The Most Important Resource
I see a lot of people who are starting out on their first venture, and they all have the same obsession: money. They want to know how much money they need to get started and how they can raise it. When they think about the risk they're taking, they look only at the money they might lose. But losing money is not, in fact, the biggest risk in a start-up. After all, if you work hard enough, you can eventually earn it back. There's another resource that, once you lose it, you'll never see it again. I'm talking about time.
Let me tell you about Rob Levin, who approached me more than two years ago for advice about starting a magazine. He planned to call it The New York Enterprise Report and to sell it to owners and managers of small businesses in the New York metropolitan area, offering interviews with successful entrepreneurs and how-to articles by experts. I agreed to meet with him, although I'm not sure why. I thought starting a business magazine was a really terrible idea. The industry has been in the doldrums for five years now, with no relief in sight. As difficult as life is these days for established business magazines, I knew it would be even harder for a start-up publication that would be competing not only against the big boys but also against the numerous providers of free business information on the Internet. There are many easier, and more lucrative, ways to earn a living.
But I have an ironclad rule that I never discourage people from pursuing their dreams. What I will do is tell them what I think of their approach. Often they're trying something that I believe, based on my business experience, is destined to fail. In that case, I'll suggest alternatives. Then again, what makes sense for one person may be a recipe for failure for someone else. So I begin by finding out as much as I can about the person I'm going to be advising.
As first-time entrepreneurs go, Rob Levin was a fairly sophisticated businessperson. After graduating from college in 1991, he had worked for Arthur Andersen as an accountant for four years, then gone back to school to earn his M.B.A. Subsequently, he'd been CFO or CEO of three small companies that ranged from $1 million to $25 million in annual sales. He had parted company with his last employer the year before he contacted me and had been doing some consulting while he searched for a business to start. Although he had $300,000 of his own savings to invest and his wife had a good job, she had recently given birth to their first child. It was obvious to me that he could not go indefinitely without a steady income. If his new business did not become viable--that is, able to sustain itself on its own internally generated cash flow--within approximately 24 months, he would probably have to look for a job.
Rob, for his part, was convinced that the magazine was his ticket to success. Not only was he passionate about it, but everything else he planned to do depended on it. He had already spent $75,000 on start-up costs and a website; without the magazine, the website would never break even, let alone earn a profit. He was also planning to make money from seminars and networking events, which would be difficult if he didn't have the magazine to use as a platform. The question was, how likely was it that he could launch such a publication successfully?
"This approach won't work," I told Rob. "You have to go about it differently. Have you thought about giving the magazine away?"
Not very, I concluded. As we went through the numbers, it became clear that Rob, like many entrepreneurs starting a business--including me--was wildly overoptimistic about the sales he could generate and the time it would take to generate them. In addition, I felt he was dramatically underestimating his expenses. One number in particular jumped out at me. He planned to sell subscriptions by direct mail and was counting on a 10% response rate. I don't know a lot about direct mail, but I do know that no one gets a 10% response rate for a new magazine. He would be doing well if 1% to 2% of the direct-mail recipients responded. It would therefore take him much longer and cost him much more money than he expected to get the number of paid subscriptions he was counting on.
"This approach won't work," I told him. "You'll run out of money before you find out if your idea's viable. You have to go about it differently. Have you thought about giving the magazine away?"
He looked at me as though I'd just put a knife in his heart.
He looked at me as though I'd just put a knife in his heart. There was shock and anger on his face. He later told me that the suggestion was devastating. It was a huge blow to his ego. But the logic was compelling. Rob couldn't survive without advertising revenue, and the first question of any potential advertiser would be, "How many subscribers do you have?" He wouldn't be able to make the sale until he could give the advertiser a solid number. The fastest way to get that number, and to build a subscriber base, was to offer the magazine free of charge to the members of business organizations and trade groups. Advertisers might still be cautious about spending their ad dollars in an untested publication, but at least they would have an idea of the number of people they'd be reaching, and some of them might be willing to take a chance. Even if they bought only one ad in one issue--rather than signing up for six months or a year--he would have some cash flow coming in, and cash flow was what he needed to survive.
If he insisted on going after paid subscriptions, Rob wouldn't have a prayer of generating the revenue he needed. He'd wind up wasting a lot of precious time, which would come back to haunt him even if he quit before spending all of his money. He would probably have to take a corporate job, and he'd have a lot of ground to make up. It would take him a year or more to get back to where he'd been before he'd left his last job. Granted, he would learn some important lessons from a failure, and later he might even be able to raise enough money to give the magazine another try. But, in the meantime, he would have spent three or four years and ended up back where he'd started with little to show for his efforts. By giving the magazine away, he would at least have a shot at succeeding.
That wasn't what he wanted to hear. In fact, he was seething when he left. I tried to offer him an olive branch by noting that he could later convert his free subscriptions to paid ones. That was technically true, but I knew in my heart that if he built a successful company around free subscriptions he would never start charging for them. It wouldn't be necessary from a business standpoint. He'd be wasting his time and money simply to boost his ego. He was too smart for that.
In any case, the decision had to be his and his alone. "You have to go with your gut feeling because it's your money and your time," I told him as he was leaving. "I have experience, but that doesn't mean I'm right." A day or so later, he called and told me that he'd decided to take my advice. He'd done some research and realized I was correct about the direct-mail response rates. He couldn't argue with the numbers. So he was going to change his plan, basing it on free subscriptions rather than paid. I wished him luck. A couple of months after that, he called again to ask if I'd be willing to let him interview me for a cover story in the magazine's premier issue. Naturally, I agreed.
That was almost two years ago. Since then, Rob has published 10 issues of the magazine (it appears six times annually) and held five seminars and forums for small-business owners. In 2005, his sales were 10 times higher than in 2004, and almost 70% of them came from advertising, up from 50% the year before. Meanwhile, he had passed the breakeven mark and was clearly on his way to building a successful business.
I guess that means I was wrong about one thing. Starting a business magazine in New York City wasn't such a bad idea after all. Granted, Rob could probably have made more money by going into another type of business, but he's following his passion and doing what he loves, which is far more important than getting the best possible return on his investment.
On the other hand, Rob agrees that he wouldn't have gotten this far had he stuck to his original plan. "Looking back, I was overoptimistic about everything," he says. "I would definitely have run out of money if I had tried to charge for the publication. I didn't know it then, but I do now."
Most important, by adjusting his course, Rob saved at least three years of his life. Instead of spinning his wheels, he used that time to lay the groundwork for a business that he can stay with as long as he likes and that can take him wherever he wants to go.
Norm Brodsky is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham. (firstname.lastname@example.org)
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.