What it is: Strong companies are purposely designed and created. To create a strong company, start by looking at it from an outside investor’s point of view.
If you’re thinking about starting a company, take a moment to think about the end before you even think about getting started. The end of every company involves how you will deal with your own death, retirement, or sale of your company. Eventually you will not be with any company you start, so you need to design it from the beginning to be sustainable and profitable without you.
Here’s where most people make a mistake. They start a company and they basically create a job for themselves. If you’re the only person who can bring in money, then you don’t have a company; you have a job.
You may be your own boss, but the moment you leave, that company can’t survive without you. For example, picture a restaurant or plumbing business. If you leave for a two week vacation, can your business thrive in your absence? If not, you have a job, not a company.
From the beginning, you want to design your company to be independent of you. That not only creates a stronger company, it also creates a company that has a solid business plan in place that can run by managers, not by you 100% of the time. If you’re indispensable to the company, you will never be free.
If you look at your company from an outside investor’s point of view, you can objectively analyze whether that company is worth buying. If a company depends on one person doing all the work, it’s not a company. App developers fall into this trap all the time because they pump out apps in the market, but if you take them out of the company, the company falls apart. Companies aren’t made of individuals so much as they are made of plans and processes to fulfill that plan. Then they’re run by individuals who make that plan work.
In “Finish Big,” the author suggests eight factors that outside investors look at to determine the worth of a company. If you look at you own company or startup idea from the same perspective, you can design a stronger, more organized company right from the start.
- Financial performance — how does the company make money and is this a process that can be sustained?
- Growth potential — is the company in a market that’s growing?
- Overdependence — is the company dependent on one customer, one supplier, or one person to do all the work?
- Cash flow — is the company making money?
- Recurring revenue — does the company make money through repeat business?
- Unique value proposition — what is the company’s unique advantage that makes it harder for rivals to copy?
- Customer satisfaction — do customers repeatedly buy from you and do they refer others to do business with you?
- Strength of the management team — does the company have talented people running the company?
The more of these factors a company lacks, the weaker that company will be. Look at Microsoft and their financial performance is fine, but their growth potential is much weaker now that PCs are no longer the dominant computer around. Microsoft is rapidly shifting towards the enterprise market and software subscriptions. The question is can they make this transition fast enough to make up for declining Windows revenue?
Microsoft is overly dependent on the PC market for both Windows and Microsoft Office. They also lack customer satisfaction as some people love Microsoft products (usually tech-savvy users who profit from their complexity), but many others tolerate Microsoft products while some get frustrated and annoyed with Microsoft products. Despite being financially strong, Microsoft stumbles on several other areas.
Now look at Apple. Their growth potential is huge because they’re leading the shift from PCs to mobile and wearable computers. Their financial performance and cash flow is extremely high, they have recurring revenue through sales of products and digital products like music, e-books, and apps, and they have a high customer satisfaction. Their management team is strong and their unique value proposition is that they’re a leader that others mimic.
Comparing the two companies, Apple is much stronger than Microsoft or any other company currently trying to copy Apple such as Samsung.
Google is a strong company except for their over dependence on dominating search. Beyond their Google ads, what other products does Google make money on? They don’t make money on Google Glass, self-driving cars, or their Google+ social network. Google is basically in the same position Microsoft was in decades ago where they dominated a crucial market.
In Microsoft’s case, they dominated the PC operating system market. In Google’s case, they dominate the search engine market. Apple’s potential weakness is over dependence on the iPhone.
Now consider the typical business plan of an app developer or wannabe entrepreneur. They have a good idea and they try to start a company. But they may not think how they’ll make money (other than magically wishing people will start using their product for no apparent reason), they don’t think about recurring revenue (since selling to happy customers is easier than constantly finding new customers), and they don’t think of a unique value proposition that makes their products or services unique and difficult for others to copy.
If you design your company that covers these eight factors, you’ll have a much stronger company than one that omits most (if not all) of these eight factors. Whether you’re a startup or an existing business, reshaping your company to meet these eight criteria can turn your company into a stronger business that you could potentially sell. Even if you don’t want to sell, the process of making a company attractive to outside investors forces you to design a better company.