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Myth Busting

“Myth Busting”

5 fallacies about entrepreneurs — and how they can affect your company’s growth.

The National Commission on Entrepreneurship published a study in March 2001 that examined five popular myths about growing entrepreneurial companies. We asked second-stage business owners to comment on the reality — and how it affects advancing to the next level.

1. The risk-taking myth

Startup fiction: Successful entrepreneurs take wild, uncalculated risks when starting their businesses.

Second-stage fact: Founders actually face higher levels of risk, both financially and professionally, during later stages of their companies’ development.

David Wiener says his initial risks at startup were "commitment" risks. "You’re devoting time to one thing instead of working on something else that might have been easier, faster or more profitable," explains Wiener, founder of SoundTube Entertainment Inc., a manufacturer of audio products in Park City, Utah, with 35 employees. "The bigger risks come later when you have more people, customers and equipment."

Once you’ve developed a brand and market presence, there’s more at stake because both customer and market expectations grow as your company does. "And people will remember your one ‘hiccup’ more than the five times you bent over backward," says Wiener.

Another aspect of risk is heightened competition. "If you’re successful, you don’t just run away with the prize — you actually create more competition for yourself," warns Wiener. "People will look at your success and say, ‘Hey, they’re doing well with that. Why don’t we try it?’"

To mitigate risk, Wiener likes to ask, "What could go wrong here?" and then devise preventive remedies. For example, SoundTube has evolved its product design to maximize consistency on the assembly line by eliminating any production details that might be misinterpreted and result in an error.

Although it pays to be farsighted with risk, you also need some balance, Wiener adds: "If you spend all your time being defensive, you won’t be able to spot opportunities."

2. The high-tech invention myth

Startup fiction: Entrepreneurs launch companies with a breakthrough invention that is usually technological in nature.

Second-stage fact: Success more often stems from the exceptional execution of an ordinary idea.

Take David Alexander, who has built a thriving $20 million business in janitorial contract cleaning.

Alexander founded Potomac Services Inc., Bethesda, Md., in 1972 with a simple value proposition: to deliver high quality consistently.

"This industry is fraught with mistakes and broken promises," says Alexander. "It’s easy to start a cleaning service and get a couple of buildings, but as companies win more contracts, they usually start slipping up. In contrast, we do what we say we’re going to do."

Yet delivering consistent quality is tougher than it sounds — especially when you grow beyond 100 employees, says Alexander, who now has a head count of 1,500.

To keep close tabs on customer satisfaction, Alexander has invested in advanced reporting and communications systems. Yet, perhaps even more important to maintaining Potomac’s high standards are the training and safety programs that Alexander has developed over the years. "Everyone vacuums the floor the same way; everyone cleans restrooms the same way," he says.

Excellence in execution is something Alexander learned during his football days (he played college ball at East Carolina University and spent a year with the Oakland Raiders), a lesson that he has applied to his business.

Persistence and patience are also crucial, adds Alexander: "The key to any growth business is the people you hire. You first have to know what you need and then have your antenna up at all times looking for these people. It took me 20 years to find the right operations manager; now we’re in the transition of putting together a salesforce. It takes time and good people."

3. The expert myth

Startup fiction: Entrepreneurs have strong track records and years of experience in their fields.

Second-stage fact: Rather than traditional industry expertise, success stems from an entrepreneur’s personality, flexibility and desire to provide unique products or services.

In fact, a lack of industry experience proved to be a blessing for Fran Bigelow. "I didn’t always realize what might be unrealistic, which helped me approach things in a fresh way," says Bigelow, founder of Fran’s Chocolates Ltd., a Seattle-based company that has 50 full-time employees and generates more than $3 million in annual revenues.

An accounting major in college, Bigelow had worked at a stock brokerage and in the accounting department of a large company. She dropped out of the workforce for a few years to start a family. But after her children entered school, Bigelow began to take cooking classes at the California Culinary Academy and research business opportunities.

In 1982, on a vacation to Europe, Bigelow visited a Parisian chocolate shop and found her calling: artisan chocolates. "I wanted to introduce high-quality chocolates to the United States — not just the product, but also the experience," explains Bigelow.

Although an industry background wasn’t necessary to get Fran’s Chocolates up and running, Bigelow, like other successful entrepreneurs, has had to import technical expertise as her company grew:

  • Equipment. In the ’90s Bigelow added more-complicated equipment, such as enrobers and large-scale melters. "Vendors can help train you on this equipment, but it’s a good idea to have someone on your staff who is mechanically oriented," she says.
  • Shipping and distribution. As her customer base grew geographically, Bigelow has introduced new packaging techniques to make sure product arrives at its destination in perfect condition.
  • Information technology. The rise of Internet retailing has meant integrating the company’s Web site with its accounting and shipping systems.

Sometimes acquiring specialized knowledge means hiring new employees; other times it may mean outsourcing — something Bigelow prefers to do with information technology. "Every year, you have to grow with the business," she concludes.

4. The strategic-vision myth

Startup fiction: Entrepreneurs craft detailed business plans and research their ideas before taking action.

Second-stage fact: For many startups, extensive research and planning are unnecessary and financially impossible. However, strategic planning and research are critical to continuous growth.

Rodney Capron Jr. launched Synthenet Corp., a Northborough, Mass.-based Web-development company, in 1998 after breaking up with a former business partner. At the time, Capron had no long-term vision, no strategic game plan. "I had a couple of clients who demanded to go with me, so we had billings right off the bat," he explains. "I think that was common for companies that started in the late ’90s — there was so much opportunity you could practically walk down the streets and pick up projects. Yet in today’s economy you have to be very smart and diligent."

During Synthenet’s first three years, Capron developed formal processes and procedures for the operations side of his business. Yet he largely ignored sales and marketing until last year, when Synthenet hit $1 million in annual revenues with 11 employees. "At that point, I wanted to increase business and realized that ‘repeat and referral’ could only take you so far," says Capron.

His immediate goal was to increase sales, but Capron discovered that he had to dig deeper and first articulate his long-term vision for Synthenet. "Granted, I knew who we were and what we did. However, I didn’t have a firm grip on our ideal client," he explains. "I needed to better understand who we should be targeting."

By writing a business plan, Capron gained clarity on where Synthenet could offer the highest value to clients. That "sweet spot" turned out to be service, distribution and manufacturing companies in the $5 million to $250 million range.

Creating a formal business plan also forced Capron to address resource issues. For example: If we grow 20% this year, how will that affect our costs? Will we need to hire more staff?

What’s more, strategic planning helped recharge Capron’s entrepreneurial battery. "Before writing the business plan, I wasn’t sure where Synthenet was going," admits Capron. "Due to that uncertainty, some of my personal satisfaction had faded — I had sort of a love-hate affair with my business. Creating a strategic plan forced me to think through all the reasons why I started the company in the first place, which helped me focus on what was really important to me."

5. The venture-capital myth

Startup fiction: Most entrepreneurs have millions in venture capital at startup.

Second-stage fact: Aside from the dot-com craze, venture capital is pretty uncommon in the early entrepreneurial stages. Yet funding is always an issue for growing companies. As they establish a track record, companies typically become candidates for an equity infusion. Some owners may turn to venture capitalists or angel investors, while others prefer traditional bank debt. There is no one-size-fits-all answer.

Michael Muyot co-founded Tracer Technologies in 1997 with a $50,000 home-equity loan to fund his financial-software consultancy. Two years later Muyot applied for a $100,000 revolving line of credit at a bank, which was increased in 2000 to $125,000.

"A lot of people borrow from family and friends, but that’s something we’ve avoided. Why put relationships in jeopardy?" asks Muyot.

Granted, borrowing from banks is not fast. "You don’t get quick or large sums — and you have to offer some sort of collateral," adds Muyot, noting that his house is securing Tracer’s debt. "I’d prefer not to use personal equity, but it helps that my wife is my partner and willing to do it. It also helps that we’re in a service industry where there’s not as much pressure for capital as opposed to manufacturing."

Funding issues never go away, Muyot acknowledges. He’s considered bringing in a working partner who could put up capital — but the emphasis is on "working." A partner would have to contribute to daily operations, otherwise Muyot would resent splitting profits — one reason he’s also avoided venture capital (see sidebar).

"On the bright side, we have total control of the company right now," says Muyot. "We own everything."

Writer: TJ Becker.