Like a lot of people, entrepreneurs are very busy. And, says Rick Pinto, of the College Road East law firm Stevens & Lee, they do not take advice very well. So boiling things down and making information simple is the key to getting the message across.
Hence Pinto’s “Seven Deadly Sins To Avoid In Building a Successful Business,” which he will present on Tuesday, May 20, at 5:30 p.m. at the Mercadien Group’s Quakerbridge Road headquarters, as part of Mercadien’s “Raising Capital In a Challenging Marketplace” free seminar program. The evening also features a talk on finding financial resources for small and mid-sized businesses by Margie Piliere of the New Jersey Economic Development Authority, and “Putting the Best Face On Your Business,” by Dave Stafford of Mercadien. Contact Jillian Denarski at 609-689-2366 or email@example.com.
Honed over 25 years of experience as an attorney dealing with new and emerging businesses, Pinto’s seven sins make a short, simple laundry list of common pratfalls rising businesses should avoid at all costs. Originally developed as part of his own “seven series,” which also features a list of cardinal sins for startups and another for cutting deals, Pinto first presented his business-building advice to software developers through the New Jersey Technology Council and the IT Software Group, both of which he advises. Soon he realized the rules apply to any business, not just IT and not just new and emerging companies.
1.) Don’t miss the market. Also presentable as “Don’t invent a market,” Pinto says a major error new entrepreneurs make is believing, “If you build it, they will come.”
“Well, if you build it, they will not come,” he says. He recalls a client who entered his office some years ago with six meticulously written manuals designed to simplify the operation of mainframe computers. The client had spent “a couple million dollars and two years” developing and crafting the manuals. Now he wanted to sell them. To whom? He didn’t know. “He didn’t have a buyer lined up,” Pinto says. “And there was no evidence that anyone wanted it.”
Pinto also mentions the Segway scooter, an idea that had almost no market research and quickly turned into a cool toy no one really wanted to buy.
Many new entrepreneurs do not understand how venture capitalists and angel investors view new ideas, he says. They want to see evidence of significant customer interest, and, typically, they want to see modest improvements on products people are already flocking to. Wild ideas or self-envisioned dreams of grandeur rarely get investors to cut checks, he says. Always do your homework because “unless you do market research, you’re just guessing.”
2.) Avoid capital inefficiency. There are any number of ways to develop a company and an image, Pinto says, but not all of them are good. “You don’t really need offices on Madison Avenue and limousines and planes,” he says. New companies looking to give themselves instant cache often get lodged in the trappings of big, established companies, but do not have the capital reserves of an IBM. Most new ventures must choose between looking good and actually being able to provide the product or service they are setting out to provide.
Pinto remember the first major biotech revolution in the 1980s. Hopeful companies spent lavishly on lab equipment and then promptly bottomed out in developing products. They then had no money to continue research and development and promptly went under. Entrepreneurs need to think about what will get them to the next stage, not what will look good in the brochure, he says. Similarly, there is no need to hire a huge staff for project development if qualified consultants can be used, he says.
3.) Don’t get crushed by the 600-pound gorilla. Most businesses have a favorite, lucrative account. And that’s fine. Trouble begins, however, when a company becomes reliant on that one major account. “It’s an easy trap,” Pinto says. “You find that one big customer and think one customer is better than no customer.”
But the key to success in any field is to diversify, he says. Building a stable of good, quality customers is infinitely less risky than maintaining one major client. Consider the fate of Rubbermaid, which thrived until it got too cozy with Wal-Mart in the 1990s. The household goods manufacturer sold almost exclusively through Wal-Mart and then raised its distribution prices. Wal-Mart responded by shunning Rubbermaid, and the devastated company was forced to merge with Newell, its chief rival, in 1999.
4.) Don’t ignore financial needs. Perhaps the deadliest of deadly business sins, Pinto says this is, nonetheless, one of the most common mistakes he sees in new and emerging businesses. “Not knowing the margins and not leveraging the money is the mistake that kills most companies,” he says. Too many companies spend without really looking at the bank accounts, the cash flow, the projections, and costs. But his basic advice is simple: “Don’t run out of cash.”
5.) Don’t hire the wrong talent. Perhaps the second most common mistake Pinto sees is an eager company putting the wrong people in the wrong jobs. In order to build a successful company, you need to find qualified people with experience doing the kinds of things you are doing.
“An early company doesn’t have access to the Fortune 500,” Pinto says. “You have to be much better at picking who to go with.” One of the problems new companies run into is that managers cannot bring themselves to fire new talent after only a few months. The tendency, he says, is to chalk bad performance up to growing pains and give the situation more time. But if someone is not performing well after three months the situation is likely to be twice as bad after six months.
The very fact that small companies with few employees are the least likely to replace or reposition staff is especially deadly when considering that newer, smaller companies are the most in need of strong early performance and the least able to afford a long learning curve.
6.) Don’t inflate investor expectations. People have a tendency to think highly of themselves. Entrepreneurs with hot ideas and a trunk full of dreams especially overestimate their worth out of the gate, Pinto says. But this is a dangerous trap akin to misinterpreting the market.
The trouble is rooted in the fact that many new entrepreneurs simply do not understand what venture capitalists and angel investors want to see. They are not looking for great ideas that could sell, they are looking for profitable ideas that will sell, he says. When new companies open their doors, their vision of what could be is what drives them, but the folks putting up the money are less interested in what you think you are worth; they are only interested in what you will bring them back on their investments.
7.) Don’t miss growth opportunities. Even a mild taste of success is enough to make most people sit back for a few minutes and relax. “You think ‘I can take a breath,’” Pinto says. “But you really can’t. The world keeps innovating around you.”
As companies settle into their routine, complacency becomes a greater threat. Like companies that rely on one major client, those that rely on the product as it is can soon find themselves in trouble. Again, Pinto says, the trick is to diversify. Sell to multiple clients, update the staff, bring in fresh ideas, and, above all, stay tuned into the marketplace.
Pinto cites another moment in the 1980s — the one when the American auto industry suddenly found that while it had hit cruise control, Japanese automakers threw it into fifth gear and took over the industry. The Americans felt they had a lock on the auto market, that it knew what people wanted, and that it could rely on its long, loyal list of customers. But by 1985 the U.S. auto market was crippled by the success of Japanese car companies, led by Toyota.
Similarly, he says, the New York Yankees have proven repeatedly that past success means nothing to the present, and that a fat payroll is worthless if all those well-paid players don’t jell. Business works the same way.
“Wall Street lives quarter-by-quarter,” he says. “It’s all ‘What have you done for me lately.’”
Pinto says he built his list from years of watching how entrepreneurship works. The son of a serial entrepreneur himself, Pinto studied “18 different disciplines” at Yale in his efforts to be “a Renaissance man.” After graduating in 1975, he earned his law degree from the University of Virginia.
Practicing law amid entrepreneurs, he says, has allowed him to be involved in varied areas. Pinto boasts clients involved in pharmacogenics and quantum mechanics, among other fields. It makes for a job with few dull moments. “You can’t help but keep your interest up,” he says.
No longer content to simply watch from the bleachers, Pinto says he is in the process of forming an accelerator program through Stevens & Lee, where he heads the venture technology and entrepreneurial side of the practice. The accelerator, he says, will allow the company “to take bets on our own,” rather than simply helping facilitate investment between two other parties.
“I see so many new opportunities,” he says. “But so many times great technology or great innovation is not well commercialized. I know how to find the right resources, and I can use that to help.”
— Scott Morgan