When I recall the stupid excitement former (annoying) employers felt about their fantastic "plans," I feel sick. Some of these plans sounded so good they should have been mounted and framed. But now they line gerbil cages.
December 30, 2007: Jon had some recent debates about topics in this chapter, including an MLM guy hot on his heels, which inspired this new Free From Corporate America podcast.
Readers have been after me. Through the course of writing this book, I’ve been asked about classic entrepreneurial topics like business plans, venture capital, and multi-level marketing. I briefly mocked business plans in an earlier chapter, but that raised more questions than answers. So let’s go through each of these topics, as well as the tactic of franchising, in the context of this book’s themes.
I have no real beef with business plans. I criticized them earlier because business is more about execution than salivating over the “next big idea.” I’ve read lots of business plans over the years; they all gushed with confidence. And yet, none of those companies exist today. Oh well, at least they looked sexy on paper. When I recall the stupid excitement former (annoying) employers felt about their fantastic “plans,” I feel sick. Some of these plans sounded so good they should have been mounted and framed. But now they line gerbil cages.
Sure, writing a business plan can be a great education. As you master the components of the plan, such as marketing and financials, you learn how to tie these concepts into your business model. As a way to learn more about business, writing a business plan is a useful exercise. But the time you spend writing and researching can take you too far into theory. Some would call that an “opportunity cost.” The real learning happens when you take those neato ideas and try to get customers to actually buy them.
A particularly treacherous area is the financials section. Most business plans crunch numbers until they come out right. You have to hold your nose from the stench of these over-inflated fantasy numbers. Fact: there’s no way to pinpoint what the exact costs and revenues of a business are going to be. Contingencies are called contingencies for a reason. Divorcing ideas that aren’t financially viable takes ruthless honesty. Most people rework the numbers until their ideas look good, rather than trashing their ideas. The point of the exercise, of course, is to walk away from ideas that aren’t financially viable. I have yet to see someone who takes their own medicine though.
Jon Reed notes, December 2009: While I’m not a fan of conventional business plans – as in formal, overly polished paperwork – I am a fan of planning in general. Which is why I can strongly recommend Morris Rosenthal of FonerBooks.com and his new “Starting a New Business Plan and Making a Living” flow chart. The opposite of a formal plan, this chart, with jumps to text explanations of each section you might need help with, is exactly the kind of real world thinking that will give you a leg up on your ventures and minimize risk.
Business plans do tie into the world of venture capital, however. You can’t get financed without a business plan, so in that case, a business plan is a mandatory part of the process. I haven’t spent much time on venture capital in this book because I’ve been writing about “freeing yourself from corporate America.” In the first chapter, I contrasted the difference between “lifestyle entrepreneurs” and “Bill Gates entrepreneurs,” noting that this book is focused on the former. There’s nothing wrong with launching the next great American company, but you’re not going to free yourself from corporate America by following that model.
Becoming the founder and CEO of a major American company is beyond the scope of this book. Those kinds of startups typically require large-scale venture capital at some early phase. This book works better for “build as you go” businesses that are not intended to go through the process of becoming a publicly-traded company – a common end goal for most venture capital scenarios.
I’ve never seen a venture capital scenario firsthand that worked out well for a business. True, you can look to today’s business pages and find some that did, and in a big way. But it’s a high stakes game. I’m referring less to the pressures of big-time financing, and more about losing control of your vision. I’ve seen venture capitalists alter businesses beyond recognition. And I’ve seen owners lose control to investment vultures and literally weep with remorse. The old saw “be careful who you get into bed with” never applied more than it does with venture capitalists.
Some people are drawn to venture capital because it’s glamorous. When good looking people in power suits fly to your business to talk smack, things seem pretty swell. If you go the venture capital route, just make sure you are clear about the amount of ownership you are going to have and what the downside might be. Make sure the money folks are either going to step out of the way or be true partners. In the end, venture capital is just one form of financing. There are always other options. I tend to be a bigger fan of debt-financing or business loans. Loans can give you a similar cash influx but perhaps more control over business direction.
Multi-level marketing (MLM) is another topic that comes up when people look at business startups. One of the biggest appeals of MLM is that a legit MLM operation can give you a good head start with a pre-defined product or service. Some businesses would be offended if you labeled them as MLM, for example Avon. This is a good sign. The only worthwhile MLM companies would object to the label.
If an MLM venture is simply about selling products and getting commissions, and if it doesn’t require a hefty down payment on your part, then it may be an option. Once you start talking about making money from folks you recruit into the business who are “downline” from you, junk the literature and take a shower. MLM can provide a useful sales and marketing education, but they are a cop-out from developing your own materials and ideas.
Franchises are a similar concept. If you buy into a franchise, you get the benefit of the umbrella company’s products and marketing. There are franchises in almost every industry. For example, you can buy into a home inspection franchise and get the credibility of being affiliated with a bigger company. Of course, you give up a lot of money in exchange for that credibility. I donâ€™t have a “one size fits all” opinion on buying into a franchise. It can be a good option for folks who are looking to get something off the ground, have a bit of money saved, and have a passion for a business concept that already exists. Some franchises give you a lot of leeway to define how your business will look and run. Others do not. I tend to lean toward inventing your business rather than buying into somebody else’s, but there is a time and a place for franchises.
Another way to look at franchises is to flip the concept on its head: roll out your own business as if it might someday be a franchise. To some people, that’s a repugnant idea, and to me, I guess it is too. I would never want to get into a “Jon Reed’s Beef Stew for the Soul” book series. Franchises can be financially powerful but they are also limiting. However, it doesn’t hurt to think about the re-usability (or scalability) of your ideas. Expanding beyond one location can be a key to streamlining your costs through volume and having a competitive business. It’s important to understand why franchising works, though we might make a conscious decision not to take that route.
There’s no one way to succeed in business. If you’re like me, you’re more interested in maintaining control of your ideas, lifestyle and values than losing all of those things in exchange for a cube in a venture you no longer control. If that’s the case, I recommend keeping the options of venture capital and franchises at arm’s length.
And if must you do a business plan, don’t waste months on it. If writing a plan gets you off the couch, then by all means, do the plan. Just remember that when the plan is done, the business is exactly where it was before you started – a good idea in dire need of execution. Business planning is oxymoronic, because there’s no real way to plan for business, any more than there is to plan for life. A good plan might help you to sleep better at night, but there are contingencies on the way that you didn’t and couldn’t predict. Having the resources to adapt (and knowing how to adjust your venture on the fly) is a lot more important than a pretty plan. That said, I’ve already noted that number crunching is vital to successful business. It’s just as vital to personal finance. But the best numbers are not hypothetical numbers, but real ones, certified by our own sweat.
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