Many people are attracted to the idea of starting and growing their own business. In most countries there are literally millions of Small Businesses and all of them have been started, at some point, by a person highly motivated and excited about starting their business. However, this is a highly risky and quite traumatic experience for many. In this article, we introduce several of the issues that a start-up needs to consider. We also suggest a far less risky approach to getting yourself into business. If you are starting a venture capital funded, high-tech, business with out much business experience, the startup techniques here can also help you. This material is at Yellow Belt level.
Option 1: Start Your Own
Starting your own business is a very enticing and exciting opportunity for many who plan to get into a business of their own.
However, it comes with very high risk. Even businesses that are backed by Venture Capitalists, who have a great deal of experience in starting up successful new businesses, often have something in the order of 60-80% failure rates. .
If you consider that you might be starting your own business with no previous experience in starting businesses, you have to assume that you might be facing a significant level of risk. However, you might have a better chance of survival than these odds as you won't face such a 'soar or crash and burn' culture and can better pace your progress.
Not only is there some risk that the business itself may fail to reach take off or viable velocity, there can also be other costs.
When you start a new business, it is a period of intense stress and uncertainty and this can result in problems, both for your own levels of stress and in your family who have to live with the stressed business founder. There is a possibility of less family income and time.
It is also a time when you, the business founder, will be outlaying money to get the business rolling. You may be actively engaged in running the business, which will mean you might not have the income you previously had.
For many, all this uncertainty simply means that they never start to launch their business. The person who is keen to be a founder just keeps finding themselves bogged down in detail and uncertainty and fails to ever get going.
Lean Start Up Theory
Fortunately, there is an increasing body of very useful knowledge on how to most effectively, efficiently and with the least risk, start up a new business activity.
This is known as Lean Start Ups.
The Lean comes about from the science of lean manufacturing and is designed to get from position A to position B as rapidly and effectively as possible.
Most interestingly, Lean has adapted the Plan/Do/Check/Adapt (PDCA) Cycle (see PDCA article) to operate for a Start Up activity.
They call this process developing a Minimum Viable Product (MVP).
Essentially it says that rather than start the entire business from top to bottom and then see if it works, you start the absolute minimum you need to test the viability of that business and then you go out, effectively door knocking, to see if people are prepared to buy the product. If too few potential customers are interested in your MVP, you are very unlikely to be able to sell a full-blown business with the same offering. So you “fail fast” before you spend too much time and money on something destined not to work.
This is very sound advice, and highly recommended, not only for Start Ups, but for any new avenue that an existing operating business is thinking of engaging in.
It is a thorough approach to testing the feasibility of an activity before getting to far immersed in it.
Military people say that all plans fall apart the moment the first shot is fired. Much better to have a small plan (your MVP) that you can launch and test in the market and then adapt to whatever circumstances come about. This process of adapting is very firmly entrenched in the Lean Start Up discipline and is referred to as doing a "Pivot".
A large number of very successful businesses started out doing something quite different and found that their MVP's weren't viable, then did a pivot into what has become a successful business activity for them.
If you decide to launch your own business, we strongly encourage you to read some of the Lean Start Up books and videos we list in the Resources section below.
One of the other Accelerator programs we offer suggests how you can "Redouble Your Profit in a Year" which we refer to as DP365 (see Redouble Your Profit in a Year article here).
This takes the owner of an existing business through the necessary steps to relaunch that business on a growth trajectory.
However, the same decision making and techniques can be used by a Start Up business with some adaptation.
Associated with DP365 is our Profit Flywheel (see Profit Flywheel article here) concept that walks a business that is relaunching itself through a suggested 12-month program on a quarterly basis.
People in a startup phase of their own business will find both topics of interest.
Reduce Financial Risk
Start-ups big and small generally find themselves in some tight corners financially while starting out. Bills for wages, taxes and suppliers come rolling in regardless of how well you are doing in the business and finding enough money when you need it can be time consuming and stressful.
Our Profit Autopilot articles show how you can greatly reduce the hassles of managing startup financial demands using techniques developed to help people debt restructure (e.g.) credit card debt.
What might the Future hold?
Millions of people have started businesses before you so we have some data on how those evolve.
- about 75% of startup businesses do not reach the point where they can employ someone. They comprise one or two founders and do everything themselves; the work of the business, sales & marketing and the office admin. Many in this group are those that are self-employed rather those wanting to grow their business. They might range from a solo lawyer or doctor to a tradesperson. Normally, your maximum income is limited by your time available as likely that is what you are selling. The big question here is, given your income will not be much bigger than a wage as an employee, and you get a lot of additional hassels being in business, is it worth it?
- businesses with 3 to 12 people are sometimes referred to as 'boutiques'. They roughly divide into;
- those with low revenue per person that make wages but are not very profitable and not growing. Often they are restricted to one location because expanding to additional locations is a big financial and management challenge. Their activities are not much differentiated from others in the same industry. Examples might include cafes, bookshops and dress shops.
- those with high revenue per person which are usually profitable, fun places to work. They may develop a reputation for excellence in their industry which makes sales easier. Staff here might also get well paid jobs working for larger companies but prefer the small-team feeling. Examples include businesses not facing a lot of local competition, having specialist (rare) skills or not limited by geography. Many IT startup are in this group which is one of the reasons why so many are starting up. Others are consultants of various types that can travel to work.
- businesses with 13-40 staff may find themselves in the desert between the two oasis of the fun of a successful boutique or well padded like a larger business can be. It is often forced into hiring staff and other resources before it earns a return on them so cash shortages can be regular problem. The company culture can be damaged. Some will like the 'good old days' of smaller size and more cameradie. The ever growing size requires more professional management with division into specializations like sales, production, accounting with the attendant bureaucracy that comes with it. This is a tough area to be in. Either one tries to grow out of it as fast as possible or one decides this is 'big enough' and sets about streamlining the operation to return to better cash flow and culture. Too long in this space while trying to grow has a serious risk of running out of money. In Britain, perhaps 3.6% of businesses are in this group.
- Businesses in the 40-150 person range represent about 0.5% of British businesses. They might fall roughly into two types;
- 'factory-like' operations with low revenue per person. Because of this, cash is likely to always be tight and probably the ability to increase prices and sales is hampered by competitors if you are in an industry without much product differentiation. Returns can be comfortable but the hum-drum nature of the business might not suit the entrepreneurial spark in the founder that got the exercise started in the first place. Steady growth can continue via organic growth or acquisitions of your weaker competitors or you can park the business as a 'cash cow' (see Boston Matrix article for explanation)
- specialist operations earning high revenue per person and rather like their earlier boutiques but larger and with better systems. They likely are more profitable and can also decide to continue growth or become a cash-cow.
- although the size of the business can continue to grow, we are talking about such small numbers that do. In Britain, only 0.12% of businesses have more than 250 staff. Realistically, this is not going to happen to you.
We outlined this hierarchy of business size and type to encourage you to think about how far you want to go with your start-up and whether you will be largely in a factory or specialist industry. The discussion above gives you some idea what you might be in for under each scenario.
Option 2: Buy a Going Concern
We have already talked about the risk and uncertainty associated with starting a business from nothing.
There is an alternative that might circumvent many of these problems.
At any point in time, there will be a number of businesses for sale or owners who will potentially sell them if they are approached. As the "Boomer" generation gets older, many of them will be thinking of exiting their business and retiring.
If you could find a business in the industry and location you are attracted to, that is a going concern and buy it, you are taking on your new business but with a great deal more certainty than you have with a complete startup.
You know, for example, how much it is earning, who its clientele is and you can easily find out its problems.
It also has the advantage that it might be in a condition where a bank will fund you whereas banks will rarely fund a startup business. There could be Government Small Business bridging loans and/or guarantees that will fund an existing business but are not available to startups.
This approach is also much faster.
You do not have to do a lot of preliminary planning and research; you simply buy a business, within a couple of months of finding it and doing your due diligence.
If you follow our "Double Your Profit in 100 Days" (DP100) strategy in the Accelerator section of Profit Savvy you will see suggested strategies to turnaround a business that might not be hitting its straps in as little as 100 days.
This means that you very quickly improve your profit over and above what the business was doing when you bought it.
You can then launch into a DP365 growth stage to aim to Redouble Your Profit in the following year.
Your acquired business also has the advantage of having both the founder’s business skills and your fresh set of ideas, so it is often much quicker to restart than a startup.
In many ways, this is a much more attractive opportunity than the highly risky, stressful and potentially expensive Startup of a brand-new business. It is not as "sexy"; but it certainly might be faster and less stressful.
There is an industry called Venture Capital, designed to assist the Startup of new businesses.
Venture Capital refers to money that is contributed by people who are prepared to take a lot of speculation and risk in return for a very high pay off.
Typically, they understand that 60-80% of the companies they invest in will fail to make a very large profit but they hope to make a very large profit from the remaining, successful, businesses.
For that reason, Venture Capitalists are primarily focused on businesses that have the probability of a very large profit in a comparatively short period of time.
Venture Capitalists are far less likely to be interested in funding a so-called "Mum & Dad" type of business because it would never raise enough profit to offset the high risk of their investments.
There is a whole body of practice associated with Venture Capital.
Going down the venture capital route may be more of a live or die experience (with the emphasis on the 'die') than those who use their own money for their start-up. You can read more on the VC perils in "Lost and Founder" mentioned in Resources below.
Very often it starts with "Angel Investors" who take a small share in a large number of businesses to get them started. As the business opportunity progresses and seems to be increasingly viable, it will usually demand more money to be input to take it to the next level. Because of this, there are various additional tiers of Venture Capital who step in at these later stages.
For the Small Business operator, the classic way to get Venture Capital is to take out several credit cards and use that money to get started. In addition, friends and family may tip in.
In more recent times, the concept of "Crowd Funding" is taking hold. An opportunity to start a business is presented to a large audience, some of them will invest (usually) comparatively small amounts of money in the hope that they get something in return. That return might be money or more likely it might be early versions of products that the Crowd Funded business created.
The following books on the concept of Lean Startups are recognised as industry leading:
Ash Maurya: Running Lean
Eric Ries: The Lean Startup
Eric is considered the Godfather of the Lean industry and any books endorsed by him are likely to be of use.
Steve Blank & Bob Dorf: The Startup Owner’s Manual
These authors were some of the early writers who started before the concept of Lean but set the trend in place.
Alistair Croll & Benjamin Yoskovitz: Lean Analytics
This discusses the sort of data and analytics you might use.
Books relating to the purchase of existing businesses:
Walker Deibel: Buy Then Build
A very useful reference.
Video's relating to Lean Startups:
Eric Ries: The Lean Startup / Talks at Google (video link)
Alistair Croll: Growth Tribe: Lean Analytics
Workshop on Lean Analytics & Growth Hacking - Part 1 (video link)
Benjamin Yoskovitz: Lean Analytics (video link)
Co-author, Lean Analytics and VP Product, VarageSale talks about the One Key Metric that matters and how to use data to build a better startup faster.
Books relating to Venture Capital:
There is a huge number of books on this topic. Some idea of their quality can be gained from the 'stars' assigned in Amazon reviews.
One book that is a real-life 'warts and all' dive into the difficulties of venture capital finance from the point of view of the founder is the excellent "Lost and Founder" by Rand Fishkin who founded Moz.com - the well known SEO business. This should be compulsory reading - before getting into using venture capital.