If you want to scare a bunch of business-school students, show them what it really takes to be an entrepreneur. I see it happen twice weekly during a course at the Norm Brodsky College of Business at Rider University. The class is called “Inside the Mind of an Entrepreneur,” and I co-teach it alongside Professor Lisa Teach and Brodsky himself. Every Tuesday and Thursday, Norm and I arrange for a world-class entrepreneur to present their personal journey to 15 undergraduates. The entrepreneurs we bring on all have harrowing stories about building their businesses from nothing and overcoming adversity over and over again.
By the end of the first class or two, I can practically see the confidence drain from the students’ faces as they confront the reality of entrepreneurship — backbreaking work and sky-high financial risk. They hear how Noah Chaimberg of Heatonist spent his weekends behind a push cart outside music venues to test his approach to selling hot sauce before it became a multi-million dollar business. Jay Jay French from the heavy metal band Twisted Sister related how they played thousands of live shows before getting their big break on MTV. They learn how Charley Ryan from Brooklyn Bowl navigated the COVID pandemic with a shutdown that lasted more than a year. I imagine that an entry-level CPA position began to look increasingly attractive to them by comparison.
It’s no surprise that these students have a skewed idea of entrepreneurial life. Like all of us, they’ve read how Brian Chesky got the idea of Airbnb when he decided to rent out his apartment for a few days, or how Pierre Omidyar started eBay to sell his girlfriend’s Pez dispensers. This familiar narrative starts with solving a common problem with a brilliant, disruptive solution that was right in front of everyone’s eyes, continues with enthusiastic inflows of VC capital, snatching market share from traditional players to an eventual lPO, and… well, you know the rest.
The problem? That’s not how the vast majority of entrepreneurial wealth is actually created. In reality, a successful entrepreneur is someone who builds what I call a smart business.
HOW TO BUILD A SMART BUSINESS FROM SCRATCH
A smart business is one that has the potential to provide all the wonderful benefits of entrepreneurial success without requiring a one-in-a-million idea. While it’s true that being an entrepreneur allows you to design your own career, your own company culture and your own impact on the world, it doesn’t happen the way we’re told it does. A smart business doesn’t solve a problem we all have, and it doesn’t require a boatload of outside investment — at least not at first.
Part 1: Build a Moneymaker
There are two phases to creating a smart business. The first is to build a “moneymaker.” Simply put, this is a business that makes money — one that grows consistently and profitably. The most direct path to building a successful moneymaker is this:
Step 1: Start a small services business which solves a problem for larger businesses.
You’d be surprised at how many young entrepreneurs want to start the next Yeezy sneaker company or AirBnB. The first two things we show them is that B2B strategies are more likely to succeed than consumer-facing businesses, and that service-based businesses require less cash to launch and grow than product-based businesses.
Step 2: Start a business that solves three underlying problems for large companies:
Problem #1: Large companies prefer not to hire people. Every addition to a large company’s headcount means more costs in benefits, real estate and fixed overhead. A new hire at a large company costs more than just the salary. It would be safe to assume that every new $100,000 employee at a large company costs about $150,000 when you add up everything (taxes, real estate, etc.).
Your small B2B services business can hire at a lower cost than your larger customer.
Problem #2: Large companies are afraid of technology. New technologies to make work easier and faster are entering the marketplace every day, but investing in new technology comes with risks. The technology (or the company behind it) might fail. It might become obsolete or increase cyber risk.
Your small B2B services business can adopt new, unproven technologies more nimbly than a large company. If something bad happens, it’s not your customer’s problem.
Problem #3: Large companies use small companies as their bank. This is a surprising one, but the logic is simple. When you employ someone to service a contract for your large customer, you pay them every week or two. Your customer, however, pays you every month, and may even stretch out their payments to two or three. There’s a cash-flow problem, but the problem is yours, not your customer’s.
Thank the small business gods for American Express and other short-term lenders that allow you to manage the float in between your employees’ payday and your own.
That’s Part One: Build a moneymaker — that is, a small services business that solves a problem for large companies. Make sure you address the three underlying challenges that large companies face when you design your offering.
Some examples from our Inside the Mind of an Entrepreneur class at The Norm Brodsky College of Business include:
Customized Energy Solutions, Philadelphia. Founder: Stephen Fernands
Customized Energy Solutions monitors energy usage for large clients like big box stores in your neighborhood so these stores can manage their electricity usage better.
Terracycle, Trenton, NJ. Founder: Tom Szaky
Terracycle helps large consumer-based companies develop more environmentally-friendly products to reduce their waste footprint.
Part 2: Build a Moonshot
There’s nothing better than building a small business that grows significantly, does a great job for its clients, employs lots of people, and makes its owners millions of dollars year after year. Well, that’s not entirely true. There is one thing that’s better: to turn that company into a business worth hundreds of millions or even billions to a buyer. That’s a moonshot.
So how do you get there?
Once you’ve built a moneymaker that helps your large-company clients with headcount, technology risk and financing, it’s time to start addressing those challenges yourself. We’ll consider all three at the same time because they are highly interconnected.
Now that your moneymaker has been in business for a while, you’ve got three (or maybe four) things going for you:
You have a brand and a reputation in your marketplace. Important influencers in your field will listen to your ideas.
You have deep industry knowledge. Now that you have been working inside your field for a long time, you have deep knowledge of the challenges your industry faces along with the opportunities it offers.
Your moneymaker has a seasoned team. You’ll be turning to them to help you develop your moonshoot.
Oh, and the fourth: Since you’ve been a moneymaker for a while, you probably have much greater access to capital from banks, investors, and clients than you did when you started out. You may need that money to become a moonshot.
So, back to those three underlying challenges that you took on for your large company clients:
Hiring people so they don’t have to
Employing new technology and taking on the technology risk that comes with it
Acting like a bank for your clients by carrying their receivables
Your pivot to moonshot requires developing innovative solutions using your reputation, access, industry knowledge and team (and possibly capital) to discover a way to:
Reduce your own headcount—likely one of your biggest sources of overhead costs—by developing your own proprietary technology
Using that technology to attract in a new kind of client: one that’s buying your technology solution, not your company’s service.
Charging for your solution in real time, rather than billing upon completion of service
Washington, D.C.-based Kitewire Mobility, founded by Jere Simpson, originally developed custom software for its clients, many of whom were government agencies. They would come to Kitewire when they needed a new database or a new app to automate some business process. One day, Jere saw a way to turn his moneymaker into a moonshot. One of his clients needed to monitor the digital activity on the mobile devices of its employees. Jere wondered: Would other companies want this solution as well?
Fast-forward three years, and Kitewire no longer develops custom software for its clients. Now it is a mobile application business that allows large companies to monitor the digital activity of their clients for a few bucks a month per device, paid automatically. Here’s the best part: When a new client comes on board with 1,000 new devices, Kitewire doesn’t have to hire any more people! It just spins up a few more servers to support the additional workload.
Gross margins shoot up, labor costs go down, and the total addressable market goes from a few clients to every company in America — even the world. Jere’s business collects its fees in real-time automatically.
That’s how his moneymaker became a moonshot worth hundreds of millions of dollars.
As you’ll recall from my previous post, I teach alongside Norm Brodsky at the Norm Brodsky College of Business, and the thing I’ve enjoyed most about participating in this initiative is seeing how students apply the knowledge we share with them in real-time.
Remember how these students began to doubt their own entrepreneurial spirit at the beginning of the semester? Well, later on, I’m happy to report that their mood would shift noticeably. After the fourth or fifth story of entrepreneurial high-wire acts, they focus their questions less on the hardships and more on the other parts of these business owners’ stories: the quality of life, the freedom, the creativity, and yes, the wealth. They begin to understand that entrepreneurship is a product not of genius (though that never hurts!) but of passion. And finally, they come to recognize that while the road to success can be rocky, it’s not beyond the reach of anyone with that passion.
Lewis Schiff runs Birthing of Giants Fellowship Week, the legendary entrepreneur school, on behalf of our Board of Experts. He also runs Moonshots & Moneymakers: The Oxford Innovation Conference for American Entrepreneurs. He has sold businesses to publicly traded media companies and written 4 books about success, including The Middle-Class Millionaire, Business Brilliant, and The First Habit. The preceding post was reproduced with the author’s permission.
