Advice on Starting a Business

My primary advice on starting a business is—PROPERLY PREPARE! According to the Kauffman Foundation, about six million new businesses are started each year…and by my analysis, about five million businesses also fail each year. Those are not very good odds and the only way to beat them is to prepare well, before you start your business.

So, if you use only one piece of advice on starting a business, it should be to "do your homework"…properly prepare.

Preparing to start a business is not to be confused with writing a business plan…you may not even need a “formal” business plan. But, you certainly do need to address several areas of planning during your preparation phase—or, as it was titled previously, the pre-venture planning phase.

So, here are several areas that new entrepreneurs usually fail to properly address in their preparation and pre-venture planning. These topics are addressed in more detail in other reports, but are presented here as summary advice on starting a business:

1. Entrepreneurship. I know this is repeated from earlier reports, but it is incredibly important to consider whether or not you are entrepreneurial material. Not everyone is suited to being an entrepreneur…just as not everyone is suited to being a concert pianist, or an astronaut.

   I would not suggest you start a business just because you think you must, e.g., maybe because you’re out of work, you just got laid off, your severance is ending etc.

   You need to start a business when you have enough passion to know there is nothing you would rather do than start your own business. Take careful stock of yourself and make sure you are entrepreneurial material.


2. Vision. Keep it simple. If you try to take your new startup business in too many directions, you will never have a strong base to build from. Stay focused and follow your pre-venture planning. Keep this in mind when you are doing your market research.
3. Viability. Is your business idea viable? Many businesses fail, not because they were undercapitalized, but because their business idea was not good enough. Even if you develop a great product, or service, that doesn’t mean it is something that people want, or will pay for.

   This aspect of your new business needs to be looked at over and over again during your pre-venture planning. Will people want to buy your product or service? Are you sure? Don't ignore this advice on starting a business. Just because you're in love with your idea doesn't mean others are.

4. Market Analysis. Even if you have a viable idea, you can’t just say, “Oh, everyone will want it.” That is the mantra of the new entrepreneur headed for failure. Even if what you have to offer fills a particular need, not as many people as you think will want to buy it.

   You need to do some research and be realistic about the overall market size and not delude yourself into believing you will serve a market that is actually smaller than you think.

   Do surveys; ask people; study your competition; ask your advisors/mentors (after all, they are there to give you advice on starting a business), and do whatever it takes to convince yourself that you are looking at a realistic potential market size.

5. Estimated Revenue. This is one of the most important pieces of advice on starting a business, because all new entrepreneurs get this wrong. It is one thing to study a market to make sure it is a solid market, and that you have a viable product for it—it is something else altogether to tap into that market. I can almost guarantee that you will not get as many sales initially as you think you will, nor will they come in as quickly.

   This is where you absolutely must reign in your excitement and develop your sales revenue planning numbers as realistically as possible. Then divide by 2! As I said before, this is something some venture capitalists do, because they know a new entrepreneur cannot totally control their enthusiasm.

6. Estimated Costs. You need to address three major cost issues: (1) startup costs (which we discussed in the Business Startup Costs report), (2) product costs, and (3) operating costs. Unfortunately, no one ever accurately projects or estimates costs in these areas. Investors know this, but they also expect you to estimate all costs as carefully, and as thoroughly, as you possibly can.

   Then when you think you have them figured out about right—increase them by half! This will put you much closer to what will really happen.


7. Funding. After you are satisfied that you have accurately estimated your startup and operating costs, along with first year sales revenues, I suggest you perform a "Cash Flow Analysis." This will help you determine how much money you will really need to successfully start your business.

   Simply begin the analysis for the first month you plan on spending money, and run it out for the next 12 months (longer if you need to).

   You can access a detailed report on Cash Flow Analysis here. This analysis will show you the amount of money you should have lined up before you start spending money on your new business.
   
   We will discuss this in a later report, but remember; owners, their families, and their friends fund most smaller small business startups. If you do determine you will need outside investor money, you will need to upgrade your planning and produce a “formal” business plan to present to Angel Investors, or Venture Capitalists. Then you will be getting more advice on starting a business than you ever wanted.

8. Legal and Financial. As the old saying goes: "Anyone who represents themselves in court, has a fool for a lawyer"—and the same holds true for a business startup. I frequently see financial statements from businesses where the owner is obviously not properly accounting for the way they do business…or if they are, it means they are breaking a few laws.

   Before you actually start up your business, the best place you can spend some money is to get good reputable, specialized, legal and accounting advice on starting your business. If you expect your new business to fulfill your financial dreams, you will find that this will have been the best money you could have spent.

9. Partners. There are partners, and then there are “partners.” Obviously, if you need outside investor money, it is very likely that an investor will want an ownership position in your new company—and become your "partner." Although unavoidable, you will want to negotiate the smallest percentage possible.

   Likewise, if there have been two (or more) of you hatching the idea for your new business, and assisting in developing the product(s) and planning, everyone working at this level would have some ownership in the new business. But, that is where it should stop…for now.

   Stock options for employees may be all right for a company after a successful startup, but until then, you should treat the ownership of your business like it was your family jewels—because it is!

10. Employees. Most new small business startups do not require employees at first, so there is always the question of when to hire employees. All too often a small business startup hires employees too soon. Just because you are working 80-hour weeks does not necessarily mean you need to start hiring employees. You need to stay true to your planning, and hire employees according to the time, or event, schedule you developed in your planning.

    If sales and profits are rising ahead of schedule, and you need more manpower to handle the increase, then move your hiring up as well. Just remember, the reverse is also true.

    One more piece of advice on starting a business—do not hire relatives under any circumstance, and only hire friends if they are superbly qualified…and you can handle the eventual loss of their friendship sometime in the future.


11. Overspending. You may be surprised at how many startup businesses spend money unnecessarily—and as a result have to eventually shut down their business.

    Upscale offices, excessive space, expensive office furniture or fixtures, too many employees too soon, perks that are unnecessary, too many “chiefs” in your organization…these are the things that will not only turn off potential investors, but will likely create a cash drain that can take down your business.

    A startup needs to go “bare-bones,” with cheap office space (if any space), second-hand furniture or fixtures, employees who are committed to working hard in a less than perfect setting. Outside investors certainly will give you this same advice on starting a business.

    If you have a viable dream, and share it with your employees, you can have a successful startup without spending money on unnecessary trappings. You can save the “good stuff” for later.

12. Profit. Profit is not a dirty word. It is only from profit that you will have the money to grow your business, make your employees happy, and accomplish what you want out of life. So, keep your eye on profit, and use it as your guide throughout the life of your business.

    All too many new entrepreneurs watch sales and growth, but pay too little attention to business profits—a big mistake.

13. Focus. While you are going through the planning and startup phases of your new business, it is very easy to have so many things going on at the same time, that you begin to lose focus. One small aspect of your business begins to account for a major portion of your time, and everything else begins to suffer. It is absolutely essential that you keep your focus and attention on every aspect or your business.

    Don’t let anything suffer from lack of attention (this is why you will be working 80 hour+ weeks). I should also mention that this concern follows you every day of the entire life of your business.

14. Exit Strategy. Obviously, if you are going to require investor money, you will need an exit strategy that pays back that investor, plus much more. This strategy will need to be spelled out in the business plan you discuss with investors.

    However, for the most part, you should not be concerned with an exit strategy during your business planning and startup…unless you are talking to investors. You need to keep your eye on the ball and concentrate on profit. Build your business first, then you can always think about an exit strategy later.

3/29/12