Like so many Americans, Seth Rubin was a victim of the recession of 2009.
He was laid off as a project manager for a construction company as home building plummeted in Denver, Colo. An avid cyclist, he had always dreamed of opening up a coffee and biscuit shop, but the huge upfront investment and the risk was too much for him to pull the trigger.
Unemployed and backed into a financial corner, doing something became less risky than doing nothing. So during a long ride Rubin made a proposition to cycling buddy Mike Miller, owner of the small local chain, Basil Doc’s pizza. Rubin said he wanted to take over one pizza shop for a few hours in the morning, before lunch, when it was closed anyway, and try out his biscuit shop idea.
“I figured I’d bounce the idea off of Mike, hoping that he’d talk me out of it,” Seth said.
But Mike didn’t talk him out of it. In fact, he offered to keep Seth’s share of the rent low while he was feeling his way through it. Four months later and less than $5,000 later, Seth served his first biscuit as Rise and Shine Biscuit Kitchen and Café. Recession be damned.
With America’s economic recovery inching glacially along, and banks still stingy with loans, starting or expanding a business can be harder than ever. It’s a problem we examined intensely in our new book, The Plateau Effect: Getting from Stuck to Success.
So here’s three ways to right-size the risk and minimize exposure while maximizing chances for success.
Complimentary peaks and partnerships– Seth Rubin’s plan worked perfectly. While Seth’s biscuit business was peaking in the morning, Mike’s pizza restaurant waited out the slow period of the day. And when Seth’s business would have naturally waned in the afternoon, Mike was being pummeled by dinner pizza orders. The two realized their businesses had complementary peaks: They were busy at exactly the opposite time. Perhaps more important, their needs were similar. Both needed an oven. They both needed a similar layout to display and then deliver their goods. They both wanted stability for their businesses, but being the sole renter of an oven-equipped store only to have it sit idle for half the day was a serious drawback.
It was a partnership baked in heaven. Within a few months, Rubin was baking at three of four Basil doc’s spots. And he was really cooking.
Can you minimize your risk, like Rubin did? The first place to look is to pool that risk, and find a symbiotic, complementary relationship. If you are Mike Miller in the story above, your first step is to do an inventory of underutilized resources at your company. Do you pay rent for 24 hours per day but only use 14? Do you have a fleet of vehicles that sit in a warehouse? Paying for server space you don’t need? Look for a dance partner to offload that cost.
Elimination step functions, and the subscription economy– If you are Seth Rubin in this story, either trying to start or trying to expand, you are facing what economists call a step function–you are facing a large initial investment to move forward at all. It a bit like running out of salt when baking that last batch of cookies. You might need just a pinch, but you have to run out and buy a whole box. Unless you find Mike Miller, who enables you to open a business for $5,000. Mike Miller might be a provider, too, like Zuora, a company that is enabling what’s called the “subscription economy.” Zuora tries to rent everything, so small firms don’t have to buy anything, completely eliminating step functions.
Fail quickly, and cheaply– On average four out of five startups fail. Most books don’t earn back the author’s advance. Some of this failure can be chalked up to bad execution: Even a great idea can’t survive poor implementation. But precision execution can’t protect against a fatal flaw: A good idea might not be a good business.
If that’s true, the key is to figure out if your next big idea will fail or flourish as quickly as possible. The real disasters are slow failures–areas where you continue to put more time, more money, and more energy into something that just won’t work. The quickest way to the top, to the peak, is often to reach the bottom first. The faster you fail, the faster you can move on to something that will work. Former Google executive Alberto Savoia might have a way to make this happen.
You’ve heard of prototypes. They’re an important part of the development process, used to show investors or others how a product might work without having to manufacture on a large scale. Prototypes, however, are generally fully operational. That means they can still take years to build. Savoia used the concept of a “pretotype” to move Google forward quickly without the fear of pricey mistakes.
A pretotype could be as simple as a drawing of a website that you imagine is fully functional, or a piece of wood that testers pretend is a new gadget. The advantage is enormous: While a test website might takes weeks to build, a pretotype can be drawn in Photoshop within a few minutes. With pretotyping, you never have to say, “Sorry, it’s not worth experimenting with that idea,” because there are hardly any barriers to entry. Pretotyping involves testing the initial appeal and actual usage of a potential new product by simulating its core experience with the smallest possible investment of time and money.
Making money always requires spending money. But in today’s risky environment, it’s important to spend as little as possible. Finding complimentary peaks, eliminating step functions, and pretotyping are three critical tools.
—Bob Sullivan and Hugh Thompson are entrepreneurial analysts with 40 years of experience between them. Sullivan is an investigative journalist and the best-selling author of Gotcha Capitalism and Stop Getting Ripped Off. He lives in Seattle, Washington. Hugh Thompson is a mathematics and computer science professor and internationally acclaimed speaker. He lives in Los Gatos, California. Their new book, The Plateau Effect: Getting from Stuck to Success, is available this month from Dutton Penguin Group.
[Image: Flickr user Dèsirèe Tonus]