The Laws of Entrepreneurship

by Fred F. Richards, Jr.

There are only three things certain in life.

They are taxes, death and change ... and the most opportunities for success come with change. During the past century, the rate of change has increased greatly and as a result, the opportunities for success have also increased!

The task facing any potential entrepreneur is to decide the strategy and tactics that can be used to be successful.

"Nothing great was ever achieved without enthusiasm." -- Ralph Waldo Emerson
"Successful entrepreneurs are those who analyze and minimize risk in the pursuit of profit." -- Brian Tracy
"Entrepreneurs have two basic assets: their creativity and their relationships." -- Mark Victor Hansen

So how do you find that brilliant idea that will make you rich!

Make a list of all the things that bug you! Can you solve them not only for yourself but also for others? Will people pay you to solve those problems? Make a list of things that can be done better and which offer the customer more convenience, productivity, ease of use, or simplicity.

Test your ideas, test, test and test some more! Edison tried more than a thousand experiments on filaments to get one to light! Decide if you are going to be an innovator, or a ME2 provider.

Having the idea does not make you successful, you have to market it successfully.

Entrepreneurship is not for everyone!

You must evaluate the risk/reward elements and the demands which will be placed upon you by your family, your employees, your peers, your customers, your competitors, and yourself. The entrepreneur's life is always a bed of roses and often, the flowers either do not bloom or wilt from the competitive heat. It is not a 9-5, 40 hour a week avocation!

It takes commitment, dedication, skill, luck, timing and courage to succeed and the most important of these is timing!

To succeed, you have to dream like a statesman visualizing the long-term impact of each scenario but have the skills of a politician to appease the mob facing you!

You will often find yourself unable to talk to anyone and isolated from the real facts by your employees.

Don't sit in your office, visit with your employees, your customers, and above all, know your competitors!

But also remember . . . Knowledge is power!

The definition of a business is extremely simple . . . Control of information for a profit!

The key is to identify the business you want to be in.

Determine whether to start from scratch or to acquire an existing business. Remember what you pay for an existing business will have absolutely no relationship to what you make or lose from it in the long run. Buying a business eliminates a competitor and provides you with their customer list, trade secrets, employees, and problems.

It is as important to know about your competitors' plans as your own. Spend as much on market intelligence as on in-house R&D.

To fly as an eagle, you have to associate with eagles! To walk as a duck, you have to go to the duck pond!

Don't hock the family farm unless you are willing to lose it.

	Pay yourself first and dance naked as often as you can. Each $1.00 withdrawn in salary and bonuses reduces Net Income. When the company is sold or has an IPO (Initial Public Offering), the cost may be a large multiple of the $1.00 in lost net worth.
	Your aspiration is to work smarter, not harder! It takes $10 million in sales for one person to play golf.
	Diversify your holdings and always have an exit strategy! The sale of the business is the most important decision in your career.
	If you don't fail at least once, you did not take enough risks! And don't think that any of your vendors, creditors or employees will cry for you when you do! Only if your failure will significantly affect their well being, will they try to help you out of your difficulties! Another reason to Think Big! Learn from your mistakes, don't be defeated by them! Only 20% of all U.S. businesses remain in operation seven years after they begin.

You can build a great business in any industry by providing at a fair price a quality product and/or service coupled with the best deliveries and customer service.

	By treating people (customers) right, profits will flow. The Golden Rule was J.C. Penny's guiding light . . . he did not do too badly.
	The customer is always right . . . but they don't always have to be your customer. Some are too much trouble!
	Build long-term relationships for lasting value!
	Think Big! Would you rather have 75% of a $1 billion company, or 100% of $100,000 company.

People are the most important asset of any business . . . but profitable sales are imperative to stay in business.

A wise entrepreneur plays the role of the facilitator and key dreamer . . . and is not necessarily the doer.

	Being an entrepreneur is a lot like being a symphony conductor . . . the music from a whole orchestra beats a one-string instrument every time. The key to success lies in selecting the music for your audience, auditioning the players and motivating them to play the music with emotion. If successful, the audience will demand an encore.
	However, when you first begin to have doubts about someone, cut the string immediately and draw the corporate veil tight. Your instinct is probably correct. Control proprietary information and assume that every employee may be recruited by a competitor or will desire to start a competitive business.

You must take the time to personally know the 20% of your key customers and vendors that provide 80% of your sales and purchases.

The perfect product and/or service is one that can be made for a dime, sold for a dollar, has no moving parts and is either habit-forming or consumable.

Price has no relation to cost but perceived value does in the eyes of the customer.

Uncontrolled growth is extremely dangerous.

Business plans and spreadsheets are only blueprints . . . the real world requires them to be implemented and executed successfully. Actions always speak louder than words!

A well-run company can grow at 1/2 of its gross profit margin for an extended period of time without losing control or selling more equity.

OPM (Other People's Money) is dangerous to your long-term control whether equity or debt. The best money is your own or your families, or reinvested earnings.

Most venture capitalists have never actually run a real operating business except as a member of the Board of Directors, and their backgrounds are as financial analysts, investment bankers, or ex-bankers. Most can be characterized as lemmings following one Pied Piper guru! Their MBA's are proudly displayed but many have not ever built a company from scratch. But they are now your judges.

If you don't own 50.000001% of the company, you can lose it.

If you don't have a majority of the board, you can be fired!

Remember the Japanese motto . . . steal ideas from anyone but then improve upon them to make your company stronger.

Beware the NIH (Not Invented Here) syndrome! The creator or inventor is often vilified for his/her new ideas. Galileo was crucified by the scientific community of his time. Both the Wright Brothers and Einstein were initially considered crackpots. Cold fusion is being mocked. The phenomena was discovered at the University of Utah, but Toyota now employs Fedderson and Morrison, the original researchers.

The Flat Earth Society still exists!

If every word in the Bible is sacrosanct and absolute, where did Cain's and Abel's wives come from?

Basic research is where the breakthroughs are made but applied research is where the immediate dollars are obtained. Beware of the expert . . . that's either someone 50 miles from home or a drip under pressure. Just because it hasn't been done, does not mean, that it can not be done! If you can dream about it, you can make it happen if you try and try and try again.

If successful, you will be copied. The key is to control the market niche. Remember Visicalc was the innovator but Lotus 1-2-3 made the money. Within three years of Viscalc's debut, there were over 80 different spreadsheet programs on the U.S. market. Perhaps, 10 survive today.

The marketing strategy decisions devised and implemented by Bill Gates were the real difference between the success of the CPM and MSDOS computer operating systems. If you don't believe me, ask Tim Patterson.

A patent means nothing until it is adjudicated in the Supreme Court. A patent disclosure provides an opportunity for your competitor's lawyers and engineers to find a way to build a similar product. Patent lawyers make mistakes.

PCF (Positive Cash Flow) is more important to your long term survival than creativity, innovation, corporate image, and community awards for being a good corporate partner.

	Accounts Receivable is the worst asset on a balance sheet and unlike wine, does not improve with age.
	PV (Present Value) rather than FV (Future Value) determines if you remain in business or fail.
	Incremental pricing often leads to every deal being priced incrementally and none left to cover the overhead . . . a quick way to the poor house!
	Cash, or liquid assets, must be harbored carefully. When you can't pay your bills on a timely basis, you are bankrupt!
	Learn the truth about sunk costs, resale value, depreciated value, and especially, real market value! Financial statements rarely reflect true value and earnings!

Cultivate all networks, screen professional advice, and above all, be a decision maker.

Networks are important! Build a list of all your school classmates, acquaintances, friends, and business associates on a Roladex or on a PIM (Personal Information Management) computer program and regularly keep in touch. Thoughtfulness and courtesy are a great competitive edge. Networks are important to your success and/or failure.

Remember that you often meet the same people going up the ladder as when you are going down it.
Use "cold calling" as an opportunity to make a friend while learning about someone else's business, and hopefully, begin a long-term relationship with a future customer.
A good "listener" attracts information like a honey pot attracts bees!
But be considerate of the other's time, they also have deadlines and goals to meet! Be prompt, or reschedule!

Prairie View A&M was accredited before Harvard and William & Mary.

Sheepskin does not guarantee competent advice or common sense!
There is no substitute for common sense!

Mentors and informal Advisory Board of Directors are extremely valuable sources of advice, bank & investor introductions, business knowledge and feedback about your "half-baked" schemes. They should be selected with the greatest possible care!

Select persons who can really contribute to your success. Your CPA, attorney, or banker can provide leads as well as Venture Capital clubs, SCORE, and small business incubators. Remember about the eagles and ducks!
For startups and early stage companies, the advisory board should be not more than three people.
Tell your advisory board members why you want them to help you before they join the board.

Running a business requires legal assistance!

Find a lawyer that will tell you what to do, not what not to do! Your lawyer should only have one arm . . . "This is my recommendation but on the other hand . . ." should not be in their vocabulary.
Draft the initial agreement yourself, then let the lawyer fine-tune it. After all, you know what you want, not the lawyer. Their job is to stop you from walking on land-mines, not in structuring the deal.
Documentation of business decisions and meetings is imperative for your long-term survival if you are legitimate!

Professionals may be accredited but are they any good? Before engaging any professional interview several to determine if they fit your culture and have real knowledge about your business. Don't count on their reputation!

Management consultants from large firms were exceedingly bright college students but most have not spent years in the real operating world except as observers.

	Most of the work will be done by people 1-4 years out of college. Their salaries may well be larger than yours.
	Unfortunately, they will only recommend and not implement. You are responsible for the implementation and eventual results, not the management consultants.
	Common sense is still important! Challenge the consultant's assumptions with your view of reality.

Most bankers, venture capitalists, investors, and management consultants are only interested in the near term (3-5 years) and to hell with the long-term future. However, you, as the entrepreneur, had better look at the long-term!

CPA's are more interested in the past than the future and most opinions and comfort letters they issue are designed to protect themselves rather than you.

Remember you get paid to make decisions, and procrastination is a decision, and most often, a bad one.

Know when to ante and when to fold.

You can make a billion dollars by only making 55% of your decisions correctly but knowing when to cut your losses.
At one time, Jobs and Wozniak sat on $200 million in cash and decided to build an Apple III. I often wonder if they now wish that they had liquidated and gone fishing.
Lightning often does not strike in the same place twice.

MCS (management control systems) should provide you with the information required to run the business today . . . not yesterday and be accessible from anywhere.

It is easier to run a $1 billion dollar business than one doing $100,000 in sales but it takes different skills and talents.
Technology must be cost effective and provide redundancy.
Off-site backup is the only solution to a catastrophe.
Expenses are easier to control than sales. Be frugal . . . a dollar not spent is worth a lot more than an extra dollar in sales.
Cash control is critical to your daily survival.

Compliance or the Underground Economy.

You have to decide whether or not you are going to be a legitimate enterprise and comply with all the regulatory compliance maze, the federal, state, and local regulations and meet the requirements for all the paperwork.
Inspectors don't worry about your making a profit. They expect you to read the thousands of pages of rules and regulations and proposed changes in the rules and regulations and then to properly file it. Making sales calls, servicing a customer's needs, and making that collection call to meet the payroll are unknown to them and the inspector could care less. After all, they are paid by a governmental entity that taxes your success to enable them to regulate you.
If you decide to not comply, you are taking a substantial risk and must be willing to fold your tent and waltz into the dark when the regulators come looking. Better have at least two passports, deal only in cash (no checks or M/C and VISA), a couple of social security ID's and a lot of friends who are very discreet.
Cash businesses are the first to be audited by the IRS. Banks must report any cash transaction over $5,000 to the government.
The NSA (National Security Agency) monitors all telecomunications including financial transactions between the US and other nations.
It is impossible to try to work in both.

It is the owner's and/or shareholder's business.

It is not the officers, nor the employees, nor the customers, nor the governments, and certainly not your competitors.
The business can be located anyplace on the planet.
If everyone downsizes, who will be left to purchase your products and/or services?
Can a worker at $6.50 an hour, buy a new Chevrolet, eat steak, pay rent and health insurance, and get a new large screen TV?

When you are dead, was it worth it?

If you can't sleep at night, something is wrong and changes should be made.
If you are too busy to speak to a member of your family or a friend, perhaps, your priorities need rethinking?
Don't make the mistake of thinking that you are indispensable. Somehow, the sun will continue to rise in the East and set in the West without your help.
But did you plan for your business to continue without you? If not, you have failed an important responsibility for entrepreneurs, the continuation of your dream. Estate planning and management succession can not be left to lawyers, distraught family and heaven forbid, the probate court.

Everything you needed to know about anything, you learned in kindergarten!

Now you must apply it.
Continued education is obligatory
and

Supercalifraglisticexpealladoscious!

The original Laws of Entrepreneurship were codified in 1962 by Fred Richards for Professor Herbert F. Stewart's Management of New Enterprises course at the Harvard Business School. During those years, the course was the most popular one at HBS. Mr. Richards became Professor Stewart's Research Assistant in 1961.

The revised Laws compiled here are the result of years of learning, making mistakes, relearning, and observing several generations of entrepreneurs in the real world.

Last updated - February 28, 2007