10 Things to Be Clear About Before You Start a Company
This post is part of our ReadWriteStart channel, which is dedicated to profiling startups and entrepreneurs. The channel is sponsored by Microsoft BizSpark. To sign up for BizSpark, click here.
This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.
1. Is this your first venture?
2. Are you really an entrepreneur?
3. Does your venture involve something you understand really well?
4. Can your mother understand the value proposition?
5. Can you see the right wave?
6. What does your startup want to be when it grows up?
7. Starting a company is hard and uncertain.
8. Get a partner or fly solo?
9. Would you refuse a well-paying job to do this?
10. Can you raise appropriate financing?
1. Is This Your First Venture?
If you have already created and sold a venture, and you and your investors made lots of money, and you now have another good idea, call one of the investors over for coffee. Tell him or her about the idea, and decide how much of the company you would give them for a couple of million dollars. And skip item #2 below. But you may still find the remaining checklist valuable. Lots of second ventures fail, hubris being the primary culprit.
If your first venture was a failure, it might be worth evaluating honestly whether you want to do it again. Yes, you hear all the inspiring stories of folks who try and try again and fail many times before succeeding. You don't tend to hear the stories of those who try and try again but never succeed.
In other words, are you an entrepreneur? Really.
2. Are You Really an Entrepreneur?
A lot of checklists out there help you think about this. Our next chapter has a checklist about it. But ultimately, it is a gut check. There are two times when you need to be more than usually clear-eyed about this:
- During the late stage of a boom, when it all looks so simple. It is not. If you start at this stage, you may raise money, but the next down cycle will test you severely. Are you really ready for this? Or do you think the boom cycle will last forever? See item #7 on this checklist, "Starting a company is hard and uncertain."
- In hard times when you don't have a job. This forced entrepreneurship is happening right now. It sure beats pounding away at a fruitless job search. And even a failed venture looks better on your resume than a blank space. See item #9 on this checklist, "Would you refuse a well-paying job to do this?" If your honest answer is no, be clear-eyed about this. Treat this period as a learning experience and a resume-filler. You may get lucky and things take off and you get to reject the offer of that job you now want so badly. But don't count on Lady Luck; she is a fickle dame!
3. Does Your Venture Involve Something You Understand Really Well?
Can you answer any question from anybody, without notes? Do other people ask for your opinion on this subject? People talk a lot about passion. Yes, you need to care, but understanding, knowledge, and expertise carry you through the days when your passion is flagging.
4. Can Your Mother Understand the Value Proposition?
No, really. She will certainly want you to succeed, but you don't just want, "Yes, sweetheart, that sounds great. I have total confidence in you." Can she really understand it? Can she explain your venture to her friends? This test will help you avoid the bubble thinking that happens when everybody in one's network thinks that x, y, or z is the latest hot trend. Make sure you don't miss the common-sense, mainstream point of view.
5. Can You See the Right Wave?
A venture needs a wave to succeed. The odds against a startup succeeding are enormous. You need to "find the trend that is your friend," so that you can compete against entrenched incumbents. This may seem to conflict with item #3, which is all about timeless common sense. But the two can co-exist. One example of a trend is the movement from offline to online advertising. But you still have to explain to your mother how you will get attention from your audience at a low enough price and sell advertising inexpensively enough to make a profit.
There are the big monster waves. And there are the smaller waves. The big monsters are obvious: there are very few of them, and everyone is already riding them. Find the smaller waves within the bigger waves.
Can you, in 30 seconds, describe both the big and small wave you are riding?
6. What Does Your Startup Want to Be When It Grows Up?
Do you want a lifestyle business? Or a quick flip that you can sell in two years? Or do you want to build a massive public company and have your picture on the front cover of Fortune? Or perhaps something in between?
Be honest with yourself and be honest with your investors and partners.
Envision what success looks like to you. Are you working four-hour weeks, while your employees or website bring in enough to fund your fun-filled lifestyle? Have you just closed a deal to sell your venture to XYZ MegaCorp for a lot of cash and are thinking, "Thanks, suckers"? Are you the CEO addressing the board of a public company of which you are the largest shareholder, and you are facing existential threats that require tough decisions that, if executed wrong, could ruin everything you have spent a decade or more building... and loving every minute of it?
7. Starting a Company Is Hard and Uncertain
The failure rate for self-financed ventures is 90%. Do you like those odds? Venture-funded companies fail at a rate of 33%. So there is reason to celebrate VC financing. But the odds of getting VC financing are very low for first-time entrepreneurs. So, the odds starting off are really, really bad. Playing roulette in Vegas may be more lucrative.
Of the companies that make it, most have gone through stomach-churning, crazy-stressful times for much, much longer than anybody would think reasonable. Don't believe the cashed-out entrepreneur who makes it sound easy. He or she has simply forgotten!
8. Get a Partner or Fly Solo?
There is no right or wrong answer here. It depends on you and what type of entrepreneur you are. A partnership means 50/50, equal. Not 49/51. Not, "Here is 10% for making x, y, or z happen." Or do you want two partners, splitting the equity three ways?
Including a buy/sell clause in your partnership agreement is a wise precaution. People change. Their needs and motivations change. You might be the one who wants to get out of the partnership and move on. Or you might be the one who buys out your partner. Either should be possible, and the terms should be mutual.
9. Would You Refuse a Well-Paying Job to Do This?
Really? How high would the salary have to be before you say no?
10. Can You Raise Enough Financing?
The failure rate for self-financed ventures is 90% (remember item #7?). You may not need much money. "Enough" is based on what kind of startup you want to be (see item #6).
One last point: do you know at least one investor fairly well who has that kind of money and who invests in your type of venture? Or do you know somebody really, really well who knows one of those investors really, really well? If not, the odds just got a lot worse.
Determination, smarts, and hard work can beat lousy odds. But calculating your odds before you start is smart.
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Awesome Post Bernard!
Thanks for the thoughtful comments. The points on the thinking about what it might be like during a downturn are especially useful.
FWIW, I think that its probably most important for each individual to consider the additional, quite personal questions around one's resilience and persistence, as those are probably the most improtant t consider.
I wrote about this in more depth here: http://bit.ly/PQiPV.
Great article for make people realize that starting off is easy but sustaining is very hard unless you are very clear.
Great read! These questions really provide a sanity check before you dive into the mess of starting your venture.
About partnerships, I learned the hard way: either you all ride in the same boat or you don't. 2 or 3 way equity splits are best for everyone to stay committed and focused.
Another point is to be sure that you can pay your rent without having to jeopardize the integrity of your enterprise.
This is a good list to start with. There are many questions which need answering before starting a business. I cover off 10 of them at my blog, with a series of posts (starting today, actually) explaining how to answer each question in more detail.
Check out http://www.fourthirds.com/10-questions-to-answer-before-starting-a-business/
Great article. Looking forward to more of these posts!
Oh...no no no no.
Most entrepreneurs have failed and they will fail again. Everyone can be an entrepreneur as long as they have the confidence....and this post opens up with two startes that more or less makes people think and think again.
You also take for granted that all start ups need money. Almost every major brand in the world is started with passion, not $$$.
Steve Jobs - Apple, Bill Gates - Microsoft, Ingvar Kamprad IKEA, Stefan Persson HM to mention some of the oldies. I'm sure you've read about Ebay and how that started...
Passion...belief is what you need. What you don't need is people making you feel smaller...
4 more questions:
- How will you market your offering? (Have you any experience in marketing)?
- How will you generate leads? (Customers don't come to you)
- How will you sell? (Any experience in sales?)
- What is your business model? (How to make money?)
We believe these are the most important questions.
No marketing leads to no leads
No leads leads to no sales
No sales leads to no revenue (especially if you have no business model).
No revenue leads to FAIL.
This article is really excellent and I can relate to some of what is being said.
Family and friends are often overlooked when looking for financing but can sometimes be the best sources. Marketing is the key to everything, I have found investors when I was not even looking for one because the word spread in my social circle. Tap it first for money before you go to loan sharks...
As I saw @andyy say on twitter yesterday...
"entrepreneurship is like throwing yourself off a cliff with a sack full of silkworms & hoping they're all over-performers"
Nicely written article; all of this is true for anyone starting but most importantly it is also very true for those who are flying high. For example two companies I have been following that are growing like madman gone wild are www.DragToTop.com and www.Twitter.com. in both cases I don’t believe they have any business model in sight for a very long time and I think growth is the main factor but can they get to that tipping point without burring whatever money they have. What Does Your Startup Want to Be When It Grows Up is the key question for the lucky few who actually start seeing a momentum but what I don’t understand is; how far can you go as a free provider? I have an idea of my own also but so far reading the article above I’m missing about 60% of the suggested items. Thanks again for a great article.
"A partnership means 50/50, equal. Not 49/51."
This is horrible advice. Have you ever actually had a partnership where this is the case? A partnership is a *relationship* - that doesn't automatically mean a simple 50% split in the amount of responsibility each partner has. It never works out that way in real life and part of being in a partnership that actually _works_ is understanding your partner's strengths / weaknesses, figuring out who is the leader, who is the face, who is the business guy, who is the technology guy (if that's the kind of partnership it is) and figuring out what those skills mean in terms of value to the company.
A split clean down the middle makes no sense at all - it's the kind of thing that ends up killing a partnership as resentment builds when one person feels they are more valuable, or complacency sits in because "even if I do bugger all, I still own 50% of this gig".
I also kind of take issue with:
"Can Your Mother Understand the Value Proposition?"
This is probably a good litmus test if your business is consumer internet (i.e. "lets get a billion users and then sell to some big corporation"), but I don't think it's such a big issue for niche businesses. And niche is where there are growth opportunities for the entrepreneurs you're aiming this article at - you said it yourself, look for the small wave within the big wave.
Thanks alot for this info everyone!
Africa needs more tips and advice like this.
Who wants to guest post on http://www.startupafrica.com
Let me know, thanks
In complete agreement with @Jon. Having experienced the pitfalls of the 50/50 split personally, I wouldn't wish that approach on my worst enemy -
Furthermore, the whole "Can Your Mother Understand the Value Proposition?" .. just makes me chuckle.
As an entrepreneur I like to execute 3 strategies at the same time: short term revenues, mid term financing and long term vision.
I have given up to try raising money, since I don't see any value in it if you already make money which secures your mid term financing, which again allows you to execute your long term vision.
Sounds strange?
Yes, but if you live in country where the term Venture Capital is mostly unkown (Austria), real entrepreneurs start getting creative.
The quintessence?
If you wanna be an entrepreneur than stop thinking about how to raise money and start thinking about how to actually make money ;-)
Thanks Bernard for these tough questions.
They really help re-think the mission, and turn into correct direction.
Gr8!!! questions....
We are thinking of, starting freelancing projects. We have all the skills required...
What all tips would you like to give me before i start!!!
Gr8!!! questions....
We are thinking of, taking freelancing projects. We have all the skills required...
What all tips would you like to give me before i start!!!
Thank you for not writing yet another "Now is a GREAT time to start a company!" article. Every time is always a hard time to start a company, because starting a company is hard - for all the reasons you list and more.
Entrepreneurship is rewarding. But so is climbing K2 - and neither are easy or assured.
hi,this post is really good.and i'm wondering if i can translate it into chinese and post it in my blog?
Let's not forget, are you willing to work hard? Late? Sacrifice? Does your wife understand that owning a business means that hours are not always set? This obviously comes from personal experience. My husband tried to take on a partner, his partner had the right work ethic, but his wife had no clue. She was on his case so much about the long hours that it wore on the relationship and they had to sever the partnership.
My husband is better off, but still something to think about.
Nice post, thanks!
Thanks to all who commented. Keep 'em coming. Writing a book with instant feedback chapter by chapter is a pretty exhilarating process!
Johan, passion is essential but not the only thing. And any passionate entrepreneur who is turned off their venture because they see obstacles is not an entrepreneur. Obstacles are for jumping over, not ignoring.
Jon, re 50/50 partnerships, I believe it depends on the entrepreneur and the partner. It is obviously not right for you. Many first time entrepreneurs choose to have a partner because they are too daunted to do it on their own. Usually one partner ends up in charge. Bill Gates and Steve Jobs both had partners. On the next venture, few entrepreneurs feel the need for a partner. My point was not - find a partner. My point was a) have a buy/sell agreement if you do choose to have a partner and b) don't call an employee with some stock a partner, it is dress-up.
On your other point, that "your mother" (aka a generalist who cares about you) cannot understand a niche play. Maybe. Or maybe you need a bit more time to really articulate what you are doing. The process of articulating is what is useful.
Alexander, this series is mostly aimed at high trajectory ventures that will need to raise some money (maybe small). We will explore all funding options, from personal credit cards to VC. The choice is based on the needs of your venture. But you may also want to design your first venture based on your realistic chances of raising money. If your only realistic options are personal credit cards and friends/family, then design a venture that only needs that amount of capital.
Great article. My 1.97 cents:
11. If you fail, would you regret having tried?
You'll only get regret if you're trying something not 'big' enough (or 'challenging', 'interesting', 'cool', whatever is your fuel). So you bet ask yourself at the beginning. YOU have to make it worth the effort and the risk.
Great stuff, I've thought about entrepreneurship a lot, but never asked these questions (Thank God for good paying jobs).
I totally agree with these business start-up tips. Everybody should read it and study deeply. Starting up the business may sound attractive and promising, but it is true that most small businesses fail within one year upon establishment. This is mostly due to the fact zhat entrepreneurship is too easily understood by the majority of the people.
re: item 8 partner = 50/50
William Hewlett had 40% and David Packard had 60%, Packard was clearly the "senior partner" when they started, and yet they built an enduring partnership and a company that has acted as a model for many to come after. I find your answer somewhat dogmatic and perhaps a recipe for deadlock in the early stages of a startup.
This checklist concentrates too much on financing and not enough on customer and market (I cannot determine if item 5 is about customer demand: it's phrased more as a trend analysis). Raising money is not an accomplishment: it just means you have a high paying job working for one or more VC's for a few years. Finding paying customers you can satisfy at a profit is the key to survival.
I think these are all good points. But even if you answer to maybe to some of the questions you should still try. As great Wayne Gretsky said: "You miss 100% of shots you don't take". If you don't try you already failed.
Gene and Emmanuel, totally agree. Not being afraid to try and not being afraid to fail is essential, I should have emphasized that more. This Jordan Nike ad sums it all up:
http://www.youtube.com/watch?v=45mMioJ5szc
Sean Murphy, you are right, I was being too dogmatic on forms of partnership, there is a lot of choice here. Methinks it may warrant a chapter/post all to itself.
Re funding, all I am saying is raise appropriate funding. That might be $150k to incorporate a company. Or it might be $15k for some basic costs to build a site. Or $150k or $1.5m or $15m. I stop there. I cannot envision $150m for a startup.
Bernard: What is the source of the stats you site on the failure rate of self-financed start ups (i.e., = 90%)? Thank you.
These are great questions to ask. I'm mentally answering all of them and figured I had a lot to think about. Thanks for the post!
I am of the opinion that if you have to do some soul searching to find out whether you're an entrepreneur, then you're not. You don't need checklists to see if you have passion.
As for the partnerships, the best take ever is Seth Godin's Advice on Equity: "Today, right now, your contribution is worth 5% of the company and my creation of the company is worth 5%. The other 90% is based on what each of us does over the next 18 months. Here's a list of what has to get done, and what we agree it's worth..."
http://sethgodin.typepad.com/seths_blog/2009/03/advice-on-equity.html
Great post Bernard, clearly comes from the heart :)
@Sean Murphy
Hewlett and Packard had already their first customer(s): The government (defense) or companies working for the government (defense research).
The Secret History of Silicon Valley:
http://www.youtube.com/watch?v=hFSPHfZQpIQ
Elliot (# 28), I found this in the Slideshare from Elliott Dahan - see notes on page 3
http://www.slideshare.net/ElliottDahan/start-fund-feb2009
Paul Gompers and Josh Lerner are noted academics in this field so I trust the source, though tbh I would love to find the time to really dig into the data a bit more. I am sure, like all statistics, it is open to debate and interpretation.
@Bernard & Elliot -- I think your statistics are misleading, if not incorrect. I accept your statement that you're not 100% sure of them, but I wanted to add some additional stats which ARE backed with real data.
First, your statement that only 33% of funded companies fail is certainly untrue. I would challenge you to find a VC shop with more than 10 companies in the portfolio who have a 67% success rate!
No, the rule of VC is to run all the companies up as fast and big as possible, and the successes more than make for the failures. And most are failures.
Yes, a company that gets $40m pumped in over 6 years and then finally fails is a failure; it's a failure the whole time.
Small business owners traditionally love what they do and would do it again (regardless of financial success or failure). See for example the 2006 Gallup poll: http://www.gallup.com/poll/24103/Most-Small-Business-Owners-Feel-Successful.aspx
More to the point of financial success, note that in that study business owners report 4-to-1 that they make more money per hour than working for another company in the same field.
The number of small businesses has grown steadily and linearly since 1990, even in the face of economic ups and downs. See for yourself in US Census Statistical Abstract 2008 Table 0737 (http://infochimps.org/dataset/statab2008_0737_EmployerFirmsEstablishmentsEmployme). It's hard to understand how this could be with a 90% failure rate.
thanks your comments very good
zirvesesli.com
I'm more in line with Johann (#6), Jon (#11), and Dmitri (#30) about this, in that I'm more apt to disagree with this advice that you're giving --- though I understand the good intentions behind it.
However, if you were to provide more background on your personal entrepreneurial experience, then maybe we would all have a frame of reference to put you in because no two entrepreneurial ventures are the same.
Oftentimes, my mother probably shouldn't understand my value proposition --- unless she's part of my target market. Otherwise that means what I'm offering is probably far too common.
My advice to entrepreneurs before starting: "Don't wait for the 'perfect time' just do it if you have the passion. Action is the only thing that bears results. Failure is necessary to help you achieve success quicker."
If one sits around and evaluates themselves against a list of 10 things, it will just be an excuse mechanism of why one shouldn't start.
Great article for make people realize that starting off is easy. All of this is true for anyone starting but most importantly it is also very true for those who are flying high. I have no idea about business, but I realize it is helpful to us.
Thanks again for great article.
These 10 points are very true, and I'd include that it's vital to do it for the passion of it, not the money.
Additionally I think it's better to be honest with people who inform you they're doing a startup, about how hard it is. Especially if they're not the type for it.
-- Rick
Great points..
I did try to go full time once as an entrepreneur, but it failed for two major reasons I mis calculated the business potential. I wasnt able to expain and convince my wife forget about my mom.
Although I quit my high paying job, my family didnt want me to get into business. So I had to make a U turn to come back home again.
Now, I am working for someone who hands me my monthly paycheck. My family is happy..well I am still employed.
Started this venture, but now running it in freelancing/parttime mode.
http://www.dealzone.in
Thanks alot for this info everyone!
yes.. Passed the exam. It was good to review my motivations though.. especially during these times.
thanks for articles
To assist those who are thinking about starting up their own business, I thought I would lend a few helpful hints for the "small business" sector.
Being an SBA 7(a) loan expert, via research for an online portal with a start-up that innovated an automated, online SBA application and calculation software that could disect your chances for SBA qualification, I can tell you that the hardcopy process is timely and could become very costly. However, taking advantage of the SBA could, most certainly, save you time, money and possible rejection.
If you are short of funds, as most start-up's are, the SBA is a great way to get started. Not only do they offer the chance to get the funds you'll need to get started, they also offer vital informational marterials that will give you a viable avenue that could save you from dealing with a bank.
A little known secret about small business loans: Let's say your dream has always been to own a sea-side hotel (just an example) if the bank that you choose to request funding for that particular venue and they do not have a hotel loan expert within their organization, they are held by law to not proceed with your application and you will be rejected. In addition, the bank is not obligated to disclose this information with you. What they do is place a rejection stamp on your application without explanation.
Ultimately what this means is, when you take your application to the next banking institution, all they will see is "Rejected" and assume you were disqualified due to the lack one or more of the god's of the loan process(known as the Five C's - Credit, Cash, character, Collateral & Capital!)
Whatever industry you are seeking to begin and decide to go to your local banking institution, ask if they have an expert in type of business you wish to start up.
If you decide not to try the SBA (Small Business Administration) route, you can still take advantage of many of the free services they provide, such as business plan examples; something you will most definitely need to present when applying for a loan.
I hope this little tid-bit will assist you with the loan process and may all of your endeavors be successful!!!
great article
ya any venture should definately be looked at very carefully, i've seen too many people fail because of lack of research
Great article. But one thing that is missing . If you don,t believe in what your doing,don,t have passion, desire to succeed, confidence in yourself. You won,t make it. I don,t care if you have the funding of 40 VC players. You must believe in yourself first. 89% of every sale is you. Confidence in yourself radiates out to other people. Then again, a long time ago , people bought Petrocks. Give me a break. That,s what,s so great about America. You can sell anything to anybody if you convince them, you have the next Petrock. Look at Twitter, live text messaging ? Seen by everybody ?
Great post, Bernard (and good meeting you at Web 3.0). Tweeting this and I blogged about it on my blog To Revenue: http://www.torevenue.com/2009/06/are-you-into-growth-or-lifestyle-building-on-great-rww-post/
I especially like the point about lifestyle businesses, as I've met more than my share of tech entrepreneurs who think they want to raise money because of the validation, but end up not making the move even with term sheets in front of them, and waste everybody's time...
Greg Boutin
http://www.growthroute.com/
Good stuff here. It's not easy, and it's not for everyone. If you don't have anything slightly original, don't waste your time. Keep your job. Set yourself apart from the pack, and you might be on to something.
If you try to swim upstream, you won't be able to fight the current. And if you do decide to get in the river, you better have a really cool looking skiff, or at least a really hot chick (godaddy anyone?) sitting in the boat so you can blow past the competition, while they oogle at your skiffmate.
For you who are willing focus and be the best, you will make it...after lots of hard, hard work. Go get it!
Do you have the passion. Is this something you simply can't not do?
I answered yes to most of these! Thanks for the interesting post. Value proposition is really important in a recession - and I think the everyone sees the wave as a big 'ebb' right now.
Hard work, passion, and professional virtual assistants!
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