I was recently asked about my view on the first three steps to starting a successful business. For sure, there are more than three, but I didn’t think long. I have led the founding of two successful public companies and guided the public listing of a third. Multiple shots at business creation have taught me a lot, providing me with a perspective I wish I had at the outset.
“People don’t want to buy a quarter-inch drill, they want a quarter-inch hole.” - Theodore Levitt
All successful businesses provide solutions to a problem. The solution is the business’ product. Your product may be as simple as providing a solution of where to eat or as complex as launching satellites into space. Those benefitting from your solutions can be regional or global.
Whatever solution you provide, the first question to be asked is why potential customers would ever elect to adopt your product, assuming they have choices. Highly successful businesses universally have competitive advantages, even when they are just getting started.
It is common for observers to confuse a product for a solution. The three companies I led were chiefly engaged in owning free-standing real estate leased to individual tenants on a long-term basis. With just a quick glance at our balance sheet, a common refrain was that we were in the business of investing in real estate. But the act of owing real estate does not provide a solution for anyone, except maybe our shareholders who benefitted from the dividends arising from the rents we received.
It turns out that the real estate we held and the dividends we paid would not have existed but for the solutions we provided our many tenants. That solution was a financial one. Our tenants had the choice of owning their real estate and financing that ownership through traditional means or renting the real estate from a landlord. We convinced them that renting was their better option and that they were better off having a landlord than a banker. Then we convinced them that we were the best landlord to select. This solution enabled us to own large amounts of real estate, receive rents and then provide a byproduct solution for our shareholders: A solid, dividend-paying investment.
“Things don’t just happen. People make them happen.” - Zig Ziglar
A large part of business success comes from the bottom up. Business leaders almost invariably benefit from other team members in developing the solutions their companies provide. Likewise, senior corporate leaders are dependent on middle management, which in turn is dependent on rank-and-file associates.
There is no “chicken and egg” question here. Most companies start with one or a few leaders having ideas for solutions their future business can provide. But once the solution to be offered is hatched, then it is essential to form your team to get cooking. They will be instrumental in crafting the initial business plan to sell the product you have conceived. And sales are the essential lifeblood of any business.
Several years ago, the lesson of bottom-up leadership importance was bought home to me. I, along with other senior leaders, departed the first company I co-founded and was not replaced for nearly two years. Despite this, the company continued to perform well, owing to the leadership we had put in place. When it comes to daily execution, well-run companies will be able to succeed without the senior leadership team. On the other hand, the senior leadership team cannot succeed without middle management and rank-and-file associates.
Compiling a senior team, together with product ideas, are the first two steps needed to attract investors. Most of us require outside investors because we simply do not have the personal means to capitalize on a company on our own. In my case, the companies I was instrumental in founding required a great deal of capital to get started. Investing in real estate is expensive. So, we started with a core complement of senior leaders, foremost among them a chief financial officer and a chief business development officer. Without them, we would not have been able to raise the capital to start our business.
The Business Model
"Corporate wealth creation requires a solid business model.” - Christopher Volk
Throughout history, the world’s richest people have virtually all made their fortunes in business. The key to this is the ability to make their companies worth more than they cost to create. And that is the definition of business wealth creation: Value is literally created out of thin air by starting a company and then by having that business become worth far more than it cost to create.
Business wealth creation happens when your company’s business model propels you to produce shareholder returns exceeding their expectations. In business, it is the excess return and not the appreciation of underlying business assets which creates value from thin air.
Your entrepreneurial challenge is this: Take the product you are proposing that solves a problem and then translate that product into a viable business model. If the business model you create has the potential to deliver returns to shareholders that exceed the cost of shareholder equity, then you have a solid chance of raising investor equity.
All company business models center on three corporate efficiencies. Those efficiencies include operating efficiency (think product pricing and overall cost controls), asset efficiency (think the cost of the business investment required), and capital efficiency (think the cost and payment requirements of money obtained from outside shareholders and other capital providers).
While guiding the first company I took public, I combined the three corporate efficiencies into a simple, universal six-variable model called the Value Equation. This tool is the first step on a short path to estimating business model shareholder returns and corporate value creation. We made use of the model over many years as we evaluated our corporate business performance and the performance of the companies that leased the real estate we owned.
The Fourth Step
“The biggest risk of all is not taking one.”- Mellody Hobson
If you are considering an idea having the potential for wealth creation, America is as good a place as I can think of to execute it. For one, the US, with approximately 4% of the world’s population, has more small- and middle-market companies than any other country in the world. Businesses with fewer than 500 employees collectively employed nearly half of all working Americans. And the number of small businesses shows signs of growing. In the wake of the pandemic, applications to start new businesses in 2021 rose to 5.4 million, a record. Americans like and are accustomed to working for small businesses.
Contributing to business development has been a sea change in capital formation. Forty years ago, there were virtually no private equity firms. Today, there are no fewer than 10,000 private equity and venture capital firms investing in every kind of company imaginable. Add them all together, and you have an abundance of capital unheard of in American history. I learned this personally—access to investment capital enabled me to co-found companies in 2003 and 2011 that would both go on to be listed on the New York Stock Exchange. Conceiving a business begins with three steps: a good product idea, a qualified leadership team, and a solid business model. With those accomplished, you are ready for your fourth step: Getting your business off the ground. You have also reduced your risks of business failure. In my experience, these three elements are scarcer than the investor capital needed to support and sponsor them