One of the most popular entrepreneurship pursuits is consulting. Maybe you sit down with clients and work with them, or you visit their place of business to interact, or maybe you do business over the phone. With Square you can start taking credit cards, too, with no setup fee or anything. All you need is an Android, iPhone, iPad, or iPod touch and you’re off!

You swipe credit cards through the free reader they send you, have the payer sign right on the screen (unless you’re taking the card over the phone and hand-keying the number) and it will email or SMS the person a receipt.

I requested my reader recently and I’ve already used this to collect payments without a hitch. They deduct a standard credit card fee and that’s it. No monthly transaction fees.

Highly recommended. Try it out!

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Negotiation And Principles Of Fairness

by Matthew on June 27, 2011

Voluntary negotiation and principles of fairness have been on my mind a lot recently and I really think you need to learn negotiation skills. Even in a relatively free market where parties voluntarily may enter into particular transactions, there are still plenty of sentiments that some of these negotiated arrangements are “unfair” or “unjust” in some way. From an economist’s perspective, as long as the transaction was entered into voluntarily, the parties involved believe they are better off than they would be otherwise so the transaction is a net positive. The ability to engage in voluntary transactions is a key component of liberty and different people have different ideas about what kinds of transactions are fair, so legal restrictions on voluntary exchange can be perilous. Still, why can some voluntary exchanges still seem exploitative?

Last week’s EconTalk podcast with Mike Munger was an excellent insight into why this is. It also helps to understand how your negotiations can be perceived by outsiders. I’d recommend listening to the entire podcast, but the main point is both simple and extremely insightful. In a sense, as you increase your leverage through traditional negotiation strategies, the more likely you are to be accused of being “unfair.” Here’s why.

During a negotiation between two parties (let’s say Party A and Party B), both sides are attempting to come to a meeting of the minds whereby both parties agree to a common transaction. When working through negotiations, each party needs to consider: 1) the benefit to the proposed transaction, and 2) their next best option if this negotiation fails…the so-called “Best Alternative To a Negotiated Agreement” (BATNA), also called “Plan B.” If, during a negotiation you have another transaction nearly just as good lined up as a fallback, this gives you leverage. Said another way, the less you really need one particular transaction, the better leverage you have over the other party. You can probably see how emotions can really skew things because people will decide they really need one particular car/house/whatever and won’t be willing to walk away, instead focusing only on their emotional desires instead of developing an alternate plan that is a good as possible.

Good negotiation includes trying to develop the best possible Plan B for yourself while finding out as much as possible about the opposing party’s Plan B. The better your own Plan B, the better your leverage. The better the other party thinks your Plan B is, the better your leverage. E.g., if your car has broken down and you decide you absolutely must purchase a car this weekend, you would still probably be best advised not to mention this to the dealership when you go to look at cars. :)

I developed the slide below to show a common negotiation situation. This is just an example; the lines may be different for each transaction.

Each party has an actual Plan B which is significantly less desirable to them than the proposal on the table. In addition, they each have a perception of the other party’s Plan B. I believe that in many cases the actual desirability of each party’s Plan B is only knowable to that party themselves since they are the ones deciding desirability. This means that the opposing party and outsiders can only guess at the value of the alternative. Not only that, but an inexperienced negotiator may not know how to increase the perceived value of their Plan B to others. What we end up with is being stuck analyzing transactions based on outside perceptions of each party’s alternative option to a transaction.

The larger the gap between the parties’ Plan B, the more unjust the transaction may seem. One example from the podcast is a guy in the desert dying of thirst and along comes a food truck. The food truck driver, seeing an opportunity to make some extra money, offers the following deal: 3 tacos for $5 and water at $1,000/bottle. If the dying man has the money, he may indeed “voluntarily” choose to spend thousands of dollars to keep from dying of thirst. On the other hand, something about arbitrarily charging a man dying of thirst $1,000 for a bottle of water doesn’t sit well with most people’s sense of fairness. The dying man’s Plan B is to die of thirst. The taco truck driver’s Plan B is to forgo the transaction and lose a single sale.

Obviously that’s an extreme example, but it illustrates a way that others may perceive “fairness” when looking at a transaction. Keep this in mind as you engage in negotiations because the nature of negotiation is to work on increasing your own leverage, thereby (it would seem) increasing the risk of the transaction being perceived as unfair.

For me, this mechanism of looking at transactions is helpful especially for trying to predict how an outsider may view a voluntary transaction. As new businesses grow, reputations will be made based on these perceptions, regardless of the ultimate voluntary nature of the final transaction itself.

What do you think? Is Munger correct about the source of our perceptions of fairness? Does this mean that any effort to increase your own negotiation leverage is “unfair?” Is it fair to the point where you feel the leverage is equal on each side? How can you really know when the leverage is equal, or can it ever actually be equal? Does fair even matter?

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You Need To Learn Negotiation

by Matthew on June 23, 2011

Whether or not you realize it, you’re always negotiating and will be for the rest of your life; you might as well work to get better at it. Good negotiation skills will improve your awareness and enrich your personal and business prospects. Especially if you’re looking to escape the rat-race, basic negotiation skills are a must.

Any first-year law school contracts student can tell you that if you’re on the lookout, it’s almost maddening how many mini-contracts and negotiations take place all around us all the time. Ever buy a car, home, or even an old lawnmower at a flea market? You were negotiating.

Submit a project proposal to a client? Interview for a job? Ask for a raise at work? Your negotiation skills (or lack thereof) played a role.

Mrs. ARR and I have often talked about how market principles and negotiations apply even (especially?) to dating and the western marriage process. If you’re ever out at dinner and see a couple obviously on an early date, don’t mistake this for merely a budding romance. In fact you’re also seeing preliminary negotiations. Consider many people’s lack of experience with principles of negotiation plus the emotional element of romantic relationships and you can see some obvious challenges to the parties involved. Think a couple’s negotiations end with an exchange of rings? Don’t fool yourself.

Plenty of materials are available to study negotiation and learn some basic principles. Some time back, I spent a worthwhile day in a class taught by Marty Latz and followed that up by reading his book cover-to-cover. If you’re looking for a place to start, start there. (I don’t directly gain anything from the recommendation, I just think it’s excellent content.)

I’ve made it my goal to continuously develop my negotiation skills by actively applying some common principles and learn from my mistakes as I go along.

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Time Is Wealth

by Matthew on June 19, 2011

Here’s a good column by Barry Ritholtz on life lessons from the very wealthy. I especially like lesson two:

2. Don’t become “cash rich” and “time poor.”

Devoting all of your waking hours to making money is a problem, especially in professions with a partnership fast track. Lawyers, doctors, bankers and accountants can get so caught up in the competitive nature of their jobs that they lose touch with their family. Any semblance of a normal personal life disappears, and a very unhealthy balance between work and home can develop.

Work is the process of exchanging your time for money. Remember: What you do with your time is far more meaningful than the goods you accumulate with your money. If you are working so much to become rich but you ignore your spouse and miss seeing your kids grow up, you are actually poorer than you realize.

When people say “time is money” it may be more true than you realize. Your days are numbered and your allotted time is fixed. Doesn’t it make sense to try and maximize the time you spend on meaningful things (you can decide what those are)?

One of the myths of rat-race jobs are that they are “9-5.” While we all know what that means, these jobs don’t typically operate within that nice, fixed time bracket. In many cases they seem to spill over into people’s entire lives. Not only that, but rat-race jobs tend to be relatively inflexible. Work is noble, but if you’re neglecting important things in life like family, in a manner of speaking you are working yourself into the poorhouse.

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Business Tools And Focus Like A Mosquito

by Matthew on June 18, 2011

This is the first of what may be a recurring post topic of resources and content that I’ve found useful of late.

Nat Friedman (one of the founders of Ximian back in the day) posts about how 2011 is a great time to start a business because of all the terrific and inexpensive tools available. There’s a great list of tools he’s using at his new company, Xamarin. Bookmark that list.

Next, this interview with Paul Graham is good to see how he thinks about business. There are a few recurring themes around businesses that continue to pop up among folks with a lot of experience. One theme is that you just have to go out there and give things a try. It’s possible to over-think things and never try anything. Another related theme is that you just have to hit your target once; think like a mosquito. There are plenty of big scary things which could easily derail your plans, but you’re better off just tenaciously focusing on your target.

The good thing in business is that if you fail, you can just go back to the beginning and start over; kind of like a video game. You can’t get good at something if you don’t keep trying.

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My Very Very First Start In Auto Mechanics

by Matthew on June 17, 2011

After my post about my start in auto mechanics, I realized that, although that was my first really significant project, there was obviously more leading up to my asking my dad to buy me a project car. All my life, I’ve been drawn to mechanical things and always wanted to know how things worked, but a few things stand out in my memory.

First, I remember the old-timer shady-tree mechanics decrying the “plastic cars” of the 1980s. I was four years old when I first remember hearing this kind of talk; I remember that because my parents had purchased a new car and everyone had to chip in their two cents about the new Japanese automobile. “I remember,” they used to moan, “…when you could actually open the hood of a car and know what was going on under there. Now there’s so much stuff under there, and all those tubes and wires…and now those computers and now some cars have fuel injectors!”

I remember thinking “that’s funny…the guys at the garage my parents take the car to seem to generally be able to figure out what’s going on under that hood.” For a number of years, I was completely confused by the idea that cars used to be understandable and now they weren’t. Surely some people built them, so some people must understand them, right?

In fact, what those commentators were saying was that they didn’t understand new technologies. That’s it! It probably took me until I was 11 or 12 years old to realize those comments were statements about the folks making them, not really about the cars.

Secondly, my parents generally had 1.5 cars while I was growing up. One was a commuter which my dad drove to work. The other was a “second car” my parents could afford which typically meant a domestic POS station wagon. Color: oxidized. Two or three of the doors could reliably be opened from the outside. Those cars broke down with astonishing regularity.

One time, the POS needed some kind of exhaust work. Being the kind of family we were, money didn’t grow on trees, so these things were significant expenses. My parents got a quote from a local reputable shop and eventually dropped off the car for the repairs. I forget the quoted price but whatever the quote, when they went to pick up the car, the bill was three times the quoted amount. This literally shocked the family budget with tsunami-like ramifications. Knowing what I know now about automotive work, I’m sure something broke when the mechanics were trying to fix things and they did what they had to do, but the customer service was poor, the shop owner was relatively detached, and I swore this would never happen to my family again. (I think there are laws about this now.)

Not too long after this episode, the alternator in the POS blew out. I forget how we figured this out–maybe some guy my dad worked with suggested it, or maybe the AAA guy started to recognize us and figured he’d give us a helpful tip–but I tagged along over to the auto parts store with my dad and we brought home an alternator in a box. I think the idea was that we could somehow fix the car ourselves this time and save some money. That alternator sat there in the box for a number of days when one afternoon I figured I’d open it up and see what the thing looked like.

That was another shocking moment in my life. There in front of me lay a hunk of metal with just a couple holes in it (“hmmmm…bolts must go through those”) and literally one electrical terminal connection. One. (“hmmmm…I wonder where the wires go?”) There was a pulley which I figured a belt must go onto, but I went and asked my mom for the car keys so I could open the hood and check things out.* Hey, the old part was already in there, so that should be able to tell me how the new one should go in. (Some of this stuff really isn’t that complicated.)

I’m not sure what I had in mind before, but looking at this alternator, it was obvious that it didn’t take a genius to replace one of these. Two bolts and a wire. I’m sure I made a couple rookie mistakes, but when my dad came home from work–car-pooling with a friend–I had pulled some tools out of my dad’s toolbox, removed the old alternator in the car, and was trying to put the new one in. If I recall correctly, the family friend helped me make sure the tension on the belt was correct for the new alternator and that was it.

The reason it was such a watershed moment was that I had been listening to all these adult “experts” talk about how complicated cars were, seen outrageous bills from mechanic shops, and yet I was able to confront and resolve a problem with no training just by looking and trying what seemed right. Two bolts and a wire. Adults sometimes…sheesh…

Sometimes in life you just have to go out there and do what has to be done; not just hang around talking and thinking about it.

I was hooked.

*Note: Props to my parents for letting their 11 year old just start unbolting things from their car…even a dead old crapper like the family station wagon.

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Regarding Introverts

by Matthew on June 15, 2011

I’m interested in the effect that personality type has on business and have been thinking about these issues for a while, especially as they relate to my own perception of the world. This list of “top ten myths about introverts” is awfully familiar, as a person with an “I” for the first character of my Myers-Briggs profile.

More about personality profiles in a future post.

What M-B profile are you? I’ve taken tests both in printed form as well as online. Here’s one I found online if you want to try it out.

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Build It And They Won’t Come

by Matthew on June 12, 2011

A common mistake I’ve seen people make when starting a new business is to envision the empire their business could end up being and then trying to make that vision the reality from day one. You very well may build it and they…won’t come.

For example, let’s say your business idea was to produce tourist guides to sell in a local area and you hope to eventually build this up into the definitive source of tourist guides for your region. Day one of business planning would probably not be the right time to purchase a $50,000 high-volume, commercial printer. “But,” you say, “this business is going to be huge! If I buy a cheap printer, the quality won’t be nearly as good and that might turn people off of my product entirely, in the process sinking my business which would have made it huge if only I had a good printer.”

I suppose there’s a tiny, tiny, tiny chance that might be true. On second thought, no, actually, there probably isn’t.

What’s more likely is that you’ll begin interacting with your market and find out all kinds of other things you never anticipated. Maybe accurate, readable information is the most important aspect of tourist information and a lot of people don’t care at all about the print quality if the content is good and accessible. Maybe there’s an ideal size which makes all the difference in the desirability of the product. Or maybe people want to write on their guides and your high-end, expensive printer only produces glossies which can’t be easily written on.

Some people decide they are going to start selling real estate and immediately go out and buy a new Cadillac because, you know, prospective buyers need to be driven around and a brand new car will make a good impression and might mean the difference in having clients or not. Or so the reasoning goes.

I know some people who decided to become restaurant owners and after purchasing an operational restaurant, poured all their money into massive renovations to turn it into basically a different color schemed version of the exact same restaurant it was before…not only in food offerings, but in lack of customers.

Instead of trying to build to suit your dream, start small, as small as possible, and build a customer base large enough to provide you with feedback. Then adjust your offering(s) as needed to serve your market. Rapid growth challenges in the future should be cause for celebration; those are good challenges to have. In the meantime, you’re limiting your downside should there be no market at all.

Back to the tourist guide example, maybe no one even wants printed tourist information anymore and you would be better off creating a tourist application for the iPhone…

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My Start In Auto Mechanics

by Matthew on June 8, 2011

I thought I’d sprinkle in a few posts here and there about my various experiences over the years in business and education, though not necessarily chronologically. One of my big challenges in life is juggling my interests in efficient ways. I have a lot of interests and a reasonable amount of skill/knowledge so I could spend the rest of my life just tinkering around in a place like MITERS making things.

Machines and systems of all kinds fascinate me. From tractors, to automobiles, to software systems, to civic organizations, to corporations and governments, I’m really intrigued by the idea that a whole bunch of moving parts can play a part in something larger. I take things apart and always have. Not only that, but most things work after I put them back together.

When I was about 12 years old, I rebuilt a blown engine in an old Nissan (Datsun?) I asked my dad to buy for me as a project. I figured I knew how engines generally worked, figured I could buy a manual to tell me the specifics of this particular engine, and wanted to prove that I really understood all the parts. After taking everything apart, persuading my parents to buy a bunch of tools in the process, I convinced my mom to drive me down to the local machine shop where I plopped the crankshaft on the counter and asked if they could help me measure crank journals to tell me if the thing was still usable. I’ll never forget the look on the guy’s face when he asked me “where did you get this?” I told him about my project and got ushered into gear-head heaven when he took me back to introduce me to the machinists.

The mom taxi service somewhat dried up that summer and I spent a few weeks carting parts back and forth to that machine shop in my backpack riding my bike. I had a credit account at the machine shop to buy parts (I’m not even sure if that was legit, come to think about it) and the machinists loaned me close to a thousand dollars of tools at a time to take home to take measurements and test things. I was on cloud nine. These guys were cool. They had precision test equipment, parts cleaning machines, metal lathes for engine work…everything I could possibly need!

By the end of the summer, I had finished my project and the engine ran really well, so I had my parents take the car over to our mechanic to get a state inspection. The shop owner said: “You did this work? If you’re looking for a job when you graduate high school, come see me first.”

I sold that car through the newspaper classifieds, and with one victory under my belt I promptly bought another car out of the same classified section…

I drove a pretty hard bargain on this next deal…the guy selling the car (that didn’t run) told his wife “this kid is learning auto mechanics” and gave me a good deal on his broken car. That car was fixed in no time at all…

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It’s Easy To Become An Entrepreneur

by Matthew on June 7, 2011

In a previous post, I talked about how there are only two steps to get rich. I just came across an older but terrific post by Sebastian Marshall about how you only need two skills to become an entrepreneur. You really should read his full post for the elaboration, it’s excellent, but basically you need to receive a portion of the value you create. That’s it.

So what if you work as a salaried employee at a company doing programming? That’s sort of similar, right? You are creating value for the company, and in return you are paid a salary, which is some piece of that value, right? Wrong.

If you are a salaried employee, you are exchanging hours for dollars. Let’s say your annual salary is S. If you create a product for them worth S x 10 you will get paid the same amount of money as if you create a product worth S x 100. Your salary is very decoupled from the value you create.

A couple of years ago I was working for a very large Fortune 500 company and had the privilege of meeting a particularly brilliant engineer. We met in the spring and he had started in January creating a product which would solve some specific needs of his group. Five months later, he had a product literally worthy of a product launch were he a startup. A product easily worth hundreds of thousands of dollars as it stood at that time. Created in five months and, unfortunately, the property of his employer which had no good mechanism to make sure he remained challenged and happy as an engineer. When he sought to move to new, more challenging endeavors within the company, the bureaucracy and nonsense of large companies prevailed and his attempts were frustrated. For the company, this was sheer foolishness. They should have done literally whatever it took to make him happy. Last I heard, he was leaving due to sheer frustration…off to get his PhD or something just to feel challenged. In retrospect, what he should have done was leave the company, create his product on his own, then find a buyer and move onto the next challenge.

Watching that unfold was one of the many things I’ve seen which has galvanized my confidence in the entrepreneur’s ability to best get a return on the value they produce. Corporations, due to their necessary but inefficient management structure, simply cannot be agile enough to even closely approximate a real market.

One of the fears I suspect many folks have in becoming entrepreneurs is…what if they are currently overpaid?…maybe their portion of the value they create would be less than their salary…?

What do you think?

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