understanding entrepreneurship, starting up key points


as you start a business you need to
think about how you can position yourself so that you are taking on
market rather than competitive risk here are three questions you can ask yourself
to help figure this out first is it easy to find information about the market
opportunity when an entrepreneur says to me there’s a huge market and I’ve got
the projections to prove it it may well be that there’s a competitor that has
already scoped out that market in which case they will be taking on competitive
risk competing against established rivals if there’s very little
information you don’t know if there’s a market for the problem that you want to
solve but there are no competitors that’s market risk number two is there
an established competitor that has the incentive to co-op to your idea the
incentive being that by offering this product or service the competitor can
increase revenue and expand margins the grocery store could have come to the
football field but it didn’t because it didn’t make financial sense in other
words how likely is it that your idea will be co-opted or quashed leaving you
crushed if your product or service involves doing what a well capitalized
player is already doing and requires their cooperation or worse could involve
a game of chicken until you get squashed like a bug that’s competitive risk third
are you going after people that haven’t historically been anyone’s customers
these are people who would be customers but haven’t been able to gain access to
the product as you’re vetting your potential business ideas eliminate the
competitive risk whenever possible this is a difference between a
friends-and-family lemonade stand that earns a few dollars and one that makes
multiples of that because customers are truly thirsty for your product and you
are the only one serving it up the most successful entrepreneurs play
to their distinctive strengths or what they do uniquely well the trouble with
distinctive strains is if they’re easy to overlook because you do them
reflexively well as Malcolm Forbes said we tend to undervalue what we are and
overvalue what we aren’t here there are a few clues for tapping into your
strains the first is ask what makes you feel strong Marcus Buckingham author of
now discover your strengths frames it well our strengths clamor for our
attention in the most basic way using them makes you feel strong you feel
invigorated inquisitive successful Erin Newkirk the founder of red stamp for
example has built a business on what makes her feel strong sending notes and
cards to loved ones a couple of other clues to your unique abilities what do
you think about when there is nothing you have to think about and when are you
exasperated the frustration of genius is in believing if it’s easy for you it
must be easy for everyone else the second question is what do others
identify as your best skills what do people endorse you for and LinkedIn for
example keep an ear open for those compliments you have bitchu alida Smith
it’s possible that you’re discounting a strength that others value your biggest
superpowers may not even be on your resume because you overlooked them the
third question is do you have a confluence of skills as you mined for
your unique abilities your distinctive skill may not be one skill but an
unusual intersection of ordinary proficiencies in building a business
it’s easy to identify the things you do reasonably well you’ve likely worked
very hard for these skills and no doubt you’ll use them but to build a truly
robust business play to your distinctive strengths what you do remarkably and
uniquely well as an aspiring entrepreneur one of the
questions you need to ask yourself is do I have a business or a hobby the word
hobby comes from the word hobby horse a fancy toy
hence the sometimes pejorative use of the word historically if you did
something just for fun you were described as an amateur which derives
from the French word lover of whereas if you engaged in an activity for a reward
you were considered a professional over the last century as we’ve had the
resources to give our dreams more sway especially in the developed world more
and more hobbyists are becoming experts and there is more and more demand for a
hobbyists expertise the first step in determining if your hobby is something
you can do for fun and earn money is to gauge interest or demand are there
people stopping you on the street asking about what you’re wearing downloading
your do-it-yourself instructions or watching you explain what you do on
YouTube that’s a good sign once you determined there’s interest the
next step is to find out are people willing to pay for what you do the third
thing to consider as you decide whether you have a business is to ask the IRS if
you do using the profit or three of five tests have you earned money on this
activity in the last three out of five years including the current year if you
have you are presumed to be spending money to make money or have a profit
motive the IRS is concerned is that you are deducting indulgences as business
expenses from a tax perspective this also applies to passion or social good
projects whether you’re raising cancer awareness we’re trying to raise the
self-esteem of teenagers I learned this the hard way
I had spent a lot of money on the initiative know your neighbor in order
to help build community a wonderful thing to do said my accountant but
without having gone through the proper steps to become a non-profit this was a
hobby my expenses were not tax deductible in addition to the three out
of five tests you’ll want to show proof that you are trying to make money
for example do you have business cards a well-maintained set of books a separate
business account current business licenses and/or marketing expenditures
that would persuade an auditor that you really are in business now more than
ever people can make a living doing what they love so if you’re still looking for
a business idea why not start with what you’ve already invested considerable
time and money on your hobbies you’ve got a business idea you’re
confident there will be customers but you don’t know it’s time to find out to
do this as quickly and inexpensively as possible
I recommend the minimum viable product or MVP approach popularized by Eric Ries
author of the Lean Startup the MVP is the version of a product that allows you
to collect the maximum amount of learning about customers with the least
cost it’s an iterative process of idea generation prototyping presentation data
collection analysis and learning building an MVP is the opposite of this
stealth approach to use by many startups where they are developing products
behind closed doors with little to no feedback with this approach you start
working backwards by starting with a paying customer if you’re relying on
patents there may be challenges with releasing an early version of your
product but because patents tend to be issued for defensive reasons the
learning benefits typically outweigh the risks whether you have a physical
product or service there are a number of different ways to affordably prototype
first is with the physical product for example you can work with a 3d printing
factory build a low-cost prototype that you can put in the hands of potential
customers you may even want to post DIY instructions if downloads far exceed
expectations the next opportunity for data collection is a Kickstarter
campaign asking customers to pre-fund a build for handmade goods Etsy is an
ideal marketplace if you’re a service business you may want to consider the
concierge approach the same approach applies for idea preneur x’ or aspiring
thought leaders rather than writing a full-length book start with tweets blogs
podcasts or a quick video as you do the work to provide customers with a product
they want remember that building a Minimum Viable
Product is an iterative process of generating ideas prototyping presenting
collecting and analyzing data and learning you
eventually get the right product market fit or you won’t either way you will
have affordably determined if you have the makings of a viable business you you have a product or a service you have
your first customer now you need a plan for how you’re going to make money a
business plan is a formal statement defining your business goals
the reason do you think they can be achieved and how you’re going to achieve
them there are several different types of business plans the elevator pitch a
30-second summary or teaser for potential investors typically used at
informal meetings a pitch deck with an oral narrative also to pique the
interest of potential investors there’s also a detailed written proposal
targeted at external stakeholders such as when you’re trying to secure a
business long and an internal operational plan that includes detailed
guidelines for how management plans to execute on its business idea as you turn
your idea into a business it’s important to think like a CEO creating a business
plan can be an initial step in this transformational process in writing this
plan there are a number of different resources available such as Bill
Salman’s how to write a great business plan but for now you want to just get
started and getting started starts with a simple checklist for example I want
you to think about what will you sell what problem will you solve what will
you charge and who will buy your product how will people find out about you how
will you make the product or provide the service and what will it cost
do you have competitors why will customers prefer you or are you
disrupting another company does this business play to your strengths what are
some obstacles or challenges you are going to face and by when will you start
it can be that simple you may at some point need to do a more in-depth and
detailed business plan especially if you need external funds whether borrowing
money we’re raising equity but in the spirit of a Minimum Viable Product this
is a good first iteration one that you can use to vet your idea with trusted
advisors be aware that your plan will change in fact if your plan isn’t
changing you may not be learning enough about your product and potential
customers as stated in the module on finding your first customer business is
about idea generation prototyping data collection analysis and learning the
importance of the plan is far less about where you end up but rather thinking
through how you will get there how you make money may change but start with a
plan in order to have a successful business
it’s important to determine the right price for your product price too high
and your business stalls before it starts price too low volume may be high
right up until you go belly-up to get the price right here are several
considerations ask your target customers what they pay for a similar product or
service do they buy online or prefer to buy at the store
do they like ala carte or all-in-one pricing what price ranges don’t require
outside approval a manager if you’re selling to a business or b2b significant
other if you’re selling to individuals or b2c use this as a starting point the
next step is to benchmark against competitors if your product is better
than the competition demonstrate it and charge more conversely if your product
has fewer features acknowledge it and justify a lower price next err on the
side of pricing too high you can always lower your prices but
once you have published prices it’s a lot more difficult to raise them more
often than you’d expect entrepreneurs price their goods and
especially services too low if you don’t have obvious competitors you may want to
experiment with prices or a B tests like Amazon does one day a book will cost
$19.99 another $14.99 do this for several consecutive weeks and measure
which price point generated the most revenue if offering services anchor
around value meaning calculate how much of value you could create for an
individual and then charge them 30 to 40 percent of that value with the
expectation that they will earn two and a half to three times their money for
example if a customer believes that your products will give them a hundred
dollars of value then you should charge them thirty to forty dollars also be
aware the payments promote satisfaction which likely explains at least in part
the popularity of subscription models when customers pay once after a while
the product or service feels free they use it less instead
faction declines a simple tool look at the nine and zero effect most people
associate the number nine with value and zero with quality a burger meal may cost
$4.99 while a gourmet meal $30 sometimes you can increase sales by signifying
value other times by indicating quality in addition to thinking about what the
market will bear also consider what you need to charge to make money one rule of
thumb is whatever the product costs you to make mark it up by a hundred percent
so that once you factor in overhead including keeping the lights on and
paying your employees you are profitable finally remember that price shapes
customer perception according to a study out of MIT 82 people received identical
painkiller placebos half of the participants were given a
brochure that described the painkiller as a newly approved painkiller that cost
two dollars and fifty cents per dose while half were told it cost ten cents
per dose without being told why in the full price group 85 percent of the
participants experienced a reduction in pain after taking the placebo in the
low-priced group only 61 percent experienced less pain pricing is so much
more than just what people will pay and what you need to be profitable
it is a cue to the customer about value let’s say you have your business plan
ready you know who your customers are and what you’re going to charge them now
it’s time to set up shop the question is bricks and mortar online or both
it depends some businesses require a physical presence bricks and mortar
refers to a physical space store or office customers can walk into during
business hours bricks and mortar being a figure of speech that derives from the
traditional materials used in the construction and buildings
if you require a storefront you’re going to start a spa for example there’s no
question a physical space when it’s not so clear as in you have a consumer
product or service that could be sold entirely online in addition to web
presence do you also set up a store or push for retail distribution my
recommendation is start online if at all possible the startup and overhead costs
are significantly lower frequently an order of magnitude lower you’ll still
have to work hard to acquire customers but if you make the right amount noise
you’ll have more people visiting your business than could possibly visit us
physical space and if you aspire to retail distribution or an actual
storefront at some point think of an online presence as your Minimum Viable
Product if and when you decide on a bricks and mortar approach here are a
few things to consider so that you are more than a showroom for Amazon the
first step is to choose a specialty find a niche and cater to the enthusiasts
specialize in something you know well your distinctive strengths and then
offer exclusive items events tied to goods or services tied to those goods
for example Best Buy’s Geek Squad will install a home theater at a deep
discount it’s essential that you offer something that Amazon or other large
businesses cannot provide the second step is to curate your inventory where
as an online retailer has the largest possible selection because it isn’t
constrained by inventory capacity too many choices can lead to shopper
paralysis because you’re the expert you winnow down the options sucking only the
best solution products the third step is to place an emphasis on non commoditized
items sure you’ll carry some mass-produced items but focus on those
that aren’t providing the best products at different price points also look for
ways to provide additional value even something simple like a lollipop
the fourth consideration is to have a great website even though customers may
want the gratification of shopping locally they are probably still going to
check you out before they show up make sure they can
find out when you’re open see images of your inventory and size availability and
information about your return policy they may even want to know that you
would deliver the product today the fifth consideration is to emphasize
exclusivity and/or privacy sometimes customers want their service or product
providers to cater to their tastes to feel that they have been invited to the
club meanwhile Amazon may be able to give good service because it’s tracking
your every online move but it’s also tracking your every move when you
purchase at a local retailer the transaction is relatively anonymous the
final and most important consideration is to hire only superb customer facing
employees employees who are knowledgeable perhaps enthusiasts
empowered to make it right for the customer always whether on or offline
customer experience is your battleground the entrepreneur that can provide the
most frictionless experience at the lowest cost will be the victor what’s
going to work for you clicks or bricks once you put together your business plan
it’s time to build a financial model the purpose of a financial model is to set
short-term targets to keep you focused track costs monitor cash and to see if
you have a viable business in short to tell the story of your business using
math as your business gains thrashing you may want to build an expansive
detailed model but as a start-up you want to keep the calculation simple
focusing on just a few line items the first item you forecast is revenue which
is price times volume from your business plan you’ve made a first pass at how
much you’ll sell and at what price is this forecast data-driven meaning if
you’re estimating you’ll sell 100 units what are the assumptions behind that
number for example if you have an online business and you know that the average
conversion rate for your industry is 3% this implies 3333 visitors to your
website each month is that realistic you probably won’t get the right numbers
initially that’s okay the point is to think logically and quantitatively about
how you’re going to generate revenue this will give you a credible basis for
analyzing your prospects having short term targets will also keep you and your
team focused next calculate your costs what are you spending to make and market
your product on employees on office space is the cost of acquiring a
customer lower than the revenue per customer are costs going up or down as a
percentage of sales while your revenue projections are just that projections
you should be able to account for and categorize every penny spent a
surprising number of businesses go bust not because there’s no revenue but
because the owners have no idea where the money is going or can’t keep a lid
on costs the next step is to solve for the profit or loss if you can operate at
a profit immediately your business model works if the numbers don’t add up
analyze why do you need to sell more at a lower price less at a higher price or
simply lower costs you want to be patient for
growth impatient for profits there is an equation underlying your business
iterate until the equation works finally know your burn rate this is how much
cash you use each month and know your runway or how long you have until you
need to shut down for example if your burn rate is twenty thousand dollars per
month and you have a hundred and sixty thousand dollars in the bank then you
have eight months of runway ideally you’ll build your business using
resources on hand but if the business doesn’t lend itself to bootstrapping you
want to have enough runway that you can think strategically but not so much that
you don’t feel the pressure to generate profit posthaste
if you’re a proponent of the discovery driven approach to entrepreneurship as I
am it may be tempting to forego building a model after all you can’t predict what
will happen next but if you want a clear read on your company’s prospects you
need to look at the numbers more importantly a financial model is a
barometer for your bottom line because for an entrepreneur cash really is king once you’ve run the numbers you’ll want
to get serious about a legal structure this is sometimes referred to as
business formation how you structure your business has implications for how
profitable you are how protected you are if something goes wrong and how readily
you can raise capital there are five basic structures the first is a sole
proprietorship where one person legally makes up the whole company if you have
little concern about liability this is the way to go there are no setup costs
you have complete control and it’s tax efficient no taxes are paid by the
business they passed through directly to you this is often referred to as passed
through taxation service businesses such as landscaping computer support daycare
contractors are typically sole proprietors the second is a limited
liability company commonly referred to as an LLC an LLC does involve some setup
costs and legal filings but it’s separate from you with an LLC as an
individual you have limited liability and your personal assets are protected
meaning a business creditor can’t come after your house as with the sole
proprietorship an LLC enjoys pass through taxation there’s also the added
benefit you can issue stock and therefore raise outside capital the
third structure is a partnership law or investment firms are frequently
structured as partnerships it costs less to set up in an LLC and is a
pass-through tax entity however the partners are responsible for the
business obligations and debts meaning like a sole proprietorship a business
creditor could come after the personal assets of you and your partners the
fourth is the subchapter S corporation or S corp if you expect your business to
be generating a lot of cash quickly the S corp could provide significant tax
savings like an LLC and escort provides liability protection pass through
taxation but the tax rate is lower whereas members of an LLC are subject to
employment tax on the entire net income of the business with an S Corp only
wages are subject to tax further if a shareholder sells leaves or dies the S
corp doesn’t dissolve as it would with an
ll see the solidity of this structure does come at a price
startup costs are higher and there are more legal requirements the fifth and
final is a C Corp this is the structure you will want and need should you intend
to raise venture capital or conduct an initial public offering it’s an
independent entity separate from the owners none of your personal assets will
be at risk but there’s double taxation not only our C corpse subject corporate
income tax earnings distributed as dividends are taxed at the individual
rate regardless of your legal structure be sure to keep your business and
personal accounts separate hire a bookkeeper if need be to run a business
like a business and make sure your life is much easier come tax season you want
to avoid mixing business and personal accounts now for a disclaimer because
there’s always a disclaimer with legal matters
make sure to consult with an accountant and lawyer so that you form your
business properly and obtain the necessary business licenses and
approvals if you want or need a low-cost solution initially take a look at a
service like Legal Zoom finally remember this isn’t a binary operation where you
get the structure right or wrong as with your financial model put an initial
structure in place probably sole proprietor may be LLC then in a few
months assess and if necessary adapt intellectual property commonly referred
to as IP is an important legal consideration for all startups what if
you pick a name for your business that infringes on someone else’s trademark or
you haven’t filed for protection of your own great brand names what if you’ve
hired an independent website and logo designer have they assigned the rights
over to you what if your website code incorporates open source code that has
licensing restrictions intellectual property actually covers an array of
legal ownership claims which include five basic types the first is trade
secrets these are defined as confidential information that gives a
business its competitive edge trade secrets can include business plans
customer lists pricing designs or procedures at launch you’ll want to make
sure that neither you nor your employees are using unauthorized IP from a former
employer as your business develops its own secrets it will be important to have
employees independent contractors and vendors sign non-disclosure agreements
or NDA’s NDA’s are critical in court as evidence of a trade secret the second
kind of IP is a trademark trade marks can be names words slogans pictures
graphics or sounds that distinguish a product by making sure that you have a
legal claim to each of these trademarks you build brand identity and goodwill
but also ensure that you can use the trademark and then others don’t pass off
your services as theirs to see if someone already has a trademark there
are three quick checks number one look at domain registrations is the dot-com
taken number two google the name you want to use number three do a free tests
or trademark electronic search system search in the federal registry to check
for registrations a coherent brand strategy includes the registration of
core trademarks the third kind of IP is copyright copyright law does not protect
title slogans names or common expressions copyright protection only
extends to original works of authorship fixed in a tan
medium of expression giving you the exclusive rights to copy sell distribute
perform and display work if you have a website you will want to pay attention
to copyrights if you don’t have a copyright or clear license a web
developer or designer could claim that the website is theirs and shut you down
the best way to protect your rights is to have a written agreement that assigns
the intellectual property rights to your company for the works you pay to create
including patents which is the fourth type of IP a patent is a set of
exclusive rights granted to an inventor in exchange for detailed public
disclosure of an invention a patent can be obtained for inventions that are new
useful and non-obvious each of these concepts sounds simple but it’s
complicated and based on case law because the process of filing for a
patent with a patent and Trade Office or PTO can cost tens of thousands of
dollars filing a provisional patent with the PTO which you can do yourself is a
nice stopgap before a formal application the fifth and final is publicity rights
the right of publicity or personality right is the right of an individual to
keep one’s image and likeness from being commercially exploited without
permission or contractual compensation what this means for you as you build
your business avoid using any one’s name or likeness without permission
intellectual property is so much more than patents protect it it’s one of your
most valuable assets now that you’ve run the numbers and are
confident that you’ve got the makings of a real business let’s drill down on the
what where and when for example what are the processes and procedures you will
use to produce your product or provide your service what inputs do you need
whether physical goods or information how will you sources materials who are
your suppliers or vendors and how will you choose them next take a look at
inventory management or how you’ll track what you sell if you have physical goods
where will you store them will you build to order or build to stock you’ll then
want to consider logistics and delivery once you have something to sell what are
the logistics involved to get the product or service to the customer for
example what are your delivery channels we deliver the products yourself or we
outsource if you’re delivering a service or information how quickly will that
delivery happen it seems like an obvious question but when you think about your
online experiences speed and simplicity or paramount one of the most important
elements of operations is customer service in preparing a business plan you
articulate why customers will prefer you to any would be competitors how do you
need to operate your business so that they actually do prefer you and as you
add your first and second employees what are your expectations around service we
sometimes think of the customer experience as marketing marketing is
what we say we are operations is about making our marketing true it’s the
day-to-day details of running a business as you launch your business you will
need to decide if you are going to fly solo or form a founding team there are a
number of reasons why you may decide to go solo you have enough of what you need
expertise networks and money to get off the ground you want to retain a hundred
percent of the equity and decision making you like to work alone if you
decide to go the route of a co-founder here are some tips for ensuring that you
pulled together a founding team that works first you’ll want to look at the
relationships of the co-founders there will be an allure to founding a company
with family and/or friends this is in part because with a prior work
relationship you have already thought carefully about your respective roles
and have verified that you have complementary rather than overlapping
skills and that you can actually work together further one of you has probably
already emerged as the leader and it won’t necessarily be the person with the
idea making a call about who will be in charge likely implies you’ve made a
decision about how you will make decisions there will still be
disagreement so be aware of the titles you give yourselves and their
implications third you need to think about how to divide the spoils this will
be the hardest conversation you have if you work together before it will be a
bit easier ideally that you’ll wait as long as possible to divide the equity
apportioning equity is typically based on the founders past and present
contributions opportunity costs and motivations
because roles and responsibilities invariably evolve a dynamic equity split
is advised this involves breaking down the launch of the startup into separate
phases waiting the importance of each phase let’s say you’re starting a
business with two other individuals you decide that the pre-launch phase of your
product will create 40% of the company’s value and that
you with the idea will contribute 60% of the value during that period well each
of your partners is creating 20% of the value respectively on that basis for the
first phase or pre-launch phase your equity split is 60 percent of the 40
percent or 24 percent while your partners receive 20 percent of 40
percent or 8 percent of the total equity of the company in the subsequent phases
the remaining 60 percent of the equity will be allocated as you develop this
template together you can focus on criteria waiting’s and responsibilities
rather than quibbling over specific numbers the most common type of a
dynamic equity split is vesting which requires founders to earn their equity
stakes based on time or milestones again this is a hard conversation but if you
can’t have it you may have the wrong partners working with a co-founder is
similar to marriage in fact it’s frequently more difficult to dissolve a
business partnership than a marriage to move through the ups and downs it’s
vital to sort out relationships roles and rewards from my experience it’s also
important to have a lawyer in place who can protect your interests but once
that’s in place it is vital that you look for every opportunity to reinforce
trust because when you have a business partner who has your back you can get
through nearly any up and down the business throws your way your business is growing you can no
longer do everything by yourself it’s time to hire your first employee you
know it’s a critical decision how do you get this right the first suggestion is
to identify what you really need the hire to do this is surprisingly
difficult because there’s often a gap between what we think we need and what
we actually need further according to recent research we tend to hire people
similar to us this helps with communication but there also needs to be
enough difference so skill sets are complementary not redundant in order to
piece together a high-performing team there are a number of Diagnostics
available such as team ability and plumb just as the myers-briggs test helps you
identify your personality type these Diagnostics help you determine your team
type or what kind of T player you are the second is try before you buy some
people interview extremely well others don’t which is one of the reasons that
hiring is so tricky it’s like running for president of the United States
campaigning requires a very different skill set than actually governing during
a trial period you can gauge how hard a person works uncover their true
superpowers and most importantly see how they respond to stress everyone has bad
days you just want to make sure that your bad and their bad isn’t a dangerous
cocktail there used to be a stigma attached to asking people to freelance
for a time but with our work force becoming increasingly modular a trial
stint is more common a corollary to this is to hire for expertise not credentials
as Frances Pedraza CEO and founder of Everest says quote the experienced
candidate might have a resume which on paper gives you a lot of confidence but
you have to be open to the possibility that it might be the candidate with less
experience or with an unconventional background who is the right person for
the role some of my most expensive hires I made
ended up not working out well several of my unconventional hires have been total
game changers for example one engineer without a college degree almost
instantly transformed the entire engineering culture of the company not
only was he a great individual contributor creating very dramatic
overnight improvements in the performance of our application he has
won the respect of the entire product team and eventually the entire company
as a leader and quote a fourth is to think of employees as assets and not
cost centers athelia Wooley the CEO shabby Apple says quote for several
years I was Pennywise and pound-foolish about hiring I tried to control costs by
spending as little as possible on employees a couple of years ago I hired
several people to be customer service representatives and paid them slightly
above minimum wage at the time I thought that it was an easy job and shouldn’t
cost the company much but I thought wrong after spending an inordinate
amount of time spinning in the revolving door of surly and irresponsible hires I
learned that if I just paid several dollars more per hour when I hired I
would attract better people now my payroll costs are higher but I spend
much less time managing poor hires and our customers receive service from
helpful and happy employees end quote Booker T Washington said few things help
an individual more than to let him know that you trust him once you’ve done your
homework on a hire hammered out the rules of engagement it’ll be time to do
this seemingly impossible let go and trust them to do their job as you build your company you may decide
that you want or need an advisory board an advisory board is a committee of
typically four to ten individuals who lend their expertise networks and cash
aid to the organization without taking on the fiduciary and legal
responsibilities of a governing board in either case board members are expected
to be ambassadors or walking billboards for your company in pulling together
your board identify what you don’t have but need to take your organization to
the next level whether it’s strategic partnerships improving customer
acquisition scaling operationally driving down costs or personifying your
target market one clue to what you need is to observe which tasks you and/or
your team put off doing saying I know that’s important but I’ll deal with it
later but then never do most of us have things we worry about almost obsessively
those things get done with your advisory board you’ll want to bring on an advisor
who will worry about the things you don’t want to think about next be aware
of an inclination to bring on more experienced versions of you these are
the people you most admire you may even want to be like them when you grow up
one of these individuals on board is good they can act as an in-house mentor
but the more overweight you are on expertise you don’t need the more likely
you’ll be underweight the expertise you do need then only bring on people you
trust because your advisory board members will have core competencies that
are complementary to yours they will know things you don’t which means you
may feel vulnerable you need to feel safe so you can ask stupid questions once you’ve got the right people on
board make specific asks such as I would like to know I can reach out to you for
advice and you will respond within 48 hours or I would like you to review the
company financials and once a quarter and make suggestions for our KPIs or key
performance indicator or review our RFP or request for a
proposal for a new technology platform other possibilities are make
recommendations around customer acquisition refine our investor pitch
connect us with media outlets or introduce us to prospective investors
because you’re drawing on hard-earned expertise it’s important to find ways to
compensate your advisory board members depending on what your company does
offering the product you produce can often be an appropriate way to
compensate board members another common form of compensation is cash which can
range from a few hundred dollars per quarter to several thousand for growth
startups the CEO often offers equity a typical equity allocation is 25 to 50
basis points or 25 to 50 percent of one percent of equity per advisor so what
does this look like well let’s say your company is valued at $500,000 one
percent of that is $5000 a stake of 50 basis points is worth $2,500 finally
find people who love your company Advisors can be among your most
important advocates hunt for people who love you and your product and would
likely tell people about you even if they weren’t on the board paraphrasing
the Beatles you really can’t buy my love if it’s not just a little personal
you’re not in business you know it’s important to bring on the
right co-founder hire the right people and get the right advisors on board but
how do you actually find the right people much as a computer network is a
collection of computers that facilitate communications and allow users to share
data we network to gain access to broader resources including expertise
and capital here are a few tips for activating and expanding your network
once you’ve done the hard work of identifying resources you need to build
your business make sure you can articulate what you’re looking for 30
second elevator pitch style distill tasks will make it easy for you to tap
into your network you’ll want to start by networking with your friends and
family they may not understand exactly what you’re doing but because they want
to see you succeed they will likely be supportive and helpful if you can
simplify what you need the people you’ve built strong ties with will do what they
can to help you reach your goals while individuals with whom you have strong
ties have a vested interest in you don’t discount the value of your weak ties or
acquaintances which you have more of than ever because of sites like LinkedIn
a distilled ask gives them something to trade order barter with as they expand
their own network just as people are more likely to find a job through weak
ties according to social psychologist Mark Granovetter
you are more likely to build your business through weak ties as they can
expand your access to expertise beyond friends and family a weak tie can be the
node or connection point into an entirely different network in addition
to your ask being clear you’ll want to ask the right person for the right thing
ideally something that may be valuable to you but is very low cost for them
for example the CEO of a startup I advise had spent a number of hours of
market research not getting an answer because I know someone in this
particular industry I was able to get an answer very quickly the CEO got valuable
information at a low cost to the expert I asked and remember networking
should be transactional a gift for a get asking someone to do something for you
just to be nice can deplete your social capital very quickly when you ask for
help and receive it I would recommend asking what you might do for the giver
no matter how a symmetrical things may seem in your relationship you may be
surprised by what a person of higher status might need and you might provide
for them according to social anthropologists Melinda Blau and Karen
fingerman most of us like to think of ourselves as independent agents marching
through life to our own iPod soundtrack but our relationships propel us as well
the problem is that networks are like traffic jams you can easily see the
cards that surround you your intimates but it takes a helicopter to view your
entire entourage your social convoy seeing our lives from this aerial view
allows us to understand that life is as much about who you associate with
as who you are and the ability to bring people into your convoy when you need
them is a key coping mechanism in a complex world end quote to build a
business we need to network we may be wary of considering
transactions or trades in the context of a relationship but we will be far more
effective by remembering the give and get rule networking is in fact a lot of
work but if we do it well we can get so much more done you in order to persuade customers to buy
your product suppliers to provide lines of credit banks to lend and investors to
invest you will need to tell your story in crafting your story the first thing
you want to do is answer the question why why did you start your company why
this product or service why you be patient with yourself during this
process getting the story on paper when this startup is your brainchild and you
poured so much of your time talent and identity into the business can be
surprisingly difficult to help you figure out the why of your product you
may also want to ask your customers why do they buy your product why do your
employees want to work at your company and when people engage with your brand
on social media what did they say the second thing you will want to do is to
make your message memorable there are a number of techniques you can employ to
do this third make it easy for people to share your story the best way to craft
an air-tight soundbite is to use alliteration
I am bikini tur or five syllables and rhyme for example click it or ticket is
better than buckle up for safety when people can repeat your story and
delight in saying your name they are more likely to become brand ambassadors
in terms of getting people to share your story online in addition to putting your
story in writing tell your story with images and with videos in an era where
content marketing is king for brands the content has become the add as a start up
the best advertising you have is a compelling Genesis story whether
customer supplier lender or investor we want to buy from entrepreneurs with a
passion for what they are doing it’s a given that you want to make money and
your business plan and financial model will help tease out the market
opportunity and whether there’s early traction but it’s the passion that
predicts grit and staying power one of the best ways for a customer to
gauge passion is to say tell me your story there are several elements to building a
good website the first is usability because users are not patient enough to
spend a lot of time trying to figure out where information is menu items need to
be clear text needs to be readable navigation should be easy with important
information less than two clicks away the site should be designed to work with
any type of browser and on any type of device whether on a laptop tablet or
smartphone the second consideration is structure just as a builder uses
blueprints to build a house you’ll want a blueprint for your site
creating a website goes much more smoothly if you take the time to sketch
either by hand or on a computer what the pages will actually look like where
menus will go what they will be called and where photos and text blocks will go
you’ll then want to consider layout the layout should be clean and engaging to
the primary users and customers branding colors and fonts should be consistent
throughout and remember to optimize your site for lead generation and conversion
I recommend that you use hub spots free marketing grader a tool that measures
and analyzes all of your marketing efforts as checklist if you build the
website yourself there are a number of good options the first is WordPress
which can be used as a blog or the backend of a regular website another is
Squarespace a hosted service that allows you to build sites with a drag-and-drop
editor if you’re looking for an e-commerce solution Shopify and Big
Cartel are reputable if you decide to hire someone to build your website be
aware that there is a difference between a web designer and a web developer the
designers like an architect the creative expert who creates the look of the site
they work with you to make sure the pre design sketches look the way you want
the designer then mocks up the site and hands it off to the web developer a web
developer is like a builder the one writing the code taking the creative
vision of the to designer and making sure the website
looks and functions correctly for basic sites you may want to go the route of a
designer who can do basic programming customizations
on WordPress or Squarespace even if you’re outsourcing the build you will
still need to give some real thought to the structure and layout well your blog
run ads do you need a shop what do you want people to learn about the services
and/or products you provide the designer will ask you if you already own a domain
and have hosting set up they can either instruct you on how to
acquire these or they will provide that service for you they will also ask for
any logos marketing or design elements previously utilized by your business to
make sure the branding is cohesive your website is about a calling card and
point of sale you’ll want to get this right once you have a product or service that
you know will sell it’s time to start marketing one essential tool is a blog a
blog is a long-term marketing asset that will bring traffic to your website the
more blog posts you publish the more indexed pages you create for search
engines to display in their results and the stickier the content the better this
doesn’t necessarily mean pretty professional or well-written it means
unique memorable and shareable which leads to the second way to drive traffic
to your site social media what you use will depend on your preference and where
the customers are artifact uprising for example they make high quality photo
books they focus on Instagram while inbound marketing company HubSpot
concentrates on LinkedIn it used to be that the best way to get SEO or search
engine optimized traffic to your site was to accumulate as many backlinks as
possible these incoming links are so helpful but social media coverage is
increasingly important in driving SEO power now that you’re successfully
pulling in visitors to your site you’re ready to focus on lead generation or the
process of converting visitors on your website into leads a person usually
becomes a lead when they fill out a form in return for some sort of offer whether
it’s a webinar a free product or something else of value on a targeted
landing page you’ll then want to identify brand ambassadors well you need
to be able to tell your story it is typically more effective to have others
talk about you than to talk about yourself brand ambassadors are already
like you as you incentivize them they’ll talk about you even more the incentive
doesn’t need to be monetary it can be a discount or you can do what Diet Coke
did a cheap online marketing tool is the affiliate program or a fee for referral
two of the largest marketplaces are Commission Junction and pepper Jam as
with ad campaigns you need to understand how it works so you don’t get taken
advantage of again from wooley commission junction offers free online
seminars on how to either hire affiliates or become one yourself even
if you decide to outsource your affiliate program you may want to take
one of these courses so that you can understand the details behind the
marketing system once you’re ready for primetime contact media outlets if
you’re contacting me outlets yourself forgo the large national publications
instead opt for smaller bloggers instagramers and youtubers offer to give
them something in return for talking about your product if you’re looking to
hire an agency try to find one that you could pay on a fee-for-service basis
like live in five PR not on a monthly retainer retainers create misaligned
incentives and lock you into a service finally remember that nothing ruins a
bad business faster than good marketing there are so many ways to get the word
out about your company you’ll know you’ve hit upon the right mix because
when you mark it well customers will find you as you think about your customers there
are several things I’d like you to consider the first is do you love your
customers marketing guru Seth Godin says there are two ways to think about your
customers you love your customers because they pay you money or you love
your customers and sometimes there’s a transaction in the first the customers
are means to an end in the second you exist to serve customers and profit
allows you to do that if you don’t love your customers that’s
not necessarily a bad thing but it may be a cue that you’re in the wrong
business for you when you find customers for whom you can be all in you want to
show them the love all too often we spend every waking hour and huge line
items in our budget on customer acquisition once a profit becomes a
customer we forget them just as we frequently do in our personal lives when
we’re dating we continually find ways to delight our beloved surprise texts
special meals hard to come by event tickets but once we’ve converted them to
a boyfriend/girlfriend husband/wife we put the relationship on maintenance for
a time we stay engaged but once we become secure we start to take the
relationship for granted there are a number of ways to show love one is to
find the yes in a customer request companies that say yes are more likely
to go viral this is easier said than done because it means you empower your
employees to do what they need to do when the customer needs it which means
you need employees with good judgment therefore you need to hire well you’ll
also want to be responsive most customers want to be left alone until
they want something when they ask hop to it increasing number of Internet
users who reach out to a brand online expect an answer back within 30 minutes
and learn to apologize customers may not always be right in fact they frequently
won’t be finally you’ll want to follow up a big difference between good and
great service is follow-up not customer service surveys these take time but
personalized follow-up when the customer asks for something specifically get back
to them quickly calling them by their formal name delight them and then some
according to Jeff riddle an expert in customer experience based on the
analysis of huge amounts of data seventy to eighty percent of new customers are
generated not by formal marketing and acquisition initiatives but by
word-of-mouth from the five percent of existing customers that were most
delighted with the product and service the cost of customer acquisition
continues to climb the irony is that if you care about your customers they will
trust you and Trust is a shortcut to customer acquisition if you really want
to build your business stop spending time and energy on would-be customers
and give your current customers some love you’ve made a lot of progress in
building a business now it’s time to take a breather and survey the scene to
see what you’ve learned and where you want to flex possibly even pivot let’s
begin by reviewing your sales where are your customers coming from are you
solving the problem you thought you would solve selling more or less than
you thought you would what about the price point initially you’re going to
look at vanity metrics like number of visits we all do on the surface this is
exciting but it isn’t going to give you any information or insight about why
your business is growing or not like what percentage of visitors to your site
are returning visitors what percentage of visitors are converting into leads
meaning signing up for something on your site is this percentage increase in your
decreasing now I know you may be thinking wow this is a lot of questions
to make reviewing and considering these questions easier I’ve included a list of
questions in the exercise files be sure to take a look and follow along so one
of the best ways to really get at whether your product or service is
actually improving is cohort analysis at its simplest this means dividing up your
customers into related groups rather than viewing them as one unit for
start-up cohort analysis usually involves clustering users by the day
week or month they first started using your product the great thing about this
kind of analysis is that each new group provides the opportunity to start with a
fresh set of users this allows you to a gauge how well you’re engaging with
customers or audience independent of growth next you want to examine costs
are they higher or lower than expected what about the cost of customer
acquisition which source of customers is most cost effective and which would be
easiest to scale again using cohort analysis is the cost of customer
acquisition increasing or decreasing it’s also time to do a check in with
your code founder how are you working together are
your roles and responsibilities stable or are they shifting if you agreed on a
dynamic equity split is it time for an adjustment consider your employees are
you in compliance with labor laws specifically is everyone who should be
classified as an employee classified as such there are stringent laws about
paying people as independent contractors and are your employees happy is their
ability to serve the customer improving are they improving the bottom line if
someone isn’t really working out are you dismissing the person quickly and
appropriately based on everything you’ve learned how is your burn rate the amount
of cash or losing monthly changing what adjustments are required among the most
important questions are those that involve self reflection are you still
playing To Your Strengths and are you still enjoying being an entrepreneur as
you complete your periodic check-in if you find yourself going in a different
direction you won’t be alone 70% of all successful new businesses end up in a
different place – from Groupon that started out as an activism platform and
Netflix that began as a door-to-door DVD rental service as an innovator you are
in pursuit of a something that is yet to be defined well it’s important to
develop a business plan and financial model you still need an emergent
strategy you’ve now taken a step forward you’ve gathered feedback today it’s time
to adapt you as a start-up you won’t have everything
figured out but you do need to know you’re moving in
the right direction this is where metrics come into play having access to
numbers that can provide a snapshot of how your business is doing the good news
is you only need to focus on five metrics acquisition activation retention
referral revenue or are commonly referred to as pirate metrics which were
popularized by venture investor and PayPal alum dave McClure I’m going to
talk about these metrics in the context of an online business but you’ll quickly
see that with minor tweaks they can be applied much more broadly the first
metric is acquisition or how many people visit your store or site so let’s say
you search engine optimized your site are engaging on social media and you may
even have a few mentions in the press you’ve got visitors if you’re like me
you are tracking how many probably using Google Analytics you’ll know if you have
the right kind of visitors or potential customers by tracking your bounce rate
your bounce rate is the percentage of customers that visit your store or site
but leave immediately without completing a transaction a healthy bounce rate is
around 30% so if you have a hundred visitors seventy actually land this
second metric is activation or the percentage of users who not only land on
your site but have a happy first visit they stay more than 10 seconds read two
plus pages for example you want this number to be at least 50% of all your
visitors from here you’re looking for at least 20% to click on a link or a button
the most important metric is retention this doesn’t mean a visitor has made a
purchase it just means that they’re signaling they plan to come back by
providing you with our contact information for example this number
should be at least 10% of total visitors but of course will vary depending on
your business a simple way to get started with retention is interviewing
customers and potential customers or a Steve Blank
says get out of the building this will likely mean engaging on social media
reading and responding to enquiries quickly anything that will better
acquaint you with what people are really hiring your business to do the fourth
metric is referrals the customers who recommend you a successful business has
a viral coefficient greater than one meaning for every customer they
recommend you to more than one person what you need here is for at least one
percent of your visitors and thus a sizeable percentage of your actual
customers to tell more than one person about you and the sooner the better
the final metric is revenue you want lots of visitors who sign up come back
and talk about you but you are only in business if people are willing to pay
you so the question is how well are you monetizing visits the conversion rate or
percentage of visitors that become customers will vary depending on your
business but should be at the very least 1 to 2% shortly you will be ready to
scale your business at which point the number of metrics you track may multiply
but during this experimentation phase when you are seeking empathy stickiness
and virality the pirate metrics are the ones that matter and remember if your
metrics make you just a little bit embarrassed then be assured you’ve got
the right ones one of the skills that you must have as
an entrepreneur is the ability to negotiate here are a few suggestions on
how to do this the first is signaling when you’re transacting if you’ve come
out of the corporate world unless you’re in sales yours is always a soft sell
there’s a transaction but you may never actually negotiate as an entrepreneur
you will negotiate continually with your customers suppliers and possibly
investors it’s important to give cues so that people know when you’re entering
into a negotiation such as this is what my company does here’s the problem we
solve for our customers this by the way is one of the reasons it’s easier to do
business with people you’ve worked with before that you’re transacting is a
given but it’s just not always the case with friends the next thing you want to
do is learn to sit on both sides of the table another way to say this is to look
for the win-win learning how to lay out the logic of what you’re proposing in
the context of your relationship this also means that you don’t negotiate just
to negotiate sometimes what the party has presented is fair enough and for the
sake of the relationship you stop when it’s not about me but we you’re sitting
on both sides of the table the next thing I would suggest you do is to avoid
ultimatums in film and television we often see standoffs and ultimatums they
bank for great drama but don’t try this at work when you are at an impasse be
creative consider the whole deal what do you have
that is valuable to your counterpart and vice-versa
also ask yourself what deal would make me over the moon happy or trigger my
resent of your now strike a deal somewhere in between this doesn’t mean
you never say no when you set a price or a point at which you need to walk away
you remove stress and anxiety if you know when a transaction is unprofitable
you will do more deals that make sense and less that don’t
another thing I’d recommend is you negotiate is to look to the horizon
thinking about the long-term requires confidence though you have to believe
you can get to where you want to go so it’s scary but it’s vital it will guide
you in tactical negotiations that draw short-term business results and push you
to negotiate in such a way that you preserve the relationships you need to
stay in business now something I want you to watch for is
wanting a deal too much when a negotiation becomes charged with emotion
there’s usually something else at play it’s important to figure out what it is
because it makes you vulnerable and that means you’re probably about to give up a
lot and you still won’t get what you really wanted nothing will improve your
bottom line personally professionally and emotionally more consistently than
being able to effectively negotiate some of us are good at the get others at the
give but a one-sided approach to negotiation needs to fractured
relationships learn to do both and you can build a business and relationships
that last a lifetime according to the US Small Business
Administration nearly 30% of the businesses declaring bankruptcy cite
problems with a financial structure of the company and the fact is as a
start-up cash will probably be tight at a minimum you should know what your cash
burn rate is so that you know how much runway you have for a refresher on burn
rate and runway check out the video in chapter 2 on building a financial model
again though this is at a minimum in order to run your business well and
without the stress that uncertainty brings you will need to know more the
first step is to see how much cash you have once a week look at the balance of
your accounts checking savings and anywhere else you may have available
funds that’s your cash on hand then look at your receivables money you’ve earned
but haven’t yet collected what could convert into cash this week is it
possible that you can nudge the collection process forward and what do
you need to pay this week as a start-up you can’t possibly think in years and
not really even in months you’ve got to know where you are week to week as a
second step act like you’re broke and do a 13 week cash flow forecast you may
have plenty of cash but if you act like you don’t your cash will last longer and
you’ll have more of it what are your expected inflows over the
next 13 weeks your outflows watch out for confusing revenue with cash flow
some people take longer to pay than expected or they don’t pay anticipate
unexpected expenses a thirteen week time frame will allow you to capture the ups
and downs of a quarter to think concretely and realistically sure you
have projections but for a startup 80 forecast beyond a few months is fiction
the third step involves what is referred to in accounting as closing the books
while a hard closing is an involved technical process which you will need to
implement as you scale for now a soft-close will suffice and involves
categorizing your transactions this by the way is something you may
want to outsource a bookkeeper for example contract your whistles and
payables and make sure all your receipts contracts and invoices are accounted for
this process allows you to be in tune with your numbers and it will make
end-of-the-year accounting much less torturous the net effect of tracking
your cash will be higher revenues and collections lower costs and a signal
that you need to start fundraising before your situation becomes leaked we
improve what we measure mind your cache and caching you’ve started a company and it goes
belly-up or you launched a new product and not only does it fail to sell
customers actually hate it what happens when you dare to dream make that dream
real and then fail as I’ve grappled with my own this just may break me failures I
am increasingly convinced that building a business is a process an engine of
experimentation as we learn by doing something will eventually and inevitably
not work at this point we have to decide how will approach failure as you see
here ask yourself did I fail my way into a black hole or is failure a tool that
will help me build a more successful business here are a few tips to get you
started first and foremost acknowledge the
emotional affect failure has on you when you start a company there is a fantasy
that most of us engage in you’ll work hard your business will succeed you will
find contentment and happiness with your accomplishments but business isn’t one
straight shot to success there are ups and downs like the stock market with the
occasional zero then what when I’m back to business that imploded
apart from feeling mortified I was heartbroken I had been all-in I had
envisioned a future in which I would achieve a goal perhaps be hailed as the
conquering hero and then I wasn’t I’ve learned it’s important to grieve when we
sublimate the sadness we risk losing our passion which is essential to building a
business next ditch the shame if you let failure become a referendum on you the
Millstone of shame will drown you and your dreams
according to dr. Brene brown when ethos is kill-or-be-killed control or be
controlled failure is tantamount to being killed being perceived as weak can
elicit tremendous shame for example the business I fronted that went belly-up
shouldn’t I have better read the situation how could I claim to
a savvy investor if we don’t ditch the shame we will never throw ourselves into
another venture pulls shame out of the equation when you fail and there’s no
limit to what you can accomplish as you deal with failure and building your
business the narrative you construct is key it’s about learning the right kind
of lesson or what Lean Startup guru Eric Ries describes as validated learning ask
the question what valuable truths did you discover about the present and
future prospects of your startup by failing was my takeaway when the
business that imploded to never invest in another friend’s business instead I
gained the valuable insight the vetting prospective partners is vital as our
clear rules of engagement learning is the essential unit of progress for
startups says Ries for most of us the mere prospect of failure is a
take-no-prisoners mind game pushing us to the edge of an emotional cliff where
shame would happily push us over but in a world in desperate need of your
startup mentality it’s important to bury shame and to see failure for what it is
an opportunity to learn valuable truths in a signal that our startup really
matters so much so that we’re willing to invest not only our minds but our hearts as an entrepreneur you are a dreamer
dedicated to achieving your goals your passion will make you successful it can
also cause stress which means that your mind and body don’t yet have the
adaptive capacity to deal with what is happening this can affect your memory
immune system and overall health and because people pick up on and mimic your
stress level when you’re stressed out your team likely is to the question that
is how do you manage the stress of high expectations long hours setbacks and
successes and importantly increase your adaptive capacity as an entrepreneur the
first step is to give yourself a break you can do this by approaching your
business as a marathon not a sprint according to marathon training expert
Jeff Galloway the best way to do this without injury is to adopt the
run/walk/run approach another aspect of this is you need to build stamina and
endurance if you’re not used to working flat out starting in a sprint pace is
unsustainable you need to work up to it therefore figuring out how you’re going
to gradually increase your pace is also an important part of this approach one
thing I do is to work in 15-minute increments setting the timer on my phone
after which I take a five-minute break at night I’ve stopped checking my phone
and wait for 15 minutes in the morning before checking messages thinking about
what’s really important it can be through prayer meditation or journaling
also consider resting one day a week it’s counterintuitive I know but trust
me you will be more productive in the remaining six days the next step to
managing stress is to take care of your body exercise when you take a
five-minute break from working walk for five minutes eat good food meaning eat
or drink more of what makes you feel good avoiding what debilitates you mine
is sugar and follow Arianna Huffington’s advice to get more sleep pick just one
exercise food or sleep and work on it this coming week
the third step is to maintain connections with the people who will
love you whether your business is successful or not maybe you call a
friend or a family member once a day you’ll know if the person is the right
person because there’s no transaction nothing bought or sold when you hang up
the phone even better have lunch with or take a walk with a
friend once a week if you have children at home have dinner together whenever
possible when you have a world that revolves around relationships outside of
your work you will be happier and better able to adapt to the stress of startup
life finally do not underestimate the power of your mind which means if you
will give yourself a break take care of your body and connect to those you love
you will increase your adaptive capacity becoming better at dealing with the
stresses of startup life and turning setbacks into success you financial capital is one of the key
inputs for growing your firm this is the money you use to buy what you need to
make your products or provide your services your motivations and goals will
impact the types and amounts of capital you raise you may be driven by financial
gains and rapid growth you may want to be your own boss or do something you
genuinely love augment family income while balancing work and family or maybe
you’re pulled into entrepreneurship by an unmet need in the market your
motivations will not only impact the kind of business you start but also a
kind of financing strategies you use if you want and need your business to scale
quickly you may decide to bring in equity investors otherwise you may be
able to finance the business through personal savings and earnings however
you decide to finance your business remember that bootstrapping will allow
you to get the most out of your plan bootstrapping involves techniques that
lower expenses and leverage the resources you already have on hand these
could be number one we’re home to obtaining low-cost or no-cost services
such as using equipment at a local restaurant or Church 3 leasing rather
than buying for delaying compensation 5 using temporary personnel or 6 borrowing
to obtain products and services it could even involve a Kickstarter or
crowdfunding campaign in order to prototype or pre fund your product for
more on this you can listen to the modules on bootstrapping and
crowdfunding one of the most common sources of startup financing is debt
because banks rarely land to an early stage startup debt financing usually
involves loans from friends or family credit card debt or personal loans while
you may need to take on personal debt initially was her business is
established with steady sales profitable growth and collateral you should try to
do debt financing through your company the advantage of debt financing is it
allows you to maintain full control over your business plus interest on a
business loan is tax deductible the disadvantage is that you have to service
the debt which could be a risk if your business doesn’t generate sufficient
cash to make the debt payment may need to use money from your personal
accounts to service the debt otherwise you will likely suffer the consequences
of defaulting on a loan another common source of financing is equity this is
usually most appropriate for businesses looking to scale quickly equity
financing involves selling an ownership stake in your business for cash equity
investors may come in the form of friends and family angel investors high
net worth individuals who take a personal stake or venture capitalists a
professional investment organization that invests in order to make a profit
at some point you may even explore an accelerator which typically takes five
to eight percent equity in exchange for a small amount of startup cash and
mentorship not surprisingly this is the hardest type of financing to obtain
because it comes at a huge risk to the investor more than a third of all new
businesses fail within the first year so you will need to persuade the investor
that you the entrepreneur and your business are risk worth taking further
once you sell a stake in your company you’ve got partners this will involve
collaboration and shared decision-making if a business does fail you don’t need
to pay the investors back but it’s important to be aware of the
implications for relationships if you do lose their money
you could lose something much more valuable so take this very seriously one
other option that may make sense for potential high growth business is
convertible debt this is a hybrid between debt and equity you’re not ready
to decide on valuation or you want the option of paying back the cash this is
typically issued to angel or venture investors who are looking to back you
and are ready to provide a smaller initial round of financing now that you
know what kinds of financing options are available to you circle back to your
motivations and what kind of business you’re starting once you’ve decided on
the why and the what you’ll have a good idea of the right financing strategy for
you and your business an emerging form of financing as
crowdfunding this is the collection of funds through small contributions from
many different people in order to finance a particular project for
entrepreneurs looking to eventually attract investors a crowdfunding
campaign can demonstrate market demand and attract publicity first use the
campaign to fund a very specific project or product run within the business it’s
not an open-ended call for me second limit how much money you try to raise
the majority of successful campaigns are looking to raise $25,000 or less third
there’s a reason it’s called a campaign like a political campaign successful
crowdfunding is dependent on well-thought-out marketing and a
grassroots strategy that will take three to six months to come to fruition fourth
tend the campaign daily once launched you need to have a dedicated person who
promotes awareness through targeted emails and social media on a daily basis
fifth expect to work hard to reach your target also you’ll want to have a budget
for the campaign that factors in the administrative costs of using a
crowdfunding platform the cost to deliver this incentives or rewards to
donors you’ll also want to be sure you can comply with all the fine print that
comes with using a crowdfunding platform like Kickstarter or IndieGoGo if you
violate any of their policies they have the right to terminate your campaign
withhold funds or even sue in addition to demonstrating market demand
crowdfunding gives you the chance to interact with your target demographic to
learn what people like or not about your product or service it’s a great testing
ground for your product and team and in effect a graduated form of bootstrapping
also using donor based or rewards based crowdfunding allows you to raise money
for your business without taking on debt or giving up company ownership all too
often entrepreneurs turn to crowdfunding when they have exhausted other funding
options if your pitches fund me or my dream dies you’re in trouble but if your
pitches fund me so that you can have dibbs at this fabulous new idea you are
proving market demand while a successful crowdfunding campaign is not a guarantee
of continued success it is a sign of good business and if you reach your
funding target and deploy the capitalist promised you significantly raise the
odds of getting additional funding because you’ve proven there’s demand for
your product and within this microcosm of a business that is your business
you’ve proven you’ve got the goods to execute if you decide that your business
requires equity financing you will need equity investors whether
friends family angels or venture capitalists here are some tips for how
to make that happen first prepare an elevator pitch that you
can deliver in under a minute to anyone you meet you never know who may have
interest in financing your business if you can explain what problem you solve
why you’re the one to solve it and why this will make money for investors in
less than a minute even a chance meeting can turn into a pitch and easy to
understand and share elevator pitch is a great way to leverage your whole network
and generate buzz for your business you’ll also want to be able to explain
what you do in writing and no more than a paragraph or two more and more
introductions are made via email if you’re looking for a warm introduction
you want to make it as easy as possible for the intermediary to tell your story
for more on what makes a memorable story refer to the tell your story video I
covered earlier in the course second build an angel list profile which allows
investors to learn about you and you about them creating a profile about who
you are and what you do makes it easy for investors interested in your type of
business to find you then when people follow either your personal profile or
your company send them a personal note third create a list of investors you’d
like to meet with angel list can be helpful in finding investors interested
in your industry after you eliminate people who are invested in your
competitors you’ll probably have a list of 40 to 50 investors to reach out to
build a spreadsheet and then start coming up with plan for reaching out
fourth scan your networks well it’s possible that you already know potential
investors you probably don’t cultivating
intermediaries individuals who can introduce you to potential investors can
be vital for me as a professional investor when someone I know and trust
suggests I look at a company I am far more likely to take a look than if I’m
cold called I suspect this is true for all investors rarely if ever do they
invest in someone who has reached out without any
duction also be sure to understand what a warm introduction is if you are asking
someone you don’t know well or who’s not excited about your company to put their
reputation on the line for you rather than a warm introduction you’re likely
to get a cold shoulder v do your homework a good example of entrepreneurs
doing the homework to know their audience is a reality show in the u.s.
called shark tank before you walk into a meeting you want to know about
prospective investors usually confine the basics of what you need to know on
LinkedIn tailor your pitch to what interests your audience and highlight
aspects of your company that will most intrigued and excite the investor you
will want to tell a story in 15 minutes or less with the pitch deck providing
the backup data to your oral narrative and practice practice practice this is a
speech of a lifetime sixth focus on storytelling start with a
grabber and talk about the progress your company is already making by saying
something like we grew a hundred and fifty percent in sales in five weeks
note how this allows you to tell a story while underscoring your fluency with the
numbers then move to the problem you are solving and why this matters to you and
how you and your team can solve it you’ll also want to know your
competitors why you have a competitive advantage and your exit strategy or how
they’re going to actually get a return on their investment I cannot
overemphasize how important knowing your numbers is not how big the market is
they can look that up but the actual economics of your business as per our
discussion in the video on your financial model finally you’ll want to
say how much money you’re raising the current valuation if there is one and be
specific about what you will do with the money if you decide to take on outside
investors you’ll want to prepare there is no better way to destroy your company
and your sanity than taking money from someone without having clear rules of
engagement and this begins with you deciding what your company is worth if
your business is already established you own a restaurant for example taking an
outside investors can be relatively straightforward to get a feel for
valuations in this context take a look at online marketplaces like this quest
and baibe itself where you’ll see the restaurant generating $50,000 in cash
per year after expenses and taxes would be valued between a hundred thousand two
hundred and fifty thousand or two to three times cashflow there are a variety
of factors that increase or decrease what an investor will pay for a stake in
your business like location but this will provide you with a starting point
valuations become much more complicated and subjective if your company doesn’t
yet have revenue how then do you place the value on your company the first
thing you have to come to grips with is that your business is only worth what an
investor is willing to pay however if you believe you have a high growth
business one that can grow to twenty million dollars in five years there are
some well accepted methods for determining valuation one is the burkas
method which provides you with an initial approximation here’s how it
works number one if you could convince an investor you have a sound idea you
may be worth up to $500,000 it could be less but $500,000 is the maximum – if
you have a prototype which reduces technology risk add up to another half a
million three if you have a quality management team which reduces execution
risk add another half a million four if there are strategic relationships which
reduce market and competitive risk at another half a million because these are
maximums your value will be at most two million dollars again it will be up to
you to persuade an investor to buy into your valuation a slightly more
complicated method of determining valuation for high-growth
companies is Bill pains scorecard methodology this methodology starts with
a baseline number of 1.5 million dollars and then adjusts the valuation up or
down based on a subjective appraisal of the management team size of the
opportunity and competition in the exercise files I’ve included a detailed
white paper by pane on this topic once you’ve come up with a valuation for your
company based on your business as it is today I’d also take a look at the VC or
venture capital method devised by Bill Solomon this starts with the terminal
value or what you could sell your company for in five years a simple way
to calculate the terminal value is to start with what you estimate revenue
will be in year five given that you’re building a high growth business let’s
start with twenty million dollars let’s also assume that you can sell your
business for two times revenue which is often the case for software companies
then your terminal value would be forty million dollars the next step is to
divide the 40 million terminal value by the return and investor will require
because early stage investing is very risky an investor will expect at least a
20 times return on their money your post-money valuation or the value
of your company after you have raised money is then equal to the terminal
value divided by anticipated return or 40 million divided by 20 equals two
million dollars your last step is to solve for your pre-money valuation this
is based on how much cash you need to get to your next major milestone which
is typically about 18 months out that amount is $500,000 then your pre-money
valuation is 1.5 million determining the value of your company when you’re
pre-revenue is definitely more art than science but if you do your homework and
consider these three valuation methods you will be able to triangulate on a
reasonable starting point and then you can let the negotiations begin you’ve identified people who are
interested in investing in you and your company now it’s time to establish rules
of engagement as a first step there will be a term sheet this is a non-binding
document that outlines the terms of your deal
it will include how much of the company the investor will own and at what price
how much stock needs to be set aside to attract talent what kind of rights the
investor has if the company is sold who will be on the board of directors and
when the deal closes in evaluating this term sheet you will want to build a
capitalization table this is a spreadsheet that shows how much each
person owns at the company as you negotiate you’ll want to keep in mind
the investor’s perspective your first outside investment will probably come
from an angel investor a high net worth individual who is putting their personal
capital at risk usually in the amount of 25,000 to a hundred thousand and
typically wants to own ten to twenty percent of the company this will have
you circling back to valuation you need to have done the work to value your
company if you know you need a hundred thousand dollars to get to your next
major milestone and the investor wants to own twenty percent then your
pre-money valuation is four hundred thousand dollars post money five hundred
thousand dollars again valuation is more art than science note to that the
principal factor affecting real valuation is the investors liquidation
preferences meaning what happens if you sell the company investors will
typically own preferred stock while you is the entrepreneur own common if the
company gets liquidated the preferred stock has priority a standard term is
that preferred stockholders get one-time or all of their money back before the
common holders get anything after which the spoils tend to be equally divided
you’ll also want to be aware that control of the company is driven by the
terms of the investment documents not just ownership investors can negotiate
veto rights over later finances or sale the company for example no matter how
much they own it’s important not to negotiate every term know what a
standard then choose your issues as investors are conducting due
diligence on you you want to conduct due diligence on them does the investor
understand your business your industry do they have enough money so that if you
need to raise more capital they can participate how is this investor
interacted with other entrepreneurs if you’re talking to venture capitalists
you may want to check funded com a site where entrepreneurs actually rate theses
consider to the advice of my friend start-up attorney Ellen corn sweat when
you is the founder negotiated term sheet you are negotiating on behalf of the
company not yourself you need a lawyer for the company and for you
which brings me to my final point no matter how good you are at negotiating
get an experienced lawyer one that’s been referred to you it is invaluable
when you bring on an investor you are bringing on a partner but no matter how
invested they are new in your business you will need to negotiate your rules of
engagement walk into a negotiation expecting to get and willing to give and
your partnership will pay off you

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