Forget what you’ve heard about building the next big thing. The ‘next twitter’, ‘next youtube’, ‘next' business that doesn’t make money but ends up worth billions.
You might as well go and buy a lottery ticket. We’ve all seen wild success for these companies. It does happen but the odds of your startup being the next big thing built on smoke and mirrors and cashing in on a huge IPO or acquisition is only fractionally better than the dude next door with the tinfoil hat actually achieving cold-fusion in his kiddie pool.
So, that’s the one big thing to ignore. Trying to be the next ‘big thing.’ Now, onto some concrete actions you can take to improve your chance of success.
The Truth About Start-ups
The truth is much more simple. For the 99.9999% of us, we need to build businesses with highly desirable products and services that people are willing to pay for. That’s a start. The next big question is whether they’re willing to pay more for our wares than it costs us to deliver.
Most businesses take years to get off the ground, stabilize and grow so prepare to be in it for the long haul. If you're going to dedicate that much of your life, your attention and your money, make sure you're jumping in with your eyes wide open and keep them open.
The Five Things You NEED to Know
1. Does your startup idea have the potential to make money?
It's amazing how many businesses jump straight from an idea to building or hanging up a shingle and expecting the dollars to start rolling in. Do yourself a huge favour and take a highly realistic look at the potential revenue your business can generate before you even think of going into business.
This isn't the time to rush or gloss over things. Do your research. Talk with prospective customers. Talk with mentors. Get as much information as you can on this single, critical question.
Don’t get discouraged. It can be hard to come up with these numbers but it’s worth the effort.
Record those numbers and make an educated guess at the total amount of revenue you can make monthly and yearly. Also estimate how long it will take to generate and grow that revenue.
Now, create at least two other scenarios. An absolute worst case scenario and a best case scenario. Is your first attempt still realistic? Adjust the numbers of your three scenarios as much as needed until you believe you have created three, REALISTIC scenarios. A best, worst and most likely scenario based on everything you know right now.
2. How much will it cost for you to start and run your company?
Next, you need to establish how much it will cost to start your startup company. Again, this is no time to rush things. It's best to be prepared and try to avoid nasty surprises later.
Do your research and try to uncover all of the expenses that will hit your company as you are established. Create an exhaustive list of every cost that you can predict.
Start with the obvious ones. Where will your business be located? What sort of equipment will you need? What will your payroll costs look like?
Then dig a little deeper. Do you need to incorporate? Register a trademark? Buy a domain name? What about insurance and accounting fees? The list specific to your company could end up being much longer than you expect.
So now you have a list and a total but that's only half the story. Once you're up and running what will it cost every month to stay in business? Some of your costs initially are one-time expenses but many of those costs will repeat every week, month, year etc. Rough out those numbers on a monthly basis so that you can establish your 'burn rate'.
Simply put, when you're not yet profitable, you will 'burn' through a certain amount of money every month that's beyond the revenue you are bringing in (which will likely start at zero and may remain at zero for some time.) When you have a burn rate, you will eventually run out of cash. The time you have, until you run out, is called your runway. That's other critical info to know.
Record these numbers and predict your budget for your first year. It's also useful to stretch those numbers out over a three year period with some estimates for your growth.
For instance, how many staff members do you expect to have in year two and three? What sort of equipment and resources will they need to do their jobs? Of course, these are estimates right now but the numbers are still highly valuable.
Finally, again, it's useful to predict a worst case scenario so that you have an understanding of what could potentially head your way and be better prepared to react to unforeseen issues.
3. Combine your numbers and see where you are headed
There's a reason that I encouraged you to define your revenue potential and your cost of doing business separately. It's essential that your estimates are highly realistic and you don't 'massage' the numbers to make them work.
Join these projections together, step back and take a look. What is the likelihood that your revenue will significantly outpace your expenses? How long will it take for your revenue to put you in the black on a monthly basis? How much money do you need to stay in business until you reach the point of profitability? What happens if things go slower that you expect, cost more or a worst case scenario lands at your feet?
This realistic and detailed financial plan is now an essential part of your business. It's your foundation and your plan explaining how you will become profitable. Your revenue numbers are no longer estimates, they are now sales goals. Your expense plan now serves as a budget.
These are the numbers that you will need to live by. They are also the numbers that you will need if you are trying to attract investment or potential partners. A highly detailed, realistic plan for your budget, revenue and cash flow is simply the prerequisite to convince anyone that you have a chance at success.
4. Your financial plan is a living document that guides your business
If you've accomplished steps 1-3, you now have a realistic financial plan for your startup business. You have laid out your potential revenue and have established sales goals. You have created a budget that deals with your cost of doing business on a monthly basis and you've developed a cash flow plan that combines your revenue and expenses into an overall view of your business.
The most dangerous thing you can do now is sock the plan away in a drawer and carry on with the belief that the numbers will work themselves out. You NEED to keep this plan up to date. The numbers will come in different than you expect. How different is the only question.
You need to revise the numbers and adjust your expectations on a regular basis. Review theses numbers weekly. It may only take a few minutes to take a peek and revise things. Take a more in-depth look on a monthly basis.
5. Separate cash flow from revenue
This is a big one. Companies that have solid revenue, and even profit, die every day.
Imagine you land the biggest customer your startup has ever seen. Their single contract has enough revenue for you to run your business for 6 months. Terrific right? Well, what if you won't get paid until 90 days into the contract and you don't have enough cash, either in your account or coming in, to cover all of your expenses this month, let alone for another 90 days.
Goodbye startup.
Now this might be an extreme case but companies get caught in this sort of cash flow crunch on a routine basis. Simply put, money in a contract is just a promise but you need to pay bills with cash that you have on hand.
Maintaining a living cash flow document is a necessity for every startup. You need to predict and track when cash actually arrives. Checks are deposited, credit card companies deposit into your account, electronic payments are made. However the money comes in, you need to know when it will be available for you to use.
This cash flow plan may simply be built on your financial plan by constantly updating your sales goals with actual sales and both predicting, and tracking when the cash will be available in your account. Or you could keep a separate document from your big picture planning that deals exclusively with your actual cash flow.
That doesn't mean that you will never run into a cash flow crunch, but knowing when a crunch might come with plenty of lead time gives you options. Your bank may be able to help you out, you may be able to work out some sort of loan or maybe find a way to speed up payment. Whatever the case, knowing ahead of time means the ability to react.
The five big things you need to know are all about your money
So, in the end, the five big things are all concrete factors that deal with your money and your plans. Ignore the temptation to dive in head first and pray you make millions. That almost never happens and business doesn't pick favourites. It will cruelly crush you no matter how much you believe in yourself and your startup if the numbers simply don't work out.
Plan your numbers, track them and live by them. They will help you understand your business, set your goals and keep you on track to a profitable and healthy business.
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