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Start-up Advice

Decision Time

A business with no sales needs to change or close.

Ed Hatton





This entrepreneur started a model and artist management company and signed up models, planning to take a commission of their earnings. But there have been few castings and very little income. Emails to potential clients go unanswered,

She asks if she should change her way of finding clients.


This entrepreneur is faced with a three way choice right now. She can persevere, working hard to make a breakthrough, she can quit, or she can change strategy and tactics. When potential buyers do not buy a product or service as expected, business people either become bewildered, as is this entrepreneur, or frustrated and angry at the buyers ‘illogical’ refusal to buy. This is naive; the buyer has no obligation to buy from the entrepreneur.

The key question to ask is ‘why would they buy from my business?’ Are the models more talented, or less expensive? Are my services superior to those of others? Users of models have an enormous choice, and will have their favourites. They know what to expect and they like the look of the models they use.

If they want a fresh look there will be a large choice from their current agency. So why would they switch from the known and liked to an unknown agency and model?

A difficult question

While this difficult question is vital for the questioner’s business, it is also applicable to any entrepreneur who supplies a widely available product or service. From accountants to garden services, many small businesses are faced with this issue.

If there is no real reason to switch to a newcomer, then that business becomes one of the dreaded ‘me too’ suppliers which offers the same as existing powerful competitors. It is doomed to feed on scraps and rely on stumbling on clients who are unhappy with their existing supplier. This is not a good business model.

If the questioner cannot think of a reasonable answer to the question ‘why would they buy from my business’ then her choices are reduced to two. If her financial and emotional situation allows, she can persevere and hope for a breakthrough; or she can quit. No entrepreneur likes to quit but there are circumstances where it is wiser to take the losses, lick the wounds and come back another day wiser and stronger.

A new approach

The best answer is to change her marketing approach. Sending an email from an unknown new company announcing a service which is already widely available from more established competitors, and then expecting a response is not smart marketing. Decision-makers are overwhelmed by too much mail so emails from unknowns are ignored, or not even read. The exception is if there is an offer in email of something desirable that they do not now have.

I keep stressing that customers buy to satisfy their own needs, not the needs of the supplier. The newcomer must identify the needs that are not being satisfied now, or those being satisfied badly. To find out what these are she must approach the target companies and ask: “What would they like, but have difficulty in obtaining now?”

Is it a certain look? A different level of service? Models who can demonstrate products? Lower prices? If she asks around she is likely to find a common thread and it is likely to be a difficult problem to solve. But if she can address the problem, or even a tiny part of it, she would have something to sell when she makes approaches.


She must become more creative in her approach as well. A good tip is to tell customers she will take all the assignments others have difficulty with – last-minute assignments for instance. She could structure her services to support upcoming but cash-strapped new event managers or agencies.

She definitely needs to network, in person and in the media, to talk to the clients and account managers. She can survive and prosper, but only if she becomes creative and changes her ways.

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1 Comment

1 Comment

  1. Steve Gumm

    Apr 2, 2012 at 02:16

    Ed – fantastic, timely article. I find that many businesses focus on the product or commodity, and the features thereof, which puts them at an instant disadvantage.
    Consumers want to work with and spend money with companies and people worth talking about. Whether it be a unique experience or the stories of the people behind the product, companies need to focus on connecting with people on a much deeper level than the product or service being delivered. I firmly believe no company can ever reach it’s true potential if they are missing one of the two key ingredients either: a fantastic story and a great product or service.

    Thanks for the great article Ed. Very thought provoking….

    Steve Gumm

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Start-up Advice

Alan Knott-Craig Answers Your Questions On Money And Partners

From starting the right business, to managing business partners and finding your magic number, there is a secret to happiness.

Alan Knott-Craig




If I get rich will I be happy? — JC Lately

Does money equal happiness? Mostly, yes. Research in the US shows that your happiness is proportionate to your earnings up until you earn $80 000 per annum. Thereafter, incremental income gains have a negligible effect on your happiness.

In other words: More money will make you happy as long as you’re poor. Once you break out of poverty and enter a comfortable middle-class existence, more money will not make you happier.

These are the top three for old folks:

  • I wish I’d spent more time with family.
  • I wish I’d taken more risks.
  • I wish I’d travelled more.

Therein lies the secret to happiness. Spend time with your family. Take risks. Travel.

But first, make money. Don’t do any of the above until you’re making enough money not be stressed about money.

Related: Your Questions Answered With Alan Knott-Craig

What is the magic number? — Mushti

The magic number is the amount of money you need to not worry about money ever again. If you don’t need toys like Ferraris, yachts and jets, the magic number is R130 million. Here’s the math: R130 million will earn R9,1 million in interest annually (assuming 7% interest). After tax that is R5,46 million.

Assuming you need 50% to maintain a good lifestyle, that leaves approximately R2,7 million for reinvestment, which is enough to keep your capital amount in touch with inflation for 50 years. The balance of R2,7 million (after tax) is for your living costs. In South Africa, R2,7 million will afford you a lifestyle that allows you to send your kids to a great school and university, to travel overseas a couple of times a year, and to live in a comfortable house.

Over time your living costs (and inflation) will eat into your capital amount. After 50 years you should be down to nil, assuming you earn zero other income in that time.

In 50 years, you will probably be dead. If you’re not dead, your kids will be able to support you (because they love you and they have a great university education).

I am the sole director of a company (the others still have full-time jobs and don’t want to be conflicted) and there is pro-rata shareholding based on our initial shareholder loans. However, I am putting in most of the hard work, together with one of the other actuaries. How best do I manage the director/shareholder dynamic? I obviously want to make as much progress as possible but there are times when I need the input from the others (and their responses aren’t always as quick as I would like). — Mike

If you have any perception of unfairness regarding effort/risk vs reward, deal with it NOW! You can’t do so later. The best approach is honesty. Call your partners together. Explain your thinking. Perhaps argue for 25% ‘sweat equity’ for yourself. Everyone dilutes accordingly. Ideally cut a deal whereby you have an option to pay back all their loans, plus interest, within six months, and you get 100% of equity (unless they quit their jobs and join full-time).

Equity dissent must be resolved long before the business makes money, otherwise it will never be resolved.

Related: Alan Knott-Craig’s Answers On Selling Internationally And Researching Your Idea

What do you think of WiFi in taxis?— Ntembeko

It’s a good idea, but not original. Before embarking on a start-up, you should survey the landscape for competitors. Just because there are none doesn’t mean no one has tried your idea.

It just means that everyone that tried has failed. You need to be 100% sure that you have some ‘edge’ that makes you different from everyone who came before you (and failed). Otherwise you will fail. What is your advantage that is different to everyone who came before?

Read ‘Be A Hero’ today


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Start-up Advice

What You Need To Know About The Lean Start-up Model

The Lean Start-up philosophy was developed by Eric Ries, a Silicon Valley-based entrepreneur who also sat on venture capital advisory boards. He published The Lean Startup in 2011, igniting a movement around a new way of doing business.





The model follows key precepts that include:

Taking untested products to market

The fact that too many start-ups begin with an idea for a product that they think people want, spending months (or even years) perfecting that product without ever testing it in the market with prospective customers.

When they fail to reach broad uptake from customers, it’s often because they never spoke to prospective customers and determined whether or not the product was interesting. The earlier you can determine customer feedback, the quicker you can adjust your model to suit market needs.

The ‘build-measure-learn’ feedback loop is a core component of lean start-up methodology

The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a start-up can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect.

Utilising an investigative development method called the ‘Five Whys’

This involves asking simple questions to study and solve problems across the business journey. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.

Lean isn’t only about spending less money

It’s also not only about failing fast and as cheaply as possible. It’s about putting a process in place, and following a methodology around product development that allows the business to course correct.

Progress in manufacturing is measured by the production of high quality goods

The unit of progress for lean start-ups is validated learning. This is a rigorous method for demonstrating progress when an entrepreneur is embedded in the soil of extreme uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build — the thing customers want and will pay for, rather than an idea you think is good — you need not spend months waiting for a product beta launch to change the company’s direction. Instead, entrepreneurs can adapt their plans incrementally, inch by inch, minute by minute.


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Start-up Advice

Start-Up Law:  I’m A Start-up Founder. Can I Pay Employees With Shares?

Bulking up employee salaries with equity is a common method to attract, retain and incentivise top talent.




Every early stage start-up company battles with restricted cash flow and not being able to pay market related salaries to their employees. Bulking up employee salaries with equity is a common method to attract, retain and incentivise top talent.

Can I pay salaries with shares?

South African labour laws require that employees be paid certain minimum wages, and “remuneration”, as defined within the Basic Conditions of Employment Amendment Act, either means in ‘money or in kind’.  ’In kind’ does not include shares or participation in share incentive schemes, as determined by the Minister of Labour. As such, there is no room for start-ups to completely substitute paying salaries with shares or share options. However, there is no restriction in topping up below market related salaries with equity via an employee share ownership plan (‘ESOP‘).

Related: 7 Ingredients Of Small Business Success Online

Employee Share Ownership Plans

There are a variety of ways in which employees can be incentivised, and it will always be important for the start-up founders to consider what goal they wish to achieve by incentivising their employees.

ESOPs can be structured in several ways, for example: employees may be offered direct shareholding in the company, options for the acquisition of shares in the future; or alternatively, a phantom / notional share scheme can be set up.

ESOPs permit employees to share in the company’s success without requiring a start-up business to spend precious cash. In fact, ESOPs can contribute capital to a company where employees need to pay an exercise price for their share options or shares.

The primary disadvantage of ESOPs is the possible dilution of the Founder’s equity. For employees, the main disadvantage of an ESOP compared to cash bonuses or bigger salaries, is the lack of liquidity. If the company does not grow bigger and its shares does not become more valuable, the shares may ultimately prove to be worthless.

Related: 7 Strategies For Development As An Entrepreneur

Key Features

Some key features to consider when setting up an ESOP are:

  • ELIGIBILITY – who will be allowed to participate? Full time employees? Part-time employees? Advisors?
  • POOL SIZE – what percentage of shares will be allocated to incentivise employees?
  • RESTRICTIONS – will employees be able to sell their shares immediately?
  • VESTING – will there be a minimum period that service employees will have to serve with the start-up to receive the economic benefit of his or her shares?

Employee share ownership plans are great corporate structuring mechanisms for attracting and retaining employees, as well as fostering an understanding of the company ethos and encouraging loyalty and productivity. It is essential when implementing an ESOP that all the tax implications are considered and that the correct structure and legal documentation are in place.

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