It’s been my experience that people start a business either because they have a skill they believe can be monetized (you are a graphic designer so you start a web design studio; you are a carpenter so you open a contracting business) or they want to be self-employed and go searching for a viable niche to fill. New business start-up ideas abound – everyone seems to have one – just be sure yours is viable.
Most small business owners start out with whatever money they have available, plus credit cards, loans and investment from friends and family. If this endeavor fails, you will likely end up with a significant debt, possibly leases and contracts you can’t afford, inventory and other assets you can’t sell for what you have in them. I’ve seen many business owners who have mortgaged their homes, used up their children’s college funds, and even sold their cars to keep a business going. Once you are in business it’s difficult to let go. Do the work before you seriously consider opening a business.
Is there a Market for this Business?
Too many would-be business owners simply jump into the fray based on some gut feeling that, of course, everyone needs a new salon or a different program for marketing to adolescents. Actually, they don’t. You will have to convince them that you are a better option than whatever they are currently using. That is difficult. That is expensive.
Begin your research here, learning what your potential customers are using now and how they feel about it. Use industry research, local area business associations and clubs, talk to other business owners and potential customers. You need to have a clear understanding of who your customer is, what your customer wants, how to reach your customer and how likely they are to buy your product.
What Will it cost for Start-Up
I’ve seen some wild underestimates of the cost of starting and running a business. A frequent error is not understanding how long you may have to support the business before it is able to support itself. Remember, start-up costs occur before any revenue begins so must be supported from other sources of money.
Another error is not understanding what sales need to reach before you can support the enterprise. If you anticipate positive cash flow at $300k in revenue and, but reaching that goal requires a substantial additional investment in people or other assets, you had better understand that before you order the business cards.
How are Your Marketing Skills?
Don’t open a business assuming the customers will materialize. They well may not, or at least not in time to save the business. You must introduce the business to your public and, over time, build confidence in it. That takes marketing and communication skills few possess. So how will you create the kind of “buzz” about your start-up which brings in customers? Work with an expert to build a marketing plan you are able to execute. That marketing plan becomes part of your business plan. Yes, you need a business plan. See How to Prepare For Business Planning, Writing a Small Business Plan, and other articles on planning.
Some businesses are immediately understood in terms of what they offer. People assume they know what a plumbing business or a hardware store is. But other enterprises are in a substantially different space from the norm and require explaining. If your start-up is out of the ordinary, part of your marketing must explain what you do and why people require it in a way those not in the industry can easily grasp.
How are Your Sales Skills?
Never assume you don’t need sales skills – you do. You are not only selling your product or service, those skills will also serve you well in negotiating with suppliers, landlords, and many others.
If sales is not your strong point you need to get some training early on, before you are seeking customers. Not only must you learn how to close a sale, whether it be an apple pie or a contract for consulting, you will need to train your people.
How are Your Management Skills?
Managing a startup is not the same as managing the department you previously headed or the project team you were charged with. In those cases you had a very limited responsibility and, whether you succeeded or not, you and your people got paid. Where a bad decision might have earned you a rebuke, it now could sink you altogether. Think very carefully about whether you have the broad capabilities needed to manage everything: people, money, assets, sales…everything.
Getting The Money
You are going to start in your garage, spend the minimum possible, and pay-as-you-go using whatever money you have. Just remember that you still need to meet those credit card payments every month.
Loans From Friends & Family: What do they want in return other than repayment? Do they feel they have the right to interfere in your business and, if that’s a possibility, how will you cope with it? How forgiving will they be if your business doesn’t succeed? Curb your enthusiasm and consider carefully what may happen if the venture fails to repay the loans. Can they afford to lose the money? Can you afford to lose the friends?
Bank Loans: Unless you have a track record in the specific industry and can show evidence of a strong management background it’s unlikely a bank will make the loan. Even with that experience, you may need collateral. Again, be very cautious about mortgaging the house.
Investment: this seems to be the holy grail for start-ups, apparently because some people see it as free money. It’s not. Your investor will want some combination of equity in the company and a guaranteed pay-back. How comfortable are you with have a partner? What happens if you don’t meet the payback schedule (you may lose your business). How well can you share authority with this partner? Be careful. Find an attorney who is savvy about these kinds of deals.
We have a full article on grants and suggest you read it (Small Business Grants – The Real Truth). Your state may have some granting opportunities and you should check with the appropriate departments. There are very few grants available from the Federal government for very specific areas (e.g. “Clinical Studies of Safety and Effectiveness of Orphan Products Research Project Grant”). All grants are available on line for free. Do not pay one of the many companies who, for a sizeable fee, offers to find you one. You can find your own easily. Go to Grants.gov. The site will lead you through the steps to register including the acquisition of A DUNS number if you don’t have one. It will take a bit of time but it will give you ongoing access to all grants available. For the vast majority of you this will prove to be an interesting way to waste some time.
So you have researched the market for your enterprise and determined that it exists, is large enough, you know how to access it, and are able to close the deal. You have done the work and know you have enough cash to carry you through until the company is viable. Now take a vacation because, once you begin, you are not likely to get another for a long time.