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Inc. and SAP are looking for the Next Economy Hero Are you leading a fast growth company? Is your company going to lead us out of the recession?
Grand Prize package is worth $250,000 and Finalists prize packages are worth $75,000 Includes: • National Exposure • SAP Business software and consulting services • Inc.Navigator membership and strategic services All applicants receive a 60 Day Free Trial of Inc.Navigator–useful tools to drive focus, alignment, and accountability within your leadership team.
Inc. is looking for the Next Economy Hero– innovators and job creators who lead companies that have weathered the storm and come out ahead. We want to tell your story and celebrate your growth. Five finalists will be selected for a trip to Inc.’s GROWCO Conference April 6–8, 2011 in Las Vegas where the winner will be announced on the mainstage
NAVIGATOR NO PURCHASE NECESSARY TO ENTER. Contest subject to complete Official Rules available at www.inc.com/economyheroes. Contest open to legal residents of the U.S. or DC who are 18 years or older (or the age of majority in entrant’s state of residence if greater than 18) and are either owners or officers of businesses who have more than $10MM in 2010 earnings and a minimum of 25 employees. Contest begins 1/18/11. Entry submission deadline is 3/4/11. Contest ends 4/8/11. One grand prize is offered. The grand prize consists of business products and services, and a trip to Inc.’s GrowCo Conference, Las Vegas, NV, 4/6 – 4/8/11 with an total approximate retail value of $253,500. Four finalist prizes are also offered. The finalist prize consists of business products and services, and a trip to Inc.’s 2011 GrowCo Conference. Approximate retail value of each finalist prize is $78,500. Contest void where prohibited.
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February 2011
contents
74 Ready for Liftoff?
80 How I Did It eileen Gittins
84 step Into the Future
by john brandon
by john brant
Queen of the north The rich in Norway tend to keep it low key. Inger Ellen Nicolaisen, less so.
62 Ja, socialism 54 How Great entrepreneurs think Here’s the short version: They like action. The long version involves a number of insights gleaned from a fascinating study of highly accomplished company builders.
Northern European socialism is, in contemporary political discourse, the bête noire of business. So we took a trip to Norway, where the taxes are crazy high and the entrepreneurs are...thriving? by max chafkin
Your jetpack is ready. We’ve all seen far-out gadgets in movies and TV shows and wished we had one. Meet the entrepreneurs who are making real versions of Hollywood fantasies.
Eileen Gittins had a story she wanted to tell and no good way to do it. That led her to create Blurb, the fast-growing custom bookpublishing service.
Do you have a vision of what your business will look like in three years? In five? Here’s a guide to dreaming big—and getting the future you want. by ari weinzweig
THIS PAGE: ERIkA LARSEN; COVER ILLuSTRATION: RICHARD BORGE
by leigh buchanan
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50 case study We’ll Make It Up in Volume
The online billing service Chargify had plenty of happy customers. The problem: Less than 1 percent of them were paying a dime. by jason del rey
PRINTED IN THE USA. COPYRIGHT ©2011 BY MANSUETO VENTURES LLC. All rights reserved. INC. (ISSN 0162-8968) is published monthly, except for combined July/August and December/January issues, by Mansueto Ventures LLC, 7 World Trade Center, New York, NY 10007-2195. Subscription rate for U.S. and Possessions, $19 per year. Address all subscription correspondence to Inc. magazine, P.O. Box 3136, Harlan, IA 51593-0202; 800-234-0999; icmcustserv@cdsfulfillment.com (U.S., Canada, International). Please allow at least six weeks for change of address. Include your old address as well as new, and enclose if possible an address label from a recent issue. Single-copy requests: 800-234-0999. Periodical postage paid at New York, NY, and additional mailing offices. Canada Post International Publications Mail Product (Canadian Distribution) Sales Agreement No. 40063884. Canadian GST registration number is R123245250. Canada Post P.O. Box 867, Markham Station Main, Markham, Ontario L3P 8K8. POSTMASTER: Send address changes to Inc. magazine, P.O. Box 3136, Harlan, IA 51593-0202. Material in this publication must not be stored or reproduced in any form without permission. Requests for permission should be directed to permissions@inc.com. Reprint requests should be directed to The YGS Group at 800-290-5460, ext. 128. Inc. is a registered trademark of Mansueto Ventures LLC. FEBRUARY 2011 VOL. 33 NO. 1
cover
Photographed in Oslo by Andy Ryan
FEBRUARY 2011
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February 2011
14 Editor’s Letter 16 Feedback 18 Inc. 500|5000 Update
40 Innovation Switchgrass that is genetically modified to tolerate salty soil
20 Behind the Scenes
43 The Goods
Trapeze equipment, popcorn, animal feed, and elephant headgear: the companies behind the Greatest Show on Earth
23 Launch
✛ ✛ ✛ ✛ ✛
23
✛ Portland, Oregon, land of the electric car ✛ Blogger Logic: Just focus on what’s in front of you. ✛ The Ticker ✛ The Inc. Data Bank ✛ A Skimmer’s Guide to The Price of Everything: Solving the Mystery of Why We Pay What We Do, by Eduardo Porter ✛ Chocolatiers get socially conscious. ✛ Research Corner: Recommendation letters for women can cut both ways.
30 Passions On the roller derby track, Web entrepreneur Micki Krimmel is better known as Mickispeedia, pride of the Varsity Brawlers.
120 Legacy 28
93 TECHNOLOGY How to rebrand a company online, without losing Google traffic 94 FINANCE Networking groups help start-ups craft their pitches to investors.
40
96 ELEVATOR PITCH Lifesta lets people resell their unwanted Groupon coupons. Can it raise $1.5 million?
43
98 GOING GLOBAL Working with franchisees in other countries
By Norm Brodsky How to make customers realize they need your product, understanding your company’s numbers, and building your company to sell
100 MANAGING The art of the pivot—retooling your business model on the fly
37 Get Real
106 The Way I Work
By Jason Fried Sometimes you have to figure out—fast—how to turn a crisis into an opportunity.
When he is not recording video blogs or meeting with clients, Gary Vaynerchuk is tweeting his heart out.
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Antonio (“Tony”) Moreno, 1944–2010 A big man with a big heart and an outsize influence on Latin music
STRATEGY
33 Street Smarts
6
Fun desk accessories New Windows smartphones Daily deals on office supplies An app for texting in flight Cutting-edge gaming devices
CLOCKWISE FROM BOTTOM LEFT: BARTHOLOMEW COOKE; COURTESY COMPANY; LEO ESPINOSA; COURTESY COMPANY; DAVID YELLEN
CONTENTS
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When you combine the economy of our vast rail network with the flexibility of truck transit, your shelves get stocked with the right inventory at the right time. So whether you have tracks to your loading dock or not, see why we might just be the best option you’ve never considered. Visit UnionPacific.com or call (800) 877– 0513.
Wherever you find business, you’ll find us.
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CONTENTS
Inc.com
expand, I’m going to favor the activity where I can put pedal to metal fastest.
FEBRUARY 2011: SPOTLIGHT ON
BANKING
And small-business lending does not fit into that mold. Correct. It was and remains an activity that requires a banker to go and talk to the borrower. Analysts can pretend that all housing loans are the same, but with small business, the pretending completely defies belief. So small business gets the short end of the stick. What about the bank bailout? Why did so little money reach small businesses? The way to get more credit into the hands of the small-business owners has been long impaired, and for the money to reach the people who need it, you need more channels. Small-business lending requires a mechanism that frankly will take a long time to rebuild.
Rewriting the Rules of Credit Economist Amar Bhidé, on getting banks to lend again In his new book, A Call for Judgment: Sensible Finance for a Dynamic Economy, economist and Tufts University professor Amar Bhidé laments a banking system that bases decisions on complex algorithms rather than good old-fashioned loan reviews, a practice that has greatly choked off financing to small business. Here are excerpts from a conversation between Inc.com senior producer Matt Quinn and Bhidé about how we got into this mess—and how we might get out of it. Lending used to be a subjective matter. Why did we wind up with a system of stringent rules? First, there was an ethos that developed in academia that said that all risks can be quantified. What economists did was say the stuff that we cannot quantify is really on the margin. And what’s essential to risk, we can
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pretend to reduce to one or two numbers. Once you do that, then you can create a machine. If you’re required to think of risk in a broad, holistic kind of way, it’s much more time-consuming. Implicitly and explicitly, the government embraced this view of risk. Almost unwittingly, [Fannie Mae and Freddie Mac] created the largest mechanistic model of lending in the world simply by saying we will underwrite the risk of mortgages if they meet XYZ criteria. If you followed the model for a loan, the government would take it. The interesting part is that not all lending can be equally mechanized and scaled up. And therein lies the rub. It means that if I’m a bank, and I want to
How can the U.S. revive small-business lending? The government should demand that any depository institution whose liabilities are ultimately guaranteed by the taxpayer make its loans prudently—where a banker and an examiner understand the risks and where each loan is made with a case-by-case examination of the risk in the bank. Small-business lending will remain risky. But there’s a difference between a risk taken after a bank has obtained a deep understanding of the situation and a risk taken based on algorithms or rules that do not in fact make a lending decision safer. To read the full interview, go to www.inc.com/ money-and-finance
KEN COLLINS
FINANCE
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Mass exercising in this square 8:00 - 8:30 A.M.
In the morning it’s better to change elevators at the 38th floor to reach the 60th floor. Go around the back on Friday mornings. Vendors setting up for street market.
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Ask for Maleah. She likes to sign for all packages.
Before 9:00 A.M., there are two ways to get around this one way street.
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CONTENTS
Inc.com
10 THINGS TO DO
ONLINE THIS MONTH
1. Get New Employees Up to Speed Inc.com’s New Employee Tool Kit pulls together tips, tools, and tactics for making sure that your latest hire masters his or her job—and learns your culture—as seamlessly as possible. www.inc.com/new-employee-tool-kit-2011
2. Assess Your Credit Risk Some customers should be kept on a short leash. Here’s how to identify them. www.inc.com/settinga-credit-policy
10. Become the Next Big Thing How products such as the Orabrush and the Shake Weight went viral
3. Tell Us All a Little About Yourself
www.inc.com/viralmarketing
How to turn your website’s About Us page into a showstopper www.inc.com/e-commerce
9. Mind Your HR P’s and Q’s
4. Outfit Your Home Office
We don’t mean to imply that you have any legal issues surrounding HR. But here’s a rundown of the important stuff, just in case.
Helpful tech tools, for both the regular and the occasional telecommuter
www.inc.com/ employment-law
www.inc.com/homeoffice-technology
5. Learn How to Win Entering small-business contests? Here are six tips for submitting entries that will dazzle the judges and help you win big prizes.
8. Meet a Model Entrepreneur
6. Study Recipes for Success
Summer Rayne Oakes has written a book on sustainability, made a name for herself as a model, and launched two green companies. Here’s how she does it all. www.inc.com/green-business
7. Take a Fresh Look at Your Website Mistakes to avoid as you build your company’s Web presence, plus tips on crafting effective e-commerce pages www.inc.com/website-design
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A delicious roundup of news on restaurant and food businesses, written by Inc.com’s new blogger, Clarissa Cruz www.inc.com/ clarissa-cruz
CLOCKWISE FROM TOP: ISTOCK; GETTY; JERRITT CLARK/GETTY
www.inc.com/public-relations
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Technology is constantly improving itself. Finally, so is the way you buy insurance. For the first time you can get small business insurance direct and online. No one-size-fits-all approach, it’s for professional services businesses with 10 employees or less and the coverage is even customized to your industry. It’s not just a new way, it’s a better way.
Reinventing Small Business Insurance
TM
Learn/quote/buy: hiscoxusa.com/smallbiz
Underwritten by Hiscox Insurance Company Inc., 233 North Michigan Avenue, Suite 1840, Chicago, IL 60601, as administered by Hiscox Inc., a Delaware insurance producer that is licensed in all states and DC. In California, Hiscox Inc. does business as Hiscox Insurance Agency. Coverage is subject to underwriting and is not available in all states.
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editor Jane berentson deputy editor dan Ferrara deputy editor, inc.com MiKe hoFMan creAtive director blaKe taylor mAnAging editor alexandra brez photogrAphy director travis ruse executive editor larry Kanter senior editors bobbie gossage, nadine heintz, eriC sChine senior producers, inc.com tiFFany blaCK, Kalina Mazur, MattheW quinn senior editors, inc.com Christine lagorio, niCole Marie riChardson editors-At-lArge leigh buChanan, bo burlinghaM senior writer Max ChaFKin stAFF writer Kasey WehruM senior reporter Jason del rey reporters april Joyner, issie lapoWsKy, J.J. McCorvey, taMara sChWeitzer, lindsay silberMan copy chieF peter J. Mclaughlin copy editor paM Warren editoriAl production mAnAger raChel MosKovitz-abrahaM production AssociAte doMiniCK santise deputy Art directors sarah garCea, Jason MisChKa deputy photo editor alison zavos AssociAte photo editor Kate osba AssistAnt producers, inc.com Joel Froude, eriC MarKoWitz senior contributing editor norM brodsKy contributing editors JeFF bailey, darren dahl, donna Fenn, david h. FreedMan, Jason Fried, robert litan, Courtney rubin, Carl sChraMM, suzi sosa, Joel spolsKy, JaCK staCK, riChard todd, liz WelCh interns lauren Cannon, angela diMarzio, evan KlonsKy
president robert lapointe
publisher John M. tebeau publisher, inc.com Whelan Mahoney Category Development DireCtor reg ungberg new york manager Keri haMMer Chris andreWs, aMy Christiansen, stephen siMMons: 212-389-5300 sales assoCiate anita pai senior aDvisor irvin v. FalK franChise seCtion manager david desiMone AtlAntA loretta anderson, MarK anderson: 678-814-4455 chicAgo JaCK Carson, steven neWMan: 312-494-1919 dAllAs steven g. tierney: 972-625-6688 detroit george Walter: 248-205-3900 los Angeles/southern cAliForniA Chelsea McCarthy, riChard l. taW iii: 310-341-2341 pAciFic northwest Julie Chisar, aliCia gaMble: 415-343-1530 cAnAdA MarK boxer: 416-368-6800 ext. 10 internAtionAl John M. tebeau: 212-389-5360 sourcebook edWard C. Weil iii: 239-947-2812 clAssiFieds ann Marie Johnson: 727-507-7505 FrAnchise And mArketplAce toM eMerson: 212-655-5220 business resources DireCtor, BUsiness Development Kristine Kern DireCtor, Content Development Jon Feld aCCoUnt DireCtor darCy leWis aCCoUnt manager Melissa stern senior DireCtor, smB patriCK hainault DireCtor, oUtreaCh to private Companies Megan burns projeCt manager, inC. 5000 JiM Melloan mArketing sales Development DireCtor JenniFer henKus integrateD marketing manager alison taFFel marketing managers elizabeth FuChs, billie gibson researCh manager ben o’hara Design manager hoJoon Jon jUnior Designer Myung-hun Jin events events DireCtor Courtney Mcneese DireCtor, program Development sheila brennan events managers raChel Kovar, shira Kundinger production groUp proDUCtion DireCtor Kathleen o’leary aDvertising operations manager sung Woon Kil groUp proDUCtion manager Jane hazel assistant proDUCtion manager dave poWell proDUCtion manUfaCtUring ConsUltants Janet MannheiMer, Catherine FiCK consumer mArketing CirCUlation operations DireCtor doug sMith ConsUmer marketing manager traCy Chan assistant marketing manager tyler adaMs Accounting Controller eve pai aCCoUnt manager JaCqueline nurse staff aCCoUntant sharita neverson aCCoUnts payaBle sUpervisor Marilou ordillas payroll manager/aCCoUntant Chareyl raMos
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digitAl services DireCtor, BUsiness Development david grossMan Design DireCtor haeWon Kye Design CoorDinator eriKa sChneider DireCtor, weB arChiteCtUre MiChael KraKovsKiy DireCtor, weB Development Jason tagg senior weB Developer serge KhaladzinsKi Developers orlando Caraballo, John guaragno teChniCal proDUCer gloria Chen senior mUltimeDia proDUCer MiChael shiCK proDUCtion CoorDinator eriC Foster digitAl Advertising operAtions DireCtor steven suthiana manager david vasquez assoCiate manager Charles gilMore assoCiate CoorDinator MiChael bleJer mAnsueto ventures llc
chAirmAn Joe Mansueto
executive committee Jane berentson, robert lapointe, MarK rosenberg, robert saFian chieF FinAnciAl oFFicer MarK rosenberg director, humAn resources M.M. MerWin director, FAcilities randy davis executive AssistAnt lori plevrites oFFice AssistAnt lisa Kay davis WWW.Mansueto.CoM
how to reAch us subscription service: inc., p.o. box 3136, harlan, ia 51593-0202 800-234-0999 or icmcustserv@cdsfulfillment.com oFFice oF the publisher: 7 World trade Center, new york, ny 10007-2195 212-389-5300 editoriAl phone: 212-389-5377 FAx: 212-389-5379 web: www.inc.com letters to the editor: mail@inc.com permissions: permissions@inc.com inc. 500/inc. 5000 inFormAtion: feedback5000@inc.com reprints: 800-290-5460 ext. 128 or increprints@theygsgroup.com bAck issues: 800-234-0999 our subscribers list is occasionally made available to carefully selected firms whose products or services may be of interest to you. if you prefer not to receive information from these firms, write to the subscription service address above.
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EDITOR’S LETTER WE’LL CUSTOMIZE THE RIGHT PLAN FOR YOU
YELLOWBOOK DIRECTORY The go-to source for local businesses
YELLOWBOOK.COM Advertise online where millions search
SOCIAL MEDIA See what your customers are saying
DIRECT MARKETING Customize the message for your target
EXPERT ADVICE Consult with those in-the-know
WEBSITE PACKAGES Build a website and have it seen
SEARCH MARKETING Advertise on major search engines
METRICS REPORTS Track your performance with data
www.yellowbook360.com 1.800.YB.YELLOW © 2010 Yellow Book USA, Inc. All rights reserved. Yellowbook® is a registered trademark and Yellowbook360SM and Beyond YellowSM are service marks of Yellow Book USA, Inc. worldmags
Northern Exposure One of the most satisfying aspects of working at a magazine is being able to ask a questıon, then spend time fınding the answer (or at least an answer). That’s our actual work. The goal is to ask questions that have relevance to our readers, and to answer those questions through the tools of journalism: good reporting, sound reasoning, and engaging storytelling. For the past several months, the journalists here at Inc. have been wondering about the relationship between taxes and entrepreneurship. One argument, much covered in the press, is that the taxes levied on small businesses are way too high; in fact, that at current levels, taxes are helping kill small business and the entrepreneurial spirit of America. This point of view has become so widespread that it made us stop and question the basic assumption: Is there actually a relationship between entrepreneurship and tax levels? We decided to explore this question by looking at entrepreneurs and entrepreneurship in the famously high-tax nation of Norway. Norway doesn’t get a lot of attention in American publications, except, perhaps, when the Nobel Committee releases the name of its Peace Prize recipient. Norway’s just up there near the Arctic Circle, pretty much not bothering a soul, its citizens going about their business, quaffing aquavit, and paying taxes. We bought senior writer Max Chafkin a cheap plane ticket and sent him to the land of the midnight sun. He came back with a story that we’ve titled “Ja, Socialism.” Max’s feature on Norwegian entrepreneurs is the first in a series of articles that will look at how government policy and culture affect entrepreneurship in countries around the world. As American companies expand overseas and foreign companies enter the American market in ever increasing numbers, we at Inc. think it’s important, and relevant to our readers, to have an understanding of where entrepreneurs are coming from—to get to know their different experiences and to think about their different points of view. We hope you agree.
Jane Berentson janeb@inc.com
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THIS IS WHAT SUCCESS LOOKS LIKE FOR FLOWERS BY JAN. Yellowbook used a full spectrum of marketing tools to find the right solution for Flowers by Jan. Our marketing consultant assessed their business fully, then created a powerful online ad, a custom video ad, a print ad, and also provided transparent reporting to track the campaign’s success. To discover all the colorful new tools from Yellowbook, visit yellowbook360.com.
YELLOWBOOK DIRECTORY
YELLOWBOOK .COM
SOCIAL MEDIA
DIRECT MARKETING
EXPERT ADVICE
WEBSITE PACKAGES
SEARCH MARKETING
METRICS REPORTS
©2010 Yellow Book USA, Inc. All rights reserved. Yellowbook™ is a trademark of Yellow Book USA, Inc.
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FEEDBACK At Your Service
An Elegant Success
Our story about companies that are tapping into nonobvious pools of profitable demand [“The Demand Economy,” November] resonated with readers who are doing just that. “For the past 20 years, I have specialized in working with the elderly and their families,” wrote Connie Lambert, CEO of Our Generations in Columbus, Ohio. “Businesses such as GrandCare are doing the kind of forward thinking that will totally change the landscape of eldercare. Baby boomers have no intention of aging in the same way they witnessed their parents age.” Joe Entwisle, senior policy analyst at Health & Disability Advocates in Chicago, suggested another high-demand market. “This is a great article, but you missed people with disabilities,” Entwisle wrote. “They are the largest minority group in the U.S., and they tend to be very brand loyal.”
Our article about clothing designer Eileen Fisher [How I Did It, November] drew comments on Inc.com from entrepreneurs who are just starting out. “I recognized the name Eileen Fisher because my wife loves her clothing,” wrote Wayne Parker, co-founder of Belle Terre NC in Lincolnton, North Carolina. “As a newbie to the entrepreneurial game, it is nice to hear inspiring success stories, especially since there is way too much gloom and doom right now. Keep the good news coming!” Syieda Penn, founder of Pastiche Group in Silver Spring, Maryland, echoed Parker’s sentiments. “This story was inspiring, to say the least,” Penn wrote. “My firm is still in its very infant stages. Articles like this make it possible to believe that doing good work, and doing it right, will lead to success.”
A Small Price to Pay Jason Fried’s column about raising prices [Get Real, November] evoked a strong response from readers. “You hit the nail right on the head,” wrote Hussain Kitabi, CEO of ImpressionZZ in Houston. “People have started to sell software so cheaply that they are making good software developers an object of ridicule when they charge fair prices. We have to understand our worth better.” Fried even won over some critics with the column. “I don’t always agree with what Jason has to say, but this is spot on,” wrote Brad Farris, principal adviser at Anchor Advisors in Chicago. “The more you charge, the more you will attract the clients for whom you are exactly the right fit. It works for everyone.” Lisa Wagner, CEO of Piranha Marketing in Tempe, Arizona, expressed a similar opinion. “Higher prices bring in a different partnership between clients and companies, and a much more mutually responsible dynamic,” she wrote. Mir Rooshanak, a business analyst at UPrinting.com in Los Angeles, cautioned that raising prices can easily backfire. “If
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Dressed to Kill
you have a product that is separate from the competition, which Fried seems to have, then you can charge a higher price and get away with it,” Rooshanak wrote. “Otherwise, you are just preying on your existing customer base, and there are few things worse for business than customers who think you are ripping them off.”
Divorce, Inc. Readers also had a strong reaction to Meg Hirshberg’s column about how entrepreneurship can spell the end of a marriage [Balancing Acts, November]. “I am sure if I worked with my
husband during the first 10 to 15 years of marriage, I would be divorced,” wrote Holly Sher, president of Evanger’s Dog & Cat Food in Wheeling, Illinois. “But I bought this company eight years ago, after we had already been together for a long time, and I am very grateful every day that my husband works for me.” Ingrid Brown, owner of The Villager and AuburnArt.com in Auburn, Alabama, said business stress contributed to her recent separation from her husband. “We’ve been separated for months now, and our businesses are still the most important aspect of our relationship,” she wrote. “For our businesses to survive, it requires both of us.”
Mary Campbell Gallagher, founder and president of BarWrite in New York City, was pleasantly surprised by our article about Lani Hay, the stylish founder of Lanmark Technology [The Way I Work, November]. “Finally, Inc. shows its readers a chic business owner,” Gallagher wrote. “The tieless, unshaven men in your pages may be successful, but who wouldn’t prefer to emulate a well-dressed, civilized business owner like Hay?” But Kevin Shoesmith, owner of Factory Interactive in Vancouver, British Columbia, thought Hay’s life was anything but glamorous. “I’d never want my life to be like this,” Shoesmith wrote. “It sounds like a kind of hell.” Let us know what you think. Submit a comment to Inc.com, e-mail us at mail@inc.com, or send mail to Inc. Letters, 7 World Trade Center, New York, NY 10007-2195. Letters may be edited for space and style. Submission constitutes permission to use. To alert us to an error, send an e-mail to corrections@inc.com.
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Ink from Chase is proud to support business owners like Arik Levy, CEO of Laundry Locker.
a new spin on laundry
UPDATE
It’s Easy Being Green
Sustainability is a popular buzzword these days, but it has been part of Wendi Goldsmith’s vocabulary since she founded Bioengineering Group in Salem, Massachusetts, in 1992. The company helps clients such as the Department of Defense, Target, and MIT embrace green building and design practices. Bioengineering Group brought in revenue of $9.1 million in 2009, earning it the No. 932 spot on the 2010 Inc. 5000. —Darren Dahl I love proving that, contrary to popular opinion, the things that work well economically are also the best ecological answers.
Levy’s company is changing the way the world does their laundry. Laundry Locker’s goal is to provide customers with the most convenient, easy and high quality way to do their laundry and dry cleaning. Laundry Locker uses a patent pending lockerbased delivery soluton located in apartment buildings, office buildings and retail stores throughout San Francisco. “ When I needed spending power to purchase new equipment, I had my Ink from Chase business credit card. When I needed a higher credit limit to match my growing business needs, I had Ink from Chase. When I needed to make a quick payment, I had Ink from Chase. And when I need a vacaton, I have my Ink from Chase rewards.” To learn what Ink can do for your business, visit Chase.com/ink.
One of our big projects is working with the military to implement energy- and water-conservation policies on five bases. We’ve helped them realize that when you have local renewable energy sources, you not only make the climate better; you also have fewer security threats. We also have a project with the Vancouver Canucks, who want to use the waste heat created from making ice to warm the arena.
I think the recipe for success is curiosity mixed with humility. When we dig deeper, we find that many of the things that we assume are true are actually false. The building we work in was an abandoned building that we reclaimed 11 years ago. We were the first firm in the area to use sustainable design to refurbish a building, and it helped turn around the neighborhood. It was also a great investment strategy. Our firm received an award in October, and the prize included dinner with Warren Buffett. When I told him what I did, he told me, “You are in such a great space. You’ll never run out of business.” It’s amazing when the Oracle of Omaha tips his hat to you. For more on the Inc. 500|5000, go to www.inc.com/inc5000.
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PHOTOGRAPH BY BOB O’CONNOR
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BEHIND THE SCENES
Companies at the Heart of Everyday Life
Concession equipment The Ringling Bros. and Barnum & Bailey Funundrum tour will stop at more than 40 U.S. cities this year. During each leg, crowds will eat about half a ton of popcorn, popped fresh in machines made by Gold Medal Products. The Cincinnati company also supplies the circus with cotton-candy and snow-cone machines. David C. Evans started Gold Medal in 1931, initially selling inks, pastes, and glues before switching to “fun foods.” Evans’s son, J.C., is chairman of the business, which is now run by president Dan Kroeger. It has more than 350 employees, and its customers include ice cream shops and movie theaters around the world.
Elephant headpieces Like any big stars, these elephants have to look their best when they perform. These decorative headpieces add some pizzazz and function as a grip for trainers and performers. Made from two-ply harness leather by Classic Leather Works of Altoona, Florida, the headpieces are adorned with a metal shield and small metal rivets, manufactured by Ringling Bros., that say “The Greatest Show on Earth.” Leatherworker Don Engleking founded Classic Leather Works in 1997. The two-employee shop makes about 25 elephant headpieces for Ringling Bros. each year, along with holsters and accessories for Old West gun enthusiasts.
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Ringling Bros. and Barnum & Bailey Circus, Indianapolis
12.04.10 1:34 P.M.
Trapeze rigging They may dangle 35 feet above the ground, but the circus’s trapeze artists can take comfort knowing their equipment is safe. The wire ropes, shackles, and support rigging, supplied by Southeast Rigging of Jacksonville, Florida, are made of galvanized steel and load-tested to be certified secure. Co-owners Dan Giannattasio and Scott Elliott bought the 15-employee company in 2002 from a larger Baltimore-based wire supplier. The bulk of the company’s roughly $7 million in sales comes from supplying wire rope and rigging for construction, marine, and roadwork projects.
Animal feed Weighing as much as 10,000 pounds each, these Asian elephants don’t live on peanuts alone. Their diet consists of hay, vegetables, and roughage, along with grain-based feed provided by Smelt Feed in Tampa. Smelt also supplies feed and some hay for the circus horses, dogs, llamas, and zebras, sourcing it from farmers, brokers, and pet-food company Purina. Owner Alton Smelt runs the $2 million company, which his father, Jack, founded in 1981. It has seven employees and serves zoos and theme parks nationwide, including Busch Gardens in Tampa.
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REPORTED BY KASEY WEHRUM
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Exceed Your Growth Goals This Year and Beyond April 6-8, 2011 Cosmopolitan Hotel Las Vegas At GROWCO 2011, expect brass-tack advice—mined from the pages of Inc.—to take your business to the next level. Learn how to develop a vision, manage a team, perfect an elevator pitch, create a brand, get the most for your marketing dollars, connect with customers, close deals, and find capital. Join Inc. and your peers—bright lights in the changing economy— for three days of learning, networking, optimism, and inspiration at the Cosmopolitan Hotel in Las Vegas on April 6-8.
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News, Ideas & Trends in Brief
LAUNCH
Electric Paradise? Why Portland could be the EV promised land Six months after Mark Frohnmayer and
his co-founders sold their video game developing company, GarageGames, to IAC for $50 million in 2007, Frohnmayer launched a new business: an electric-car manufacturer called Arcimoto. That may not sound like the most obvious career shift, but, given Frohnmayer’s location, it might be a smart one. Based in Eugene, Oregon, Arcimoto is part of a growing concentration of 27 electric-car and component companies along the 110-mile-long corridor from Portland to Eugene. Will Arcimoto’s Pulse LT, a tearshaped three-wheeler, appeal to car buyers? Frohnmayer figures there is no better place to find out than in Portland itself. “Portland has had some of the earliest, most enthusiastic leadership around electric vehicles,” says Chelsea Sexton, an alternative-fuel expert. “And the industry tends to align with where the market is.” Most of these companies are start-ups, including the charging-station manufacturer Shorepower Technologies, which
FROM TOP: COURTESY COMPANY; COURTESY SUBJECT
BLOGGER LOGIC
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Highway Ready Arcimoto’s Pulse LT has a top speed of 65 mph. DATA POINT
EV Nation
Portland, Oregon, isn’t the only place with innovative electriccar start-ups. Here are some other promising regions: LOS ANGELES
Coda Automotive’s four-door will go on sale this year for $45,000. AC Propulsion licensed its drive system to Tesla and to BMW.
has sold nearly 50 stations in Portland’s metropolitan area to the likes of Intel and Nike, and the motor and component manufacturer Synkromotive, which makes parts for Arcimoto. Others are more established businesses, like the 50-year-old AmFor Electronics, which began selling its wiring systems to the
BOSTON
Boston-Power is a leader in cutting-edge lithium-ion battery technology, as is A123 Systems, whose batteries are used by Navistar and others. ANDERSON, INDIANA Bright Automotive, with backing from General Motors, is developing a plug-in hybrid van for use by fleets.
EV market two years ago. Meanwhile, Nissan, Navistar, Ford, and Mitsubishi have chosen Portland to test-market their electric vehicles. There are good reasons an electriccar industry is taking hold in and around Portland. First, there is plenty CONTINUED ON THE NEXT PAGE
s
Never look over your shoulder
It’s a cutthroat world, so you had better keep an eye on the competition. Right? Wrong, writes venture capitalist Fred Wilson (avc.com). The smart strategy, he says, is to do your best and forget about the rest.
“One mistake I see startups make a lot is getting too focused on what is going on around them. They spend too much time trying to figure out what their competitors are going to do. They watch the next hot startup with jealousy and it reminds them of when they were that ‘shiny new thing’ and they want that back. The reality of startups is that there is so much opportunity out there that if you just focus on what is in front of you, your company will do fine.” FEBRUARY 2011
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of local demand. The city had the most hybrid vehicles per capita in the country in 2008 and 2009, according to automotive researcher R. L. Polk & Co. American City Business Journals ranks Portland the greenest city in the country, and its compact 145 square miles make Portland easy to navigate in an electric vehicle with limited range. What’s more, Intel and other local tech companies, together with a once-booming motor-coach industry, provide a wealth of high-tech and manufacturing talent. Then there is the impending rollout of 1,100 charging stations, funded by the U.S. Department of Energy, as well as statewide tax incentives for electric-vehicle purchases. Arcimoto intends to start selling its Pulse later this year. With its slender shape, the diminutive Pulse is the antithesis of a hulking SUV, and a natural, Frohnmayer hopes, for progressive Oregon urbanites. Because it has only three wheels, the Pulse is classified as a motorcycle, but it has regular car seats and a carlike, instrument-rich dashboard. Frohnmayer is betting the Pulse will appeal to commuters, because it can travel at highway speeds and has a range of up to 160 miles. A sweetener is the Pulse’s expected price tag of $17,500, less than half the price of a Chevy Volt. In Portland proper, Michael Czysz’s 12-employee company, MotoCzysz, is busy making an integrated electric drive system called the Digital Drive. Czysz started his company five years ago as a manu24 worldmags
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facturer of high-performance motorcycles, but he turned to building electric drive systems two years ago, first for motorcycles and now for cars. MotoCzysz’s drive system, which will be available by the second quarter of this year, is a fully integrated system that includes the motor, inverter, cooling system, oil pump, and virtually all other essential components. The Digital Drive has received rave reviews from the industry press, and Czysz says he is in talks about selling it to companies in the U.S., Japan, and India. “I think Portland is the perfect environment for us,” he says. “It’s competitive on the manufacturing side. It’s competitive on the technology side, and it’s a leader on the environmental side.” —Issie Lapowsky
Pat’s World Pat Boone has sold 45 million records. He is also an author, philanthropist, and entrepreneur. Here’s a sampling of his ventures: Lamb & Lion Records: In the 1970s, Boone’s Christian record label produced albums by the Pat Boone Family and such rock bands as DeGarmo & Key. The Gold Label: Gold caters to older singers, including Jack Jones; Roger Williams, Pianist to the Presidents; and Boone’s daughter, Debby Boone. Zero Pollution Motors: Boone is a partner in the U.S. licensee of this French maker of compressed-air-powered cars. He has been lobbying U.S. mayors to buy the cars for government use.
BOONE
Jessica Jackley, co-founder of the microlending platform Kiva.org, has launched ProFounder, a crowd-funding website that helps entrepreneurs JACKLEY raise money. “As Kiva expanded, I realized that it was very difficult for a regular person to invest in businesses they love,” Jackley says….Frederick Morton, a native of St. Croix, is preparing for the U.S. debut of Tempo, his Caribbean television network. “The Caribbean attitude is all about being positive and appreciating life,” says Morton, whose lifestyle channel, based in Newark, New Jersey, is available on more than 25 Caribbean islands. “I want to bring that to the world.”…Matt Maloney and Mike Evans, founders of GrubHub, a Web service for ordering takeout, recently raised $11 MORTON million from VC firm Benchmark Capital. “Restaurants are very good at cooking, but they’re not that great at technology,” says Maloney, who plans to use the money to double the number of cities the site serves to 26…. Paula Abdul has launched AuditionBooth.com, a website for submitting audition videos to casting directors for reality TV shows and commercials…. Singing legend Pat Boone, 76, recently launched All-American Meats, a mail-order beef company that donates 5 percent of gross revenue to charity. “Now, families can enjoy eating fine meats and help out other people at the same time,” Boone says. —Nadine Heintz
CLOCKWISE FROM TOP: NEWSCOM; LEE CASHLEY/COURTESY SUBJECT; LESTER COHEN/GETTY; COURTESY COMPANY
The Ticker
Electric cars continued
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A friendly reminder from the University of FarmersR. FarmersR offers small business insurance. Our agents have been trained to work with owners of many different types of businesses and can help you select the coverage that best fits your business and your bottom line. Talk to a local Farmers agent and learn how you can protect your business in the event of a disaster, an accident, or a workers’ compensation claim. To find an agent near you, go to farmers.com or call toll free 1-866-200-4BIZ (4249).
We Are Insurance. We Are Farmers.S auto
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Insurance underwritten by Farmers Insurance Exchange and other affiliated companies. Visit farmers.com for a complete listing of companies. Coverage not available in all states. ©2011 Farmers Group, Inc.
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LAUNCH
BUSINESS SENTIMENT
Portion of smallbusiness owners who regarded cash flow as their greatest concern in September 2010, down from 60% in September 2009
Crunching the numbers PERSONAL FINANCE Average amount U.S. parents spend to raise a child to 18, excluding college tuition:
The book: The Price of Everything: Solving the Mystery of Why We Pay What We Do, by Eduardo Porter; Portfolio.
$286,000
The big idea: How we assign value—to the things we buy, to the way we spend time, even to the principles we hold dear— affects every decision we make.
BUREAU OF LABOR STATISTICS
U.S. DEPARTMENT OF AGRICULTURE
PROFITS VS. WAGES
TAX POLICY
RETAILING
Net domestic profits earned by U.S. corporations since the fourth quarter of 2008:
Estimated annual revenue California would receive if it legalized marijuana and levied a $50-per-ounce tax:
Average amount a gift-card holder spends beyond the card’s value:
$609 billion Net change since then in the amount these companies spent on wages and benefits:
$1.4 billion
BUREAU OF LABOR STATISTICS
THE WORKPLACE The No. 1 complaint about office working conditions:
Temperature INTERNATIONAL FACILITY MANAGEMENT ASSOCIATION
CALIFORNIA STATE BOARD OF EQUALIZATION
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FIRST DATA; MERCATOR ADVISORY GROUP
19%
Portion of newly hired employees who achieve “unequivocal success” within 18 months of hire LEADERSHIP IQ
State with largest decline in small-business profits in 2010:
SALARIES
$5,525 The amount of additional pay a typical 6-foot employee earns compared with a 5-foot-5-inch co-worker
HARVARD UNIVERSITY
INTUIT
26
Share of retail gift cards never redeemed:
PERSONNEL
SMALL-BUSINESS PROFITS State with strongest growth in small-business profits in 2010:
$33 6%
-$171 billion
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A skimmer’s guide to the latest business books
—Compiled by John Kador
The backstory: The Price of Everything is global in scope and reportorial in approach. That is not surprising. Porter serves on the editorial board of The New York Times and has worked as a journalist on four continents. Voter’s guide: As we gear up for 2012, the book smartly lays out the economic underpinnings of many of today’s most troubling issues: health care, climate change, immigration. Think global; price local: Given the differences in values from country to country, it is surprising global companies don’t send in teams of sociologists before entering markets. Fortunately, writes Porter, the more two countries trade, the closer their values become. If you read nothing else: Businesses will eye consumers eagerly and consumers will eye businesses warily after reading The Price of Everything, which explains some of the psychology that influences buying. (The money you will save on toner cartridges when you learn how printer companies spike sales of ink will more than offset the cost of the book.) Rigor rating: 9 (1=Who Moved My Cheese?; 10=Good to Great). Porter read what sounds like a lot of really dull reports to make this engaging book possible. —Leigh Buchanan
ANTHONY VERDE
INC. DATA BANK
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LAUNCH
RESEARCH CORNER
Damning with praise The study: “Gender and Letters of Recommendation for Academia,” by Juan Madera, University of Houston; and Michelle Hebl and Randi Martin, Rice University; Journal of Applied Psychology.
Won’t You Be My Fair-Trade Valentine? Chocolatiers that make a difference Countless entrepreneurs have tapped into the craze for artisanal chocolates, but far fewer have combined a focus on quality with socially conscious methods. Here’s a sampler of chocolate makers that do:
Askinosie Chocolate Springfield, Missouri; founded in 2005 SOURCES: Honduras, Ecuador, Tanzania, and the Philippines EMPLOYEES: 6 KNOWN FOR: Smallbatch white chocolate bars, hazelnut chocolate spread, bars sourced from specific farms
Shawn Askinosie says his 20-year career as a criminal defense lawyer was a cinch compared with his current job of finding the best cacao beans for small batches of his namesake chocolate bars. Askinosie shares profits with farmers and uses open-book accounting. “I’ve visited every farm I’ve made chocolate from,” he says. “None of the farmers had ever met a chocolate maker before me.” Madécasse Chocolate Brooklyn, New York; founded in 2006 SOURCE: Madagascar EMPLOYEES: 5 KNOWN FOR: Bars available in 63 percent to
80 percent cocoa content, plus a specialty bar with cacao nibs and sea salt
Peace Corps alums Tim McCollum and Brett Beach founded Madécasse to make money and to help Madagascar, one of the world’s poorest countries. “We decided to break up the plantation model, where there are many middlemen,” McCollum says. Madécasse provides employment for 60 farmers and 29 workers at a local factory that makes its bars. It’s one of just two bean-to-bar operations in the country. sweetriot New York City; founded in 2005 SOURCE: Latin America EMPLOYEES: 5 KNOWN FOR: Dark chocolate-
covered cacao nibs—chocolate in its purest form
Sarah Endline has built her company around the cacao nib, the bean at the center of the cacao pod. Good for the people who eat the nibs; good for the people who grow them. But raw cacao beans don’t taste so great. “People thought I was nuts,” she says. So she coated the nibs with dark chocolate and sold them in small tins. Bingo. “I figured chocolatecovered nibs would answer a lot of desires that people didn’t even know about,” she says. Taza Chocolate Somerville, Massachusetts; founded in 2006 SOURCES: Latin America and the Caribbean EMPLOYEES: 25 KNOWN FOR: Dark chocolate stone-ground bars and Mexicano “discs” flavored
with coffee, sea salt, pepper, cinnamon, vanilla bean, chili, or yerba maté
A trip to Mexico in 2005 got Alex Whitmore thinking about chocolate in a new way. “Up until that moment, my experience had been heavily processed European-styled sweets,” he says. “This was stone ground and as close to the source as you could get.” Given that chocolate was first made in Mexico some 2,000 to 3,000 years ago, the centuries-old practice is the definition of sustainable. —Liz Welch 28 worldmags
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The finding: Gender stereotyping in recommendation letters may hurt women’s job prospects. Colleagues tend to praise women’s skills in communicating and building relationships. Men tend to be valued for independence and achievement, which are viewed more positively by hiring managers. The process: Researchers studied 624 recommendation letters for junior faculty positions at a university. They compared the frequency of relationshiprelated words with the frequency of action-related words. Then, all names and gender pronouns were removed, and six professors rated the letters. Intriguing discovery: Men’s attitudes don’t account for the difference in emphasis. In fact, male writers were more likely than female writers to point out accomplishments in letters for female applicants. The takeaway: Hiring managers need to be aware of the different ways in which men and women are perceived and described in letters of recommendation and take subtle biases into account when making hiring decisions. —April Joyner
CLOCKWISE FROM TOP LEFT: COURTESY COMPANY (2); ISTOCK; LEO ESPINOSA
It Starts With the Bean Drying cacao in Madagascar; stone-crushed cacao from Mexico
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PASSIONS Rough and ready Krimmel is shown here (second from left) competing for the Varsity brawlers. She also skates with the after Shockers, the Derby Dolls’s all-star team. this year, she hopes to join the league’s national division. breaking away Krimmel plays the position of jammer, meaning she must break through the pack, race ahead to rejoin the back of the pack, and jam through. She scores a point for each opponent she passes. In this game, she was ejected in the second half after racking up too many penalties, and her team lost, 100 to 98.
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Life Outside the Office
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Micki Krimmel
Roller derby
Two years ago, a friend of Micki Krimmel’s invited her to an L.A. Derby Dolls roller derby
competition and encouraged her to try out. Krimmel, founder and CEO of Los Angeles– based NeighborGoods.net, an online service that helps people borrow, lend, and rent items, was hooked immediately. She joined the Derby Dolls’s “fresh meat” squad of rookie skaters and was soon drafted by the Varsity Brawlers, one of the league’s regional teams. Krimmel, who skates under the name Mickispeedia, practices with the Brawlers two to five times a week and competes roughly seven times a year. One of the best parts of the sport, she says, is being surrounded by strong, diverse women. “That community has become really important to me,” she says.
“You can’t be afraid to run toward a girl who’s twice your size and have her hit you.”
PHOTOGRAPH BY RUSS QUACKENBUSH worldmags
REPORTED BY ERIC MARKOWITZ
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He started covering His pretzels witH cajun spices. now tHe Hartford is covering His new delivery trucks. Sometimes one simple change opens a whole new world of opportunity. And seizing that moment might call for an investment in resources, from staff to trucks. The Hartford helps over a million business owners make the most of change, by covering business assets and helping employees prepare for their financial future. So go forward with confidence. Hear real stories from business owners like you at achievewhatsahead.com.
With The Hartford behind you, achieve what’s ahead of you.® © 2010 The Hartford Financial Services Group, Inc., Hartford, CT 06155. All rights reserved.
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STREET SMARTS BY NORM BRODSKY
Time for a Checkup How to make customers realize they need your product, understanding your company’s numbers, and building your company to sell Dear Norm, My new business puts on-site medical examination rooms in assisted-living communities. There is an urgent need for such rooms, because most communities don’t have one. Doctors and dentists from outside have to treat their patients in the hair salon or the cafeteria, even in a shower stall sometimes. As a dentist myself, I am appalled by the unsanitary conditions that medical professionals have to deal with in these places. My problem is that the industry is in denial. I can get to the CEOs, but then they talk to the facility managers, who deny that a problem exists. How do I overcome this resistance, short of appearing on 60 Minutes or Oprah?
ISTOCK
—Stuart Boekeloo Founder and CEO, Aleydis Centers, St. Joseph, Michigan
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We all run into unexpected obstacles and problems when launching a business. It’s part of the process. To me, it’s what makes entrepreneurship challenging and fun. Often, however, we get so close to a problem that we can’t see the solution sitting right in front of us. I think that’s what’s happened to Stuart. He actually isn’t so far off in his joking reference to 60 Minutes and Oprah. He is acknowledging, in effect, that outside pressure is needed to generate demand for his product. So how can he create that pressure? For openers, he can bring the issue to the attention of the people who would care most about it—namely, the men and women who are putting their parents in these places. There are many ways to reach them. I suggested Stuart think about approaching organizations such as AARP, Consumers Union, or the Department of Veterans Affairs. Maybe they would run articles in their magazines and newsletters or develop a system for rating assisted-living facilities
that would take into account whether they have separate on-site examination rooms. Or, if Stuart has contacts in local government, he can try to get an ordinance passed mandating that any assisted-living facility have a medical treatment room. He could then say to the CEOs, “Look, the regulators are stepping in. Instead of waiting for them to force you, why don’t you become a pioneer and lead the entire industry to do the right thing?” The word pioneer got Stuart thinking. When I spoke to him, he mentioned that one of the largest assisted-living companies had agreed to put his examination rooms in two of its downtown Chicago facilities. “That’s a start, but you have to get some press behind you,” I said. “I’d begin with the Chicago media and go from there. It’s perfect for them: an aging population, a growing need for assisted living, a problem that has to be solved, and a pioneer in solving it. The publicity will be great and may help you sell the customer on putting rooms in its other facilities.” “You’re saying I should go outside,” Stuart said. “I’m saying that when something isn’t working, you need to try something else,” I said. “You’ve FEBRUARY 2011
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STREET SMARTS
been going inside, and it hasn’t worked—because there’s no outside pressure on the facility owners to change. That’s what’s missing, and that’s what you have to create.”
Dear Norm, Fifteen years ago, I answered an ad in the paper for a sales job in the foundation repair industry and got hired. The owner ran the business out of his garage and had two installers, plus me. With a lot of hard work, we became one of the top companies in our area. Well, about a year ago, I bought the company by somehow persuading a bank to loan me $2 million. My problem is that I have only a high school diploma and have come this far by working hard and winging it. I realize I need to stop winging it and build the company the right way. I’m just not sure what I should do to become the kind of leader it needs. What’s your advice? —Bud Norton Matthews Wall Anchor Service, Beaver Falls, Pennsylvania Good entrepreneurs are constantly striving to improve themselves
and expand their knowledge, but sometimes you have to stop and give yourself credit for what you’ve already done. What Bud has accomplished with so little formal schooling is nothing short of amazing. He’s actually had a great education in business and one that he could never have gotten in a college classroom. To me, that is a big positive, not a problem, and I suggested that he start thinking—and talking—about it that way. That said, I could tell after a few minutes of conversation that there is one area Bud hasn’t yet mastered and needs to: the numbers. In that, he is no different from the vast majority of entrepreneurs, most of whom find accounting mysterious and daunting. But you really can’t know what’s happening in your company or make consistently good decisions without mastering the numbers. There are many ways to acquire the knowledge Bud needs. I suggested four. The company used QuickBooks, he said. I told him he should get the employees who put in the numbers to show him how the program works. Second, I thought he should hire a strong accounting person willing to also serve as a kind of tutor. Third, I urged him to sign up for an introductory accounting course. Finally, I recommended that he read Financial Intelligence and Financial Intelligence for Entrepreneurs, both co-written by Karen Berman and Joe Knight, with my former Inc. colleague John Case. They provide the best, clearest guides to the numbers that I know of.
Dear Norm, My wife, Michele Baratta, and I have a jewelry business, which we converted six years ago into a direct-selling company. Previously, she had sold her jewelry wholesale to customers such as Nordstrom, Sundance Catalog, and Macy’s, as well as to thousands of retailers. Although it was a big change, it has worked out great. Now I’m thinking we need a five-year plan with an exit strategy. Do you have any advice about when and where to get started? —Andrew Detwiler CEO, Michele Baratta atHome, San Diego I believe that, from Day One, you should build
a business as if it’s going to be sold—even if you never intend to sell it. When you look at it the way a potential buyer would, you notice things you might otherwise ignore, including improvements you can make and best practices you can adopt. So in response to Andrew’s question about when to start preparing for an exit, my answer was, “Immediately.” As for where to start, the opportunities were all over the place, but Andrew had missed them—perhaps because he wasn’t looking at the business through an investor’s eyes. For example, he told me that the company sold Michele’s jewelry through “consultants” who buy it and then hold house parties at which they resell it. When I asked how many consultants he had, he said “under 400”—out of 1,500 the company has recruited over the past five years. So how does that turnover rate compare with the industry average? Can Andrew figure out ways to reduce it? What do other direct-selling companies do? Among the consultants, there are wide variations in productivity. What are the stars doing that the others can learn from? Are the company’s prices right? What are the gross margins on its different types of jewelry? Maybe some lines aren’t making enough money to justify their continuance. The point is that building to sell will lead you to ask a lot of questions you should be asking anyway but don’t because you’re focused on the day-to-day, month-tomonth challenges of running a company. Andrew and Michele have built a good business with great prospects, but there’s more work to be done.
Please send all questions to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.
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IT’S TIME TO REWORK WORK
“If given a choice between investing in someone who has read REWORK or has an MBA, I’m investing in REWORK every time. A must-read for every entrepreneur.” —Mark Cuban, co-founder HDNet, owner of the Dallas Mavericks
“Simple, straightforward, and proven. Read this book multiple times to help give you the courage you need to get out there and make something great.” —Tony Hsieh, CEO, Zappos.com
“There’s no jargon or filler here—just hundreds of brilliantly simple rules for success. REWORK is required reading for anyone tired of business platitudes.” —Chris Anderson, New York Times bestselling author of THE LONG TAIL
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GET REAL BY JASON FRIED
How to Ride a Storm
When one of our products malfunctioned, thousands of stranded customers erupted in fury. Yet we came out of the crisis more credible than ever. Here’s what we did
cHRis sTRonG
It was a really lousy week.
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One of 37signals’s key products is Campfire, a real-time chat tool for small businesses. For about a week in mid-December, Campfire, which users access via the Web, kept bouncing on- and offline. This was the first major problem we have had with Campfire since it launched in 2006. For a product that needs to be as reliable as the dial tone on your phone, things couldn’t have been worse. Thousands of companies rely on Campfire. At 37signals, we use Campfire to run our business. Because we have employees in a dozen cities around the world, Campfire is our lifeline. It’s how we communicate with one another in real time. Campfire is where we make decisions, share designs, debate ideas, broadcast companywide announcements, and keep up to date on what everyone’s working on. Campfire went down for highly technical reasons, so I won’t go into detail about it. Essentially, three problems emerged at the same time, a combination of hardware and software failures that caused a lot of people a lot of problems. In some cases, we’d be down for only a minute or two. In others, outages would last as long as 45 minutes. For nearly a week, it was impossible to be sure if Campfire would work. Downtime disgusts us. It’s embarrassing. Knowing that our mistakes are disrupting thousands of people’s lives weighs heavily on us. No one is happy around here when our customers aren’t happy. And believe me, they let us know when they’re not happy. They flood our inbox with complaints. They broadcast their exasperation on Twitter. Here’s a little bit of what we heard when Campfire crashed: “I wish @37signals could sort their sh*t out, causing me a lot of grief lately.” “Come on guys. Killing my business over here...”“Up until a week ago, I’d suggest @37signals’ Campfire to anyone. Now, I’m telling everyone I know to avoid it.” People were upset, and they were right to be. When we mess up, we deserve to be the punching bag. illustration by laurent cilluffo
Of course, all companies experience episodes like this. How they handle the situation is what counts. I’m not talking about fixing the problem—you have to fix it; that’s a given. I’m talking about how you communicate with your customers, how you accept responsibility, and how you make things right. That’s what people remember. I’ve been a customer of companies that don’t know how to respond to a crisis. These outfits don’t own up to the problem. They hedge, they tiptoe, they get their PR departments to issue abstract nonapology apologies. Here’s one of the worst: “We apologize for any inconvenience we may have caused.” If ever there february 2011
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gEt REAl
was a nonapology apology, this is it. And just about every company uses it. I Googled the phrase We apologize for any inconvenience. It came up 41 million times. Let’s break this statement down. We apologize… Come on—when you really mean it, you say, “I’m sorry.” You don’t say, “I apologize.” If you spill hot coffee on someone, you say, “I am so, so sorry.” “I apologize” is renting the problem. “I’m sorry” is owning it. Now, to the second part of the nonapology: …for any inconvenience we may have caused. What a copout. For any? How about for all of it? May have caused? Don’t say maybe—say yes. Own it. We’re very careful about how we explain downtime and other glitches. We don’t beat around the bush. We don’t try to hedge. We don’t pass the blame to a vendor or another party. When our customers are affected, it’s on us. And we’ve discovered that the more
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We responded to every complaint and took the blame every time—even when people went overboard and launched into personal attacks. honest we are, the better our customers feel. They just want to know what’s going on and what happened. They want to be informed. Wouldn’t anyone? You don’t win any prizes for confusing people— especially during a crisis. The clearer and more honest you can be, the better off you’ll be. It’s hard to admit mistakes, but you really don’t have a choice. So here’s what we did when Campfire went down. First, we posted regular updates on the status page of our company’s website. We let people know we
were working on the problem. As we figured things out, we shared the results. And if we still didn’t understand something, we admitted as much. That’s OK with us. What isn’t OK is leaving people in the dark. Everyone’s afraid of the dark when their data are involved. We also took to Twitter. My business partner David Heinemeier Hansson responded to more than 100 tweets from customers. “We’re battling demons on all fronts and losing. It’s pathetic, I know,” David tweeted to one customer. “We’re
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spending the goodwill we’ve built from years of reliable service like it’s going out of style.”“So sorry for the disruption,” he wrote to another. “You can only say duh! so many times before people just think you’re annoying. We’re way past that,” he wrote. We responded to every complaint and took the blame every time—even when people went overboard and launched into personal attacks. There was no fighting back, no attempt to save face. We messed up, we knew it, and we let every customer know that we knew it. And our customers responded with enormous goodwill. “37signals has been giving a free lesson in customer service and honesty the past few weeks,” one customer tweeted. “Way to go on being awesome and communicative to your customers,” said another. Such expressions of support were really heartwarming—and evidence of how honesty, openness, and personal attention to a
difficult situation can turn the darkest moment into one of the brightest. We decided to give every Campfire customer a free month of service. We were down for only a few hours, total, but the downtime was spread out over multiple days. Besides, we didn’t earn our customers’ trust in December, so we didn’t earn their money, either. We have thousands of paying Campfire customers, so this wasn’t a cheap or easy decision. But it was the right thing to do. Finally, once we figured out what went wrong and took steps to make sure it wouldn’t happen again, we wrote a full post on our product blog detailing exactly what had happened. We started with a general overview that could be understood by everyone. Being in the software business doesn’t give you license to speak in code. Yes, some of our customers are technically gifted. But most of them aren’t, so speaking in tech jargon can cause even more confusion.
That said, we also delved into the technical details for those who care about those kinds of things. And we added a link to the announcement inside Campfire, so all our customers would see it. You can read the product blog post at productblog. 37signals.com/products/2010/12/campfire-outage-explanation-and-servicecredits.html. We learned a lot during that awful week. People don’t judge you on the basis of your mistakes—they judge you on the manner in which you own up to them. In my experience, most companies do a terrible job of taking blame. They lob press releases. Or they apologize for the inconvenience. Resist that temptation and say you’re sorry like you’re apologizing to a friend. Be good—and your customers will be good right back to you. Jason Fried is co-founder of 37signals, a Chicagobased software firm, and co-author of the book Rework, which was published last March.
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innovation
Companies on the Cutting Edge
“There’s no shortage of Third World farmers who would benefit from a plant trait like this.” —Richard Hamilton, CEO, Ceres
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Saltwater-tolerant Switchgrass
“This is a dummy pq. real pq is tk. This is a dummy pq, real pq is tk tk tk tk.�
Ceres
Good genes these genetically modified switchgrass plants are growing in a solution containing seawater from the pacific ocean.
—This is a pq attribute
worth its salt
Millions of acres of farmland worldwide are underused because of high salt levels. Ceres, a company in Thousand Oaks, California, has developed a genetic trait that allows certain plants to tolerate high levels of salt. Ceres uses genetic engineering tolead embed tk the salt-tolerance trait in tat. Peros vero dio dolestrud switchgrass, a nissed plantmagnit that lore minisi.Rem zzriuremas zzrit vero core maghas shown promise nibh exero dolorpero od maga source of biofuel such eliscin ismodoloreet la as ethanol. Thenibh company, consendre modo diamconum which receivedeugiam a $5 nonsendigna feu feum million grant from in henisthe nim ipisi. Department of Energy in 2009, has been testing the plants in greenhouses in California. Next, it plans to conduct field trials in natural settings, with the goal of bringing the seeds to market by 2015. Ceres also plans to conduct field trials of salt-tolerant rice plants in Asia this spring.
photograph by Bartholomew Cooke
rEportEd by jaSon del rey
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Feel Better About Your Future! Find a sense of security with your own business. INTERNATIONAL FRANCHISE EXPO April 1-3, 2011 • Washington, D.C. Walter E. Washington Convention Center Explore hundreds of franchise concepts in every industry and price range. It’s the can’t-miss business opportunity of the year! Free Expo and Seminars Compliments of Inc. Magazine! Use Promo Code: GPINC
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Your Business Toolbox
THE GOODS
Bring On the Fun! Spruce up your desk with playful accessories Is your penholder the most exciting thing on your desk?
If so, it might be time for some new accessories. These fun (and mostly functional) items will add some flair to your workspace and perhaps make you smile. —Lindsay Silberman
This whimsical 1.3-megapixel webcam has a microphone and a button for capturing still photos. The best part? You can adjust the arms so it clings to the top of your monitor. Compatible with only PCs. COST: $59, conranusa.com
i SOFT HUB USB
This USB 2.0 hub doubles as a funky objet d'art. The rubber device makes it easy to connect up to three devices, including cameras, modems, and network adapters, to your desktop or notebook. Compatible with Macs and PCs. COST: $25, momastore.org
f PINBALL MAGIC (APP)CESSORY
Bring the arcade to your desk with this iPhone pinball machine, which has a back box that lights up during play. After downloading a free app and sliding your phone into the dock, you can launch a ball with a plunger and slap it with two side flipper buttons. COST: $39.95, brookstone.com
COURTESY COMPANY (5)
f DESK DAISY
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f BUBBLEHEAD WEBCAM
Tired of scrounging in your drawer for paper clips? The Desk Daisy keeps them within reach and adds a splash of color to your desk. The 7-inch-tall "plant" comes with 30 petal-shaped clips that attach to magnetic, bendable stems. COST: $10, worldwidefred.com
f CROCHETED HEADPHONES
These adjustable headphones are encased in a soft yarn cover handmade in California by artist Traci MedeirosBagan. The "gear muffs" have a 44-inchlong cord and come in turquoise, pear, and mustard. COST: $35, uncommongoods.com FEBRUARY 2011
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THE GOODS
Products + Services
FIRST PERSON
1 2 3 4
My favorite tool for making presentations
MAUREEN CARROLL CO-FOUNDER, LIME DESIGNS SAN FRANCISCO
Have you tried a new product or service that helps you run your business? Head to www. inc.com/thegoods and tell us about it. We run the best comments in the magazine every month.
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Windows Phones Get a Makeover Is the platform worth a second look?
Windows smartphones haven’t been taken seriously until now. But the new Windows Phone 7 platform is easier to use than previous versions, runs on a faster 1GHz processor, and has a better selection of apps. We tested the following Windows Phone 7 models, all of which have 5-megapixel cameras, to see how they stack up. —John Brandon 1. SAMSUNG FOCUS
2. HTC SURROUND
3. HTC HD7
4. LG QUANTUM
Our top pick, the Focus weighs 4.2 ounces and has a bright 4-inch screen that is great for playing video games. The camera shot the clearest photos of the bunch. On the downside, the app selection is somewhat paltry. COST: $200 with a two-year AT&T contract
The 5.8-ounce Surround has a slide-out speaker and a sturdy kickstand, which makes it great for watching Netflix movies. Its 3.8-inch touchscreen was less vibrant than that of the Focus, but it responded a bit better to taps. COST: $200 with a twoyear AT&T contract
This phone's 4.3inch touchscreen was less responsive and vibrant than that of the Focus, and its kickstand was flimsier than the Surround’s. On the upside, the 5.7ounce phone comes with robust apps, such as TeleNav GPS. COST: $200 with a two-year T-Mobile contract
This bulky 6.2ounce phone has a slide-out keyboard, but we preferred typing on its more responsive 3.5-inch screen. We loved the feature called Play To, which let us stream music from the phone to a laptop over Wi-Fi. COST: $200 with a two-year AT&T contract
BARGAINS
Let’s make a deal Think of it as Groupon for businesses. OfficeArrow sends a deal-of-the-day e-mail to subscribers, offering discounts of 50 percent to 90 percent on business products and services. Recent deals include an 8GB Kensington USB drive for $14.50, a 50 percent discount, and a $50 coupon for HP toner cartridges for just $25. The e-mail subscription is free. OfficeArrow also offers paid memberships, including one that provides access to thousands of products in the site's discount club store for $99 a year. You can feature your own product or service as a daily deal in exchange for a percentage of the sales over 24 hours. —Adam Baer ILLUSTRATIONS BY MATTHEW HOLLISTER
FIRST PERSON: COURTESY SUBJECT; PHONES: COURTESY COMPANY (4)
My consulting company helps businesses and educational institutions develop problemsolving techniques related to the design process. I've never been a fan of traditional slide presentations, because they encourage linear thinking. When I first saw Prezi in action a year ago, I was blown away by its ability to facilitate new ways of thinking. My partner and I have been using it ever since. Prezi is a Web-based tool that lets you map out a presentation, including text, graphics, and embedded PDF files and videos, in one large layout. Instead of clicking through slides during a presentation, you zoom in on relevant information in the layout, then zoom out. Prezi is especially helpful during Q&A sessions, since it lets me quickly zero in on a relevant talking point rather than plod through 20 slides. Prezis are created and stored online, so I can share them with clients by sending a link via e-mail. I also hold real-time presentations with clients online. I like the fact that I can download the presentations to my desktop as well, so I always have them on hand. We pay $59 a year for our Prezi account, which lets us create unlimited presentations and store up to 500MB of data online. Unlike the free version, it does not require us to make presentations public on Prezi's site. —As told to J.J. McCorvey
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Be heard. Hear.
The Bose® Bluetooth® headset.
Finally, better sound quality for both ends of your calls. Introducing the first Bluetooth headset from Bose that does what others cannot. The Bose Bluetooth headset lets you hear and be heard, even as noise levels change. It is engineered with proprietary technologies, so voices sound the way they should and you can hear what is being said better than ever before. In addition, an exclusive noise-rejecting microphone combined with digital signal processing allows you to be heard even when calling from a noisy environment. By combining advanced design and materials, this headset stays securely and comfortably in place. No other Bluetooth headset offers all this. Experience it for yourself, and discover how much better you can hear, and be heard.
To learn more, call 1-800-486-7145, ext. 3073 or visit Bose.com/mobile ©2010 Bose Corporation. Patent rights issued and/or pending. The Bluetooth word mark is a registered trademark owned by Bluetooth SIG, Inc., and any such use by Bose Corporation is under license.
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THE GOODS
Business Travel
A reusable bottle that’s easy to clean
Things I Can’t Live Without Essentials for a pampered traveler Gina Stern knows airports better than most people. Stern is the founder of d_parture Spa, a day spa in New Jersey’s Newark Liberty International Airport that offers services such as haircuts and massages. Stern is preparing to open six more locations in airports nationwide. Here are two things she never travels without. —Tamara Schweitzer STERN’S AIRPORT SURVIVAL TIPS Skip the food court “Avoid fast food at the airport, and eat at real restaurants instead. I love Vino Volo, a tapas restaurant with several locations, including Dulles airport in D.C.”
R&D: Hotell began sketching designs for a segmented bottle that could be twisted apart for cleaning. He worked with Anvil Studios to create a prototype made of 50 percent recycled stainless steel and polypropylene. Anvil also helped him find an eco-friendly manufacturer in Indonesia. Hitting the market: Nice Reusables, Hotell's Oceanside, California, company, has sold more than 4,000 Alex bottles for $25.95 to $29.95 on its website and in small shops on the West Coast. In November, the company signed national accounts with the Container Store and Karmaloop.com. —April Joyner
Does your company sell a product with an interesting backstory? Head to www.inc.com/ thegoods and tell us about it. We feature the best ideas in the magazine every month.
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Book a room “If I have a long layover, I often check in to the airport hotel to relax. The Hyatt in the Orlando airport has nice rooms and affordable day rates.”
POCKETFLOPS BY FLOC DESIGN
SPRAYOLOGY STRESS RELIEF SPRAY
“These flip-flops have many lives. They fold up and fit in a small travel pouch, so when I’m traveling, I always keep them in my carry-on bag. I wear them to the airport just for getting through Security, then put on my regular shoes once I reach the gate. The flip-flops are also great when I want to get more comfortable on the plane, especially when my flight is delayed. When I’m on vacation and I go out for a night of dancing, I always put them in my purse in case I want to take off my heels.” COST: $22
“I love Sprayology’s line of homeopathic oral sprays, several of which are great for travel. I keep them in my purse at all times. My go-to spray is Stress Relief, which contains ingredients such as passionflower and valerian. It does wonders for me when I’m running around. TravelEase features ingredients such as tobacco (purported to treat dryness of the mouth and nose) and Indian berry (to reduce drowsiness). I also use the Cold + Flu Relief spray to ease cold symptoms on the road.” COST: $24
CONNECTIONS
Up in the air, texting away
Toktumi’s Line2 Professional app is a second line for your iPhone. It lets you make calls using Wi-Fi or 3G service instead of your cellular network. The app, a follow-up to Toktumi’s popular Line2 software, gives your phone a second number and separate calling interface. You can use the app to place and receive calls over Wi-Fi or 3G whenever service is available. The app also lets you text during airplane flights using Wi-Fi. We tested it on a flight from Minneapolis to Detroit and had no trouble sending and receiving texts. On the return trip, however, the Wi-Fi connection was spotty, and some messages did not go through. COST: $15 a month. —J.B.
FROM LEFT: COURTESY COMPANY (3); COURTESY SUBJECT
The “aha” moment: Chris Hotell switched to reusable water bottles after his wife, Olympic snowboarder Gretchen Bleiler, became an advocate for slowing climate change. But Hotell, a former pro snowboarder, had a hard time cleaning the narrow bottles. Standing at the kitchen sink one day, he resolved to come up with a better design.
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a luxury sedan for those with
money to burn but the good sense not to.
Discover why at HyundaiEquus.com. Think about it.
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THE GOODS
Work + Play
FINANCES
Tax-preparation tools, to go Even if you have a great accountant, preparing for Tax Day can be daunting. These apps aim to make the process easier. —J.B.
2
1
4
3
TURBOTAX TAXCASTER
This well-designed Intuit app provides a rough estimate of your tax bill or rebate after you tap in details such as marital status, age, income, and deductions. The app, which is available for the iPhone, Android, and Windows Phone 7 platforms, also has a robust Help section. COST: Free
CAPTURENGO
After you snap a photo of a receipt with your phone and hit Submit, Capturengo, available for iPhones and BlackBerrys, creates an IRS-approved digital receipt that you can access through an online account. You can organize receipts online and export data into Excel. COST: Free for up to 50 receipts a month, then $99 a year
The Play’s the Thing Cool new video game devices
Tired of playing the same old games? These add-ons liven things up by letting you throw faster punches, play instruments like a rock star, and control the action with your body. We tested them to see if they are worthy of a spot in your den. —J.B. 1. KINECT FOR XBOX 360
This Xbox accessory contains a sensor that scans 20 points on your body, letting you control games simply by moving. The movements were easy to master, and we had a blast playing boxing and river rafting, though the games were a bit simplistic. COST: $150
2. EVIL D-PAD
A cool upgrade for hard-core gamers, the D-Pad has four separate directional buttons instead of the connected axis on standard Xbox controllers. As a result, we threw faster punches in Street Fighter IV and switched weapons more easily in Call of Duty: Black Ops. COST: $75
3. ROCK BAND 3 KEYBOARD
4. PLAYSTATION MOVE
Rock Band, available for a variety of consoles, has unveiled its first keyboard, which has 25 velocitysensitive keys and a two-octave design. You can press colorcoded keys or play it like a real instrument. COST: $60 for the game; $80 for the keyboard
This starter kit includes a motion controller (above), a camera that tracks its movements, and a sports game. The controller was highly accurate during heated sword fights and Ping-Pong matches, but the games are as basic as the Kinect's. COST: $100
H&R BLOCK TAX ANSWERS
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TUNES
Stylin’ sounds Designed by Yves Behar, the sleek Jawbone Jambox is both a wireless music speaker and a speakerphone. The 12-ounce device, which has a rubberized top and bottom, can connect simultaneously to two Bluetooth-enabled devices, including smartphones and laptops, from up to 40 feet away. The stereo speaker, which also has a standard headphone jack, sounded crisp and clear during phone calls and pumped out impressive bass during Jay-Z songs. Available in four colors, the device comes with several apps, including one that converts voice messages into e-mail text, along with two USB charging cables and a carrying case. The battery lasts about eight hours fully charged. COST: $199 —A.B.
COURTESY COMPANY (5)
This iPhone app lets you browse through answers to tax questions posted by other users or submit your own questions to advisers. It also includes a searchable glossary of tax terms. H&R Block plans to launch another app that will let users create profiles and receive relevant alerts about tax news and deadlines. COST: Free
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BUILD A STRONGER WORKFORCE. START WITH A BETTER HEALTH PLAN.
How do you know what a better plan looks like? First, look at the health insurance company it comes from. Make sure they have the resources, dedication and commitment to address your specific needs. A good health plan can do more than help your employees get healthy, it can help your business grow healthy. To learn more about UnitedHealthcare plans, contact your broker, call 877.232.8839 or visit uhctogether.com/inc.
Start now. Visit uhctogether.com/inc ©2010 United HealthCare Services, Inc. Insurance coverage provided by or through UnitedHealthcare Insurance Company or its affiliates. Administrative services provided by or through UnitedHealthcare Insurance Company, United HealthCare Services, Inc. or their affiliates. Health plan coverage provided by or through a UnitedHealthcare company. UHCEW490212-000 worldmags
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CASE STUDY
Chargify’s clients were happy—as long as they didn’t have to pay. But when prices went up, the goodwill went away BY JASON DEL REY
L
PHOTOGRAPH BY CHRISTOPHER CHURCHILL
ike many entrepreneurs, the guys behind the online-billing start-up Chargify often
fantasized about generating buzz on some of the tech world’s most popular websites. One day in early October, about a year after the company’s launch, they got their wish. “I’m sure you’ll be laughing all the way to the bank, but not with my money,” a Chargify customer posted on the online tech forum Hacker News. “Today you’ve turned around and told all of us that we don’t matter to you,” groused another. Another was more direct: “Wow. What a kick in the nuts.” That morning, Chargify, which makes a Web-based system that small companies use to manage billing, had announced that it was changing its pricing model. Specifically, it was eliminating the free service it had offered to entice customers to sign up. The idea behind the so-called freemium model was that free users would in time upgrade to a version that cost $49 to $2,500 a month. The problem: After 12 months in business, less than 1 percent of clients were paying a dime. Chargify’s co-founders Siamak Taghaddos and David Hauser knew that no one would appreciate the change. But the pushback proved more powerful than anyone had anticipated. In addition to negative comments on Hacker News and the blog TechCrunch, the Needham, Massachusetts– based company was flooded with angry e-mails. Whether or not the pricing change was a good idea, it was clear the company had bombed the communication. Taghaddos and Hauser launched Chargify in September 2009. It was the first in-house incu-
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worldmags Good Cop, Bad Cop Siamak Taghaddos (right) called customers “freeloaders� on Twitter. David Hauser did damage control.
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CASE STUDY
The Experts Weigh In bated business for Grasshopper Group, which makes THINK BEFORE YOU SPEAK In social media, if there’s an opportunity for something to be intera suite of products for small-business owners, includpreted negatively, it will be. You really have to be careful with your ing the phone system Grasshopper. The billing-softwords; that means writing things and not hitting Send. We always ware marketplace is a crowded one, and Chargify tell our clients to put themselves in the position of the people they’re sought to stand out partially by its approach to prictalking to and try to communicate with that perspective in mind. Chargify’s big challenge now is convincing customers that it won’t ing. Users with 50 or fewer customers could use Charcontinue to change pricing policies whenever it gets “data” that say gify for free; as these companies grew and acquired the company could be making more money with a different model. more customers, they would graduate to a premium Michael Maslansky | CEO | Maslansky Luntz + Partners, New York City option. What’s more, unlike some of its rivals, the company does not collect a fee for each transaction IT’S GOING TO COST THEM or ask for a percentage of total billings. We compete with Chargify and have spent three years working in this market. The owners of these small companies—even if they Before launching, it seemed like a perfectly sound are free customers—see themselves as having made a significant idea. Given Taghaddos and Hauser’s experience with investment in time, resources, and energy to integrate with your Grasshopper, they figured that 15 percent of Charproduct. If you grandfather a bunch of the early evangelists, it gify’s nonpaying customers would grow into paying makes them feel special—and more inclined to talk up your service. Chargify didn’t do that, and I think it’s going to cost the ones within three months to six months of signing up, company more in bad will than it would in money if Chargify had which would provide enough revenue to build a sussupported those free customers for a few more months or a year. tainable business. Nathaniel Talbott | CO-FOUNDER | Spreedly, Raleigh, North Carolina But six months after Chargify’s launch, it was clear that the model wasn’t working. “We were attracting way TIME TO MOVE ON too many hobbyists—who were, with a few exceptions, Chargify’s new pricing was fine, though everything around its introduction was obviously done the wrong way. It was smart of Hauser just never going to be successful,” Hauser says. to admit on his blog post that Chargify had screwed up; it showed his The company’s executive team agreed that to lure human side. Ultimately, the company did what it needed to do to try faster-growing businesses as customers, it needed a to appease customers and move on. That’s smart; if you continue to new price structure that would weed out the hobbytry to defend your position too strongly against people who think you wronged them, it only shows you’re not paying attention. ists. The team agreed to eliminate the free option and Lincoln Murphy | MANAGING DIRECTOR | Sixteen Ventures, Arlington, Texas raise the price for companies with up to 500 customers from $49 a month to $99 a month. The price was justified, the company believed, because Chargify was adding new features, such as round-the-clock phone support and credit card security compliance services. It was a gify’s CEO, Lance Walley; and others went into damage-control gutsy move—Chargify would now have the highest entry-level mode, jumping online to address complaints and mollify angry price in the market. customers. Says Jeremy Butler, Grasshopper Group’s director of marketing: “We needed to do some triaging pretty damn quick.” n the morning of October 11, Chargify sent its As all this was happening, Taghaddos was out of the loop, 2,500 customers an e-mail announcing the as he was visiting family in Los Angeles. That afternoon, he change. “We are grateful for all the support we pulled out his BlackBerry and scrolled through Chargify’s Twithave received from merchants like you over the ter feed. He was stunned. He dashed off an e-mail to Hauser. past year,” it said, “and we are excited about the “Why are we apologizing for the pricing change?” Hauser’s future of Chargify.” The message went on to out- reply: “Front page of HackerNews, 112 comments, emails, and line the new features and included a link to the massive response on Twitter. People are ok paying (well the site’s new pricing page. The e-mail also explained that free custom- good ones) [but] they did not like the huge jump.” ers would have 45 days to begin paying or find another provider. Taghaddos fired off a response. “Rare are companies who tell At Grasshopper Group headquarters, the mood that morning it like it is however and not give in,” he wrote. “We should just be was rather relaxed. After all, says Hauser, “we changed pricing careful and not come across as weak.” with Grasshopper many times, both up and down, and never had Still, after talking to dozens of customers and responding any significant pushback.” to more than 100 complaints, Hauser felt strongly that the Then someone posted a link to the announcement on Hacker company had to do something. It had been a big mistake, he News. Others took to Twitter and the Comments section on thought, not to offer a lower-priced plan for current customers. Chargify’s blog to rip the price hike, the lack of advance notice, Walley agreed. “Our customers built their business plans and the absence of a grandfathering clause. One commenter around our pricing and didn’t think it would change,” he says. wrote, “...we were suckered into thinking that the free startup “There was a feeling of betrayal.” But Butler, the marketing account would be around until we outgrew it.” Hauser; Char- director, and chief operating officer Don Schiavone were reluc-
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tant to reverse course so quickly. “I wanted to see it settle for a week or two,” Butler says. The Decision For Hauser, waiting wasn’t an option. He wanted to act immediately. He decided to offer current Chargify customers with up to 100 customers a new, $39-per-month option, with all the features of the $99 plan. Early in the afternoon, Walley announced the new option on the company’s blog. TechCrunch responded with an article titled “Subscription Billing System Chargify Missteps as It Switches From Freemium to Premium,” inciting another wave of criticism. The next morning, Taghaddos decided he had had enough. He logged on to Twitter and began to write: “Moving away from freemium gets rid of freeloaders & bad customers, so you can provide better products & support to good ones.” His choice of words didn’t sit well with some customers. “Just saw the statement calling freemium users the freeloaders/bad customers,” tweeted a customer. “Pretty gutsy and flat out rude.” Taghaddos replied in an effort to clear things up. “Misunderstood,” he wrote. “Freemium models attract both good/loyal customers + bad ones. Moving away helps you focus on the good.” Hauser has known Taghaddos for eight years and was not surprised by his blunt comments. Still, Hauser and Walley redou-
Update
bled their efforts to accommodate customers who wanted more time before the new prices took effect. Hauser also wrote a post on his blog titled “How to Break the Trust of Your Customers in Just One Day.” Many readers commended Hauser for taking responsibility for the uproar, though several were miffed by some of his other comments, including “Free customers go out of business or never launch” and “Free customers have the time to complain.” Indeed, that was the final straw for Jeff Epstein, owner of a referral software provider called zferral.com. Epstein had been using Chargify for three months and had invested quite a bit of time into integrating the software into his own systems. Hauser and Epstein had a lengthy e-mail exchange, but in late November, Epstein jumped ship. “I really do respect that he took the time to chat with me,” Epstein says. “But I just can’t trust them anymore.” Chargify also introduced a $39-a-month option for users with 10 or fewer customers. It is guaranteeing all customers 12 months at the rate they signed up for. In the month following the October announcement, 35 customers left Chargify, compared with just 15 for the entire year leading up to the change. But the company also added 225 paying customers over the same period, up from 25 in the previous year. “We did hurt our image a little bit,” says Butler. “But the plan is already doing what we wanted it to: bringing in more revenue.”
HARMONY AND DISSONANCE eMusic’s last big move sparked outrage from longtime customers. Did the company learn its lesson?
boosted the company’s longterm prospects. Sonal Gandhi of Forrester Research said eMusic should have done more to involve customers in the changes. Alan Sorensen, a professor at Stanford, said that although the strategy was sound, the company’s PR could have been better. WHAT’S HAPPENED SINCE
THE PROBLEM
When we wrote about eMusic in March 2010, the subscriptionbased online music retailer was coping with a wave of customer anger over a price increase—as well as charges of selling out for adding titles from music giant Sony to a site once devoted solely to small, independent labels. The company attempted to address the anger by offering
perks such as free downloads. But CEO Danny Stein was determined to stay the course; he argued that eMusic’s prices were still lower than those of rivals such as iTunes and Amazon and that a larger catalog would draw more subscribers. WHAT THE EXPERTS SAID
Tim Westergren, founder of Pandora, said Stein’s strategy
eMusic has continued to expand its catalog, inking deals with more major labels, including Warner Music Group and Universal Music Group. In November, eMusic once again altered its pricing model as it switched from song-download credits to a currency-based system in which most tracks cost 49 cents to 89 cents. Adam Klein, a former EMI executive, joined as president and CEO in August. (Stein remains the company’s chairman.) At the same time, however, eMusic informed subscribers that three of its
top-selling indie labels— Domino, Merge, and Beggars Group—were leaving the site. That prompted a fresh wave of outrage, vented in messageboard posts with threats to quit and titles like “Full of Suck.” WHAT’S NEXT
As of December 2010, membership stood at about 400,000, virtually unchanged from a year before—although Klein expects a bump from the addition of Universal and Warner titles. Subscribers, Klein says, can look forward to new services, including some sort of streaming option. He also denies widespread rumors that the site is for sale. “The investors took a decision to either sell or grow the company,” says Klein. “They decided to grow it. I’ve been brought in to lead a team to build a wonderful customer experience, and we’re completely focused on that.” —Adam Bluestein FEBRUARY 2011
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An ongoing study of company builders gets to the heart of it: The most successful entrepreneurs move quickly, adjust frequently, and above all trust themselves.
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Does that sound like you? By Leigh Buchanan ILLUSTRATIONS BY GEORGE BATES FEBRUARY 2011
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“I’ve never done consumer marketing, so I don’t really know. I think probably...
I would…I wouldn’t do all this, actually.
hat distinguishes great entrepreneurs? Discussions of entrepreneurial psychology typically focus on creativity, tolerance for risk, and the desire for achievement—enviable traits that, unfortunately, are not very teachable. So Saras Sarasvathy, a professor at the University of Virginia’s Darden School of Business, set out to determine how expert entrepreneurs think, with the goal of transferring that knowledge to aspiring founders. While still a graduate student at Carnegie Mellon, Sarasvathy—with the guidance of her thesis supervisor, the Nobel laureate Herbert Simon—embarked on an audacious project: to eavesdrop on the thinking of the country’s most successful entrepreneurs as they grappled with business problems. She required that her subjects have at least 15 years of entrepreneurial experience, have started multiple companies— both successes and failures—and have taken at least one company public. Sarasvathy identified 245 U.S. entrepreneurs who met her criteria, and 45 of them agreed to participate. (Responses from 27 appeared in her conclusions; the rest were reserved for subsequent studies. Thirty more helped shape the questionnaire.) Revenue at the subjects’ companies—all run by the founders at that time—ranged from $200 million to $6.5 billion, in industries as diverse as toys and railroads. Sarasvathy met personally with all of her subjects, including such luminaries as Dennis Bakke, founder of energy giant AES; Earl Bakken of Medtronic; and T.J. Rodgers of Cypress Semiconductor. She presented each with a case study about a hypothetical start-up and 10 decisions that the founder of such a company would have to make in building the venture. Then she switched on a tape recorder and let the entrepreneur talk through the problems for two hours. Sarasvathy later collaborated with Stuart Read, of the IMD business school in Switzerland, to conduct the same experiment with professional managers at large corporations—the likes of Nestlé, Philip Morris, and Shell. Sarasvathy and her colleagues are now extending their research to novice entrepreneurs and both novice 56 worldmags
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and experienced professional investors. Sarasvathy concluded that master entrepreneurs rely on what she calls effectual reasoning. Brilliant improvisers, the entrepreneurs don’t start out with concrete goals. Instead, they constantly assess how to use their personal strengths and whatever resources they have at hand to develop goals on the fly, while creatively reacting to contingencies. By contrast, corporate executives—those in the study group were also enormously successful in their chosen field— use causal reasoning. They set a goal and diligently seek the best ways to achieve it. Early indications suggest the rookie company founders are spread all across the effectual-to-causal scale. But those who grew up around family businesses will more likely swing effectual, while those with M.B.A.’s display a causal bent. Not surprisingly, angels and seasoned VCs think much more like expert entrepreneurs than do novice investors. The following is a summary of some of the study’s conclusions, illustrated with excerpts from the interviews. Understanding the entrepreneurs’ comments requires familiarity with what they were
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I’d just go sell it. I don’t believe in market research.”
evaluating. The case study and questions are too long to reproduce here. But briefly: Subjects were asked to imagine themselves as the founder of a start-up that had developed a computer game simulating the experience of launching a company. The game and ancillary materials were described as tools for teaching entrepreneurship. Subjects responded to questions about potential customers, competitors, pricing, marketing strategies, growth opportunities, and related issues. (The full case study and questions can be found at www.inc.com/leadership.) Quotes have been edited for length, though we wish we had room to run them in their entirety. Sarasvathy remained almost silent throughout, forcing the founders to answer their own questions and externalize their thinking in the process. The transcripts, riddled with “ums” and “ers,” doublings-back on assumptions, and references to personal rules of thumb, read like verbal MRIs of the entrepreneurial brain in action. DO THE DOABLE, THEN PUSH IT
Sarasvathy likes to compare expert entrepreneurs to Iron Chefs: at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest. Corporate leaders,
by contrast, decide they are going to make Swedish meatballs. They then proceed to shop, measure, mix, and cook Swedish meatballs in the most efficient, cost-effective manner possible. That is not to say entrepreneurs don’t have goals, only that those goals are broad and—like luggage—may shift during flight. Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle Sarasvathy calls affordable loss. Repeatedly, the entrepreneurs in her study expressed impatience with anything that smacked of extensive planning, particularly traditional market research. (Inc.’s own research backs this up. One survey of Inc. 500 CEOs found that 60 percent had not written business plans before launching their companies. Just 12 percent had done market research.) When asked what kind of market research they would conduct for their hypothetical start-up, most of Sarasvathy’s subjects responded with variations on the following: “OK, I need to know which of their various groups of students, trainees, and
individuals would be most interested so I can target the audience a little bit more. What other information...I’ve never done consumer marketing, so I don’t really know. I think probably...I think mostly I’d just try to...I would...I wouldn’t do all this, actually. I’d just go sell it. I don’t believe in market research. Somebody once told me the only thing you need is a customer. Instead of asking all the questions, I’d try and make some sales. I’d learn a lot, you know: which people, what were the obstacles, what were the questions, which prices work better. Even before I started production. So my market research would actually be hands-on actual selling.”
Here’s another: “Ultimately, the best test of any product is to go to your target market and pretend like it’s a real business. You’ll find out soon enough if it is or not. You have to take some risks. You can sit and analyze these different markets forever and ever and ever, and you’d get all these wonderful answers, and they still may be wrong. The problem with the businessman type is they spend a lot of time with all their great wisdom and all their spreadsheets and all their Harvard Business Review people, and they’d either become convinced that there’s no market at all or that they have the market nailed. And FEBRUARY 2011
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“I always live by the motto of ‘Ready, fire, aim.’
I think if you spend too much time doing ‘Ready, aim, aim, aim,’
they’d go out there big time, with a lot of expensive advertising and upfront costs, because they’re gonna overwhelm the market, and the business would go under.”
The corporate executives were much more likely to want a quantitative analysis of market size: “If I had a budget, I could ask a specialist in the field of education to go through data and give me ideas of how many universities, how many media, how many large companies I will have to contact to have an idea of the work that has to be done.”
Sarasvathy explains that entrepreneurs’ aversion to market research is symptomatic of a larger lesson they have learned: They do not believe in prediction of any kind. “If you give them data that has to do with the future, they just dismiss it,” she says. “They don’t believe the future is predictable…or they don’t want to be in a space that is very predictable.” That attitude is a bit like Voltaire’s assertion that the perfect is the enemy of the good. In this case, the careful forecast is the enemy of the fortuitous surprise: “I always live by the motto of ‘Ready, fire, aim.’ I think if you spend too much time doing ‘Ready, aim, aim, aim,’ you’re never going to see all the good things that would happen if you actually started doing it. I think busi-
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The Effectual Entrepreneur in Action Bruce Flohr is one of Saras Sarasvathy’s original CEO subjects, and he recognizes in his story many of the traits her research identified. Certainly his company followed the opportunistic trajectory of a business run on effectual principles. Flohr, a brakeman turned executive at Southern Pacific, started San Antonio–based RailTex in 1977, renting hopper cars to quarry owners who needed to transport crushed rock to construction sites. By the time the company went public in 1993, it was a leading operator of shortline railroads. Flohr talks here about conducting business without a playbook. We didn’t need to look hard at the competition when we started out, because there wasn’t any, except for trucks. Some companies were financing leases on railcars. But we were renting them, and no one else had ever done that. So competition wasn’t a problem. We did do market research, because we needed the validation of “experts” to raise money. But personally, I didn’t need it. I knew this was a good idea. In those
ness plans are interesting, but they have no real meaning, because you can’t put in all the positive things that will occur...If you know intrinsically that this is possible, you just have to find out how to make it possible, which you can’t do ahead of time.”
That said, Sarasvathy points out that her entrepreneurs did adopt more formal research and planning practices over
time. Their ability to do so—to become causal as well as effectual thinkers— helped this enduring group grow with their companies. WOO PARTNERS FIRST
Entrepreneurs’ preference for doing the doable and taking it from there is manifest in their approach to partner-
PHOTOGRAPH BY JEFF WILSON
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you’re never going to see all the good things that would happen if you actually started doing it.”
first years, we made a lot of decisions because we knew they were good ideas. We once had 80 railcars coming off of a rental agreement, and Arthur Andersen, our auditor, was very uncomfortable that they weren’t going to be generating revenue. I thought there was an opportunity for our cars to be used in Alaska, hauling crushed rock from Wasilla to Anchorage. I was somewhat familiar with the state, because I had been in the Army there. We did not have a single customer or signed agreement. But I believed that if we got the cars up there, the shippers would see the benefit. So we sent all 80 cars to Alaska, and a railroad ended up renting them. In 1981 and ’82, interest rates got up to 21 percent, and most of the construction industry died. At that point we said, Do we want to look at doing something different, because we didn’t have enough cash flow to make our debt payments. We had a lot of industry expertise within the company, so we decided to try consulting. We would help small railroads solve their management problems. That move turned out to be lucky, because we found that a lot of these lines were very badly run. We thought we could do better. So when the San Diego and Arizona Eastern Railway came up for bid, we bought it. We made it profitable—partly by using refurbished engines. We ultimately ended up acquiring 32 lines in the U.S., Mexico, and Canada. By 1987, our railcar leasing business and our railroad operation business were about equal. Our CFO came to me one day and said, “Bruce, I think we should sell off our railroad lease fleet.” My first reaction was, “Gosh, are we going to throw out the baby with the bath water?” But after a 10- or 15-minute discussion, that just made a lot of sense. We didn’t do research on whether we could get the full asking price we wanted. We didn’t test the market to see who might be the buyers or whether there would be a lot more opportunities to buy railroads going forward. Since I sold RailTex, I’ve been investing in start-ups. I wish I’d known this stuff about effectual and causal when I started. I wouldn’t have made my first three investments. The founders of those companies are all causal thinkers. Only one of them is doing really well—up to $15.5 million from $4 million in 2009. I’ve been working closely with that founder to try to make him more effectual. For example, he was going to institute a bonus plan for key managers, and he wanted to bring in a consultant to put together a point system for allocating the money. I said, “No, no, no, no, no. Do what we did at RailTex. Have the top people write their own performance evaluations talking about their successes and what initiatives they plan to work on in the next year. You won’t get anything extraordinary if you have people performing to a checklist.” When I talk to entrepreneur classes, I like to use examples to explain the difference between effectual and causal thinkers. Genghis Khan was causal. Christopher Columbus was effectual. —As told to Leigh Buchanan
ships. While corporate executives know exactly where they are going and follow a prescribed path to get there, entrepreneurs allow whomever they encounter on the journey— suppliers, advisers, customers—to shape their businesses. “I would literally target...key companies who I would call flagship: do a frontal lobotomy on them. There are
probably a dozen of those I would pick. Some entrepreneurial operations that would probably be smaller but have a global presence where I’m dealing with the challenges of international sales... Building rapport with partners, with joint-venture colleagues as well as with ultimate users....The challenge
then is really to pick your partners and package yourself early on before you have to put a lot of capital out.”
Chief among those influential partners are first customers. The entrepreneurs anticipated customer help on product design, sales, and identifying suppliers. Some even saw their first customer as their best investor. “People chase investors, but your best investor is your first real customer. And your customers are also your best salesmen.”
Sarasvathy says expert entrepreneurs have learned the hard way that “having even one real customer on board with you is better than knowing in a handsoff way 10 things about a thousand customers.” Merely gathering information from a large number of potential customers, she says, “increases all the different things you could do but doesn’t tell you what you should do.” Toward that end, many of her subjects described their preference for an almost anthropological approach to customer interaction: observing a few customers as they work or actually working alongside them. “You can’t go out and survey customers and say, ‘OK, what kinda car do you really want?’ I believe very much in living it. If you’re gonna write a book about stevedores, go work as a stevedore for a period of time. My company FEBRUARY 2011
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“Your competition is a secondary factor. Analyze whether you think you can be successful or not
ket share, so they concentrate fiercely on who is in the marketplace. The first thing they do is map out the lay of the land.” was going to design and sell products for physical therapy, so I worked in rehab medicine for two years.”
Corporate executives, by contrast, generally envisioned more traditional vendor-customer interactions, such as focus groups. “I would like to get from them...by meeting with them or getting their input on what they think of the limitation of existing programs....just kind of sit and listen to them telling me...what new features they’d like. And I’d just listen to them talk, talk, talk and then be thinking and develop something between what they want and what’s possible technically.”
Sarasvathy says executives rely less on firsthand insights, because they can afford to place bets on multiple segments and product versions. “Entrepreneurs don’t have that luxury,” she says. SWEAT COMPETITORS LATER
The study’s corporate subjects focused intently on potential competitors, as eager for information about other vendors as about customers. “The corporate guys are like hunter-gatherers,” says Sarasvathy. “They are hired to win mar-
“What information do I want about my competition?…I want to see what kinds of resources they have. Do they have computer programmers? Do they have educational experts? Do they have teachers and trainers who can roll out this product? Do they have a support structure in place? Geographically, where are they situated? Have they got one center or lots of centers? Are they doing this just in English, or do they have different languages? I’d be wanting to look at the finances of these companies....I’d probably be looking at their track record to see what kind of approach they take to marketing and advertising so I know what to expect. I might look and see what people they hire, see if I can hire away someone who might have experience.”
By the time entrepreneurs start seeking investment, of course, they should be as far inside competitors’ heads as they can get. But the study subjects generally expressed little concern about the competition at launch.
Entrepreneurs fret less about competitors, Sarasvathy explains, because they see themselves not in the thick of a market but on the fringe of one, or as creating a new market entirely. “They are like farmers, planting a seed and nurturing it,” she says. “What they care about is their own little patch of ground.”
“Your competition is a secondary factor. I think you are putting the cart before the horse...Analyze whether you think you can be successful or not before you worry about the competitors.”
Corporate managers believe that to the extent they can predict the future, they can control it. Entrepreneurs believe that
And: “At one time in our company, I ordered 60 worldmags
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our people not to think about competitors. Just do your job. Think only of your work. Now that isn’t entirely possible. Now, in fact, competitive information is very valuable. But I wanted to be sure that we didn’t worry about competitors. And to that end, I gave the annual plan to every employee. And they said, ‘Well, aren’t you afraid your competitors are gonna get this information and get an advantage?’ I said, ‘It’s much riskier to not have your employees know what you need to do than it is to run the risk of competitors finding out. Cause they’ll find out somehow anyway. But if one of your employees doesn’t know why they’re doing their job, then you’re really losing out.’ ”
DON’T LIMIT YOURSELF
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before you worry about the competitors.”
to the extent they can control the future, they don’t need to predict it. That may sound like monumental hubris, but Sarasvathy sees it differently, as an expression of entrepreneurs’ confidence in their ability to recognize, respond to, and reshape opportunities as they develop. Entrepreneurs thrive on contingency. The best ones improvise their way to an outcome that in retrospect feels ordained. So although many corporate managers in Sarasvathy’s study wanted more information about the product and market landscape, some entrepreneurs pushed back on the small amount of information provided as being too limiting. For example, the description of the product as a computer game for entrepreneurship: “I would cast it not as a product but as a family of products, which might perform a broader function like helping people make career decisions. I always look for broad market opportunities.”
And: “I wanna use this product as a platform to attract other products literally to build a market-share play. I see this as a missionary product, an entrée into some of the best users and buyers.”
The most fascinating part of the study relates to the product’s potential. Asked about growth opportunities, the corporate managers mostly restricted
their comments to the game as described: “It depends on how it’s marketed. I’m a little bit skeptical....I’m not certain entrepreneurs would go for that. Maybe they think they already know everything. But in terms of simulations for business schools or in further education, they seem to be very popular. And entrepreneurship degrees seem to be very popular as well. So, yeah, it could well be a lot of growth.”
Here is where the entrepreneurs really let loose. Starting with the same information as one another and as the executives, they collectively spun out opportunities in 18 markets—not just academic institutions but also venture capital firms, consultancies, government agencies, and the military. As much as the ability to concoct new products, it is this tendency to riff off whatever ideas or materials are handy that defines entrepreneurs as a creative breed. Reading the transcripts, you can almost hear the enthusiasm mounting in their voices as the possibilities unfold: “This company could make a few people rich, but I don’t think it could ever be huge...You might have a successful second product about how to succeed
and get promoted within a large company....That would give you a market of everybody with aspirations at IBM, AT&T, Exxon, etc....You could make another product for students. How do I graduate in the top 10 percent of my class at Stanford or Harvard or Yale?...A lot about how to be a good student is teachable. Now you’ve got a product you can sell to every student in the country. Next there is negotiation. You could practice being a good negotiator. There’s not a salesman in the United States who wouldn’t buy one of those. Then you could genericize the thing to any situation which requires some sort of technical knowledge. Or learning situations within companies where you are trying to get people to understand that company’s methods or objectives. So maybe I’m gonna change my opinion about the growth potential. It’s easy to see how within an hour you could name 10 products that would each address huge markets, like all employees in Fortune 500 companies, who are rich enough to pay $100 for it. It could be a hit on the scale of the Lotus spreadsheet. You can see a several-hundred-million-dollar company coming from it.”
You might also glean from the preceding that entrepreneurs are eternal optimists. But you don’t need an academic study to tell you that. Leigh Buchanan is an editor-at-large for Inc. FEBRUARY 2011
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JA, SOCIALISM
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We venture to Norway, the very heart of the hell that is Northern European socialism. And find out that it’s not so bad. Pricey, yes, but a good place to start and run a company. What exactly does that suggest about the relation between taxes and entrepreneurship?
BY MAX CHAFKIN
AN EXPANSIVE MOOD
Jan Egil Flo (left), Simen Staalnacke (center), and Peder Børresen, the co-founders of Moods of Norway. In the early days of their $35 million company, they lived almost rent free, courtesy of the government.
PHOTOGRAPH BY ANDY RYAN
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iggo Dalmo is a classic entrepreneurial
type: the Working-Class Kid Made Good. Dalmo, who is 39, with sandy blond hair and an easy smile, grew up in modest circumstances in a blue-collar town dominated by the steel industry. After graduating from high school, he apprenticed as an industrial mechanic and got a job repairing mining equipment. He liked the challenge of the work but not the drudgery of working for someone else. “I never felt like there was a place for me as an employee,” Dalmo explains as we drive past spent chemical drums and enormous mounds of scrap metal on the road that leads to his office. When he needed an inexpensive part to complete a repair, company rules required Dalmo to fill out a purchase order and wait days for approval, when he knew he could simply walk into a hardware store and buy one. He resented this on a practical level—and as an insult to his intelligence. “I wanted more responsibility at my job, more control,” he says. “I wanted freedom.” In 1998, Dalmo quit his job, bought a used pickup truck, and started calling on clients as an independent contractor. By year’s end, he had six employees, all mechanics, and he was making more money than he ever had. Within three years, his new company, Momek, was booking more than $1 million a year in revenue and quickly expanding into new lines of business. He built a machine shop and began manufacturing parts for oil rigs, and he started bidding on and winning contracts to staff oil drilling sites and mines throughout the country. He kept hiring, kept bidding, and when he looked around a decade later, he had a $44 million company with 150 employees. As his company grew, Dalmo adopted the familiar habits of successful entrepreneurs. He bought a Porsche, a motorcycle, and a wardrobe of polo shirts with his corporate logo on the chest. As rock music blasts from the speakers in his office, Dalmo tells me that he is proud of the company he has created. “We tried to build a family, and we have succeeded,” he says. “I have no friends outside this company.” This is exactly the kind of pride I often hear from the CEOs I have met while working at Inc., but for one important difference: Whereas most entrepreneurs in Dalmo’s position develop a retching distaste for paying taxes, Dalmo doesn’t mind them much. “The tax system is good—it’s fair,” he tells me. “What we’re doing when we are paying taxes is buying a product. So the question isn’t how you pay for the product; it’s the quality of the product.” Dalmo likes the government’s services, and he believes that he is paying a fair price. This is particularly surprising, because the prices Dalmo pays for government services are among the highest in the world. He lives and works in the small city of Mo i Rana, which is about 17 miles south of the Arctic Circle in Norway. As a Norwegian, he pays nearly 50 percent of his income to the federal government, along with a substantial additional tax that works out to roughly 64 worldmags
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1 percent of his total net worth. And that’s just what he pays directly. Payroll taxes in Norway are double those in the U.S. Sales taxes, at 25 percent, are roughly triple. Last year, Dalmo paid $102,970 in personal taxes on his income and wealth. I know this because tax returns, like most everything else in Norway, are a matter of public record. Anyone anywhere can log on to a website maintained by the government and find out what kind of scratch a fellow Norwegian taxpayer makes—be he Ole Einar Bjørndalen, the famous Norwegian biathlete, or Ole the next-door neighbor. This, Dalmo explains, has a chilling effect on any desire he might have to live even larger. “When you start buying expensive stuff, people start to talk,” says Dalmo. “I have to be careful, because some of the people who are judging are my potential customers.” Welcome to Norway, where business is radically transparent, militantly egalitarian, and, of course, heavily taxed. This is socialism, the sort of thing your average American CEO has nightmares about. But not Dalmo—and not most Norwegians. “The capitalist system functions well,” Dalmo says. “But I’m a socialist in my bones.”
Norwegians don’t think about taxes the way we do. They tend to see taxes as a purchase, an exchange of cash for services. Norway, population five million, is a very small, very rich coun-
try. It is a cold country and, for half the year, a dark country. (The sun sets in late November in Mo i Rana. It doesn’t rise again until the end of January.) This is a place where entire cities smell of drying fish—an odor not unlike the smell of rotting fish—and where, in the most remote parts, one must be careful to avoid polar bears. The food isn’t great. Bear strikes, darkness, and whale meat notwithstanding, Norway is also an exceedingly pleasant place to make a home. It ranked third in Gallup’s latest global happiness survey. The unemployment rate, just 3.5 percent, is the lowest in Europe and one of the lowest in the world. Thanks to a generous social welfare system, poverty is almost nonexistent. Norway is also full of entrepreneurs like Wiggo Dalmo. Rates of start-up creation here are among the highest in the developed world, and Norway has more entrepreneurs per capita than the United States, according to the latest report by the Global Entrepreneurship Monitor, a Boston-based research consortium. A 2010 study released by the U.S. Small Business Administration reported a similar result: Although America remains near the top of the world in terms of entrepreneurial
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aspirations—that is, the percentage of people who want to start new things—in terms of actual start-up activity, our country has fallen behind not just Norway but also Canada, Denmark, and Switzerland. If you care about the long-term health of the American economy, this should seem strange—maybe even troubling. After all, we have been told for decades that higher taxes are without-a-doubt, no-question-about-it Bad for Business. President Obama recently bragged that his administration had passed “16 different tax cuts for America’s small businesses over the last couple years. These are tax cuts that can help America—help businesses...making new investments right now.” Since the Reagan Revolution, which drastically cut tax rates for wealthy individuals and corporations, we have gotten used to hearing these sorts of announcements from our leaders. Few have dared to argue against tax cuts for businesses and business owners. Questioning whether entrepreneurs really need tax cuts has been like asking if soldiers really “A SOCIALIST IN MY BONES” Wiggo Dalmo is all entrepreneur— need weapons or whether teachers really notwithstanding an ambivalence need textbooks—a possible position, sure, some of the lowest taxes in Europe, toward capitalism. but one that would likely get you laughed like Ireland, Iceland, and Estonia, out of the room if you suggested it. Or have suffered profoundly. The first thrown out of elected office. two nearly went bankrupt; Estonia, the darling of antitax Taxes in the U.S. have fallen dramatically over the past 30 groups like the Cato Institute, currently has an unemployment years. In 1978, the top federal tax rates were as follows: 70 perrate of 16 percent. Its economy shrank 14 percent in 2009. cent for individuals, 48 percent for corporations, and almost 40 Moreover, the typical arguments peddled by business percent on capital gains. Americans as a whole paid the ninthgroups and in the editorial pages of The Wall Street Journal— lowest taxes among countries in the Organization for Ecothe idea, for instance, that George W. Bush’s tax cuts in 2001 nomic Cooperation and Development, a group of 34 of the and 2003 created economic growth—are problematic. The largest democratic, market economies. Today, the top marginal unemployment rate rose following the passage of both tax-cut tax rates are 35 percent, 35 percent, and 15 percent, respectively. packages, and economic growth during Bush’s eight years in (Even these rates overstate the level of taxation in America. Few office badly lagged growth during the Clinton presidency, large corporations pay anywhere near the 35 percent corporate before the tax cuts were passed. tax; Warren Buffett has famously said that he pays 18 percent And so the case of Norway—one of the most entrepreneurin income tax.) Only two countries in the OECD—Chile and ial, most heavily taxed countries in the world—should give us Mexico—pay a lower percentage of their gross domestic product pause. What if we have been wrong about taxes? What if tax in taxes than we Americans do. cuts are nothing like weapons or textbooks? What if they don’t But there is precious little evidence to suggest that our low matter as much as we think they do? taxes have done much for entrepreneurs—or even for the I’m sure I’ve already pissed off some people with that economy as a whole. “It’s actually quite hard to say how tax question—and not just the rich ones. It’s hard these days to policy affects the economy,” says Joel Slemrod, a University of say anything positive about taxes without being accused of ecoMichigan professor who served on the Council of Economic nomic treason. President Barack Obama’s health care plan and Advisers under Ronald Reagan. Slemrod says there is no his proposal to allow certain Bush tax cuts to expire in 2012—a statistical evidence to prove that low taxes result in economic move that would cause the top marginal tax rate on individuals prosperity. Some of the most prosperous countries—for to go up by 4.6 basis points, to the rate that prevailed in the late instance, Denmark, Sweden, Belgium, and, yes, Norway—also 1990s—have caused the administration to be eviscerated by have some of the highest taxes. Norway, which in 2009 had the business groups and their allies. “We are essentially undoing the world’s highest per-capita income, avoided the brunt of the very thing that has made America exceptional: the free enterprise financial crisis: From 2006 to 2009, its economy grew nearly system,” wrote congressional candidate (and now a Republican 3 percent. The American economy grew less than one-tenth of congressman from New York) Richard Hanna in a letter puba percent during the same period. Meanwhile, countries with lished by the National Federation of Independent Business. “We PHOTOGRAPHS BY ERIKA LARSEN
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can no longer devalue the energy of the entrepreneur this way.” Newt Gingrich, a presidential hopeful and the former Speaker of the House, has called Obama’s presidency the first step toward “European socialism and secularism,” which he has suggested is a greater threat to our country than Islamic terrorism. The idea that Americans should be more terrified of Norwegian economists than of al Qaeda bombmakers is pretty nutty, but I couldn’t help wondering: How bad would European socialism really be? What if President Obama’s health care and tax policies—which so far have been modest by European standards— are just the beginning? What if his proposal to allow the income tax rate on the richest Americans to rise by several basis points is just the first step? What if, say, by some crazy backdoor dealing involving Joe Biden, Nancy Pelosi, and the Ghost of Ted Kennedy, liberals manage something more sweeping: taxes of 50 percent, a government-run health care system, an expansion of Social Security, and sweeping regulations on business? In other words, instead of some American version of European socialism, what if we got the genuine article? What if the nightmare scenario were real? What if you woke up tomorrow as a CEO in a socialist country? To answer this question, I spent two weeks in Norway, seeking
out entrepreneurs in all sorts of industries and circumstances. I met fish farmers in the country’s northern hinterlands and cosmopolitan techies in Oslo, the capital. I met start-up found-
ers who were years away from having to worry about making money and then paying taxes on it, and I met established entrepreneurs who every year fork over millions of dollars to the authorities. (Norway’s currency is the kroner. I have converted all figures in this article to dollars.) The first thing I learned is that Norwegians don’t think about taxes the way we do. Whereas most Americans see taxes as a burden, Norwegian entrepreneurs tend to see them as a purchase, an exchange of cash for services. “I look at it as a lifelong investment,” says Davor Sutija, CEO of Thinfilm, a Norwegian start-up that is developing a low-cost version of the electronic tags retailers use to track merchandise. Sutija has a unique perspective on this matter: He is an American who grew up in Miami and, 20 years ago, married a Norwegian woman and moved to Oslo. In 2009, as an employee of Thinfilm’s former parent company, he earned about $500,000, half of which he took home and half of which went to the Kingdom of Norway. (The country’s tax system is progressive, and the highest tax rates kick in at $124,000. From there, the income tax rate, including a national insurance tax, is 47.8 percent.) If he had stayed in the U.S., he would have paid at least $50,000 less in taxes, but he has no regrets. (For a detailed comparison, see “How High Is Up?” below.) “There are no private schools in Norway,” he says. “All schooling is public and free. By being in Norway and paying these taxes, I’m making an investment in my family.”
HOW HIGH IS UP?
So, how much higher are taxes in Norway? We looked at Davor Sutija’s 2009 income tax return—available, like all tax returns in Norway, on the Internet—and calculated a rough estimate for what he would have paid if he lived in the U.S. The CEO of Oslo-based Thinfilm isn’t rich enough to be touched by Norway’s 1.1 percent wealth tax, but he still paid far more in taxes in Norway than he would have in America, even if he lived in a high-tax state like Massachusetts. Leonard Levine, a C.P.A. in Boca Raton, Florida, and Martin Wikborg, a tax attorney in Ernst & Young’s Oslo office, helped us with the calculations.
GROSS SALARY INCOME AFTER DEDUCTIONS PAYROLL TAXES
INCOME TAX
OSLO
MASSACHUSETTS
FLORIDA
$537,000
$537,000
$537,000
$501,000
$516,000 for state tax $453,000 for federal tax
$479,000
National insurance, employee contribution, 7.8% of gross
Income tax (28% flat rate) Surtax (9% on income above $76,000; 12% on income above $124,000)
TOTAL INCOME TAX BILL EFFECTIVE INCOME TAX RATE
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$42,000
Social Security (6.2% on first $106,800) $6,600 Medicare (1.45%) $7,800
$140,000
Federal income tax (progressive, up to 35%)
$136,000
$138,000
$54,000
State tax (5.3% flat rate)
$27,000
None
$236,000
$177,000
$152,000
43.9%
33%
28.3%
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For a modestly wealthy entrepreneur like Sutija, the value of living in this socialist country outweighs the cost. Every Norwegian worker gets free health insurance in a system that produces longer life expectancy and lower infant mortality rates than our own. At age 67, workers get a government pension of up to 66 percent of their working income, and everyone gets free education, from nursery school through graduate school. (Amazingly, this includes colleges outside the country. Want to send your kid to Harvard? The Norwegian government will pick up most of the tab.) Disability insurance and parental leave are also extremely generous. A new mother can take 46 weeks of maternity leave at full pay—the government, not the company, picks up the tab—or 56 weeks off at 80 percent of her normal wage. A father gets 10 weeks off at full pay. These are benefits afforded to every Norwegian, regardless of income level. But it should be said that most Norwegians make about the same amount of money. In Norway, the typical starting salary for a worker with no college education is a very generous $45,000, while the starting salary for a Ph.D. is about $70,000 a year. (This makes certain kinds of industries, such as textile manufacturing, impossible; on the other hand, technology businesses are very cheap to run.) Between workers who do the same job at a given company, salaries vary little, if at all. At Wiggo Dalmo’s company, everyone doing the same job makes the same salary. The result is that successful companies find other ways to motivate and retain their employees. Dalmo’s staff may consist mostly of mechanics and machinists, but he treats them like Google engineers. Momek employs a chef who prepares lunch for the staff every day. The company throws a blowout annual party—the tab last year was more than $100,000. Dalmo supplements the standard government health plan with a $330-per-employee-per-year private insurance plan that buys employees treatment in private hospitals if a doctor isn’t immediately available in a public one. These benefits have kept turnover rates at Momek below 2 percent, compared with 7 percent in the industry. But it takes more than perks to keep a worker motivated in Norway. In a country with low unemployment and generous unemployment benefits, a worker’s threat to quit is more credible than it is in the United States, giving workers more leverage over employers. And though Norway makes it easy to lay off workers in cases of economic hardship, firing an employee for cause typically takes months, and employers generally end up paying at least three months’ severance. “You have to be a much more democratic manager,” says Bjørn Holte, founder and CEO of bMenu, an Oslo-based start-up that makes mobile versions of websites. Holte pays himself $125,000 a year. His lowest-paid employee makes more than $60,000. “You can’t just treat them like machines,” he says. “If you do, they’ll be gone.” If the Norwegian system forces CEOs to be more conciliatory to their employees, it also changes the calculus of entrepreneurship for employees who hope to start their own companies.
In search of an opinion on how soak-thesuccessful policies affect the truly successful, I visited the tiny town of Misvær, north of the Arctic Circle. “The problem for entrepreneurship in Norway is it’s so lucrative to be an employee,” says Lars Kolvereid, the lead researcher for the Global Entrepreneurship Monitor in Norway. Whereas in the U.S., about one-quarter of start-ups are founded by socalled necessity entrepreneurs—that is, people who start companies because they feel they have no good alternative—in Norway, the number is only 9 percent, the third lowest in the world after Switzerland and Denmark, according to the Global Entrepreneurship Monitor. This may help explain why entrepreneurship in Norway has thrived, even as it stagnates in the U.S. “The three things we as Americans worry about—education, retirement, and medical expenses—are things that Norwegians don’t worry about,” says Zoltan J. Acs, a professor at George Mason University and the chief economist for the Small Business Administration’s Office of Advocacy. Acs thinks the recession in the U.S. has intensified this disparity and is part of the reason America has slipped in the past few years. When the U.S. economy is booming, the absence of guaranteed health care isn’t a big concern for aspiring founders, but with unemployment near double digits, would-be entrepreneurs are more cautious. “When the middle class is shrinking, the pool of entrepreneurs is shrinking,” says Acs. The downside to Norway’s security, of course, is that it is expen-
sive. Norway has substantial oil reserves—but most of the proceeds are invested abroad in a sovereign wealth fund. Norway’s generous social benefits are financed largely from taxes that fall heavily on the country’s richest people. The most controversial of these taxes is a wealth tax, a 1.1 percent annual levy on the entirety of a person’s holdings above about $117,000, including stock in private companies held by the owner. In search of an opinion on how such soak-the-successful policies affect the truly successful, I visited the tiny town of Misvær, a mountain hamlet in the country’s interior, 38 miles north of the Arctic Circle. To get to Misvær, I took a small plane from Oslo to Bodø, where I was met by a gorgeous twentysomething blonde in a flight suit. She was, I somehow knew instantly, the pilot for Inger Ellen Nicolaisen, the country’s answer to Donald Trump and the most flamboyant character in a country that prefers its wealthy to go about their business modestly. After a short helicopter ride over a fjord and some mountains, we touch down in a snow-covered backyard, where we are greeted by a positively feudal scene: Nicolaisen trots out FEBRUARY 2011
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and for founding Nikita, the largest chain of hair salons in from the house, a modernistic structure perched far above the rest of the town like some enormous suburban castle, followed Scandinavia. Over 26 years, Nikita has expanded into a hair care conglomerate called Raise, whose concerns include a by five dogs—two Great Danes, two toy poodles, and a bullline of private-label products and 120 salons in Norway and dog. She has shoulder-length platinum blond hair and wears teal contact lenses and knee-high boots, looking entirely unlike Sweden. Nicolaisen owns the $60 million company outright. Her story, which she tells in a best-selling memoir, the 52-year-old mother of three that she is. “Welcome to Drivkraft—Norwegian for driving force—is a triumph of Miami,” she yells above the roar of the helicopter. scrappiness. Nicolaisen dropped out of high school at 14, She leads me inside, where we are attended by a pair of when she became pregnant. In her late teens, she supported servants who bring us coffee, pastries, and, though it’s not herself and her daughter, Linda, by hawking handmade quite noon, champagne. Nicolaisen’s husband—her second, children’s clothes. In her early 20s, she moved to Bodø and a 39-year-old former professional soccer player—eventually got a job as the receptionist in a hair salon. She took up with shows up and immediately begins assisting the servants. the salon’s owner, they eventually married, and she got Later, he shows me around the grounds on a six-wheel allhooked on the hair business. terrain vehicle. There are the grazing sheep, the three teepees Nicolaisen was never much of a stylist, but her entrepreequipped with heat, electricity, and full bars—Nicolaisen uses neurial ambitions quickly outstripped her husband’s.“My first the structures for corporate retreats—and the pack of Icelandic goal was five salons—that seemed like a big goal,” says Nicohorses. As we rumble around on the ATV, it seems clear to me laisen. She would eventually divorce her husband and take over that these are the sort of people who should be animated by the business completely. By 2000, she had expanded to 50 the wealth tax—and who won’t mind saying so. salons, and she found herself at a crossroads. She was booking But they aren’t, not really. Although Nicolaisen considers $21 million in revenue a year, and the company was throwing herself a conservative, she told me the issue that most animates her is poverty, not taxes. “Yeah, the wealth tax is a problem,” she off enough cash to allow her to live well. “I had to decide: says. “But you have to make a choice. You can live in the Cayman Should I relax, stop growing, and just earn a lot of money, or should I expand?” she says. “I realized I couldn’t stop there, Islands and pay no tax. But I don’t want to live in the Cayman so I set the next goal at 500. Because, Islands. To live in Norway, you have to do you know—5, 50, 500—it made sense.” what you have to. I think it’s worth it.” THE DONALD TRUMP I would have thought that Norway’s Nicolaisen is famous for being the host OF NORWAY tax system would discourage this kind of the country’s version of The Apprentice Inger Ellen Nicolaisen would love to pay less in taxes—unless it meant of thinking, but it doesn’t seem to have leaving the country. been a factor. When I asked her why she bothered growing, she said simply, “I’m an entrepreneur. It’s in my backbone.” This was the attitude of even those entrepreneurs who strenuously objected to the Norwegian tax regimen, which I learned when I traveled to Stokmarknes and visited the region’s best-known entrepreneur, Inge Berg. Berg’s company, a fish-farming enterprise called Nordlaks, is a half-hour’s flight north of Bodø. The cold North Atlantic waters there make for ideal spawning grounds for salmon, cod, and herring. We hop into an inflatable skiff and, with Berg in the cockpit, motor across the fjord to one of the company’s 23 fish farms. There are three floating pens, barely visible from a distance, each housing 50,000 teenage salmon jostling to catch the food pellets that are being blown over the pens from a nearby barge. When Berg started as a fish farmer, it was his job to hand-feed the 68 worldmags
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Even if his company made no profits,paid no dividends, and paid its owner no salary, Berg would owe the Norwegian government a third of a million dollars a year. fish, dumping bucket after bucket of feed over the pens. From the farm, we take the boat back to Berg’s slaughterhouse and packing facility, where the same salmon will eventually meet their demise at a breathtaking rate of one fish per second. “One of the reasons we’ve been successful is that we’ve focused exclusively on salmon and trout farming—some other companies tried to expand to the tourist industry or the cod industry,” Berg says over the din of the machines. “We invest everything in improving the process.” Berg proudly catalogs a number of innovations—a flash-freezing process, a robotic packing system, and a fish oil plant that ensures that no fish scrap is wasted. For now, the oil is mainly used in livestock feed, but Berg brags that he has made sure it is approved for human consumption, then proves his point by pouring me a shot of the viscous pink liquid. (It smelled and tasted awful, but to his point, I did not die.) In 2009, Nordlaks pulled in $62 million in profits on revenue of $207 million, making Berg, the sole owner, a very rich man. Although the Norwegian wealth tax includes generous deductions that allow Berg to report a net worth of about $30 million, far less than he would net if he sold his company, his tax bill is still substantial. Even if Nordlaks made no profits, paid no dividends, and paid its owner no salary, Berg would owe the Norwegian government a third of a million dollars a year. “Every year, I have to take a dividend, just to pay the tax,” he says, sounding genuinely angry. Berg is successful enough that paying the wealth tax is no hardship—in 2009, he took a dividend of nearly $10 million—but when a company slips into the red, entrepreneurs can find themselves in trouble. “If a company grows to a large size and then has two bad years in a row, the founder may be forced to sell some stock,” says Erlend Bullvåg, a businessschool professor at the University of Nordland and an adviser to the Norwegian central bank. But none of the entrepreneurs I spoke with had been forced to sell stock to pay their taxes—and Bullvåg, who has interviewed dozens of entrepreneurs on behalf of the Norwegian central bank, hasn’t encountered a case personally. Berg told me that he hadn’t given much thought to the wealth tax; he didn’t even know exactly how it was calculated. “I get so pissed sometimes,” he says. “But you just have to look forward, and it passes.” The posting of tax returns online makes tax evasion nearly
impossible in Norway, but it doesn’t stop the very rich from fleeing the country altogether. The best-known example is John
Fredriksen, a shipping tycoon worth $7.7 billion and at one time the richest Norwegian. In 2006, Fredriksen, who had kept most of his personal assets outside the country to avoid taxes, renounced his Norwegian citizenship. He became the richest man in Cyprus. Fredriksen’s past is murky—he is reputed to have been one of the only exporters willing to do business with Iran after the revolution—and he rarely gives interviews. But in 2008, he told The Wall Street Journal, “It’s almost impossible to do business in Norway today.” Norway’s prime minister, Jens Stoltenberg, dismissed the defection as no great loss—Fredriksen hadn’t paid personal taxes in Norway for decades, and his companies continue to pay taxes in the country. Even so, Fredriksen is something of a folk hero to the entrepreneurs in his former home. “He is cool,” says Jan Egil Flo, chief financial officer of Moods of Norway, a $35 million clothing company in Stryn. I visited Moods of Norway’s offices on my last day in Norway and chatted with Flo and his co-founders, Simen Staalnacke and Peder Børresen. The three were able to start their company, which makes fashionable sportswear and suits, largely thanks to the beneficence of the Norwegian socialist system. In 2004, they received a $20,000 start-up grant from the Norwegian equivalent of the Small Business Administration. Staalnacke and Børresen enrolled in a local college, because doing so meant the government would cover most of their living expenses. This may be why, when I ask the three founders if they might become Cypriots anytime soon, they protest. “No, no, no,” says Børresen. “We’ve received a lot from Norway and Norwegian society. Giving back is not a problem.” Moods of Norway operates 10 boutiques, which, in a country of five million, means the company has saturated its home market. Two years ago, it opened its first store in the U.S., a 2,500-square-foot space in Beverly Hills, and Flo is in negotiations to open stores in New York City’s SoHo neighborhood and Mall of America in Minnesota. It has been more challenging than he expected. “It’s much easier to do business in Norway,” Flo says. “The U.S. isn’t one country; it’s 50 countries.” Although Norway may be more heavily regulated than America, the regulations are uniform across the country and are less apt to change drastically when the political winds blow. In addition to regulatory stability, Flo pointed to a number of other advantages his company enjoys in Norway. Although personal taxes on entrepreneurs are high, the tax rate on corporate profits is low—28 percent, compared with an average of about 40 percent in combined federal and state taxes in the U.S. A less generous depreciation schedule and higher payroll taxes in Norway more than make up for that difference—Norwegian companies pay 14.1 percent of the entirety of an employee’s salary, compared with 7.65 percent of the first $106,800 in the U.S.— but that money pays for benefits such as health care and retireFEBRUARY 2011
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ment plans. “There’s no big difference in cost,” Flo says. In fact, ham’s Small Giants, about company owners who choose not to his company makes more money, after taxes, on items sold in maximize profits and instead seek to make their companies Norway than it does on those sold in its California shop. great; and it can be found in the countless stories, many of them Flo is pushing his business into America for reasons that told in this magazine, of founders who leave money on the table have nothing to do with our tax structure. He wants Moods of in favor of things they judge to be more important. Norway to be here because America is the largest, most influAt one point, I asked Wiggo Dalmo why he was still working ential market in the world. “There are more Norwegians in the so hard to expand his company: Why not just have a nice life— Minneapolis area than in Norway,” Flo says excitedly. “If you especially given that the authorities would take a hefty chunk of can get known in America, then the whole world knows you.” whatever additional money he made? “For me personally, buildI heard this sort of sentiment from lots of the entrepreneurs I ing something to change the world is the kick,” he says. “The spoke with in Norway. They talked about the ambition and worst thing to me is people who chose the easiest path. We aggressiveness of American culture, which can’t help breeding should use our wonderful years to do something on this earth.” success. The younger entrepreneurs yearned for our tradition of mentoring, whereby seasoned entrepreneurs help nascent ones, When I got back to the United States, I had a beer with Bjørn with money or advice or both. Holte, the CEO of bMenu, whom I’d first met in Oslo. It was The more time I spent with Norwegian entrepreneurs, the early November—days after the congressional elections—and more I became convinced that the things that make the United Holte had just arrived in New York City, where he is opening a States a great country for entrepreneurs have little to do with the new office. We talked about the commercial real estate market, fact that we enjoy relatively low taxes. Kenneth Winther, the the amazing cultural diversity in a city that has twice as many founder of the Oslo management consultancy MoonWalk, people as his entire country, and the current debate in the regaled me for hours about the virtues of Norway—security, United States about the role of government. Holte was fascigood roads, good schools. But at the end of our interview, he nated by this last topic, particularly the angry opposition to confessed that he had been hedging his bets: He intended to President Obama’s health care reform package. “It makes me apply to the American green-card lottery in January. “Why not laugh,” he says. “Americans don’t understand that you can’t try?” he said with a shrug. have a functioning economy if people aren’t healthy.” I also became convinced of this truth, which I have observed Holte’s American subsidiary pays annual health care premiin the smartest American and the smartest Norwegian entrepre- ums that make his head spin—more than $23,000 per employee neurs: It’s not about the money. Entrepreneurs are not hedge for a family plan—and that make the cost of employing a softfund managers, and they rarely ware developer in the United States substantially higher than it is in Norway, even after taxes. (For a operate like coldly rational ecoCAPTAIN OF INDUSTRY full breakdown, see “Making Payroll,” on the next nomic entities. This theme runs “I get so pissed sometimes,” Inge page.) Holte is no pinko—he finds many aspects of through books like Bo BurlingBerg says about the Norwegian Norwegian socialism problematic, particularly reguwealth tax. “You just have to look forward, and it passes.” lations about hiring and firing—but when he looks at the costs and benefits of taxes in each country, he sees no contest. Norway is worth the cost. Of course, that’s only half the question when it comes to taxes. The other, more divisive question is, What is fair? Is it right to make rich people pay more than poor people? Would paying a greater percentage of our income for more government services make us less free? “I’d rather be in the U.S., where you can enjoy the fruit of your labor, rather than a country like Norway, where your hard work is confiscated by the government,” says Curtis Dubay, senior tax policy analyst at the Heritage Foundation, a Washington, D.C., think tank that advocates for lower taxes. These are important moral issues, but, in America, they are often the only ones we are willing to consider. We have, as Holte suggests, become religious about economic policy. We are unable or unwilling to make the kind of cool-headed calcula-
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MAKING PAYROLL
The high value of the kroner makes Norway very expensive for foreigners. (A beer in Oslo can cost $15.) But employing people, especially skilled workers, is surprisingly inexpensive. Here’s what one Norwegian tech company, Oslo-based bMenu, pays each year to employ software developers in Norway and the United States.
SALARY PAYROLL TAXES
OSLO
NEW YORK CITY
$100,000
$100,000
National insurance contribution, 14.1% of total salary*
$14,100
Social Security (6.2% of first $106,800) Medicare, 1.45% of salary Federal unemployment
RETIREMENT PLAN
Supplemental retirement plan
$2,100
PRIVATE INSURANCE
Accident and travel insurance
$403
State unemployment
$349
City transit tax
$340
401(k), 6% match Workers’ compensation Disability Health insurance, 80% employer contribution
TOTAL SALARY COST OF BENEFITS
$116,603 16.6%
$6,200 $1,450 $56
$122,490 (single)
$6,000 $503 $56 $7,536 (single) $23,360 (family)
$138,314 (family)
22.5% single 38.3% family
*
The National Insurance contribution is a flat payroll tax that includes all local and national payroll taxes. Oslo, as Norway’s most expensive city, has the highest tax rate. The rate is slightly lower in the rural North.
tions about costs and benefits that I saw in Norway.“There’s a disconnect in the way people think about paying taxes and funding public services that’s worse here than in any other country,” says Donald Bruce, a tax economist at the University of Tennessee.“We refuse to believe that taxes can be used for anything productive. But then we say,‘Stay out of my Social Security. And my Medicare. And don’t cut defense or national parks.’” Our collective inability to have a rational conversation about taxes will have consequences. In 2010, the American budget deficit hit $1.3 trillion, or 10 percent of GDP. By 2035, the deficit could be close to 16 percent of GDP, according to the report issued late last year by the National Commission on Fiscal Responsibility and Reform. That report prescribed dramatic spending cuts and tax increases. But just weeks after it was released, President Obama and congressional Republicans unveiled a new package of tax cuts, which will add an extra $800 billion to the deficit over two years. Obama has said he hopes to allow these cuts to expire in 2012 and for income tax rates to revert to levels of the 1990s, and that is only one of many revenue-generation ideas kicking around in policy circles. There are also proposals for a tax on millionaires, a national sales tax, and even a dreaded, Norwegian-style wealth tax.
When lawmakers inevitably take up these issues, it’s a sure thing that those who oppose raising revenue through tax hikes will make the argument that higher taxes will hurt entrepreneurs. They will make it sound as if even a modest tax increase would represent a death knell for American business. But the case of Norway suggests that Americans should view these arguments with skepticism—and that American entrepreneurs could stand to be less dogmatic about the role of government in society. This isn’t to say that entrepreneurs don’t have a right to get angry about taxes—or to fight tax increases in the same way they might fight any price increase by a supplier. It is to say only that, despite what you hear from Washington politicians and activist groups, the tax rate is probably far from the most important issue facing your business. Entrepreneurs can thrive under almost any regime, even the scourge of European socialism. “Taxes matter, but their effect is small in magnitude,” says Bruce. “In the end, decisions entrepreneurs make are about more important things: Is there a market for what you’re making? Are you doing something relevant for the economy? If the answer is no, then taxes don’t matter much.” Max Chafkin is Inc.’s senior writer.
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DIXON SCHWABL: Winning Through Fun
Staffers at this upstate New York enterprise don’t get the “Sunday blues.” Instead, looking ahead to Monday, they get excited.
Advertising and communications firm Dixon Schwabl has created branding and media campaigns for a variety of companies in its 23 years, from United Way to Miss Betty’s Slammin’ Sauce. No surprise, then, that when it came to building its own business, founder and CEO Lauren Dixon had a crystal-clear idea of her own “brand”—one that was 180 degrees from advertising’s usual high drama. “I knew what kind of culture I wanted to create but wasn’t sure how to go about it,” she says. “So I talked to my dad—he owned a trucking company—and he gave me some great advice: hire people who are smarter than you and motivate them so they come to work excited every day. If you pay attention to those two things, everything else falls into place.” And for this firm, recognized by Inc. and Winning Workplaces® as a Top Small Company Workplace in 2010, it definitely has: the voluntary turnover rate stands at just 3 percent—and during 2008-2009, the number of new clients doubled.
Serious Fun “Our company culture comes down to giving people the freedom and responsibility to do their jobs,” says Mike Schwabl, the company’s president. For Dixon Schwabl’s 85 employees, most of whom work out of headquarters in Victor, New York (there’s also a satellite office in South Carolina), that personal freedom leads to high-energy innovation and high productivity. “We’re really empowered to have an idea and run with it,” says Kim Allen, vice president of public relations. “When I first started here, I was handed an account for a fire-proof gun safe. I came up with this crazy idea for the Las Vegas launch—for a firemen’s parade down the Strip—and Lauren said, ‘Let’s do it.’” While the logistics didn’t work out, Allen knew Dixon Schwabl would be a company where ideas would be valued. “There are no barriers.” Freedom and responsibility—along with core values like respect, integrity, and teamwork—reflect Dixon Schwabl’s serious side. But the heart of the firm is fun. “We actually have it as a line item in our budget,” says Dixon. Fun is built into every single day, even
into the very building from which the company operates. A swirly slide delivers staffers from the second floor to the brightly hued lobby where they meet clients. Fresh-baked cookies and a koi pond help employees destress during high-intensity projects. In the summer Wednesday lunch is an all-office barbecue, and on Thursdays, everybody meets up for ice cream. “We get wild and crazy, but in little pockets of times,” says Dixon. “It helps everybody keep perspective, and it makes people smile.” Celebrating achievements large and small is another big part of the culture. “We all get together every Wednesday morning and celebrate what we’ve done, work and personal,” says Schwabl. “Everybody has a chance to talk. That’s important—things tend to fall apart if you don’t communicate. And it keeps people motivated.”
Supportive Benefits Bolstering the company’s hard work/hard play style are a host of stellar benefits, including three different health plans that include vision and dental (the company pays up to 60 percent on a sliding scale), as well financial protection benefits like life insurance (two times annual salary) and disability. The company matches 25 percent of contributions to a 401(k) up to 4 percent, and employees are vested after six years. A new “find me, follow me” phone system gives staffers flexibility when they need to be offsite for a kid’s football game or a doctor’s appointment. And employees get time off for their birthdays and volunteer work, too. In addition, if they want to change career paths, the company lends a hand, helping to fund educational costs. “There’s tremendous opportunity for people to grow here,” says Karen Sims, vice president of people and development. “Ours is an intense client-service business, but the senior leadership truly cares about us,” says Kim Allen. “They know that if we’re happy, the clients will be happy too.” Dixon and Schwabl give equal credit to their employees. “It’s not like we figured out how to be a great place to work and it’s done—we’re always evolving, and we get excited when people come up with new ideas,” says Dixon. Schwabl agrees. “Our corporate culture really comes from our staff. We just make it possible.”
Unum is a proud sponsor of Winning Workplaces® and is pleased to recognize companies that show their employees how much they care.
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The cost of benefits is soaring Making it harder to keep expenses down And the quality of your plan up But change is in the air
Simply UnUm Employees want choices. You need cost stability and predictability. Simply Unum® offers it all. The key is our multiple funding options—employer paid, employee paid or our new Benefit CreditsSM model, which allows you to allocate a fixed dollar amount to each employee—helping keep costs in line year over year. And thanks to our single online platform, administering group and voluntary benefits couldn’t be simpler. To learn more, call your broker, Unum representative or visit unum.com/simplify. SimplE ADminiSTRATiOn ° EmplOyEE EDUCATiOn ° BEnEFiT AnD FUnDinG OpTiOnS © 2010 Unum Group. All rights reserved. Unum is a registered trademark and marketing brand of Unum Group and its insuring subsidiaries. Insurance products are underwritten by the subsidiaries of Unum Group. Simply Unum may not be available in all jurisdictions. NS10-010
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ready for liftoff?
We’ve all seen futuristic gadgets in movies and TV shows and wished we had one. These entrepreneurs have gone a step further, developing real-life versions of Hollywood fantasies, including James Bond’s underwater car, Batman’s grappling hook, and Professor John Robinson’s jetpack from Lost in Space by john brandon
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TAKING FLIGHT HOLLYWOOD CONCEPT:
Professor John Robinson’s jetpack in Lost in Space REAL-LIFE INNOVATION: The Martin Jetpack by Martin Aircraft Glenn Martin found an unlikely guinea pig to test his first jetpack: his wife, Vanessa, who had given birth to their second son just six weeks before the maiden flight, in 1998. “She would strap into the pack, do a test run, then go back and check on the baby,” Martin recalls. Three years ago, his company, Martin Aircraft, unveiled a final version of the Martin Jetpack. The device has two massive side-mounted fans and is powered by a 2-liter, 200-horsepower engine that runs on standard gasoline. It can lift an individual up to 8,000 feet in the air and travel at a maximum speed of 63 mph for a distance of 31 miles, beating the overall performance of many other jetpacks. Though he originally focused on the leisure market, Martin is now working mainly on military and civil defense applications for the jetpack, including an unmanned version, the Skyhook UAV, which is set to debut in 2011. The Skyhook could be used to conduct reconnaissance missions, he says, or to repair transmission towers on mountaintops. For Martin, the jetpack is a culmination of a lifelong goal that began while he watched Lost in Space as a kid. After college, he worked in the pharmaceutical industry before founding Martin Aircraft in Christchurch, New Zealand, in 1996. The company has 10 employees and, says Martin, $750,000 in annual revenue generated from classified research projects. The Martin Jetpack doesn’t have much in common with Professor Robinson’s apparatus, which had a seemingly endless supply of fuel and could position him both horizontally and vertically. The real-life version is much bulkier, stays at a vertical tilt of about 35 degrees in flight, and requires refueling every couple of hours. “Fiction had an idea of what this looks like,” Martin says. “We produce something that works.” FEBRUARY 2011
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MIND GAMES
LOOK, NO HANDS!
HOLLYWOOD CONCEPT: Alien brain-wave communication in Battle: Los Angeles REAL-LIFE INNOVATION: The MindSet brain-wave interface by NeuroSky
HOLLYWOOD CONCEPT: The gesture-controlled computer in Minority Report REAL-LIFE INNOVATION: The g-speak Spatial Operating Environment by Oblong Industries
In the sci-fi film Battle: Los Angeles, scheduled to debut in theaters next month, an advanced alien race invades Earth with high-tech weaponry. Instead of using radios or phones, the aliens can communicate nonverbally using devices embedded in their bodies. “Their technology has advanced from ours in a superior, dynamic, and organic way to create next-generation technology,” explains Jonathan Liebesman, the film’s director. The aliens’ nonverbal communication devices may sound far-fetched. But a handful of companies, including NeuroSky in San Jose, California, already make headsets that allow people to power video games with their minds. The devices sense analog electrical brain waves and process them into digital signals to make measurements that can control games. One day, such biosensor technology could be used to control a variety of everyday activities, such as turning on lights, adjusting room temperature, and even communicating with other people, according to Stanley Yang, NeuroSky’s CEO. In fact, NeuroSky is working on a device that will allow people with tetraplegia, or “locked-in” syndrome, to type their thoughts on a keyboard using brain waves. “The technology can allow machines to conform to human needs, rather than humans conforming to machines,” Yang says. As a child, Yang was inspired by sci-fi movies such as Star Wars. Eventually, he became an engineer to create real innovations. “Movies may spark an idea,” says Yang, who still dreams of making a light saber. “But engineering is the process of making a real product that is useful, not just as a Hollywood prop.”
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Hollywood production designer Alex McDowell was touring MIT’s humancomputer research lab in 2000 when he met John Underkoffler, then a graduate student at the school. McDowell was researching technological concepts for Minority Report, the 2002 Steven Spielberg film that stars Tom Cruise as a police detective in 2054. “Spielberg wanted a grounded-in-reality film that was anyone’s best guess about the future,” says McDowell, who was intrigued by Underkoffler’s work on a computer interface controlled by hand gestures. A year later, McDowell invited Underkoffler to Hollywood to be Minority Report’s science and technology adviser. Underkoffler built a nonworking mockup of a gesture interface and pitched it to Spielberg and Cruise, who approved it immediately. In the movie, Cruise uses the system to search for a murderer, flipping through images on a computer screen by waving his hands and pointing his fingers. “John is able to do something that is often hard for a scientist,” McDowell says. “He enjoys the process of making junk science coherent.” It may have seemed like junk science at the time, but four years after Minority Report hit theaters, Underkoffler co-founded Oblong Industries to produce a real version of the system, now known as the g-speak Spatial Operating Environment. During a recent demonstration at Oblong’s Los Angeles headquarters, CEO Kwindla Hultman Kramer donned a glove with a tag tracked by sensors on the ceiling. Twisting and waving his hand, he threw objects across three large projector screens, flipped and zoomed through a city map, then grabbed the map and set it down on a digital table in front of him. Several corporate clients, including Boeing, are using the g-speak system. This year, Oblong plans to unveil a gesture system designed for conference rooms. It will allow attendees in different locations to pass electronic documents around a digital workspace using a wand. “We could have returned to academia or made more movies,” Underkoffler says. “But we decided the only way to make the technology ubiquitous is to develop it in a commercial context.”
PREVIOUS SPREAD FROM LEFT: EVERETT COLLECTION; COURTESY COMPANY; THIS PAGE CLOCKWISE FROM LEFT: COURTESY SONY PICTURES ENTERTAINMENT; COURTESY COMPANY (2); EVERETT COLLECTION
REEL TO REAL
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say cheese hollywood ConCept: The iris recognition device in The Simpsons Movie real-lIfe InnovatIon: The InSight VM by AOptix
goIng up
ClOCkwISE fROM lEfT: EVERETT COllECTION; SIMPSONS MOVIE; COURTESY COMPANY (2)
hollywood ConCept: The grapple gun Batman uses to scale buildings real-lIfe InnovatIon: The Atlas Power Ascender by Atlas Devices
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as far as nathan ball is concerned, the most appealing aspect of Batman is his lack of superpowers. “His capabilities come from gear that can exist in the real world,” Ball says. Batman helped inspire Ball when he took part in a Soldier Design Competition sponsored by the MIT Institute for Soldier Nanotechnologies, back in 2004. During the competition, Ball and three colleagues developed an electronic grappling device that contained a battery-powered motor. The device yanked soldiers up a rappelling cable at a rate of 5 feet per second. “You’re not expending any energy,” Ball says. “It feels just like flying.” The powered ascender won the third-place award of $3,000. More important, it caught the eye of the U.S. Army. Two months later, Ball and several MIT colleagues founded Atlas Devices in Boston to manufacture and market the device, which is being tested by American soldiers for use in military engagements. The most recent version of the ascender, which the nine-person company developed with the Office of Naval Research’s TechSolutions program, is waterproof and weighs just 12 pounds. It can lift up to 500 pounds and span a distance of 600 to 800 feet on one fully charged lithium battery. Soldiers can use it to scale buildings, haul materiel, or even perform helicopter evacuations. They can’t, however, shoot a grappling hook to the top of a tall building the way Batman can. The Atlas Power Ascender must be attached to a stationary object by a person. Next, Ball plans to develop nonmilitary uses for the device, including firefighting. Thanks to the Caped Crusader, he has an easy time explaining the concept to prospective clients. “I just tell them we make the Batman hook,” he says.
Iris scanners have been around for years, but the devices have never been widely adopted, partly because early iterations were difficult to use and prone to errors. Even The Simpsons Movie pokes fun at the technology by showing someone waving a mutated fish with dozens of eyes in front of a scanner, hoping for a match. J. Elon (“Buzz”) Graves, co-founder of AOptix, hopes that perception will change now that iris scanning technology is more advanced. Unlike the cartoon device, his company’s InSight VM scanner can capture images from a distance of up to 6 feet. Users stand in a designated area and look at the screen. The scanner locates the irises and captures an image in about two seconds. Because each pair of eyes is unique, the images can be compared with pictures in a database to confirm a person’s identity. The InSight is being used by big corporations, including Microsoft, and government agencies to control building access. Before starting AOptix in Campbell, California, in 2000, Graves was a researcher at the University of Hawaii, where he worked on ways to minimize image degradation in astronomical instruments. A sci-fi fan who watched the TV show Mr. Wizard as a child, Graves dreams of building a telescope on the moon. “Many of the things we create are based on materials and ideas that exist around us,” he says. “You just have to realize they are there and learn how to apply them.”
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REEL TO REAL
DO YOU READ ME?
ALONE AT LAST
HOLLYWOOD CONCEPT: The personalcommunicator badges worn by the Star Trek crew REAL-LIFE INNOVATION: The B2000 communication badge by Vocera
HOLLYWOOD CONCEPT: The underwater convertible James Bond uses to elude a Russian assassin in The Spy Who Loved Me REAL-LIFE INNOVATION: The sQuba by Rinspeed
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CLOCKWISE FROM TOP LEFT: EVERETT COLLECTION; COURTESY COMPANY (2); EVERETT COLLECTION
Staff members at El Camino Hospital in Mountain View, California, don’t use pagers or telephones to communicate. Instead, they tap a small badge and speak a command, such as Locate Dr. Smart or Broadcast to Rapid Response Team. They can even command the badge to play the Star Trek theme song. “This is my best friend,” says hospital supervisor Agnes Roey, touching the small rectangular device dangling just below her chin on a chain. If Rob Shostak, founder of Vocera, has his druthers, his company’s B2000 communication badge will render PA systems and pagers obsolete. The 2-ounce devices, which are coated with bacteria-resistant polymer, work using standard Wi-Fi and last 40 hours fully charged. They foster more personal communication than loudspeakers and are easier to use than pagers or phones, says Shostak, who got the idea while working at the Stanford Research Institute in the late 1980s. Frustrated by his inability to get in touch with colleagues by landline, he envisioned a small device that worked with a tap. Shostak founded Vocera in Cupertino, California, in 2000. Today, he says, the 165-employee company has $40 million in annual revenue and some 700 hospital clients. Vocera also serves museums and hotels. Shostak has never been a Star Trek fan, but he happily embraces the connection at his company, where all the conference rooms are named after places in the show, including the Holodeck (for employee training) and the Enterprise (for executive meetings).
Three decades after seeing James Bond drive a car underwater in The Spy Who Loved Me, Frank Rinderknecht donned a scuba suit, got behind the wheel of a sleek Lotus Elise convertible, and headed into Switzerland’s Lake Zurich. On that frigid day in December 2007, the water temperature was just 26 degrees Fahrenheit. “I was anxious and hyped—so I didn’t feel the coldness at all,” he recalls. Rinderknecht started retrofitting cars in Zurich in the late 1970s. “I thought, Every man dreams of being James Bond, driving around in fast cars and getting the most beautiful girls in the world,” he says. Since then, his Zurich-based company, Rinspeed, has designed dozens of concept vehicles, including one that drives on water. In 2000, Rinderknecht, who serves as a consultant for major auto manufacturers, set out to tackle an even bigger challenge: designing a car that could drive underwater, like the one in The Spy Who Loved Me. To film the underwater scene in the movie, the production team used several Lotus Esprit sports cars modified with fins and closed-off wheel wells. To create the real deal, Rinderknecht added foam to a Lotus Elise convertible so it would sink less quickly. Next, he added rear propellers and replaced the car’s internal combustion engine with five electric ones powered by rechargeable lithium ion batteries. To avoid an entrapment hazard, Rinderknecht decided to keep the top down, retrofit the car with a saltwater-resistant interior, and outfit the passengers with scuba equipment for breathing. In 2008, Rinderknecht unveiled the Rinspeed sQuba at the Geneva Motor Show. He has no plans to manufacture the amphibious vehicle, which can dive to a depth of 33 feet and drive up to 4 mph on water and 2 mph underwater. For now, he is content to display it at auto shows a few times a year and do occasional underwater demonstrations. “You always have to live out your dreams,” he says.
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HOW I DID IT
eIleen gITTIns
blurb HelpIng THe WOrlD Tell sTOrIes
My father was born in england, and after World War II, he came to the U.S. as a crew member on the Queen Elizabeth. He worked his way up to become the president of McKesson, the health care company, here in San Francisco, the classic bootstrap immigrant success story. My father would take us out for lunch at restaurants with white tablecloths. He would have a cocktail before lunch, and we would have Shirley Temples. The emphasis in our family was on education, and the expectation was that we’d all become accomplished in whatever field we chose. My father brought home the bacon, but he always said that my mother was the brains of the family. My mother was artistic and a great reader. She introduced me to classics like A Tale of Two Cities and All Quiet on the Western Front at a very early age, and this instilled my love of books and storytelling. I went to uC berkeley to study english and journalism. It was the early 1970s, and the counterculture movement was at its height. At Berkeley, I discovered photography. I’ve always been a technology geek. Photography, of course, is extremely geeky, and it’s also about telling stories. It married my two passions. If you’re fortunate enough to discover the thing that you can’t not do, that’s the bomb. After college, I pestered Eastman Kodak to hire me. I was relentless.
They finally offered me a job in marketing. This was in 1983. My assignment was to tell the story of digital imaging, which was in its infancy. After a few years working for a big company, I got the entrepreneurial bug. I moved to Seattle for Kodak to start a company 80 worldmags
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In 2004, with the publishing world racing to embrace digital platforms as its ticket to the future, Eileen Gittins proposed a business plan that moved in the opposite direction. She wanted to give ordinary people the ability to design and produce their own bound, bookstore-quality books. Publishers and investors were skeptical. But seven years later, Blurb, the San Francisco–based company that emerged from Gittins’s contrarian vision, has grown into a runaway success. The company rang up $45 million in sales in 2009 and has published hundreds of thousands of titles by authors around the world.
As TOlD TO jOHn brAnT photograph by Cody piCkens
worldmags problem solver Eileen Gittins can churn out custom books at a rate of one every 1.5 seconds.
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HOW I DID IT
developing imaging software for the pharmaceutical industry. It was a steep learning curve. There were only five of us, and we thought we were entrepreneurs, but we really weren’t there yet. We had a good idea but were way too early. That was the first significant failure of my
parachuted out as a consultant and board member for some Silicon Valley companies. I became CEO of one of them, and that helped me realize I’m not the consultant type. I’m a builder. So I started looking around, and, as I searched, I had time to take pictures.
“Here I was, proposing a model for going from digital back to print. They thought I was a lunatic.” career, and it had a big effect on me. I realized your greatest strength can be your greatest curse. You can see things coming, but you see them before they’re ready. I had no desire to return to corporate
culture. I went to work for Wall Data. Part of my job was going to the computer science department at the University of Washington to search out new technologies. I found software developers combining Web design with database tools in ways that were just awesome. We built a company called Salsa based on that technology. It became a big success. I left salsa to move back to the Bay Area,
and a few years later, the same thing happened. Some VCs asked me to check out three software developers who had just left the Stanford Research Institute. They were designing software that followed a user’s path through websites in real time, providing companies with new insights into consumer behavior. From that, we built a company called Personify. running two successful start-ups taught me two lessons about being a CEO. The first was that you have to raise the money, and the second was learning how the minds of investors work and understanding the dynamics operating within a board of directors. Then the tech bubble burst, and Personify was acquired by another company. I
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Digital cameras were just taking off. This is awesome! the geek in me said.
aren’t book designers? How could printers profitably produce a book of one? For two years, I worked full time resolv-
ing these questions. I had meetings in every Starbucks in San Francisco. I met with venture capitalists who gave me a hearing only because of my track record. This was 2004, and everything was going digital. Here I was, proposing a model for going from digital back to print. They thought I was a lunatic. But I kept the faith. I knew that millions of people all around the world had something to say, something to express in book form. Finally, a VC decided to bet on the horse despite how crazy it sounded. Our book-designing platform had to
I set a goal—to make portraits of 40
people with whom I’d built companies. I thought I knew these people, but when I started photographing them in places that were special to them, I realized I didn’t know them at all. I never knew this man was an amateur boxer or this woman raised horses. I wanted to present my portraits of these Bay Area Renaissance people in a format that reflected their depth. I needed something tangible. You can’t gift a website. I decided I was going to make a book—a professional-quality bound book. The catch was I wanted only 40 copies. I talked to printers, but they wouldn’t accept an order of less than a thousand copies; otherwise, it wasn’t profitable for them. I would have to design and publish this book myself. So I went online, expecting to find a wealth of resources. After all, desktop publishing and Adobe had been around for years. But I couldn’t find anything. I was shocked. I thought I must be missing something.
Then the printers explained that they’re set up to produce 5,000 copies of one book, not 5,000 orders for separate books. That clarified my thinking. I’m a systems person. How do you build book-designing software for people who
be simple enough for any reasonably computer-literate person to use, but it also needed to be fun. Designing your book couldn’t be a chore. It should be the thing you want to get to. And that same software had to be clean and elegant from the printer’s perspective. That was the secret to making a profit on a book of one: a standard file for printing that came in clean every time. Our website launched in May 2006. Our
customers are everybody from photographers and architects wanting to showcase their portfolios to a couple wanting to commemorate their wedding anniversary. Business is almost doubling every year. At peak volume during the holiday season, we process a book every 1.5 seconds. The files are sent along to the printer, and a week later, the customer gets his book in the mail. We charge from $2.95 for a black-and-white text-only pocket-size book to $206.95 for a four-color 400-plus-page coffee-table-style book. When building a business, you can’t do it all. You have to stay focused. At Blurb, we’ve built an Internet platform for people to produce their own bookstore-quality books. That’s it. That’s what we do. for a full archive of how i did it features, visit www.inc.com/hidi.
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AWARDED BEST
Management Book of 2010
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BY 80 0-CEO-READ
“ …THIS BOOK WILL TRANSFORM THE WAY WE VIEW CLIENT SERVICE. ” – J. Miles Reiter, chairman and CEO, Driscoll’s
“ I COULD NOT PUT IT DOWN. ” – Mike Faith, president and CEO, Headsets.com
“ …THE DEFINITIVE PRIMER ON HOW TO BUILD RELATIONSHIPS IN BUSINESS. ” – Andy Lorenzen, senior manager, organizational talent strategy, Chick-fil-A, Inc.
“ …YOU WILL REMEMBER ITS MESSAGE FOREVER. ” – Ken Blanchard, coauthor of The One Minute Manager ®
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Step intothe future
Do you have a vision of where your company will be in three years? In five? 10? Here’s a sure-fire way to get clear about the future you want BY ARI WEINZWEIG PHOTOGRAPH BY HUGH KRETSCHMER
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Hardly a day passes without someone asking me for business advice. It might be a student or a struggling entrepreneur or an up-and-comer at a larger company. I’m sure most successful entrepreneurs experience the same thing. As often as not, people want that “one top tip,” that single piece of advice that can put a person on the path to success. Lo, if only things were so simple. On the other hand, there is one thing I wish I had understood more clearly from the get-go: When we opened Zingerman’s Delicatessen in Ann Arbor, Michigan, in 1982, I had never even heard the term visioning. Thirty years later, that deli has expanded into Zingerman’s Community of Businesses—eight different businesses (including a mail order company and a business consultancy), with 17 managing partners, 500 employees, and revenue of $37 million a year. It’s safe to say that we wouldn’t be where we are without visioning. What is a vision? It’s not as mystical or out there as it sounds. A vision, quite simply, is a picture of what success will be at a particular time in the future. It encompasses answers to an array of questions: What does our organization look like? How big is it? What are we famous for? Why does anyone care about what we do? How do people who work here feel about their jobs? How do I, as the founder, feel about the business? What’s my role in it? Complete the visioning process, and you’ll have a clearly articulated end for your organization—something that won’t change every time the market or your mood shifts. A great vision is inspiring. It gets you and everyone in the organization excited to come to work; it’s the cathedral everyone is coming to work every day to construct. This is not mere wish-
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ful thinking. A vision must also be strategically sound. You have to have a reasonable shot at getting there. At Zingerman’s, we use visioning nearly every time we start a project. For the organization overall, we have our vision for 2020 (e-mail me at ari@ zingermans.com, and I’ll send you a copy). We also have visions for each of our business units—and for most of the projects those groups undertake, whether it’s a $6 million renovation at the original deli or a new hot-chocolate recipe we’re developing at Zingerman’s Roadhouse, our sit-down restaurant. Visioning is so much a part of what we do that almost everyone who works here reads at least 20 visions in the first year on the job. To be clear, a vision is not a strategic plan. The vision articulates where we are going; the plan tells us how we’re actually going to get there. We start that planning work only after we’ve agreed on the vision. Creating a plan without a vision… Well, I just can’t quite figure how one does it. Imagine asking MapQuest to give you directions but not plugging in your desired destination. Just to give you a small but meaningful example of a vision, here’s the one we wrote for the Thursday-evening farmers’ market we host in the parking lot of
PREVIOUS SPREAD: STYLING: GILLIAN MCLEOD; GROOMING: BRIDGET O'NEIL
the power of visioning.
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THE POWER OF VISIONING
Zingerman’s Roadhouse, on the West Side of Ann Arbor. It was written in 2005 and was designed to express our vision for the market three years later. It’s the longest day of the year; the sun is at its pinnacle of warmth and light. Throngs of people are milling around the Roadhouse parking lot, amazed and excited at the abundance of locally produced goods, ranging from several gorgeous varieties of tomatoes to handmade soap and artisan crafts, to herbs and plants, plus a very strong synergy of Zingerman’s items— cheese from the Creamery, breads from the Bakehouse, and the ever-energetic Roadshow crew caffeinating all the vendors and customers. Every vendor is selling the best of what there is to offer, growing or producing themselves what they sell. There’s a tangible truth patrons have come to trust—that all these products have a story and none of them traveled very far to get here. Tents and awnings cover the stalls, creating a colorful and festive mood. There are 15–20 vendors at the Market, so it’s accessible and maintains variety but remains magnetic and welcoming. The West Side Farmer’s Market continues to provide our customers with the best products available and serves as a catalyst for community development by offering an educational component and a local music scene. We have space reserved for weekly scheduled acts, including local musicians, demonstrations, and educational activities. Several people recognize the Roadhouse chefs selecting vegetables from the Market’s vendors for the weekend’s menus at the Roadhouse. The market is a family event, where parents bring their children after school and shop for fresh produce. After shopping, families enjoy a snack at our picnic tables. Guests are thrilled with the produce, the chance to visit with neighbors, and best of all, to connect with the farmers who actually grow their food. This year, the WSFM planning committee is helping to generate interest and support for the market throughout the area business community. Local businesses hang posters or hand out fliers about the market and participate in promotions that
encourage their customers to visit. These companies recognize the potential for the market to draw additional patrons to the area and increase business throughout the West Side. These developing relationships with area businesses and the neighborhood at large are enabling the WSFM to become a more self-sustaining entity. While Zingerman’s remains an active and essential supporter of the Market, the WSFM is a self-sustaining entity. Remember, this was written before the
market even existed. Actually launching the market required long struggles with the city, landlord issues, persuading growers to join us, and probably a hundred other challenges. But read our vision to anyone who comes to the market, and that person will tell you that what’s described above is almost exactly what happens every Thursday evening. In fact, I checked with the market manager to see how many vendors we had at the start of the 2008 season. The answer? Twenty. This probably sounds silly and NewAgey to people who aren’t into hearing it. It did to me when I first started learning about it. But there’s just no way around it—the power that comes out of this visioning stuff is huge. When we do effective visioning, we’re moving toward the future we want, not just reacting to a present-day reality we don’t like. If we do our job well in this regard, I believe that we keep our competitors reacting to what we’re doing, instead of the other way around. A vision also makes it much easier to handle the strategic opportunities that present themselves every day. In my experience, most organizations, and most people, pick and choose from opportunities when they arise. The calls come in every day. And then we agonize over what to do. Having a vision makes decisions much easier: The only opportunities even worth considering are those that are going to help us attain our vision. This has enormous organizational benefits. It means that when opportunities emerge that are out of the bounds
of our vision (and they do all the time), we can veto them quickly—saving extraordinary amounts of time and energy. Life is short, and time spent agonizing over opportunities that seem too good to pass up but aren’t going to help us get where we really want to go is, in my opinion, time wasted. I’d prefer to spend my time working toward the future I’ve chosen to create. Trust me—I’ve worked both ways, and using visioning as I’ve described here is about 1,500 times more rewarding. The good news is that crafting a vision is a lot easier and less timeconsuming than you might think. As I outline in the steps below, getting started should take no more than 30 minutes. I can already see the eyes rolling. A half-hour to write a future for my entire organization? What about gathering the appropriate data, consulting with experts, assessing the big trends and the leading economic indicators? Good questions, but to get going, you don’t need any of that. Why? Though we spend most of our work lives responding to problems and opportunities as the world presents them to us, visioning comes from the inside out. It’s about what you believe, what gets you excited, what you truly want to accomplish.
EIGHT STEPS TO A VISION OF GREATNESS STEP 1
PICK YOUR TOPIC Because visioning
can be used for just about anything, it’s important to start by being clear about what you’re working on. Is it a vision for your organization overall? Or just for a particular piece? For today’s shift? Or your retirement? We do visions for all of the above and everything in between. STEP 2
PICK YOUR TIME FRAME How far out
should you look? There’s no right answer, but as a general principle, FEBRUARY 2011
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visioning works best if you go far out enough to get beyond presentday problems but not so far out that you have no sense at all of actually getting there. We have a long-term organizational vision that’s set in 2020. Most organizational visions will probably be set somewhere from two to 10 years out—but five is a typical place to start. STEP 3
Gramo A/S is rewriting the book on energy solutions. By implementing an intelligent energy management system, this midsize bookbindery in Denmark created its own virtual power plant that controls consumption and cut costs by 10%.
Rosenau is steering its fleet toward happier customers. This midsize transport company in Canada implemented onboard tracking technology to help optimize delivery routes and provide clients with up-to-the-minute shipping alerts.
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PUT TOGETHER A LIST OF “PROUDS”
Think about the work you’re embarking on, and throw down a list of past positive achievements that seem at least somewhat relevant. You might include specific contributions that you or your colleagues have made to past successes, or skills, techniques, and resources that could be assets in achieving your vision. At Zingerman’s, it might sound like this: “I feel good about the past three projects we’ve successfully implemented: (1) the team really came together; (2) we’ve improved cheese quality a lot in the past two years; and (3) we’ve brought our staff turnover rate down 20 percent since 2007.” Anything good that comes to mind is fine. And don’t stress out about it—just do it. It shouldn’t take more than 10 minutes. The idea is just to create a base of positive energy and high-quality experiences on which you can build for future success. The more people focus on the positives, not on the present-day problems, the more likely you are to attain the greatness you envision. STEP 4
WRITE THE FIRST DRAFT Writing a
vision is hugely important, but don’t let its perceived weightiness work against you. The amount of time you spend drafting it is, in my experience, generally unrelated to the quality of the vision. I would actually argue that the two are inversely related—those who just dive in and get something down on paper almost always are the ones
who emerge from this process with the most creative and inspiring visions. You can compose your vision in any style you like—prose or bullet points, by hand or on the computer. I’ve seen people draw it and then talk through what they’ve illustrated while someone else takes notes. Just make sure you put the word DRAFT on your document. We’ve found that by simply writing the word at the top of the page, we get a lot more input; whereas without it, people tend to assume the vision is final and there’s no point providing any real feedback. Before you start writing, let me provide a few technical tips. If you follow them, the work will be way better: Go for something great. The work here is about writing a vision of greatness—so put something wild out there. I think about John Kennedy’s call to go to the moon, winning the NBA championship…things that are big but also specific, scary but also exciting. Get past the 59 reasons why it won’t work. If the early draft isn’t kind of scaring you a bit, then you probably haven’t pushed yourself hard enough. Write from the heart. Go with your gut and put down what pours out, not what you think other people want to see. Often that means including what you’ve always wanted to do but have been told so many times by others that you couldn’t, a notion that you’ve long since filed away under “impossible.” Step into the future. Having gone through this process a few thousand times, I can tell you that it works way better when you write as if you’re already sitting in the future you’re envisioning. This seems strange, but it really is critical. Don’t write as if your vision going to happen; write as if it already has happened. Go quickly. The visions I’ve been involved with turned out much better when we didn’t drag out the process. Just sit down in a reasonably comfortable spot at a reasonably comfortable time and get to writing. Once you
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start, keep writing for 15 to 30 minutes, regardless of how silly you sound. Don’t start self-editing. The most interesting and insightful elements of my visions are the ones that I initially wanted to leave out but forced myself to put down anyway. Get personal. In our visioning work, we blend the personal and professional so we arrive at a single vision, or at least two compatible and mutually supportive ones. If you’re the one running the business, it makes sense that you build your passions into what you write. If you want to teach, put that in the vision. If you want to work less, say it. If you’ve “retired” into an advisory-only role in the company, talk about how the person who took your position feels about his or her role and how you relate to that person. In other words, don’t write a vision that you aren’t a part of. Now, with all these rules in mind, take no more than 30 minutes and put down a vision draft. Then put the draft aside for a few days. Go back to all the other stuff you do every day.
challenges of implementation. How specific should you get? More detail is better than less—it helps make the vision more real. Stay away from vague statements like “We’re busier than ever”; instead, use real sales numbers that mean something.
Remember, it’s your vision, and you’re not obligated to change anything. Don’t let people beat the passion out of you.
STEP 5
REVIEW AND REDRAFT When you’re
ready to revise, read your draft through from start to finish. Don’t erase anything. If you’re on the computer, start the second round by copying your first file so you can edit what you wrote without losing the original version. In my experience, at least 80 percent of what is in that first scary rendition is pretty right on. In any case, you’ll have plenty of opportunity to edit the content and the language. As you read through, keep in the back of your mind: Does this sound inspiring? Do I get excited when I’m reading it? Note that in this context, excited does not preclude anxiety about the
GSMS is protecting products and patients. Using track-and-trace technology, this midsize pharmaceutical manufacturer and specialty packaging company in California is helping keep counterfeits out of its supply chain.
Without definition, you will have no details on what success actually looks like. “I want to be wealthy” is well and good, but one person’s view of what makes you rich is another’s only-slightly-better-than-poor. So spell it out. What are the key financial numbers that define success for you? Sales levels? Salary? Savings? Status? Along the same lines, a personal vision might say, “I spend a lot of time with my kids.” That’s great, but I think you’ll get a lot further with something like, “I’m spending two to three weeks a year traveling the country with my kids. It’s amazing how much fun we’re having.” Or, “One night a week I go out to dinner with just my entire family.” STEPS 6A, 6B, AND 6C
MORE REDRAFTS If you want, you can
take this second draft and make additional adjustments. But at some point, you had better get your butt in gear and move on to Step 7. Note that there is no 6D. If there were, the D would stand for Done. More than four drafts, and I think you’re headed down the long and unrewarding road of “I’ve been working on a vision for the past few years, but I still don’t have it finished.” I’ve done it, and
Sun World is harvesting new insights. Specializing in the growing, packing and shipping of fresh produce, this midsize business in California is using IBM Cognos business analytics solutions to analyze operations data and improve harvesting efficiency.
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THE POWER OF VISIONING
believe me, it really doesn’t help you— or anyone else. STEP 7
SOLICIT INPUT This is where you
Gruppo Intergea is accelerating its data security. This Italian midsize business has been able to improve infrastructure security in car dealerships, showrooms and repair shops by identifying new threats and staying ahead of them.
Wine Warehouse is improving the flow of information. Trying to keep ahead of growth, this midsize wholesale distribution company integrated its finance, order-entry and pricing systems—improving inventory efficiency and order accuracy while maximizing profits.
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let the cat out of the bag and get input from people you trust and respect. But remember that it’s your vision, and you’re not obligated to change anything. Whom should you show it to? Folks who have experience, insight, and expertise relevant to your vision. They might be your business partners, colleagues, peers in the community, mentors, family members, close friends. Again, don’t obsess. You can always get more input later if you think of other people you would like to hear from. When I am at this early stage, I generally ask folks to let me know what they think (sometimes, I’ll explain the concept of visioning, if they aren’t familiar with the idea). That’s all. Keeping it loose gives people more room to tell me which parts excite them, which ones worry them, and the like. Inevitably, some of these advisers will shift away from talking about the vision into a discussion of all the action steps that will have to be in a strategic plan. Don’t worry. Just listen carefully, and take notes—some of those ideas might come in handy later, when you begin formulating a plan to bring your vision to life. How do you know what to add and what to set aside? I wish I had an easy answer. Practice helps. As does learning whom you can rely on to give supportive, helpful input and to have values and views aligned with your own. I like the advice I heard from John Williams, co-founder of Frog’s Leap Winery in Rutherford, California, who said, “Don’t let people beat the passion out of you!” STEP 8
SHARE THE VISION Finally, it’s time to
share the vision with everyone who will be involved in implementing it. When you roll out your vision to
the bigger group, it’s inevitable that people will ask questions about how you intend to achieve the vision. They’re asking you about the how. The vision, however, is the what. It’s totally fine if you don’t know how you’re going to get there. Later, you will figure out the how.
WHEN PEOPLE DISAGREE WITH YOUR VISION
Some folks who write visions are sole operators who have enough authority to put a vision in place unilaterally. But most of us work with partners, family members, or key managers who are prominent or equal players, and we need to get in alignment with them. Leaders pursuing different visions for the same project will almost always create enormous problems in an organization. At Zingerman’s, we begin the alignment process by having each of the partners in the group draft their own vision. We’re careful to be sure that everyone is clear on both the time frame and the topic we’ve chosen. Once each person has put together his or her vision, we compare drafts, listening carefully to what each person has to say and capturing themes on a whiteboard as we go. We then give everyone a chance to weigh in on the strength of their feelings about each theme. If there are 10 themes up on the board, we might give each participant four votes, or something along those lines. The votes help the group get clear on the top-priority items. Remembering that there aren’t any right or wrong visions, we then work to identify common themes and come to agreement on a single vision that we can all work toward. I don’t want to make it seem like visioning work is always bliss and harmony. We often wind up with
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NOTHING BUT BLUE SKIES Imagine that it’s three or five or 10 years from now, and answer these questions about your company. This list is far from complete, but it will help get you started crafting a vision. 1. How big is your business? 2. Assess the factors by which you will measure your success (be as specific as possible). a. Relative rank in your industry b. Financial success for the organization c. Personal financial success d. Product or service quality e. Contribution to the community 3. What are your most important product lines or services? 4. What products or services do you refuse to offer? 5. Describe how the shopping experience at your business takes place. What makes that experience unique? 6. Who are your customers? How do you find them? 7. If your customers were asked to list three noteworthy things about your business, what would they be? 8. How would you describe your management style? (Participative? Top down? Family style?) 9. What kind of people do you hire as managers? 10. What is your relationship with your employees? What do they say about their jobs? 11. What do you do every day? How much do you work? 12. How does your community view your business? 13. What do your suppliers say about you? 14. What do industry experts say about you?
themes that seem totally incompatible. And though there are often ways to achieve compromise, other times there just aren’t. All you can really do at that point is work toward consensus. Something has to give, or we have to come up with a different way to go forward. On occasion, what we reach consensus on is the challenging realization that we actually have incompatible visions, and that we might need to go our separate ways. If our ideas are not compatible, then our larger vision needs to shift. It might become a positive picture of a future in which we’re no longer working together, or at least not working together in the way we are now. It
could mean splitting a company in two or living in different cities. It’s painful but far more productive than having people passively go along toward a vision of the future that they don’t really buy into. When that happens, you wind up with two things: tension and trouble. Agreeing, openly and supportively, to pursue different but positive visions allows people to go in the direction they want to go. And ultimately that’s a good thing. Ari Weinzweig is co-founder and CEO of Zingerman’s Community of Businesses in Ann Arbor, Michigan. This article is adapted from his recent book, Zingerman’s Guide to Good Leading, Part 1: A Lapsed Anarchist’s Approach to Building a Great Business.
IBM, the IBM logo, ibm.com, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. © International Business Machines Corporation 2011. All rights reserved.
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Dragon Hotel is providing a legendary guest experience. At the heart of this Chinese hotel is a dynamic IT infrastructure that uses RFID-equipped smart cards for fast check-ins and custom room preferences so guests feel right at home.
Let’s build a smarter planet. To learn more about the insights and solutions behind these success stories, or to find an IBM Business Partner that’s right for you, visit ibm.com/engines
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Technology Changing domain names without losing search traffic this page Elevator Pitch Lifesta lets people resell their unused Groupon vouchers. Can it raise $1.5 million? page 96 Going Global Working with franchisees in other countries page 98 Managing Should you retool your business model? page 100 The Way I Work Between phone calls and before meetings, Gary Vaynerchuk chats with his 850,000 Twitter followers. page 106
Finance
Networking groups help start-ups craft their pitches to investors. page 94
strategy Technology the name swap Rebranding on the Internet For many years, Seth Newman had one
big regret. In 1997, Newman, president of Action Envelope, a $12 million envelope retailer based in Lindenhurst, New York, passed up a chance to buy the domain name Envelopes.com for $10,000. At the time, the price was more than the small company wanted to spend—and Newman was happy with his website, ActionEnvelope.com. Years later, Newman was kicking himself. He spent several years negotiating with the owners of Envelopes.com before finally buying the site last January at 40 times the original price. Newman was excited about the purchase, but buying the ideal domain name was hardly a magic bullet. As Newman soon discovered, rebranding in the age of Google is not as simple as it was when his father founded Action Envelope, in 1971. It’s all about search—specifically, Google search. Google’s search algorithm takes into account 200 variables, most of which are kept secret to prevent companies from manipulating the search results. That leaves a world of unknown triggers that can have catastrophic effects on a iLLuSTraTioN By BriaN CroNiN
company’s ranking during a domain name change, say experts in searchengine optimization, or SEO. “Unfortunately, there’s always some loss that you can do nothing about,” says Will Critchlow, founder of Distilled, an SEO consulting firm based in Seattle and London. “The hope is you’ll come back over time, but if your business relies on search traffic, it’s one of
the bigger decisions you’d ever make.” When it comes to domain name changes, Google recommends using a 301 redirect, a bit of code that tells Web browsers that a webpage has permanently moved to a new location. But some companies have experienced a drop in search traffic after such a move. Newman, who runs Action Envelope with his mother, Sharon, had already feBruary 2011
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spent about $500,000 developing the company’s website and making sure it was search-engine friendly. For years, ActionEnvelope.com has been the first result when someone searches for envelopes on Google. The site also ranks on the first page of results for several longer search terms, including peel and seal envelopes. Still, Newman believed the Envelopes.com domain name would make his company the definitive destination for envelopes online. “The name Envelopes.com has instant credibility and market leadership,” he says. The only problem was that Envelopes.com wasn’t on Google’s radar. Afraid of losing some 38,000 monthly page views that come from Google searches, Newman consulted his Web developer, Alex Schmelkin, president of Alexander Interactive, a New York City– based firm. Schmelkin was against doing a 301 redirect. “We’ve done those with a lot of other brands, but so much of Action’s business came from search results,” he says. “We had to take a more conservative strategy.” Schmelkin decided to keep ActionEnvelope.com as is and spent nearly five months building an entirely new site for Envelopes.com, with plans to merge the two later. Envelopes.com uses the same customer logins and e-commerce platform as ActionEnvelope.com, but Schmelkin changed the product names and added new content. (Sites with
“sometimes it takes google a little while to figure out how best to process, index, and rank a page.” duplicate content tend to rank lower in Google search results, he says.) When Envelopes.com officially launched, in September, the company sent e-mails to clients announcing the news. It also contacted websites and bloggers, requesting that they link to the new site. Since then, search traffic to ActionEnvelope.com has remained constant, while the number of visitors to Envelopes.com has steadily increased. Things didn’t go as smoothly for Evo, an $18 million Seattle-based company that last year changed its Web address from Evogear.com to Evo.com. The company, which started as a retailer of ski equipment, had been selling more than just gear, including apparel and shoes. “Evo.com is a more elastic name that lets us evolve the mix of categories we offer,” says CEO Atsuko Tamura. Evo bought the new domain and did a 301 redirect last August. Each page on Evogear.com—the Contact Us page, for example—had to forward to the corresponding page on Evo.com. But something went wrong. After the move, search traffic dropped nearly 40 percent. In Google results for crucial keywords like K2 skis, a line Evo sells, the company fell from Page 1 to Page 35. And sales were
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down $200,000 in two weeks. While Tamura’s Web team scrambled to find and correct possible problems in the site’s code, other employees quickly called vendors, asking them to link to Evo.com to boost the site’s Google rankings. By November, Evo’s search traffic and sales had recovered. When done correctly, a 301 redirect shouldn’t cause any drop in traffic, says Matt Cutts, a Google software engineer. He says instead of moving its entire website at once, Evo would have been better off moving the site very slowly, starting with the least-trafficked areas of its website. Changing something like the structure of a site during a move can also cause problems. “If someone changes to a new template, that can affect the rankings,” says Cutts. “Sometimes it takes Google a little while to figure out how best to process, index, and rank a page.” Newman, for one, is OK with going slowly—he’s still running both ActionEnvelope.com and Envelopes.com. But sales are up 23 percent, and he hopes to merge the two sites soon. “I have no doubt that Envelopes.com will be No. 1,” he says. “It’s just a matter of when.” —Issie Lapowsky
Kelly Fallis’s pitch for her start-up, RemoteStylist.com, starts out
well. The concept—an online interior-design service—is straightforward and appealing enough on the surface to elicit a couple of nods from the panel of investors. Soon, though, Fallis is in the weeds. She gestures to a projection screen behind her, pointing to key numbers on a PowerPoint slide filled with type so small that it is barely readable. Explaining how her service works, Fallis clicks through several more slides, each dense with more illegible text. And then she is rushing, visibly flustered, barely looking up from her notes. Before she has had a chance to talk about her revenue model, her team, or how she intends to use the $350,000 she hopes to raise, someone yells, “Time’s up!” Fortunately for Fallis, this is just practice. It is part of an event organized by The Hatchery, a New York City–based company that
COURTESY COMPANY
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connects tech start-ups with invessells high-end luggage and travel tors. About once a month, five or gear. Although Schultz had six founders are selected to pitch received funding from friends their start-ups to a panel of four and family, he says he refined his seasoned entrepreneurs and business plan after presenting investors—plus an audience of at Pokin’ Holes, a free monthly about 100 note-scribbling peers. gathering in Boston at which The location varies—tonight we founders pitch their business ideas are in a conference room at Baruch and receive critiques. “It helped College, where attendees have us to think about the company each paid $10 for pizza, soda, and from different angles—product, a chance to learn. In addition to marketing, sales, financials,” says Fallis’s company, the other start-ups Schultz. “And it was comforting to being pitched tonight include an see people like us going through online barter service and a rating the same challenges.” and referral site for home contracSometimes it can be hard to tors. After each pitch, the founder is take in all the feedback, which is given a score as well as a critique of why entrepreneurs often recruit the business plan and performance. allies to take notes for them. When As these things go, Fallis gets off David Bloom, founder of Ordr.in pretty easy. The comments from Networks, a Brooklyn, New York– the four panelists are blunt but based start-up that makes online Let’s Have Drinks Second Glass, a Bostonconstructive: “You’re talking so fast software for ordering food delivery, based company, let other start-ups sample it’s making me anxious. Slow down.” pitched his company at one of its wine-tasting website—and some Shiraz Viognier—after a Pokin’ Holes event. “I need a walk-through to visualize The Hatchery’s events, he had this—you need pictures.” “Your one of his board members record slides with the numbers are way too small—remember the 10-20- the presentation and feedback. Later, he says, they hashed over 30 rule: 10 slides, 20 seconds per slide, and 30-point font.” each of the criticisms. “I’ve made lots of tweaks since that Although VC firms are still making fewer investments than night,” says Bloom. they were two years ago, events like this one, which allow entreSome entrepreneurs might be hesitant to discuss a start-up preneurs to hone their pitches and meet investors, have become concept in an open forum—if you throw your idea out there, increasingly popular not only in tech hubs such as San Franwhat is to stop some wily would-be competitor from stealing cisco; Boston; New York City; Austin; and Boulder, Colorado; it? But investors and entrepreneurs who participate in these but also in places such as Miami; Pittsburgh; and Grand Rapids, events say it pays to be open. “When people are concerned, I Michigan. Most events, which can typically be found through advise them to talk at a higher level about the technology— Meetup.com or StartupDigest, an online newsletter for startdescribing it without telling exactly how it works,” says James ups, are either free or charge a nominal registration fee. Jorasch, an inventor, angel investor, and founder of the Science For a growing number of entrepreneurs, these pitch pracHouse in New York City, which hosts monthly pitch sessions tice sessions have become an invaluable step in the fundraising for scientists who want to start companies. “But 99.9 percent process. “It’s a tough world to break into if you don’t know of the time, the way to success is to talk to the most people people,” says Alex Carey, founder of VenueDex.com, an online possible. If you hold back, you give up the benefits of a network.” marketplace for event space. Carey jokes that he had nothing Networking is an important part of these events, says but a “network of low-income individuals” before he pitched Bloom—more than he realized. “I attended to sharpen my his company at one of The Hatchery’s events. Carey says it was pitch, not to meet anyone,” says Bloom. After his presentation, a good icebreaker and led to meetings with investors and he was surprised to find himself exchanging business cards potential partners. “When the intent of an event is to pitch and with so many people. “One guy introduced himself after the get feedback, instead of just having drinks,” says Carey, “it’s less panel, and when he described his business, I almost laughed,” awkward to ask, ‘Do you like my business plan?’ ” says Bloom. “It was a perfect fit, and he looks like a huge new An entrepreneur occasionally walks away from the event client. We’ve already started sketching a deal.” with a term sheet in hand, but most of the time, the practice Those interactions had yet another benefit, says Bloom. is the payoff. Even companies that don’t want venture funding “Being an entrepreneur can be lonely,” he says. “A little netcan benefit from these groups, says Alex Schultz, co-founder working is good for business, but it really helps make me feel of George Guest, a Boston-based start-up that designs and part of a community.” —Adam Bluestein FEBRUARY 2011
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Low Overhead Lifesta’s co-founders, Yael Gavish and Eran Davidov, run their company out of a café in New York City.
PhotograPh by erin Patrice o’brien
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Strategy
cO-fOunderS:
yael gavish and eran Davidov LOcatIOn:
Elevator Pitch Lifesta lets people resell their unused groupon coupons. Can it raise $1.5 million for marketing?
new york city emPLOyeeS:
none
Launched:
July 2010
2010 PrOjected revenue:
$40,000
2011 PrOjected revenue:
$4 million
the Pitch: “Sites like Groupon that offer daily discounts from local
businesses have exploded in popularity. But a lot of people who buy vouchers never end up using them. Lifesta provides a trustworthy platform for users to buy and sell these unused vouchers online. Sellers set prices for the vouchers. We take a percentage of each sale and ensure that the vouchers are valid–if not, buyers get their money back. We’ve had 50 percent sales growth per month, mainly through word of mouth. We’re raising money to launch a national marketing campaign and hire staff.” —As told to April Joyner
What LIfeSta chargeS SeLLerS:
eight percent of the sale price, plus 99 cents per transaction
unIque vISItOrS Per mOnth:
20,000
recent vOucher OfferIngS:
Discounted facials, sausagemaking classes, kickboxing lessons, dogwalking services, and boudoir photos fundIng SOught:
$1.5 million
the experts Weigh In teSt Other revenue mOdeLS
fOrm StrategIc PartnerShIPS
a PrOmISIng buSIneSS
i think there is a good opportunity to create a secondary market around group discount sites. but it seems as if Lifesta should be able to get more from its customers than just 8 percent of each sale plus 99 cents per transaction. i think the company should test alternative revenue models. Perhaps Lifesta could buy unwanted vouchers from consumers at a discount and then sell them at a profit. there are no barriers to entry with this type of business, so it all comes down to execution. anyone who invests in this company is essentially betting that the founders will be able to outdo potential competitors.
Secondary markets are a great space. Sites that let consumers resell gift cards, for example, have done exceedingly well. i am worried about the low barriers to entry, however. this is something that sites like groupon could do themselves. the key will be quickly getting enough buyers and sellers that Lifesta becomes a very active marketplace. i think partnering with coupon sites and deal aggregators would help. also, i think Lifesta could bring in more repeat users if it developed a way to let people track when their coupons are about to expire—and sent reminders to post them for resale.
i’m always a little skeptical of businesses based on aggregation, but this is quite an interesting idea. Lifesta is guaranteeing the validity of its listings and facilitating transactions, which is more valuable than simply compiling deal listings. Stubhub, for instance, became successful by being a safe intermediary for reselling tickets. i worry, though, that Lifesta’s customers are people who use sites like groupon heavily. i’m not sure whether that segment of customers is large enough to provide outsize returns. but if Lifesta can reach critical mass, it could possibly offer its own exclusive deals.
Jon chait, partner Dace Ventures Waltham, Massachusetts
Danny Schultz, co-founder and managing director DFJ Gotham Ventures, New York City
Dan ciporin, venture partner canaan partners Westport, Connecticut february 2011
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Jeffery adler always knew he wanted to take his San Diego Part of that shift can be explained by basic economic trends, company global. He just didn’t realize it would happen so soon. says Scott Lehr, vice president of development for the IFA. As In Southern California, Adler oversees three Dlush Beverage U.S. businesses cope with tight lending markets and a weak Joints, which serve fruit smoothies and café fare like pearl economy, many countries—including China, India, Brazil, and tea and powdered doughnuts in a setting Adler likens to the United Arab Emirates—still have strong consumer demand MTV. Things changed a few years ago, after members of the for American products, as well as investors flush with capital. Alghanim family, wealthy Kuwaitis who own many businesses Lehr says other factors have also played a role in facilitating in the Middle East, paid a visit to his flagship international deals, including Skype and other technologies that San Diego store while vacationing in the U.S. Later, the family contacted a New World Dlush’s first international location, Adler about developing the Dlush inside The Avenues mall in Kuwait City concept in Kuwait and other areas in the Persian Gulf. Adler found the proposal intriguing: It would give Dlush an immediate cash infusion of several hundred thousand dollars, long-term income (Dlush would receive a percentage of the new stores’ gross revenue), and an immediate international presence. “There was a lot going for it,” says Adler. So he accepted an invitation from the Alghanim family to travel to Kuwait to learn more about the proposition and the potential franchisee, Alghanim Sons Group, a large conglomerate that runs many restaurants and entertainment venues. After eight months of legal wrangling, Adler signed a 20-year agreement that allowed his new California Cool A store employee—or “player” in partners to develop an unlimited Dlush lingo—mixes iced coffee drinks in San Diego. number of Dlush stores throughout six countries in the region. There are now seven Persian Gulf Dlush stores, and Adler have made international communication easier and cheaper, as says he is happy with the deal. But it has proved more complex well as increased travel to the U.S. by foreign visitors. and more time-consuming than he first imagined. When a lucrative overseas deal suddenly emerges, it’s An increasing number of businesses are grappling with the important that company owners not lose their heads, says challenges of global expansion these days, as investors from the William Edwards, CEO of Edwards Global Services, an advisory Middle East, Asia, and South America seek out U.S. brands and firm that helps franchise companies develop international retail concepts to develop in their home markets. In a recent expansion strategies. “You have to look at where it makes sense survey of franchise businesses by the International Franchise to go, not just where there’s a deal,” says Edwards. “Think of Association, or IFA, more than 75 percent of companies—the this as an investment, because you’ll be spending resources in majority of them U.S. based—said they were planning to start terms of time, support, and actual costs.” or accelerate international projects over the next year. The first thing any company considering a foreign franchise
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“In southern California, someone walks into the store, and the guy behind the counter can say, ‘Hey, whassup?’ ”
agreement should do is secure the brand’s trademarks, says Edwards. Otherwise, a potential suitor could soon turn into a troublesome copycat. Once an agreement is in place, business owners need to get heavily involved in helping the international franchisee accurately replicate the company’s core concept. That includes helping the new franchise set up a supply chain as well as laying out guidelines about product quality, the retail experience, and the prices. “The biggest challenge we see for small franchise businesses is that they can end up losing control of their brand,” Edwards says. In Adler’s case, there were a few minor inconsistencies. In an audit of the new locations, he discovered that the Middle East franchises had been using a different espresso blend than had the California stores. Some things were adjusted for cost, says Shady Badawi, director of operations for Dlush’s Middle East franchises. But the new blend, from the Italian brand Illy, is popular in the Middle East, says Badawi. “We’ve just tweaked a few things,” he says. Badawi previously ran franchises for larger companies like Pizza Hut, where he says things were more tightly controlled. He views the arrangement with Dlush as more of a collaboration. “It’s small,” he says, “so that gives us a lot more freedom.” Adler also worries a little that the fresh, youthful vibe he has worked to cultivate at Dlush’s Southern California locations can’t really be duplicated in the Middle East, where the culture is more conservative. “In Southern California, someone walks into the store, and the guy behind the counter
can say, ‘Hey, whassup?’” says Adler. “Not there. It really has to stay toned down.” Badawi acknowledges some differences but says, “The brand has been well accepted here. It’s young— it’s fresh and trendy.” But Adler’s main concern is that the Middle Eastern stores have taken a lot of his time—and shifted his focus away from building the Dlush brand in his backyard. When Adler meets with potential new investors, he says, they often find Dlush’s international venture intriguing, but they ask, “What else could you have been doing in the U.S. with your time and attention?” Still, Adler can’t deny the benefits of the franchise arrangement, especially the solid revenue stream the Middle East stores have provided. Even as U.S. customers cut spending during the recession, the Middle East stores remained profitable. Plus, the Kuwait team developed a smaller kiosk version of the Dlush store that Adler hopes to eventually roll out to U.S. movie theaters, fitness centers, and college campuses. Adler says the experience forced him to think about how to tailor the Dlush concept for areas beyond the West Coast. But for now, he wants to focus on expanding the company in Southern California. “Our message now is to really start paying attention to home base,” he says. —Ryan Underwood
these days, Chegg, a Santa Clara, California, company, bears little resemblance to its original form. In 2003, its site—then Cheggpost.com— offered free classified listings for college students. In 2006, Aayush Phumbhra, one of Chegg’s co-founders, began rethinking the company’s business model. He noticed that the site’s traffic was heavy only at the beginning of each semester and that many visitors were buying and selling mostly textbooks.
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Instead of buying these textbooks and selling them after the semester ended, students might prefer to rent the books, Phumbhra figured. He began testing his hypothesis. The company purchased 2,000 textbooks from sellers on Amazon.com; launched a textbook rental site, Textbookflix.com; and e-mailed its customers to announce the new service. Within a few months, it was clear that the textbook rentals were a big hit, and Phumbhra began switching the focus of the company. Chegg now rents
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managing a change of direction retooling your business model
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more than one million books a year and has 150 employees. This sort of business model shift, called a pivot, has become common among start-ups. Like the basketball maneuver of the same name, in which a player keeps one foot planted while changing direction with the other foot, a pivot occurs when a start-up tests a new direction while still keeping one metaphorical foot in the original business. Although pivoting is something that smart entrepreneurs have been doing for ages, Eric Ries, a tech entrepreneur and blogger, recently coined the term and honed the concept. Pivots are an important part of creating what Ries calls the lean start-up, a methodology for launching businesses quickly while controlling spending. “Through pivots,” says Ries, “we can build companies where the failure of the initial idea isn’t the failure of the company.” In Ries’s model scenario, a start-up creates a basic product or service with just enough features to be tested by customers. By talking to customers and tracking their purchasing behavior, the company determines whether the business is viable or whether it needs to make a pivot, by adjusting some component of the business model. The idea of the pivot first gained popularity in Web-centric industries, in which decreasing development costs and cheap online tools make it easier than ever before to make rapid changes. Now, even nontech businesses have begun adopting the strategy. Bilingual Birdies is one example. The New York City–based company, founded by former teacher Sarah Farzam, hosts bilingual music classes for toddlers and preschoolers. For the first year of the company’s existence, Farzam, who is fluent in English, Spanish, and Farsi, taught many of the classes herself. She rented space in schools and community centers and then pitched moms wherever she could find them: in parks, on neighborhood blogs, and in online Yahoo Groups. Farzam gave parents the option of paying in advance 10 2 worldmags
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steps to a Pivot For entrepreneurs, tinkering with a company’s business model can be a tough and emotionally charged process. Here are five tips for making a successful pivot: Spend as little as possible. until a business model has proved effective, the company should be prudent with its spending. refrain from, say, hiring employees or investing in new product features in case a new strategy or business model is needed. Talk to customers. Customer feedback, especially the kind gleaned through in-person conversations, is essential to figuring out when and how a company should pivot. Instead of relying on assumptions, entrepreneurs need to ask customers what’s working and what’s not. Study the numbers. Tracking and analyzing company metrics, such as repeat purchases and conversion rates, are another good way to determine if and how a company should pivot. Web analytics software, such as Google Analytics, can reveal how customers navigate a company’s website. Run tests on the side. If possible, entrepreneurs should test a new business strategy while preserving the current business—just in case the new model turns out to be a dud. Be flexible. To make a successful pivot, entrepreneurs must often set aside their personal beliefs about the company or its products. “There’s a myth that stubbornness and raw determination are good traits for entrepreneurs,” says eric ries, who coined the term pivot. “The truth is that they’re good for getting started, but then they can sometimes get in the way.”
for an entire semester, but most paid on a class-by-class basis. “Some semesters, the classes were full, and others, not,” Farzam says. “It was superstressful.” And the business wasn’t profitable. Then, a local community center approached Farzam with a proposition. It wanted to pay Bilingual Birdies a flat rate to teach classes there. The community center would provide the students. Farzam wasn’t sold at first—a flat rate would cap the amount she could earn per class—but she recognized that her current business model wasn’t working. “If I wanted scalability,” Farzam says, “I couldn’t be handing out fliers forever.” She agreed to the arrangement and was amazed at the results. “There was no drama at all,” says Farzam. “I sent an invoice, and a check came in the mail every month. It allowed me to focus on sales in the right way.” Over time, Farzam phased out the old model and focused on flat-rate classes. The small pivot has had big results. These days, Bilingual Birdies, which is now profitable, employs a stable of teachers to run classes in more than 25 schools and community centers in New York and New Jersey.
In an ideal pivot, says Ries, a company will be able to test a new business model while keeping the old model intact. But some companies don’t have that luxury. Take the case of Stylous, an online shopping start-up based in San Francisco. It recently made a pivot out of desperation. The company was founded by Steve Dekorte and the husband-and-wife team of Rich and Meg Collins with the ambitious goal of revolutionizing the experience of shopping for clothes online. The founders wanted to aggregate every fashion accessory and high-end article of clothing on the Web onto one site. Users would be able to search for items visually, browsing through photos of products on streamlined webpages that weren’t cluttered with product descriptions or other text. When shoppers clicked on a product, they would be taken to the site of the retailer that sold the item, to complete the purchase. Stylous would earn a commission on the resulting sales. The founders spent four months creating a site with the technology to handle millions of visitors and load pages more quickly than most other e-commerce sites. But eight months after the site’s launch, traffic and sales
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were dismal, and the company was running out of cash. Around that time, Rich Collins started reading Ries’s blog, Startup Lessons Learned. Collins realized that Stylous was not a lean start-up. “We made assumptions about what people would like without ever really getting out there and talking to customers,” Collins says. “We were building the perfect solution for a problem that didn’t appear to exist.” He began meeting with users to get feedback and observe how they navigated through Stylous.com. Collins discovered that the vast majority of them were searching for brand names and for items that were on sale. With that in mind, the founders tried a new concept. They began creating Twitter accounts to announce time-sensitive deals from designer brands. For example, LouboutinSales, one of Stylous’s Twitter handles, recently tweeted about a sale on a Christian Louboutin handbag. Stylous earns a commission when someone clicks on the link in the tweet and buys the item. (Stylous has different commission arrangements with each retailer.) The day after Stylous launched its first 10 Twitter accounts, sales increased tenfold. Since the pivot a year and a half ago, the company has amassed 80,000 followers across its 160 Twitter accounts. Still, the founders have mixed feelings. “We were hoping to do something that would change the shopping experience for the entire world,” Collins says. “But sometimes you have to be realistic and go in the direction that allows your company to continue to exist.” For some entrepreneurs, the toughest part of a pivot may be setting aside their personal convictions—and egos. “It’s very hard as an entrepreneur to move away from your core idea,” says Phumbhra, of Chegg. “But if your customers are telling you to, you have to learn to be flexible.” —Jason Del Rey
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THE WAY I WORK | Gary Vaynerchuk, VaynerMedia
“Every day, between every phone call—during every spare second—I’m on Twitter.” Gary Vaynerchuk, 35, has been a salesman for as long as he can remember. It was lemonade as a kid and baseball cards as a teenager. At 22, Vaynerchuk took over operations at Wine Library, his father’s Springfield, New Jersey, wine store, eventually transforming it into a $60 million-a-year business and one of the largest online wine retailers. Customers flock to the company’s website for Vaynerchuk’s daily video blogs, on which he reviews wine with a playful irreverence and a New Jersey attitude. In 2009, Vaynerchuk parlayed his social media buzz into a new business, VaynerMedia, which advises large companies on managing their online communities. These days, Vaynerchuk splits his time between the two companies, packing his days with wine reviews, client pitch meetings, and a constant stream of tweets.
AS TOLD TO LIZ WELCH | PHOTOGRAPH BY DAVID YELLEN
When it comes to social media, I think most companies are putting a couple of chips on the table. I’m all in. Engagement is key to building real relationships with the people you do business with. People want to be heard and feel like their opinions matter. I typically spend four or five hours a day using social media to engage with people. Some days, I’ve spent up to 12 hours on TweetDeck. Every day, between every phone call or meeting, in every cab ride—during every spare second—I’m on Twitter. I have
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Internet Celebrity Gary Vaynerchuk’s video blogs, on which he tastes and reviews wine, get some 90,000 views a day. The New York Jets helmet serves as his spittoon. worldmags
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850,000 followers, and I care about every tweet. As soon as I wake up in the morning—usually between 7 and 8:30—I grab my laptop and start answering e-mails. I try to answer every single e-mail I receive, but it’s tough. I get hundreds, maybe even a thousand a day. My assistant organizes my e-mail into folders for me, which helps. I also have it set up so that, when people write to me, they get an e-mail with a video of me promising to do my best to write back. I usually spend about 15 to 45 minutes on the computer first thing in the morning. Then I’ll shower and go play with Misha, my 20-month-old daughter, while I chat with my wife, Lizzie, who is a stay-at-home mom. Every Monday, I make the trip to Wine Library in Springfield, New Jersey. That’s the only day of the week I’m in the office. It’s about a 45-minute drive from where I live in New York City. I usually spend that time on the phone. The first call is always to my mom—we talk about family stuff. Then, I’ll usually call Brandon Warnke, Wine Library’s vice president of operations. I’ve groomed Brandon over the past few years to run things, so I can focus on VaynerMedia. But we talk two to three times a day on the phone. We’ll discuss a range of things—problematic inventory, new products, pissed-off customers. I get to the office around 10 a.m. and meet with the key managers. We have a fantasy baseball league—so, during baseball season, I’ll talk trash about that for a few minutes, and we’ll make some trades. Then everyone catches me up on the business. We’ll talk about things like new orders, Robert Parker reviews, and which vineyards want to sell us what for how much. After the meeting, I start picking the wines I want to feature on my online show, Wine Library TV. Some shows are super planned out, some aren’t. I know wine so well that I don’t need prep work. From age 16, I lived and breathed wine. I read every magazine and book about wine. By the time I was 23, I was doing all of the buying for the store, so I tasted a lot of wine. I know my shit. Some people think I’m a huckster, but with the show, my intent isn’t to sell our wine. It’s to educate people about wine. There’s a big difference. Too many companies think they want to
do a video blog to sell merchandise, but if you turn your site into QVC, you lose. I have an audience that trusts me. It’s about building a global brand—not selling four more bottles of Pinot Grigio. When I started the show in 2006, I used to tape one episode a day, but I’ve gotten too busy. Now, I record all five shows—for Monday through Friday—in one day. I change shirts to make it look like it’s a new day, but people are catching on. I hate recording all the shows for the week in one day, because I want to be able to mention current events and pop culture. If Madonna punches Britney in the face today, I want to reference that on Wine Library TV tomorrow. Monday’s episode is always the best, because it’s hot off the press. We usually tape from noon until 6 p.m. or 7 p.m. It’s superinformal. And since everyone knows that’s the only day I’m in the office, employees will come by to say hello, or fans might show up and ask me to sign a bottle. I take random breaks to chat and sometimes ask people—like my dad—to make cameo appearances on the show. carry my laptop with me everywhere. If I have any downtime during the day, I’ll jump on my computer and answer e-mails. At least once a week, I log in to Ustream, a free video streaming site that lets you interact with people. I’ll send a tweet and let people know I’m online. Then, I’ll sit at my desk for two or three hours, chatting with up to 500 people through my webcam. I get all kinds of questions: “How do I build my car wash?” “How can I get more traction with my blog?” “What wine should I have for my daughter’s wedding?” I believe that kind of one-onone engagement with people is key to growing my personal brand. And I love the Vayniacs, my fans. When I’m at Wine Library, I usually spend at least an hour with my dad, talking about something silly or something big. He still works at the store every day, running the back office and making a lot of the buying decisions. My dad is like a cactus—introverted and tough. I’m a people person, like my mom, but I got my competitiveness from my dad. He came to this country from Belarus with nothing and built a real business. He’s my hero for giving me that need to run a business and for having enormous confidence in me. But there were times we battled about the business. I think he and I have a better relationship today, because I started doing my own things. On Tuesdays through Fridays, I focus on VaynerMedia, which I started with my brother, AJ. We teach businesses how to use social media to grow their brands. I usually schedule a meeting in the morning—with my agent, my lawyer, or potential clients—and then head to our office downtown. AJ and I started the company together in
I
“Every business decision I make gets me one step closer to my ultimate goal: to own the Jets.” 10 8 worldmags
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“People are scared of doing spec work, but I believe it shows your willingness to hustle.” 2009, and now we have 20 employees. He’s 24 years old, but we’ve been working together since he was 13. We used to spend Saturdays together, going to garage sales and buying stuff to sell on eBay for extra money. He knows me better than anyone, and I trust him 100 percent. At VaynerMedia, I’m the hunter—I get new business—and AJ’s the farmer who oversees each project and makes sure it gets done well. He’s been teaching me to be a farmer, too. I usually spend about half of my time in the office. The rest of the time, I’m going to meetings with clients or prospective clients. Our first client was the New York Jets. I’m a huge Jets fan, so landing the team as a client was one of the happier days of my life. In fact, every business decision I make gets me one step closer to my ultimate goal: to own the Jets. I asked for a meeting with Jets vice president Matt Higgins, and we started talking about my success with social media. I said, “Let me show you what I can do.” We started working with Kerry Rhodes—a safety who now plays for the Cardinals—on spec. People are scared of doing spec work, but I believe it shows your willingness to hustle. We taught Kerry how to use Twitter and Facebook strategically to build his personal brand. Soon the Jets signed on as a paying client. We got the team on every possible social media platform. The Jets went from under 1,000 to 300,000 fans on Twitter and Facebook. After our success with the Jets, we were able to land the National Hockey League as another paying client. We worked with the NHL on strategy and execution. It went from 500 Facebook and Twitter fans to half a million, just by caring. We’re humanizing the NHL. For instance, every time somebody says, “Can’t wait for the Rangers game tonight” on Twitter, the NHL will now respond with something like, “Have a great time!” Those fans feel different about the NHL. Too many people think this one-on-one stuff doesn’t scale, but giving a shit has an enormous return yield. For example, if a florist is nice to you, you’ll buy flowers there, even if 1-800-FLOWERS is cheaper. Yes, it’s hard work, but once everybody understands the value of engagement, everybody will do it. Even if someone says something negative about your brand, that’s a big opportunity. I go on Amazon.com and respond to every review people leave of my book, Crush It!, whether the review is positive or negative. When I get one-star reviews, I apologize for letting them down. Then we have a dialogue. Even
if that person did not like my book, he respects that. A lot of times, I get new business as a result of speaking engagements. I speak two or three times a month, which adds up to more than $100,000 a month. That’s real money, so I have to be careful to not just become a speaker. I don’t want to become just a talking head, the type of person I make fun of. I have a 10-book deal with HarperCollins, so that takes up some of my time, too. My next book, The Thank You Economy, comes out in March. Last spring and summer, I spent a lot of hours with my ghostwriter, just riffing. She’d tape me, transcribe, edit, and send it to me. Then I’d stay up late nights, working on revisions. Now that it’s done, I’m gearing up for the book promotion. Every Thursday night, I do my Sirius radio show about wine and social media from 8 p.m. to 10 p.m. It used to be on even later. I wanted to stay up late every Thursday night about as much as I wanted a punch in the face, but I was willing to pay my dues. This is about personal branding, and I want to be on every platform—the Web, books, radio, and eventually TV.
D
inner is usually my first meal of
the day. I know it sounds crazy, but I rarely eat breakfast or lunch. A few times a month, I might have dinner with my lawyer or grab drinks with other entrepreneurs who are good friends of mine. But more and more, I try to go home after work and see my wife. We order dinner in—I like sushi. I usually stay away from red wine at night, because it makes me sleepy. I want to get another hour or two of work done. Usually, I’m catching up on e-mails. Sundays are my day with family—and the New York Jets, which are like family. I don’t care if Oprah and Obama called and said, “We need you”; if the New York Jets were playing, I wouldn’t return the call. As much as I love work, family’s the most important thing to me. But I don’t want to be the alcoholic who says he doesn’t have a drinking problem. I wish I spent more time with my wife and daughter. It’s something I struggle with. I’m scared to play the I’llget-to-it card. These days, I spend about 90 percent of weekends with my family, which is a big accomplishment for me. Last year, it was 40 percent. At least I’m heading in the right direction. FEBRUARY 2011
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FRANCHISE
SPECIAL ADVERTISING SECTION
Finding the Perfect Fit: How Franchisers Select Franchisees
by Mark Henricks
A look at how franchisers select potential franchisees reveals surprises. For one thing, although franchisers want people who can start and grow small businesses, they’re not looking for true entrepreneurs. “If a person is too entrepreneurial, they should not even consider a franchise investment,” says Kevin B. Murphy, a franchise attorney and director of operations for San Francisco-based consulting firm Franchise Foundations. “The true entrepreneurs have a way of operating a business themselves. They will not do well in a franchise environment that dictates how operations will be done on a virtually day-to-day basis.” Many franchisers prefer someone with a corporate background who is accustomed to taking direction from above. “People that like to follow directions will do well,” Murphy says. “If somebody has a military background, for example, that’s an ideal profile for owning a franchise.” Background is far from the only thing franchisers look for, of course. Financial strength is on top of most lists. After that, franchisers often emphasize skills and experience.
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Others stress passion. But no matter what precisely they’re looking for, most franchisers today have little trouble identifying candidates. “There’s a huge supply right now,” Murphy says. “People are either being laid off or downsized and they realize they’re not going to get another job doing what they did before. It’s a significant percentage of our population right now. And for many of them, the question is, ‘Are you going to start your own business or are you going to buy a franchise?’” At School of Rock, the question for many potential franchisees is whether they get what the Teaneck, N.J. -based music education franchiser is all about. “Of course you need to have a certain amount of income and net worth, the same things everybody measures,” says CEO Chris Catalano. “But I put a lot more weight on somebody who wants to be involved in our business, who understands our purpose.” School of Rock’s purpose is to remake music education from a regimented course of instruction into a fun, informative
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opportunity to make music and friends. “Ours is a performance-based education system,” Catalano says. “Kids learn through doing in our program. They’re cast immediately into a show and we play songs that are inspiring instead of something like ‘The Blue Danube’.”
says Jerry M. Perch, director of franchise development for Birmingham, Ala.-based Express Oil Change. “Assuming the person is financially qualified, we are not looking for a mechanic or someone to work on vehicles. We’re looking for someone who, with proper training, can manage a million-dollar business. Most of our franchisees to date are white-collar people -engineers, bankers, or people who have owned a small business and are looking for something bigger.”
From the franchisee’s perspective, Express Oil Change presents an opportunity to build wealth in addition to generating income. That’s because the company’s approach calls for franchisees to own the buildings and prime commercial lots they operate out of. “So 15 or 20 years down the road, the exit model includes not only selling the business but also the prime Catalano also asks franchisees to pass a background commercial real estate and the building,” Perch says. criminal check because they’ll be working with children. And he’s looking for people who enjoy being actively involved in Express Oil Change has 176 stores and plans to open another their communities. “We like to see that they’ve run businesses 10 within the next year. Both totals include sizable numbers of corporate-owned locations. Those are typically in the before,” he adds, “because that helps.” Birmingham area, with franchising growth occurring outside What helps franchisee like School of Rock is that it’s Alabama. “We’ve been strong in the South and Southeast,” something different and doable. “We’re not an extremely Perch says. “We’re now growing toward the Northeast, expensive franchise,” says Catalano. “You can achieve it at Midwest, and the West.” moderate income levels. If you like music and you like kids and you have cash and you want to get into a business, it’s Houston tire dealer TIREMAX has plans to grow almost a lot more fun than making burgers. Basically, that’s what everywhere, according to President Christopher Wilkerson. The company expects to add 50 to 70 new franchise locations in drives interest in our brand.” 2011 across the U.S. Currently, they have 25 locations in Texas While the company employs a variety of recruiting tools, many and Colorado. Opportunities include both start-ups and area of its franchisee candidates find their way to School of Rock development agreements. without much marketing effort on it’s part. “Our best source is parents who have kids in our program,” says Catalano. “They The new TIREMAX franchisees will be selected on the basis of become interested because they love what we do, and we’ve their financial strength, management or similar business experience and “entrepreneurial drive to be successful and made such an impact on children.” growth with TIREMAX,” Wilkerson says. To franchisees, School of Rock has 67 locations in cities from Los Angeles TIREMAX offers room to grow with a company that has to Austin and New York to Seattle. “We are spread all across nationwide ambitions and operates in a recession-resistant field the country,” Catalano says. ‘The largest density is on the where its buying power gives franchisees attractive margins. East Coast, but we have huge gaps.” Target markets as The U.S. retail tire industry moves about $30 billion worth of they open an The franchiser expects to open 15 to 20 new tires each year, he notes, and dealers are benefiting from locations over the next year in such target markets as the growing sales as automobile owners extend the period of time West Coast, Texas, and Nashville. “But we don’t turn they own their cars. somebody away if they’re a good partner and have a For consumers, TIREMAX offers “a unique buying experience, location that’s viable,” Catalano adds. second to none customer service, very clean and comfortable For Express Oil Change, the most viable candidates are not showrooms, courteous and educated sales staff, 110 percent necessarily those with experience in the 10-minute oil change price guarantee, fast service in 30 minutes or less for new tires, business, or any aspect of the automotive field. “Like all vast product offering in stock,” according to Wilkerson. franchise companies, the person has to be financially qualified,”
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TIREMAX was founded in 2000 with the goal of bringing consumers an unparalleled tire shopping experience featuring attractively priced name brand tires, high-quality customer service and an emphasis on customer education. The facilities are designed to impress, with spotless service bays and visually arresting showrooms that include contemporary architecture and expansive, spotless windows. The deluxe waiting rooms provide free WiFi Internet access, wide screen plasma televisions, gourmet coffee, Cappuccino, and lattes. Combined with its well-trained and committed staff and value pricing, Wilkerson says, TIREMAX offers consumers a convincing alternative to other tire dealers. Potential franchisees who enjoy working in a white-collar home-based business may find a match at The Interface Financial Group, says David Banfield, president of the Bethesda, Md., franchise that provides invoice discounting to small businesses. “The monetary aspects are very positive,” he says. “And, being home-based, you don’t have the commute, and you’re not going to travel all around the world at somebody else’s behest to do business.” Banfield looks for potential franchisees with good communication skills and the ability to make decisions and solve problems. “For us, the foundation item is that they have a solid business background,” he says. Interface Financial Group has 160 franchise locations in the United States and six other countries. “In 12 months that 160 will be in excess of 200,” Banfield says. Todd Beckman considers financial strength as the most important franchisee trait at MassageLuXe, a chain of high-end massage therapy spas. “Banks are not lending like they have in the past, especially for new start-ups,” explains Beckman, president and CEO of the Fenton, Missouri-based company. Other traits MassageLuXe is looking for include management experience, business acumen, and sales and marketing skills.
economy we had only the strongest candidates because we wanted to make sure they’d be successful,” Bower says. Popeyes offers franchisees a high-sales volume restaurant opportunity and a reputation for customer loyalty. The company has 1,949 restaurants in nearly every state and more than two dozen foreign counties. Its biggest markets are New York, Houston, Chicago, Los Angeles, Atlanta, New Orleans, and Washington, D.C. Over the course of the next five years, Popeyes expects new unit growth in the range of 4 to 6 percent, according to Bower. Experience in the hair care industry is not something potential franchisees need to be welcomed at Minneapolis-based Regis Corp., franchiser of such brands as Supercuts. “At Regis, we look for people with business experience, financial strength and understanding, an entrepreneurial spirit, an ability to be involved, and an enthusiasm for the brand they’ve chosen,” says Alan Storry, vice president of franchise development for the Minneapolis franchiser. While consumers come to franchises like Supercuts for hair care, franchisees are looking for opportunities with strong name recognition and demonstrated recession resistance. “At Regis, we have enormous strength behind our brands,” Storry says. “Franchisees have a powerful business support system ranging from real estate and finance to marketing and management,” he adds. Supercuts has more than 2,120 corporate and franchised Supercuts locations in the United States, Canada, and Puerto Rico. Storry says they’ll look for franchisees to open 100 new locations in the next year across the U.S. and Canada, including target markets like Los Angeles, Boston, New Jersey, and others.
Beckman plans to grow MassageLuXe from eight locations in St. Louis and Virginia Beach to 40 to 50 new locations in major metro areas by 2012. “More and more people today are conscious of their health and well-being,” Beckman says. “MassageLuXe is a concept that fits well into this mentality.”
While looking for franchisees could be a relatively easy proposition for franchisers in the near future, at least while the economy and employment recover, franchising consultant Murphy says it still won’t be completely straightforward. That’s because every franchise opportunity has different and sometimes shifting requirements, and potential franchisees don’t always fit into neat categories.
Many franchisers have responded to the recent downturn by changing their ideal of the perfect franchisee. One of those is Popeyes Louisiana Kitchen where Ralph Bower, chief operating officer of the Atlanta-chain of quick-serve chicken restaurants, says they’ve added prior restaurant experience to the list of traits they seek. “We wanted to make sure in this tough
Franchisers may know they don’t want maverick entrepreneurs and they do want people who can follow orders, but they won’t always find exactly what they’re after. “Somewhere in between the true entrepreneur and the military person is where most people happen to fall,” Murphy says. “They’re usually not only one or the other. That’s where it’s really a judgment call.”
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LEGACY
Antonio (“Tony”) Moreno, 1944–2010
A Big Spirit Soul music had Berry Gordy. R&B had Ahmet Ertegun. Rock ’n’ roll had Phil Spector. And for Latin music, particularly salsa and merengue, there was Tony Moreno. A prominent music producer whose label, Musical Productions, became one of the largest independent Latin music companies in the United States, Moreno died on November 14 at 66 from complications of liver cancer.
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The Hitmaker Tony Moreno flanked by Pedro Conga (left) and Eddy Herrera, two of the stars who recorded on Moreno’s MP label
visionary,” says Oscar Llord, former head of Sony Discos, whose first job in the music industry was working under Moreno. “He saw the growth potential in the Hispanic community in the U.S. and focused in on it. He was one of the early pioneers in getting Latin music exposed and distributed in the U.S.” “He couldn’t compete with the big guys in terms of money, but he could compete with quality of music,” says Hidalgo. “He would look for the next new type of music. When reggaeton was starting to happen, nobody wanted to touch it. The same thing happened with bachata and salsa. At the beginning,
nobody wanted to know about it. So he went after it.” Among the artists whose careers he helped launch were Puerto Rican salsa singer Tito Rojas and Dominican merengue singer Eddy Herrera. Moreno sold MP in 2007 to J&N Records, but he stayed on as a vice president. Even when he was sick, Hidalgo says, Moreno would still call or send texts until 10 or 11 at night. “He was a great man, with a great heart,” says Hidalgo. “He will be remembered for a long time in the record business.” —Kasey Wehrum
CourTesy Moreno FAMily
In the often-cutthroat music industry, Moreno earned a reputation for being something of a gentle giant. “His sheer size was dominating,” says Giora Breil, former head of the legendary Latin label Fania Records. “He could have been intimidating, but his nature was more like a big, friendly bear.” That kindness even carried over to competing labels. “Even when we were competitors, we always had a good relationship,” says Juan Hidalgo, head of Miami-based J&N Records. “I would call him, and he was always there for me, always willing to share his experience in the music business.” Born in Cuba in 1944, Moreno immigrated with his family to Miami in the late 1950s amid increasing political tension, which culminated in a 13-year-old Moreno witnessing the execution-style murder of his pro-revolution uncle. His start in the music industry came at 22, when he got a job opening packages for a Miami record label. An ear for emerging talent helped him work his way up the ranks, until he landed the top spots at major independent Latin labels TH Records and Sonotone Records. In 1989, Moreno launched Musical Productions, usually referred to as MP. “As large as he was physically, he was also very intelligent and very much a
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