Talking to many successful entrepreneurs and investors, here is an overview of what they say is needed to start a successful business. We’ll look at the skills required in a new venture, how to gage whether the idea will work, what resources are needed and… getting started!
A successful venture will require key skills from you and your co-founders. You don’t need to be an expert at everything in a new venture (that’s what your team is for!) but you need to be able to see the whole management picture, and you need to be able to sell your story and take people on your journey. A good accelerator, mentor, advisor or investor will be able to help with many of these.
- Management: People have different definitions about what management really is. The reality is that the management demands on you will be constantly changing as your business changes. So management here is the ability to keep control of your business as it grows, and know what resources and skills you need to achieve that.
- Financial and legal: Setting up the business correctly, and understanding and controlling the finances (especially cash flows) of your business is vital. Note there are 2 types of financial experts: the accountants, eg CPA, helping with cash flow, accounts receivable / payable, tax and other “admin” aspects, and the more strategic financial advisors, eg CFA, helping with fund-raising, M&A, etc. You don’t need to hire both: you can use agencies and other external help, but your CFO is likely to be of the strategic side.
- Marketing: marketing is your go-to-market, ie your commercialisation, so it includes sales and other commercial aspects. This is often a tricky part for tech founders as they don’t know where to start or how much to spend. In any case, you need to understand your customers and know how your product or service meets their needs. Here is a bit more info. It’s about getting your first customers, understanding the cost of acquisition and lifetime value, and build a path to profitability.
- Production and distribution: “production” is usually associated with manufacturing a physical product, but it’s just as important to produce software or a service efficiently. In all cases, the production process is important to the final quality and price of the product or service. Familiarise yourself with agile and lean practices as well as research tools such as the NDS (net disappointed score) to prioritise your development and thrive towards product-market fit.
- Technical or specialist knowledge or expertise: If you have something that few others in the market offer, you are more likely to succeed (sic!), and innovation usually happens in the product (rather than business model, less easy to protect). It is likely one of the co-founders will have the critical knowledge or expertise, which will also reassure investors that the idea is not just a dream.
Great, you now have an overview of the skills you’ll likely need to get started. But before you put too much time, effort and money in your venture, you need to get an idea of whether your idea can work. In a nutshell, ask yourself who will want to buy what you plan to sell?
- Start with you TAM (total addressable market): is there a strong potential of existing demand for your potential product? Are any others selling anything like it? If not, what is the current alternative that you need to improve upon? If yes, how can you be better (cheaper, faster, easier, etc) and protect your advantage?
- Between value creation (what problem your product will solve) and value capture (monetisation), you need to deliver that value, that’s your go-to-market, also called marketing strategy, including your segments, personas if B2B, decision journey, etc. You need to deliver that value profitably (or risk running out of cash), which is why you need to build your budget based on the cost of acquisition and the lifetime value of your customers. That’s a critical part to understand whether your business can scale up profitably and how much to raise from investors, as it’s the foundation of the commercial proof of concept.
- Another critical part of your business model will be pricing. For B2C models, think about alternatives to direct pricing (eg freemium) and try and keep control as much as possible (ie direct to consumers rather than through affiliates). For B2B models, price is only one aspect of the negotiation; there are many things you can negotiate that are of value, including terms, testimonials, etc.
A great plan on paper is just that, a plan. To execute and deliver, you need resources, especially funding.
- Finance: Before you can get your start-up off the ground, you will need to assess your need for funds. Most new businesses have to wait a while before the income from sales starts to come in. You may therefore need cash to pay wages or freelancers / agencies, buy supplies or make investments during the early months. Many people rely on their own savings to start up, as it’s hard to raise cash without any traction (the first few customers that prove to investors there is potential). Once you’ve worked out how much money you need to raise or borrow (by building a cash flow forecast), there are a number of sources that can be approached to help raise the capital you’ll need
a/ boot-strapping: using your own cash and spending as little as possible, either by choice (getting bigger before raising funds) or necessity.
b/ grants and public sector subsidies and assistance: check for all the help you can get!
c/ banks: banks are risk-averse and unlikely to lend you any money unless you can show your business is very low risk (and you have collaterals!)
c/ business angels: often ex-entrepreneurs who successfully exited (sold) their own business, they bring “small” sums (pre-seed and seed rounds), as well as a network and practical advice. They usually invest as part of a group, mainly in businesses they “understand”. They might want to exit at the next round of investment, to lock their gain, or double down if you’re doing exceptionally well!
d/ venture capital (and corporate venture capital): they usually have clear mandates so do your homework to check whether you fit their criteria. There are many templates available on the web to understand what to include in a pitch deck, but most of all they want proof that the market potential is huge and you have a reasonable chance to get there quickly and get big and valuable— in other words, they want a good chance to make a lot of money on their investment! Some will be hands-off (unless they smell trouble and decide they “want to help”, often starting with replacing the CEO ) and some will be hands-on, getting a seat on the board and actively supporting the founding team. They usually invest with a 3–5y horizon, so showing you can scale up quickly is key. There are also lots of term sheet templates available on the web, with SAFE notes being quite popular at the moment.
e/ exit strategies: if you’ve made it so far, you’ve probably raised a few millions along the way, and are looking at selling (and retiring, starting a new venture or becoming an angel yourself!). The main exit routes are IPO (listing on the stock market), but that’s only for a select few. Most likely is your business will be acquired by another one (a trade sale), often under the leadership of the VC and other investors. Another option is a management buy-out, ie you sell your shares to the rest of the team.
- People: employing staff from your first day of trading obviously increases your costs, so consider alternatives. On the one hand, you can outsource; you get more flexibility and fewer legal requirements but still need hard cash. On the other hand, for critical skills you will have no choice but get them as part of your team: think about different packages to align interests, ie ESOP plans (stock options). Employment law is complex and there are many issues you need to consider, including minimum wages and laws on working hours, etc. You will also have to be sure that you do not discriminate on grounds of race, sex, marital status, disability, and other criteria. Other issues to consider when employing staff are the tax implications and the requirement to have the appropriate insurance policies in place. Lastly, for your senior hires, get advice as you’re not an expert in everything, for instance ask your board members to interview them.
- Premises: nowadays with covid it seems simple, just work from home and zoom each other! However you’re still likely to need to meet from time to time, and working from home might not always be possible for you or your staff. Your location needs to be right for your customers, suppliers and staff, as relevant. A common way to start is simply renting some flexible space in an accelerator, this way you also get access to their support structure.
If you don’t know where to start, here is a short guide that will take you from “no idea” to “product-market fit”.
In any case, make sure you have your roadmap of critical milestones thought through, as well as a detailed business model and business plan, that will guide you and be the basis for any pitch deck. It should summarise all we’ve talked about above: your goals, your product or service, your market and competition, your go-to-market and delivery channels, your finances and your team and premises.
Most importantly, get help: some small mistakes can have big implications later, so spending some money on tax advice, legal structure, ESOP, employment law or even how to scale up can save you from a lot of potential trouble later on. Don’t think about it as a cost, but as an investment: what will it cost you if you don’t do it?!
Best of luck