A Start Up Trek – Rules of Thumb

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X-ray photograph of a human thumbX-ray photograph of a human thumb

I am starting a new public accessible prototyping lab in Huntsville, Alabama, called MindGear Labs based on the fab lab model. I’ve dreamed of becoming an entrepreneur and have done a fair amount of research on the topic. But this is my first attempt at starting a business. Here is where I document weekly my mistakes and successes in creating a business from the ground up.

Seems like things never move along as quickly as you’d like. Each week I make progress but I would very much like to hurry up, get open, and find out if people are going to come in droves or in trickles. I hope for the former of course, but time will tell.

Unfortunately there is no sure fire way to estimate demand, other than throwing the doors open and counting the number of people that walk through. I mentioned last week that I was looking at different marketing folks. I picked one this week and I feel pretty good with the decision. That’s a good thing, because I’m rapidly coming to the conclusion that marketing is the going to be the main factor determining whether MindGear is a success or failure. A big part of marketing is developing a product line that the customer wants. For me it’s figuring out how to inspire customers to come up with new things they can create, help them to gain proficiency in their design and creation skills and most importantly to enjoy the process.

Fortunately for me that is the part that interests me. All the time I’ve spent working up spreadsheets and learning accounting rules is time well spent, but ultimately that knowledge is more about making sure I run this business effectively than something I want to do the rest of my life. Today while my son was playing at the pool I was reading The Accounting Game. I found it when I wrote about building my financial spreadsheets. It has a couple of minor edit errors but otherwise I found it very helpful in getting down some basic accounting principles.

Back to marketing. My new advisor told me that a rule of thumb is to spend 5-10% of your gross sales on marketing. I’ve since confirmed that estimate with several other people. I wish I could find more rules of thumb to help in managing a business. The only other one that comes to mind is that venture capitalists are looking for a 20x return on their investment. Although after a couple weeks of talking to a few people involved in the Huntsville area I’m hearing the new rule of thumb is 10x return. I guess the economic downturn got them too. As an engineer, I find rules of thumb are very handy. They tell you what is important and what isn’t. For instance if I’m designing a launch vehicle I know that my thrust-to-weight at liftoff better be greater than 1, that the length over diameter (L/D) should be between 6-10 and that you need a 15-25% mass reserve. I’ve seen all these rules broken, usually successfully, although I’ve seen some very hot arguments on the last one (the range between 15% and 25% actually affects performance a great deal). Point is, rules of thumb allow you to focus your attention on those parts of the system that are different from the norm, and help you decide whether deviation from the norm is justified. If I ever find a better set of rules of thumb for business development, I’ll be sure to discuss them here.

When I was building my financial projections I searched high and low for a way to estimate marketing costs and found very little. I ended up assuming a value for how much I had to spend for each new membership. Interestingly my assumption ended up being right in the 5-10% range. But I recall when I made the estimate and I started with a value 10x lower. Even then I was starting to believe that marketing was going to be a strong challenge and fortunately I budgeted as much as I thought I could reasonably afford without driving prices up. Even now thinking that I’ll spend 10 cents for every dollar earned on marketing seems like a lot. That dollar still has to pay for the price of materials and all the overhead.

But then if no one knows what I’m offering then I won’t be in business very long. There are so many businesses I drive by every day without so much as a second thought. They could have wonderful products or services I could really use, but I’m not going to enter all their shops and offices just on the off chance they have something I need. I planned on making some bulletin board buys and sending out some coupons to get me off the ground. I also wanted to put serious effort into my online presence, which still needs improvement. Hopefully with my new advisor I’ll be able to whip all of this into shape soon.

A couple of my son’s friends at school have insisted that we’re not really starting a business because if we were, then we would be advertising. My son is annoyed with them, but right now all I can think is “out of the mouth of babes …”

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