There are 3 key ingredients to starting a successful business:
- Good people
- A wanted product
- Low overhead
If you can achieve these three things your business has a great chance of succeeding. Lacking in one of these key areas will almost ensure that your business will fail.
If you look at a business plan these three items are highlighted as the backbone of the plan. Management, use of funds, and the products and/or service or competitive landscape sections of a business plan show that you have looked into these three areas and done your research.
This is why it is recommended by so many that you write up a business plan. If you fudge the numbers, lie to yourself about the items or do inadequate research, in the end it will come back to haunt you.
* Good People *
What do I mean by good people? Good people for your business are those who are knowledgeable and hardworking. These people put their nose to the grindstone and get things done. When I was in the Navy they called it "attention to detail". In other words people who will not stop until the task is done and done well.
Some may think I am describing a perfectionist. That is not entirely the case. A perfectionist never quits but they also never fully finish anything either. They endlessly toil away never knowing when they have reached a point of stopping. A perfectionist on your team can kill your business.
For example, say you're running a technology company that is rolling out a new Internet product. If your lead programmer is a perfectionist they may never get to the point of completing the project and giving the green light. They'll run past deadlines, run your expenditures through the roof and never end up with a completed project.
The other side of the coin is getting someone incompetent. In our Internet product example above, having an incompetent lead programmer is just as bad as having a perfectionist. First, they won't know when to declare it complete and doing so prematurely with bugs in it could doom your business from the start. This was seen time and time again during the dot-com boom when companies would bring in millions and never complete their actual product. Many went belly up never having actually launched a product. Most of this was due to incompetent people.
The final litmus test for the people involved is in personality. Can the people involved actually get along together? It's surprising the number of businesses with good people that fail because they simply can't get along.
The most important person to ask questions about is yourself. Are you ready to undergo the stress and strain of starting a business? Are you willing to call investors and ask for money? Can you make it financially?
If you are a procrastinator or hate doing any work outside your immediate field of knowledge you may not be the right type of person to start a startup.
However if you love trying new things, don't mind putting in some hard work and sacrificing both time and energy, running a startup may be a fun and rewarding experience for you.
* The Right Product or Idea *
You don't have to have "the better mousetrap" or "the next great thing" for your product or service. There's an old saying that "ideas are a dime a dozen" and it is very true.
There's no real secret to finding the right product or service to sell.
All you have to do is provide what a business or individual wants and needs.
By right product I mean something that is needed or wanted by people or other businesses. If your potential customer base is male and you come out with a pink dress then you've failed in doing your research. Granted there are some men out there who may like to wear pink dresses, but the market isn't large enough for your business to succeed.
If you are providing a service you should definitely do your research on the "competitive landscape". If you come out with a mediocre product compared to your competitors, you have just cut your company off at the knees from the get go.
Improving upon an existing product, service or system that already works can make your company fly. It has already been proven to work.
The hardest part of settling on a product or service is determining what a client wants or needs. Don't expect your new company to become the next big name brand. With a lot of new businesses they project heavy volume as if they are going to become the next Nike within the first year.
Don't do this.
Keep your growth numbers conservative. You don't have to be a huge company to make a lot of money. Settling on a smaller niche market can make you a fortune.
* The Money Game *
Andrew Carnegie said the sole purpose of being in business is to make a profit. If profit is not your goal from the start, then you are probably looking at starting a hobby and not a business. There are a number of sources for funding your company.
These include:
- Self-funding, such as credit cards, savings, personal income or friends and family
- Traditional financial, such as banks and financial institutions
- Venture Capital
- Sale of stock
Self-funding is usually a bad idea. With the failure rate of new businesses you stand to risk losing it all on one mistake. By self-funding you are taking all of the risk onto yourself.
Traditional financing and Venture Capital both come down to your reputation. If you haven't started a successful business in the past and have an active and working relationship with these groups your chance of receiving funding is virtually nil.
Sale of stock of your new venture comes down to the old quote of "would you rather have all of a small pie or a smaller piece of a large pie?"
Without adequate funding you could end up having no pie at all. Your company will not succeed without adequate capital. A sale of stock, while lowering the amount of the company you own, dramatically increases the chance of its success in the long run.
We'll take a more in depth look at fund raising later. For now though let's talk about the other half of the coin... fund spending.
As noted above one of the three keys to a successful business is low overhead. Running out of capital by hiring too many people, having an expensive location or spending too much on unneeded goods, can run you into the ground immediately.
Keeping down costs is a key part of financially managing your company and as we'll see below lack of financial knowledge is a key reasons businesses fail. Don't be cheap however. Sometimes it's worth it to spend the extra on something that will save you money in the long run.
Clearly defined long range goals and planning will help you keep your overhead down, your efficiency up and your business running within it's budget.
I'm a firm believer in automating as many tasks as you can. With automation you don't need to hire personnel to fill those rolls and it lowers your "burn rate" and capital requirements. When I started a sports news website in 1998 we were competing with companies that had 150-250 employees. Through automation and smart design I was able to keep our total overhead down and reduce our actual hands on employees to about 6 for all 24 hours in a day.
Take a look at your business and see where you can streamline it and automate things from the start and you'll reap the benefits of needing less capital and the ongoing monthly "burn rate".
If you need office space and won't be meeting a lot of clients face to face you may look into renting an apartment and furnishing it with cheap used furniture. A lot of people work from their homes. There's no standard that says you have to have an office. You can get a P.O. Box or mail store as an address.
Don't hire a ton of people!
For each person on the payroll you have then incurred a monthly cost and added to your "burn rate". On top of their pay, there are the payroll taxes, workers comp insurance, office space and equipment and other expenses that you have to pay for each employee.
Don't go overboard with your capital. Right when you think you have enough is when you'll run out.
* Business Failure *
SBA statistics tell us that 60% of small businesses fail within the first 5 years and 90% fail within 10. So how do you get to be the 1 successful startup left standing? Well there are a number of answers to that question. Knowing what the key reasons businesses fail is a start.
Let's look at some of the main reasons businesses fail.
1. Under-Capitalization
This is the number one killer of small businesses. Not having the capital needed to keep the business going snowballs. Without capital you stop fulfilling orders, customers get fed up with you and sales fall off or stop completely. Not only will you need initial capital, but later you will need it to expand.
2. Bad Debt
Grasping for any type of financing you can for capital can also come back to bite you. Taking a high interest or balloon payment loan can put a company under relatively quickly.
3. Not enough or too many sales
Not having enough sales is self-explanatory. How can too many sales kill a company though? An example would be taking so many sales you don't have the cash to produce the inventory or personnel required to fulfill. Things back up and the company's reputation is damaged beyond repair.
4. Financial mismanagement
Not understanding the financial side of your business can kill you. Really small businesses with low costs initially are easy to understand on paper, but as you grow things can quickly get out of hand. Lack of understanding the roots of the finances of your business can take its toll.
5. Acts of God, disasters and economic downturns
There's not a whole lot you can do about a major economic downturn or a natural disaster. If you are selling high-end vacuum cleaners and people don't have the money for luxury goods, your business is going to be hit hard. If you are running an Internet business out of your basement and it floods it can kill you off pretty quickly. Having adequate insurance is a necessity. Planning ahead for such instances will give you a leg up on not seeing your hard work go down the drain.
6. Death and disability
Having a key member of your team die or become disabled can crush your small business. Long term disability and life insurance can be a key to avoiding this.
7. Owner and personnel burnout
Working entirely too hard and expanding at a great pace can kill a business due to burnout of the people involved. Proper planning for expansion is a must.
All of these failures can be avoided through planning. While disasters such as a fire in your main office cannot be avoided, it can be planned for so that your business can continue running.
* Forming Your Company *
How many founders do you have?
How many shares should you issue?
How much stock does each person get?
Is everyone working full-time on the company?
Has everyone signed an NDA (Non-Disclosure Agreement) and IP (Intellectual Property) agreements?
What is the company's address and phone number?
Make sure no one has signed an NDA or IP rights agreement at another company!
Some of these sound like unnecessary questions to address. Why should I have a friend I trust sign an NDA? Why should we make employment agreements?
I'll tell you now from experience that it is necessary. You may be friends now, but you never know what will happen in the future. In addition, when forming your company it is an entity unto itself, which means it can be sold, traded or dissolved. Who knows who may be in charge of the company in the future?
Having all of these loose ends done from the beginning will help avoid future headaches and conflicts.
Actually forming your company legally isn't that difficult. A company really is only some paperwork in a filing cabinet. There are a number of places you can go to and actually form a company online. Just remember there are tax requirements for a company and that you should look into all the legal and tax issues when you form it.
One of the main reasons you would want get all of these things completed and get incorporated is in preparation for the next topic.
* Funding Your Company *
Funding your company is a necessary step to getting it off of the ground. Sure, you can try and bootstrap it along in hopes that it will succeed, but the point of all of this information is to give you the best chance at success, not to start a business on hopes.
This is probably the scariest part for those engaging in their first startup company. Having all of your ducks in a row through proper planning is a necessity. You don't have to go overboard and end up in "analysis paralysis", but you sure better know who your people are, what your product is and how it can be sold and what proper amount of funding you need.
A common source of startup funding comes from investors known as "angels". "Angels" are people who have made money in business and are looking to put their money to work. Most "angels" will require a business plan and possibly a description, prototype or demo of your product or service and how you intend to implement your plan. "Angels" will be looking at your three keys above. Your product, your people and your funding uses.
A key step to raising funding is determining the value of your company. How much is your company worth now? Remember that you are not only determining the current worth, but the future worth of the company as well. This is a hard number to determine.
There are some investors that won't even look at a company that values itself at less than a million dollars. Investors aren't going to put money into something that is going to remain at the current valuation, they are looking towards the future.
Once you have settled on a value for your company, you have to determine how much startup capital you will require. Let's use an example.
You value your company at an even $1 million dollars. You have also done your homework and you have determined you will need $100,000 in startup capital to purchase equipment, pay salaries, acquire insurance, etc... Breaking the numbers down shows that you would need to give up 10% of your company to get the needed capital.
Just remember that when you approach an investor that you are offering them an opportunity. You aren't simply panhandling, but are giving them the opportunity to profit off of your hard work, research and know how.
Copyright Dan Amato
Dan Amato lived through the dot-com boom and bust in Santa Clara, CA. He is the co-founder of numerous companies from the ground up and currently maintains http://www.startuphints.com, a free resource for those starting a new business. He can be contacted on his blog at http://www.diggersrealm.com or via email at danamato@gmail.com.
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