An Entrepreneur's Take-Home Test

Quick Summary: There are a series of questions that need to be answered while on your journey.

Abstract:

It is easy for an entrepreneur to either focus on the apparent immediate tasks at hand or on the ultimate end of their journey to success.  Instead of focusing on either extreme, it is better to become aware of the steps along the entire journey and develop plans to sequentially follow as you proceed. Those plans, in turn, can be developed by considering some questions that need to be answered along the way.

Remember take-home tests during your college days?  I liked them far better than the typical closed-book tests that required extraordinary preparation and memorization.  With those closed-book tests, I was often surprised with the questions and often panicked.  With take-home tests, the time pressure was off and multiple resources could be used.

This article includes a take-home test that entrepreneurs may want to take.  I won't be grading the exams.  The marketplace will!  The final grade is easy to measure: "Was the company successful or not?" To be fair, many other factors will determine a company's success.  However, failing this test is not a good sign!  Unlike normal take-home tests given at the end of the course, this test is being made available at the very beginning of this “course” whose material is in this volume, “Starting a Company.”  The test questions alert the "entrepreneur-student" what to learn in order to do well on the test.  As a hint, the clues to the answers are all within this volume.  Note that I said the clues are within the Volume; each entrepreneur will need to determine "their" answers through lots of hard work and thought.

Instead of simply listing the twenty-four questions, they are presented in the most likely order in which they will be encountered as an entrepreneur starts their journey.  In fact, an entrepreneur should not even attempt to take the entire test as they begin.  Instead, as they progress through the phases described below, they should answer the questions that are relevant to each phase.  If they attempt to answer the questions too early; they are very likely to be only guessing and probably wrong!

The questions are presented in tabular form, separated into the stages and phases.  The stages and phases sequentially divide the journey into logical segments.  It is important for the entrepreneur to understand the stages and phases and plan their efforts accordingly.  There are no shortcuts.    

 

 

Nine Business Stages

I have divided the entrepreneur's journey into Nine Business Stages that every successful company travels through during their journey.  Some companies sail through some of the stages while others linger in one or more of them for months or even years.  Independent of the elapsed time, all are encountered.  I have assigned one or more Business Stages to each of the articles in the CxO-Atlas collection.  I describe the Stages in detail in Volume 1, Chapter 1.03.

The table below is taken directly from the articles in Chapter 1.03.  Each entry consists of a one-line quick summary followed by an abstract.

Stage

Quick Summary
Abstract

Stage 1: Thinking of Starting a Business

Thinking of starting a business requires answering some tough questions objectively.

Thinking about starting a business is very different than dreaming about starting a business.  Thinking about the business involves some level of rational thought; probably, overoptimistic but still rational.  During the "thinking" stage, sleepless nights begin to occur.  It is important to start some soul-searching and answering some basic questions objectively.

Stage 2: Committed to Starting a Business

Making the commitment to start a business needs to be a conscious, objective decision.

The transition from thinking about starting a business and being committed to starting a business can be a gradual but increasingly slippery slope.  The mindset needs to change from "if" to "when."  However, before that decision is made, the entrepreneur needs to carefully consider what the commitments truly are and what impacts it will have on themselves, their loved ones, and others that may become involved.  Only after those considerations are objectively reviewed should an entrepreneur commit to starting.

Stage 3: Working Full Time in a New Business

Carefully deciding what does not have to be done now is the key to a successful start.

When an entrepreneur begins to work full time in the new business, their feelings will run the full gamut from very positive to very, very negative.  The swings may occur moments apart.  The key to avoiding the feeling of being overwhelmed is to consciously decide what you do not have to do now.  Then focus on the few remaining items that do require attention.  This process can only start with understanding the scope of activities that must be addressed "some time."

Stage 4: Have a Demo Product

The ability to demonstrate a new offering represents only 10% of the total effort required.

The ability to demonstrate a new product or service is a major milestone that should be celebrated.  However, it must be clearly recognized that the demonstration phase is only one step along the journey.  The "tip of the iceberg" analogy is often used to highlight the fact that there may be many unknowns.  The tip of an iceberg only represents about one-seventh of the iceberg's overall mass.  The demo stage of a new product or service, represents even less than that.

Stage 5: Needs to Raise Money

Many steps must be taken before a company should attempt to raise money.

Virtually all entrepreneurs focus on the need to raise money and rightly so.  "Overnight" company successes often take five or more years!  Unfortunately, most entrepreneurs start the process of seeking investors far too early, not realizing how difficult and time-consuming the process is.  Competition for investment dollars is incredibly high, and only companies that have thoroughly prepared for the process have a chance at success.

Stage 6: Has Some Customers

The commitments from customers are exciting, but it starts an entire new set of challenges.

When prospects turn into paying customers, the company's business proposition has been validated.  Efforts that were previously entirely internally focused must shift to continually delighting customers.  Customers, not the internal organization, will now dictate schedules and require different resources.  Scalability challenges will become a way of life for the company.  Often these changes require different approaches to the business.

Stage 7: Ready to Expand

Internal expansion to address increased customer demand requires careful planning.

Customer and revenue growth requires expanded internal capabilities to satisfy the ever-growing demand and increased likelihood of addressing unforeseen issues.  Expansion requires change, and change is often met with frustration and unattended consequences.  Many successful processed and individual efforts simply may not scale effectively.  Managing the subtle issues created during expansion is critical but seems to occur after-the-fact in many instances.

Stage 8: Having Operational Problems

Planning for the unexpected is an effective method of dealing with operational issues beforehand.

Unexpected operational issues are common, daily occurrences that appear during every business stage and will continue to re-occur forever.  The key is to attempt to forecast them and, most importantly, developing standard approaches to respond and not react.  Most surprises are really not surprises; someone already knew.  Thinking in terms of "what-if" will result in far more effective resolution when the issues appear.

Stage 9: Pursuing Revenue

The continuous receipt of revenue is the life blood of every enterprise.

Every enterprise, large, small, new, old, public or private, share one fundamental common activity; the requirement to pursue revenue on an ongoing basis.  The same pursuit, only referred to as donations, is applicable to non-profit organizations.  Every enterprise also shares another attribute, competition for revenue.  That competition may come from a direct competitor or it may come from simply a customer's decision to purchase something else entirely different or make no purchase commitment at all.

 

 

 

Three Company Growth Stages

The previously described Nine Business Stages naturally fall into three Company Growth Stages that occur as a company matures.  We all have heard the phrase: "Crawl, walk, and run." This phrase applies to companies as well as humans.  Unlike humans whose bodies recover from skinned knees and other mishaps, many company missteps are hard to recover from and can be fatal.

Prior to the beginning of the first stage is the Dreaming about the business period.  It is marked with daydreams and high-level discussions, usually at a bar with friends, about a foggy idea that you have that will be immediately successful and will allow you to spend time on your yacht in the Caribbean.   Once past that period, an entrepreneur enters the first of the three stages.

Solidification Phase

This stage begins with thoughts about developing a strategy for all future activities and leads to the development of a realistic and logical plan.  The dream becomes clear, and the tasks begin to surface.  Except for specialists such as musicians or highly focused subject matter experts who may be comfortable pursuing a part-time, after-hours income stream, this phase ends with the full-time pursuit of the opportunity.  You will have added a significant amount of substance to your vision.  Handwaving and generalizations will have been replaced with targeted activities.  You will be able to articulate your plan with confidence that will hold up to the scrutiny of others.

Validation Phase

This phase begins with the development and then offering an initial product or service.  It is the proof of concept that can be given to customers.  With real-world experience in hand, strategies to engage with customers can begin.  At the end of the Validation Phase, the entrepreneur will have transitioned from what they think the market needs to actual, first-hand knowledge based on what customers DO!  Revenue during this phase will be modest, but it becomes possible to begin to develop a realistic financial plan.  Along with direct customer feedback, numbers, not generalizations, will begin to be used to describe the business.  The assumptions behind the numbers are more important than the numbers themselves.  Funding the operation beyond the bootstrapping phase can now we considered.

Coming of Age Phase

This phase can be thought of as ongoing operations.  During this phase, the entrepreneur transitions from being the "Chief Everything Officer" to becoming the Chief Executive Officer.  It may not be any easier for them, but the CEO can now rely on others to help the company grow and prosper.  Feelings of accomplishment will now occur quite often.  Everyone's confidence will increase.  The focus will shift from finding willing prospects to serving customers.  The need to selectively scale different business elements at different times and different levels will become daily issues.  And, while new customers will provide new revenue, the required cash to build scalable systems, inventory, and cover accounts receivable, generally requires more capital infusion, a task that will fall on the CEO's shoulders.  These factors, plus many more, are the reason that the sigh of relief quickly turns into a gasp for air.  Along with the added pressure comes greater satisfaction!  You have passed most others on your long journey.  If not downhill, the journey ahead will be on more level ground.

 

Three Phases of Revenue

I refer to revenue as the Wonder Drug – it fixes almost everything!  Just as there are many drugs for different alignments, there are different drugs that need to be taken at different times.  Some of them help cure a temporary condition, while others need to be taken to sustain life.  The three phases of revenue coincide with the three Company Growth Stages described above.  For the first two Growth and Revenue Stages, the revenue "drugs" are intended to address temporary conditions.  The drugs associated with the Coming-of-Age Stage are needed forever.

Referenceable Revenue

This phase is marked by the transition of what the entrepreneur "thinks" to what customers "do." Although you can assume you have designed a product or service that meets prospects' requirements, you cannot be sure until customers have purchased and paid for your product.  Ideally, customers will have repeatedly purchased it or provided positive recommendations to others who have also purchased it.  It is not what you say or think that counts; it is what customers do – pay and be satisfied or delighted with their purchase.  When you have a number of referenceable customers, you have significantly de-risked your business and are more likely to appeal to other customers and investors.  The actual purchase prices do not matter; at this point, the goal is not dollars; it is external validation – the Holy Grail of this phase.

Scalable Revenue

Being able to scale the sale, fulfillment, and support processes to support high volumes is critical to the long-term success of a business.  Often, an entrepreneur or CEO can make initial sales with custom commitments, "hand-built" products, or configured services.  These types of sales do not require any repeatable, volume processes and can be very misleading about the ultimate size of the business.  Once funded, the inability to scale sales and operations is probably the single largest factor that causes new businesses to fail.  An eye-awakening test is to think in terms of how you can make ten times more sales calls, ship ten times more systems, and support ten times more customers.  Those are some of the scaling challenges that you will face.

Profitable Revenue

Understanding the total cost of fulfilling a customer order is critical in determining its profitability.  High gross margin (revenue minus product costs) is not enough.  "Below the gross margin line" costs must also be carefully considered.  The actual cost to place a product in a customer's hands is often grossly underestimated, as is the long-term cost to support customers.  Other overhead costs can also significantly overwhelm high individual product margins until higher volumes are achieved.  In most cases, reaching more customers in order to increase revenue attracts significantly more costs.  The cost of customer acquisition, often hidden during earlier phases can be quite challenging.

 

 

 

The Entrepreneur's Take-Home Test

The twenty-four question take-home test maps nicely into the three previously described tables.  They divide into eight overall areas as shown in the attached table.  Listing the questions alongside the Phases and Stages helps keep the required answers in perspective.  As an example, many entrepreneurs begin to think about raising money while they are in their dreaming period or in some of the initial stages.  If pursued in that order, they will raise their anxiety and lose focus on the actual tasks at hand.  As noted in the beginning of this article, this test is best taken over time as one travels down the journey.  It is, however, beneficial to become familiar with all of the questions to understand what is ahead.

As a final comment about the questions, the overall score is not important.  The reality is that each question is a "pass or fail" test.  If one fails a question, it does not make sense to answer the rest.  Instead, re-answer that question until you are confident that "you got it right," then move on.

 

Phases and Goals

 Nine Business Stages

Questions

Solidification

 

Referenceable Revenue

Thinking about starting a business

1.  Vetting my idea

a. Are you solving a problem that prospects agree needs to be solved now and are willing to pay you for it?

b. What are customers doing today in lieu of your proposed solution, and can you overcome the power of incumbency?

c. Do customers have a sense of urgency to address the issue that you have identified and act now?

Committed to starting a business

2.  Approaching prospects

a. How do you know which market segment is ideally suited for your proposed solution?

Working full-time in the business

b. What are the individual customer characteristics that best align with your solution?

c. What are the individual customer characteristics that are likely to cause them to balk at your solution?

Validation

 

Scalable Revenue

Has a demo product or service

3.  Developing MVP

a. How did you determine what to include or delay in your MVP?  Is what you want or what the prospect needs?

b. Can customers actually deploy your MVP and gain some benefit from its use?

c. How will you migrate your MVP customers to your commercially available product?

4.  Selling MVP

a. Who are you going to focus on, and how will you reach MVP customers?

Has some customers

b. How do you intend to help the MVP customers install, train, and use your MVP?  How will you gauge their acceptance?

c. Have you convinced both the buyers and users of the value of your offering?

Needs to raise money

5.  Financial Model

a. Do you have a financial model based on an established chart of accounts?

b. How did you validate your revenue forecast?

c. When do you project that you will attain monthly Cashflow Breakeven, and how much cash will it take to get there?

6.  Seeking Funding

a. How are you currently funding your operation?

b. How much money would you like to raise, and what will it be used for?

c. How do you envision an investor being able to receive a return on their investment, and when?

Coming of Age

 

Profitable Revenue

Ready to expand

7.  Expanding Operations

a. Who is on your team now, and what skill sets do you need now and later?

Having operational issues

b. How do you intend to "spread the word" to prospects and potential partners about your business and the issues that you address?

c. How do you intend to scale your operations?

Pursuing revenue

8.  Pursuing Revenue

a. Who is your customer (buyer and user), and what is their single compelling reason to buy from you now?

b. What is your defendable competitive advantage, and how will you maintain it as alternatives appear?

c. How do you plan to scale distribution to meet widely dispersed prospects?

 

Article Number : 3.010008   

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