxes are small enough to courier, but still quite bulky, and the mattresses take several hours to expand to full size.

The incumbent manufacturers and retailers are worried. Mattress Firm, the largest mattress retailer in the US, just announced their entrance into the market with their online-only, bed-in-a-box "Dream Bed."

What does this mean for you?

You’ll need to buy a new mattress several times in your life. You can be aware of cheaper and easier ways to buy.

If you’re an investor, you can look for opportunities to invest in this new trend and share in the value creation.

If you’re an entrepreneur, you may see opportunities to contribute to the disruption.

If you’re involved in any other industry, you can recognize that your industry will be disrupted. You can adapt and be part of the disruption, or you can be one of the value-losing stories. Be a student of your industry. Be aware of the history and the newest developments. It’s not easy to predict which trends will be fads and which will be disruptive, but at least be aware of what’s out there.

Look for significant value to be created by new startups and significant value to be lost by incumbents that don’t adapt. This is the world we live in, and it’s an exciting time to be alive!

Question: What other industries are ripe for disruption? 

How to Build a Virtual Team

In my last post, I wrote about why you should consider building a virtual team to grow your business. In this post I’ll cover how to actually build a virtual team. businessmen-786064

Technology has made building and leading a virtual team easier than ever. Many websites connect available talent with those who can use it, and free or inexpensive tools make virtual collaboration easy.

The following are steps you can work through as you build your virtual team.

1. Decide what kind of team will work for you

There are many different ways to to build a virtual team. Full time or part time. National or international. Specialists or generalists.

If part time, do you want the same people consistently or would you hire for specific projects?

National team members give you the benefit of native language skills and similar time zones. International team members are usually less expensive and can get work done while you sleep.

Of course, your team can be a mix depending on the needs for each role.

You can do some research to help you think through your options.

Chris Drucker is a prominent thought leader around building a business with virtual teams. He wrote a book, Virtual Freedom : How to Work with Virtual Staff to Buy More Time, Become More Productive and Build Your Dream Business, and a weekly New Business Podcast.

Michael Hyatt also writes about building virtual teams, including his book The Virtual Assistant Solution.

2. Find and hire

Once you decide what kind of team member you are looking for, it’s time to find the right person. Many online services can help.

eaHELP specializes in helping you find US-based virtual assistants. specializes in matching employers to full and part time Filipinos. You can hire full-time, skilled people for $200-$1000 USD per month.

Freelancer sites like Upwork (created by the merger between oDesk and Elance) help you find a variety of skills from all over the world.

Sparehire specializes in high-end finance and consulting projects that range from $50 to $300 per hour.

3. Train and delegate

Once you find the right person, you need to effectively train them to do their job and then delegate tasks to them.

Collaboration software like Slack and project management software like Basecamp make it easy to communicate and assign tasks.

It may be tempting to throw a bunch of tasks at them and expect them to figure it out. However, it may take time to gauge their skill level and how they work best. Expect to spend a lot of time with them up front to make sure they understand your expectations.

4. Lead effectively

Sometimes out of sight means out of mind, but it’s important to remember that these people are part of  your team. To help them feel good about doing their best work for you, you need to build a relationship with them just like you would with an on-site team.

Praise them for good work. Find out about their family, interests, and future goals. Acknowledge and celebrate life events, such as birthdays and the birth of children. Let them know how important they are to your team.

Building a business with a virtual team can be cost-effective and give you access to a large talent pool. However, it can take just as much work as an on-site team to find, hire, train, delegate to, and lead your virtual team.

As you invest the time and effort required, your virtual team can help you build a successful business.

Question: How have you gone about building a virtual team? 

Why You Should Consider Building a Virtual Team

Are you a business owner or manager who needs help to grow your business? Are you hesitating because you’re not ready for or can’t afford a full-time person sitting in your office? Hiring full-time employees to sit in an office you rent is not your only option for building a team.  In fact, before even thinking about local full-time employees, you should consider whether or not a virtual team would work for you.


“Virtual team" can describe a broad range of structures, but in short it refers to a team of people who work together from different locations and possibly at different times. Communication is facilitated by technology rather than face-to-face contact.

Many prominent organizations have been successful with virtual teams.

37Signals, now Basecamp, is an extremely successful software company with a team mostly working remotely throughout the world.

Michael Hyatt left the CEO post at Thomas Nelson Publishers to pursue writing and speaking full-time. Over the last few years he has built a virtual team to support his expanding product line.

The benefits of a virtual team include: 

Flexibility. You can start by hiring part-time contractors to help as needed, and you can quickly expand or contract as your needs change.

Cost. If you hire contractors, you don’t have the costs and obligations of employees. You don’t have the overhead of maintaining office space. You will also have access to areas of the world with lower cost of living, which translates to lower required pay. The Philippines and India are popular places to hire for virtual teams because of their skilled and low-cost labor.

Access to talent. Building a virtual team gives you access to a worldwide talent pool. This is especially beneficial for businesses based in rural areas, where the talent pool is small, and highly competitive markets, such as the San Francisco Bay Area, where talent is expensive and difficult to attract and retain.

Of course, building a virtual team is not for everyone and all situations.

Drawbacks of a virtual team include: 

Compatibility with the business. Some businesses simply require employees on site. You can’t build a virtual food services or landscaping team.

Communication. Technology makes virtual communication more effective than ever, but technology isn’t as good as face-to-face conversations for reading body language, for example. Also, casual conversations in the office can lead to breakthroughs.

Relationships. Related to communication, it’s easier to build strong team bonds while working side by side, day after day.

Oversight. You are not able to see when people arrive at and leave the office, and you can’t see what they’re working on. You will have to be more concerned about the end result than how your team gets there. In my opinion, that’s a better way to lead anyway, but it’s a different mindset than the traditional model.

The teams I have worked with over the last few years have have been mostly virtual. Most team members are in the US and Canada, and we also use overseas bookkeepers. It is more difficult to communicate and build strong relationships with team members in other locations, but in our case the benefits outweigh the drawbacks.

Business owners and managers should at least consider whether or not a virtual team would work for them.

Question: How have you been successful building virtual team? 

4 Ways to Become Antifragile

A few days ago my preteen son was unable to sleep as he thought about the Nepal earthquake. He knows about the major fault lines along the Wasatch Front near our home in Utah, and he was concerned we would be involved in a similarly devastating earthquake. Do you worry about the impact that unpredictable, devastating, and rare events might have on your life? These events may include natural disasters, worldwide economic downturns, war, loss of income, or personal health challenges.

What if instead of fearing these adverse events, you can be prepared to benefit from them? Wouldn’t this bring more peace and confidence to your life?


Benefiting from chaos, disorder, and unpredictable events is a concept outlined in a book I recently listened to: Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb.

Antifragile a word made up by the author, and the concept can apply to many things. In this post I’ll focus on building an antifragile life.

Our life is fragile if it can be easily broken or damaged by adverse events. You may think that the opposite of fragile is a life is one that is not easily broken or damaged by adverse events. However, the author defines the opposite of fragile, or antifragile, as something that benefits from seemingly adverse events.

Here are four ways we can build an antifragile life:

1. Get out of debt and build a financial reserve

An individual loaded with maximum debt is fragile. Many families choose to take on a level of debt with which the minimum payments fit within their budget, but barely. They are fragile to even the slightest disruption, such as reduced income or unexpected expenses.

Other budget items, such as eating out and entertainment, can be quickly adjusted down as needed. In contrast, in most cases assets can’t be sold quickly or easily to reduce debt payments. Many types of debt are either unsecured, such as a credit card, or secured by an asset with less value than the debt balance, such as a vehicle.

Living on much less than we earn, and using the excess to build a financial reserve, will make up more antifragile. It is obvious that a financial reserve, no debt payments, and a comfortable budget will make adverse events easier to endure.

But how do we actually benefit from financial shocks? One example is the ability to take advantage of great deals. Those who had a lot of cash in 2008-2009 had unprecedented investment opportunities. The Dow Jones stock market index has almost tripled since its 2009 low. Phoenix housing prices have almost doubled. Vacation properties dropped even more than residential real estate. Businesses and business assets could be bought for cheap.

2. Maximize health

The right kind of adversity can improve our health. When facing resistance, muscles tear, and then the repair makes them stronger than before. Aerobic capacity increases as we sustain an increased our heart rate, such as while running. Exposure to a small level of dangerous microorganisms can make us less susceptible to its affects in larger quantities (i.e. the principle behind vaccines).

However, we need a reasonable baseline of health before this adversity can be beneficial. A person with a weak heart shouldn't go on a long run. A person with weak bones should not try to lift heavy weights or play basketball. A person with unconditioned muscles and tendons should not try to sprint. How many people who are older and more out of shape than they think they are pull muscles while attempting to run around the softball bases!

3. De-risk career

In the book, the author compares two brothers. One has a good education and has had a long career in the HR department of a large corporation. The other has little formal education and is a New York City cab driver. The HR brother has a steady income while the cabby brother’s income varies widely each day.

Even though the HR brother makes more money and may appear to have a better career than his brother, the author argues that the HR brother is fragile while the cab driver is antifragile. The HR brother could lose his job at any time, which would completely cut off his income. The cabby brother has more sources of income than he can possibly take advantage of (millions of people in one city). If his income drops on one day, he can quickly adjust by moving to another area within the city.

You don’t need to own your own business or become a freelancer to be antifragile. You can build a strong network and solid reputation. If you lose your full-time position, tapping your network might even lead to a better opportunity.

Another way to become antifragile is to develop a career that comfortably pays the bills while allowing time and freedom to pursue other interests, such as a side business. The author is a professor of risk engineering at the Polytechnic Institute of New York University. This position allows him the freedom to research and write his books. Einstein had a well-paid and relatively undemanding job at a patent office, which allowed him to think about his most impressive ideas while working.

4. Look for minimal downside and maximum upside

Another way to become antifragile is to focus time and attention on opportunities with minimal downside and maximum upside.  Of course, these kinds of opportunities aren’t always obvious, but it’s a good principle to keep in mind as we choose how to spend our precious time.

He uses options, the financial instrument, to illustrate this principle. Options allow you to buy the right, but not the obligation, to buy (call options) or sell (put options) something at a given price (usually shares of stock in a company). If you buy a call option, you have virtually unlimited upside as the stock goes up, and your downside is limited to the price of the option.

Education is a good example of this principle. The only downside of education is the time and cost, which are measurable before you begin, and the upside can be unlimited if applied appropriately.

Another example is working for a promising startup company and receiving equity as part of your compensation. Assuming you don’t have your own money invested, the downside is the opportunity cost of something else you could have been spending your time on and the risk of losing your job. The downside is no different than working for a big company, but he upside is potentially much greater if the company does well and your equity multiplies in value.


There is no way to predict the biggest shocks in life. By becoming antifragile we can prepare ourselves to benefit from inevitable randomness and chaos. Being antifragile can give us greater peace and confidence in our lives.

Question: How can you make your life more antifragile? 

The Five Laws of Stratospheric Success (from The Go Giver)

I recently listened to The Go-Giver: A Little Story About a Powerful Business Idea by Bob Burg and John David Mann. The authors package the five laws of stratospheric success into a brief, engaging, and easy-to-read parable. Go-Giver

Multiple books have been written about each of the five laws, but the authors effectively illustrate these laws in a story about Joe. Joe is a relatively successful sales executive who feels like he is stalling in his career. He is about to miss his quarterly sales quota, and he desperately turns to a wise old co-worker for help. This co-worker introduces him to “The Chairman” who in turn introduces him to five successful people. The five people each teach him one of the laws of stratospheric success.

The format reminds me of Andy Andrews’ Traveler's Gift: Seven Decisions That Determine Personal Success. The main character, David, is transported to seven key points in history where historical figures teach him the seven decisions.

The five laws of stratospheric success are as follows:

1. Value: give more in value than you take in payment

This is a principle not easily measured by traditional accounting methods. Accounting seems to dictate that businesses should extract maximum payment from customers while expending the minimum cost.

However, this law defines value much more broadly than can be measured by dollars and cents.

In a successful transaction, one that will lead to more transactions, each party must feel they are better off than before. The customer must feel that the product or service they receive brings more value to their lives than the dollars they spent. On the other side, the seller must receive a price higher than it cost to provide the good or service.

Money is simply an echo of value created. As Dave Ramsey likes to say, banknotes are “certificates of appreciation."

This law must be followed to create any successful business, but it is easy to see in some relatively new business models.

Many online software companies use a “freemium” model. Their pricing may include various pricing levels, including a free version. Those using the free version are obviously getting more value than they’re providing in payment if they find any value at all. It also provides a risk-free way to decide if the additional features in the paid version will be of more value than the cost. This is a major improvement from the old days where customers made large and long-term software purchasing decisions based on a demo.

Many professional content creators (bloggers, authors, etc) offer most of their content for free. As they prove the value they can provide, some percentage of their followers are willing to pay for books, courses, conferences, etc.

2. Compensation: your income is determined by how many people you serve and how well you serve them 

This reminds me of Zig Ziglar’s famous quote, “you can have everything in life you want, if you will just help enough other people get what they want."

Some of the perceived inequity in the world results from this principle. It may seem unfair that famous musicians or sports players get paid millions while many beloved teachers barely make enough to live on. Like it or not, these famous people are paid more because they are able to reach more people.

In The Go Giver, a teacher realized she would be able to serve more people if she created an online education business. As a result, she was able to provide value to more people and earn more compensation.

This law doesn’t mean that it’s not honorable to serve within a small sphere of influence. But the law does mean that the compensation will be more limited when compared to serving a larger audience.

3. Influence: is determined by how abundantly you place others interests first

In order to influence those around us, we need to shift our focus from I or me to others. When others can see we have their best interests in mind, they will trust us and therefore allow us to influence them.

Of course, the interest must be sincere, and the reason for desiring for influence must be to serve. Many influential leaders have used their influence for self-serving and even evil purposes, such as Hitler and Stalin.

For one of the most influential works on influence, see the book Influence: The Psychology of Persuasion by Robert B. Cialdini.

4. Authenticity: the most valuable gift you have to offer is yourself 

You will serve best by being yourself and not who others want you to be. You have unique gifts and talents to bless the world with.

Bronnie Ware, a nurse who worked for years with dying people, wrote a popular blog post about the top 5 regrets of the dying. The top regret was "I wish I’d had the courage to live a life true to myself, not the life others expected of me."

Being yourself doesn’t mean being who you are now without improvement or progression. That’s just complacency and stagnation. Being yourself means becoming who you want to be.

5. Receptivity - the key to effective giving is to stay open to receiving 

This may be the hardest law for many of us to follow. We know that giving to others is a good thing, but we have a hard time receiving. It may be that we don’t want to put other people out. It may be that we don’t want to admit that we could use help.

It takes two to tango. For us to be able to able to give, someone needs to receive. Sometimes that receiver needs to be us.

Kids love receiving gifts. Christmas is an especially magical time. But as we get older, we find much more joy in giving gifts than receiving them. Finding joy in giving is a good thing, but as a receiver we can allow others to feel the joy of giving.


These five laws are more about who we are than what we do. Sometimes the best way to change who we are is to first change how we act. If we are sincerely trying to change, we really can fake it until we make it.

As we follow these laws, we can make our way toward stratospheric success!

Question: How have you applied these laws? 

Don't Believe Everything You Think

I loved playing Little League baseball while growing up. As an 11-year-old I was excited to move from "Triple A” (age 9-10) to the “Majors” (age 11-12). I was big for my age, and thanks to many hours playing catch with my younger brother, I was a decent player. Our region had two leagues for the Major age: the regular league and the farm league. I should have recognized that a farm league is for those not ready for Major League (like professional baseball), but at some point I got the relative prestige of the leagues mixed up.



As a result, I desperately wanted to be part of the farm league. My parents and friends probably assumed I wanted to start with a more relaxed league before advancing. They probably tried to explain the difference in leagues, but I must not have listened. I knew what I wanted to do.

I realized what a mistake I had made soon after the season started. We played in the more rugged diamonds and with no standard uniforms. I watched my friends in the main league playing more competitively in well-manicured diamonds and nice uniforms.

Much later in life I heard Andy Andrews say a phrase that brought me back to this experience: “don’t believe everything you think.” 

This phrase also reminded me of other experiences where I confidently made decisions based on flawed thinking.

A few years ago I made a series of poor decisions regarding family vehicles. Within 2 years we bought and sold an Accord, Trailblazer, Odyssey, and Tahoe because after a short time with each I became convinced that we needed something different. We lost money each time, and I was never more satisfied with the next one. I don’t even enjoy the process of buying and selling vehicles!

I have tried to learn over time that I can’t believe everything I think. The following tips have helped me look more critically at my thinking and hopefully led to better decisions:

1. Be patient and skeptical

My worst decisions have been the ones I made the most quickly. Impulse purchases certainly fit in this category but usually don’t have as much impact as choosing a career, making a job change, hiring people, expanding a business, etc.

Most decisions do not need to be made quickly. The urgency we feel is usually created in our own impatient minds. We should take time to make decisions, and during that time, we should be skeptical of our own thoughts.

2. Gain experience

Sometimes the only way to recognize flawed thinking is to recognize patterns over time. We all think differently, so it’s difficult to provide universal rules. We can try to reflect on the thought process that has led to good and bad decisions in the past.

3. Follow a life plan

In several previous posts I have referred to my life plan, which was inspired by Michael Hyatt. Creating a life plan gives us a vision of where we are now, where we want to be, and the goals and habits that will get us there. This life plan can be created and modified over time while we are thinking clearly and are free from the pressure of a pressing decision.

When we have new ideas, we can compare our ideas with our life plan. If it fits into our overall vision, it’s likely a good idea. We don’t need to automatically disregard an idea that doesn’t fit perfectly, but we should look at it more critically.

4. Have a trusted advisor

We all need confidants with whom we can share our deepest thoughts. We need people who will be kind and patient while also challenge our thinking. This adviser can be a spouse, parent, child, friend, or even a professional life or career coach.

Sometimes it takes someone objective to snatch us out of our flawed thought process.

5. Recognize that the grass usually isn’t greener on the other side

We should be skeptical of thoughts that are negative toward our current situation and positive toward a different situation. Of course, that doesn’t mean we should always be complacent in our current situation. Progression is a good thing, but we should be careful about how we think about progress.

We might think a different job, a different business, a different location, or different friends will solve our problems. And sometimes we will be correct, but we should first try to improve our current situation before jumping to a new one.

It can be hard to recognize that sometimes our thoughts are flawed or flat out wrong. After all, they are our thoughts. But not believing everything we think can save us from bad decisions.

Question: How do you recognize and correct flawed thinking?

4 Ways to Develop a Leader-Leader Culture

I recently finished the book, Turn the Ship Around by David Marquet. The author was appointed captain of the submarine USS Santa Fe. At the time, it was performing at the bottom of the fleet. He tells the story of  how he turned the submarine performance around with the leadership style he developed. The leadership methods he learned also apply to building and turning around companies. Startup founders in particular can benefit by using these principles from the beginning rather than trying to change the culture later on.


The main premise I got from the book is that leaders should treat those they lead as other leaders rather than followers. He calls it the leader-leader model rather than the traditional leader-follower model.

Here are four ways to implement a leader-leader model in our organizations:

1. Use empowering language 

Words have a strong impact on our culture. Every organization develops unique methods of communication, such as acronyms and common phrases.

The author gives examples of phrases that indicate disempowerment (said by those who are led to their leader), such as “I would like to…” or “could we…” or “what should I do about…” These are passive phrases that require the leader to dictate, or at least contribute to, the solution.

On the other hand, empowered phrases include, “I intend to…” or “we will…” These types of phrases encourage people to think and decide for themselves. If the action requires the leader’s permission, the leader can simply reply, “very well,” or ask questions if clarification is required.

We can empower those we lead to act and not be acted upon, and that empowerment can start with the words we use.

2. Have a servant mindset

Leaders should consider themselves servants to those they lead. As Jesus said in Matthew 23:11, "But he that is greatest among you shall be your servant."

My job as a leader is to make it easier for those I lead to do their jobs. I can help solve problems, provide coaching, and give advice from my training and experience.

3. Specify goals, not methods

I am guilty of not following this principle. I am system-oriented, and as a leader I think it’s my job to specify the step-by-step processes for others to follow. Sometimes I think I’m the best qualified to know the best way to do things.

Periodically I'm reminded that I’m not usually the best qualified to specify the how. As a leader, I do need to work with other leaders to define and communicate priorities and goals. However, I need to let those I lead develop the methods to achieve those goals.

A few years ago I was given responsibility for the operations of a factory. The team was struggling to load outgoing trucks within a reasonable time, and they often made mistakes by loading the wrong products. As a new leader, I thought I could save the day by dictating the methods for reaching the goal of loading quickly and accurately.

I worked out of a different city, but I would spent at least a full week every month for a few months on the ground, working side-by-side with the team, showing them what I thought was the best way to reach the goal.

Before leaving, I would document the process and encourage them to follow it. Invariably, the process would break down after I left, and I would go back the next month and try to fix it again. Frustrated, I couldn’t figure out why they couldn’t simply follow the process.

After a few months I gave up. I simply told them I didn’t care how they did it, but we needed trucks loaded quickly and accurately. Miraculously, within a few weeks trucks were being loaded quickly, and mistakes were rare. Several years later, I still oversee that factory, and I have no idea what the system is for loading trucks.

4. Don't be missed after you depart

Why do we want to lead? So we can be in a position of power? So we can have a secure job? So we can make more money?

Leaders who lead followers make sure their organization and people can’t function without them. If the leader leaves, the organize is worse off, at least until another leader steps in.

On the contrary, we should lead so we can leave our organization and those around us better than we found them.

It’s hard to think that way. As a leader, I like to think of myself as indispensable. They can’t do it without me! However, this attitude is self-serving.

By following the leader-leader model, we can build an organization full of leaders. Leaders who make good decisions when left on their own. Leaders who take good care of the customer when the supervisor isn’t watching. Leaders who identify and solve problems without being directed. Leaders who continue to build a great organization after you are gone.

Question: How do you build a leader-leader culture? 

4 Ways to Prevent Personal Finance from Hurting Your Business

Successful entrepreneurs want to pour everything they have into their businesses, including time, attention, energy, and money. 100% commitment increases the odds of success in an area with high risk of failure. However, 100% commitment doesn’t necessarily mean giving everything you have. Giving too much in one area may prevent you from giving enough in more important areas. This principle applies to various aspects of life, but I will address the financial.


It’s obvious that your business performance impacts your personal financial situation. But it’s not as obvious that your personal financial situation also impacts the success of your business.

Sometimes pouring all of your money into a venture prevents you from giving something more valuable: your undivided attention. Personal financial struggles create stress, which distracts your attention from your business.

Here are four ways to avoid distracting personal financial struggles. Although I’m addressing entrepreneurs specifically, these principles apply to anyone.

1. Keep your overhead low

Keeping overhead low is a business principle that also applies to personal finance. Overhead is a company's fixed, ongoing expenses, which could include rent, utilities, travel, and debt payments.

Successful businesses keep their overhead as low as possible. The lower the overhead, the faster a startup can get to the critical breakeven milestone. The lower the overhead, the more prepared a profitable business can respond to fluctuations in revenue or investment opportunities.

Similarly, low personal overhead means you don’t need to generate much personal income to cover your basic expenses. You know you can quickly adapt to changing circumstances, such business cash flow struggles. The resulting peace of mind allows you to focus on your business.

One way to keep overhead low is to avoid debt, especially when used to purchase depreciating assets. Getting a loan to buy a vehicle, RV, or furniture set commits you to paying for it over time, no matter what happens to your finances. These types of purchases usually drop in value faster than the loan is paid down, which means you can’t simply sell the asset to pay off the loan if you don’t want the payments anymore.

Besides, debt payments get in the way of savings money for emergencies and investing, which are covered in the next two points.

2. Set aside at least six months of expenses (and don’t touch it even in an emergency)

Having at least six months of expenses in savings, while also having low personal overhead, provides even greater peace of mind. You will make better decisions for your business knowing that you don’t have to consistently take money out of the business to live on.

Consider this stash sacred. I’m being facetious when I say not to touch it even in an emergency, but something close to that should be your mindset. It’s not vacation or nicer car or home renovation money. It’s there to help you weather the ups and downs of your business.

Most startups hit rough patches, and being able to go a few months without taking money out might make the difference between success and failure. You will also be less dependent on outside capital. Taking on debt increases your business risk, and the payments add to overhead (see point 1). Giving up equity dilutes your ownership and control.

3. Develop an investment strategy separate from your business 

Entrepreneurs, by nature and necessity, are eternal optimists about their business. You know you will succeed and want to pour everything you have into it. You wonder why you should invest anywhere else when you can invest in your own business.

But what if your business doesn’t succeed? What are you left with?

No matter how confident you are in your business, you must diversify. We all know we shouldn't have all of our eggs in one basket. No matter how attractive that basket looks right now, unforeseen circumstances can quickly crush all of the eggs.

I suggest consistently investing 10-20% of your personal income somewhere other than your business. If you take just enough out of your business to live on, take out 10-20% more to invest.

You’re likely spending every waking hour building your business, so you’re not going to have much time to research other investment opportunities. The good news is you don’t need to. For most people, investing in low-cost index funds is the way to go.

If you can break away from your business to read, I recommend Tony Robbins new book, MONEY Master the Game: 7 Simple Steps to Financial Freedom. I just finished reading it, and it provides unbiased advice for minimizing fees and risk while maximizing returns, all while spending very little time.

4. Take money off the table when given the chance

At some point you may have the opportunity to sell all or part of your business. What to do in this situation is an intensely personal decision with numerous factors.

I can’t suggest what to do in every situation, but it’s often a good idea to take money off the table when given the chance. This is especially true if you’re not well diversified in other investments.

Taking money off the table doesn’t necessarily mean giving up your business. You could sell shares to a trusted partner or spin off part of your business.

In another post I wrote about creating value vs capturing value. Entrepreneurs like to create value, but there comes a time when that value should be captured.

Hold back for success 

You will be most successful by putting almost everything you have into your business. By carefully choosing what to hold back, you increase the likelihood of achieving your goals.

Making smart personal financial decisions will give you peace of mind, which will allow you to give undivided attention to your business.

Question: What personal financial strategies have allowed you to focus on your business?

What is the Difference Between Creating and Capturing Value?

I recently heard an entrepreneur speak about the founding and growth of his company. It was a fascinating and instructive story overall, but he mentioned one concept that I’ve been mulling over since. He talked about the difference between creating value and capturing value. 547915_55603419

This topic came up when asked how he decided when to take outside capital and how much. He described how he, as a founder, is focused on building value in his company. As he was looking for capital, he found that most potential investors, including venture capitalists, were more focused on capturing value. He found this to be a problem because he believed that capturing value too early would inhibit their ability to create value.

I’ve been thinking about how VC’s and other investors can help entrepreneurs both create and capture value.

First, what does it mean to create value?

The activities that make up the economy are not a zero-sum game. Gains in one area do not have to come at the expense of losses in other areas. The economy grows, and value is created, when entrepreneurs create outputs more valuable than the sum of the inputs.

The process of creating value can include focus on the following:

Creating a network effect. Some products become exponentially more valuable with more users. The classic example is the telephone. One telephone in the world is worthless, but that one phone becomes more valuable as more phones are placed into service. More recent examples include Facebook, Twitter, and other social media sites. Some of these companies created billions of dollars of value even before turning a profit because of the number of users they have been able to attract.

Building brand strength. The stronger the brand, the more a customer is willing to pay for a product. A brand is built over time through marketing and a reputation for high quality and good service. Apple is a good example of value created through brand strength. Consumers are willing to pay more for Apple products than comparable products because they trust the brand.

Developing efficient operations. Manufacturers create value by selling a product for more than the cost of the materials, labor, and equipment needed to produce the product. The more efficient the operations, the lower the cost of production. The lower the cost of production, the more value is created. Value can be considered both the profit to the manufacturer and utility for the customer relative to price.

Second, what does it mean to capture value?

Agriculture easily illustrate the difference between creating value and capturing value. Farmers create value by planting and growing crops. However, creating a valuable crop doesn’t do any good unless the crop is harvested and sold.

Value-capturing activities include:

Monetizing users. Social media companies often struggle with capturing value. Twitter created enormous value by rapidly building a large user base, but they have struggled to capture the value through monetization. Facebook’s stock has been surging because they have found effective ways to monetize through advertising.

Pricing effectively. The value of a strong brand and efficient operations can’t be captured if the product isn’t priced appropriately. Again, Apple is a great example. They earn high margins because of their brand strength and quality product, and they protect these margins by controlling their high pricing carefully across all distribution channels. It is difficult to find lower than usual price on Apple products.

Providing liquidity to shareholders. A company can capture value by monetizing users and pricing appropriately, and then they can pass on that value to shareholders by providing the ability to sell the more valuable shares. This can be done in many ways. Profits can be distributed through dividends. Private companies often raise money at higher valuations and allow new investors to buy out existing investors. The goal of public companies is to allow investors to capture value by increasing their stock price.

Real Value Must Be Created Before Being Captured

Both creating and capturing value are necessary, but it’s important to recognize where to place your focus at a given stage in your company’s growth.

In general more focus should be placed in the early stages on creating value, and as sustainable value is created, some attention can be turned to capturing that value. Even while capturing value, management should stay continually focused on creating value, or the ability to capture value will be short-lived.

Beware of artificial value, such as that created by financial engineering. Failure to recognize this distinction is one of the causes of the housing bubble and subsequent economic collapse. Low interest rates and creative financial products led to a flood of capital into the housing market. This caused housing prices to artificially inflate, creating the illusion of value creation.

Banks allowed homeowners to capture that “value" by borrowing against the inflated value of their homes. The illusion was eventually exposed, leaving behind severely underwater mortgages and general economic disaster.

Entrepreneurs and investors should work together to recognize the distinction between activities that create and capture value and prioritize their resources effectively. As they do so, they will be able to maximize both the value created and the value captured.

Question: What are other value creating and value capturing activities?  

Should Sales or Accounting Handle Collections?

I’ve worked with startups for several years. I’ve had a lot of experience with both the giving and receiving end of collections efforts. In my role as CFO, I’ve seen what brings in our receivables most effectively and what tactics best encourage us to prioritize vendors when cash is tight.

Collecting bills is a balancing act. You must keep cash flowing to pay your own bills, but helping customers through difficult times can build loyalty. It’s important to have an effective strategy for finding the right balance.

Money in hand

An important part of the strategy is defining who contacts customers whose bills are overdue. A common debate is whether sales or accounting should take this role.

Before I share my preference, here are some of the arguments for either side:

Reasons for accounting to handle collections: 

1. Sales should focus their time and attention on selling and not administrative tasks.

2. Hounding customers for payment might hurt the customer relationship.

Reasons for sales to handle collections: 

1. Sales can use their relationship to encourage payment. Faceless accounting people are easy to ignore.

2. Knowing the customers' account status and payment habits helps sales understand the customer better.

3. Sales will be more motivated to sell to credit-worthy customers if they know they also have to collect.

You can probably guess my preference from the length of my arguments. In businesses that have sales reps with direct customer relationships, I strongly prefer that the sales reps make the collections calls.

This preference comes mainly from my experience from the customer side. As I wrote about in a previous post, the startups I work with sometimes don't have enough cash to go around.

Prioritizing precious cash is difficult when I desperately want to pay everyone on time. Often my decisions about who to pay and when are based on relationships. It's easy to ignore an email or voicemail from an accounts receivable person I don't know. It's difficult to ignore a sales rep whose relationship and service I value.

Yes, there is a risk that pushing customers for payment will damage the relationship. But customers understand they need to pay their bills on time. If they're offended when asked nicely to pay, they aren't the kind of customer you want anyway.

Yes, collections takes time that a salesperson could be using to generate more sales. But they should be in regular contact and familiar with the customer anyway. Mentioning a late bill shouldn't take much extra time.

Here are some tips for salespeople who want to collect effectively:

1. Set expectations from the beginning. When onboarding a new customer, make it clear that you expect them to pay their bills on time or they will hear from you.

2. Follow up promptly. After telling them they will hear from you if they get behind, follow through. The contact doesn't have to be threatening. The day after a bill is due, give them a friendly reminder. Sometimes late payments are simply the result of a misplaced invoice.

3. Be patient and understanding. For honest business people, not being able to pay the bills is stressful. You can make it clear you expect to get paid while empathizing with their situation. Helping a good customer through difficult times goes a long way toward build lasting loyalty.

4. Blame accounting! And it will be the truth. Accounting and management set the collections policies, and as a salesperson you are just doing your job.

I encourage you to at least consider giving sales the responsibility for collections. Let the salespeople leverage their relationships to keep the cash flowing.

Question: In your business does sales or accounting handle collections, and why?