Test Your Idea
Many of us have thought about starting our own business. We have a passion, an expertise, an intuition that our idea might work. And the reality is that, even if you are gainfully employed, rarely is a job secure and someday, you may have no choice but to be self-employed. So why not do something now?
We hesitate to test ideas, for lots of reasons – most of which have to do with lack of resources: money, time, people, materials or the requisite knowledge. And we implicitly adopt an all-or-nothing approach to starting a business – which sets us up for failure.
An alternative methodology is to invest small amounts. For example, what could you do with $500 to assess the viability of your product, service or business model? Set a goal and time frame to test the feasibility and whether it is worth another small investment of whatever resources are needed, to move the idea along – or re-shape it. Don’t be in for a penny and a pound when figuring out if your idea or some version of it might be feasible. Opt for the penny.
Ask Potential Customers
Customer validation is a necessary process before moving ahead on your new venture. Find out if your new idea resonates with your target market or if you even have the right target market. So, you have to get out there and talk to potential customers.
Customer interviews should be planned. Here are some things to think about:
- Be prepared for negative feedback. If you refuse to see the downsides, you risk moving forward with a product that won’t make it; or you may find yourself trying to convince the potential customer of the value of your idea. This is not a sales call; it’s early stage validation.
- Similarly, let people know that it is safe to be honest; that you don’t want to start building something that no one wants or needs.
- Ask about the person’s current behavior in the problem space you are trying to solve. This gives you an idea of what customers are doing now, the competition, and why they may or may not switch to your solution.
- And remember to take notes, either through recording or writing. Details of conversations fade quickly and you want to capture this information.
Establish Founder Agreements
Starting your business with a partner? Allocating equity among founders can be difficult. Splitting equity evenly may be easy, but it is usually NOT the best answer and can lead to problems later, because this method of dividing equity is usually an inequity.
Another common mistake is to assume that the idea person gets the most equity. The “idea” plays a minor role in success; it is about the execution which depends on the value that those, other than the idea person, bring to the table. If other founders have strong relationships with vendors or customers, or expertise in marketing, finance, or information systems, the value they contribute to distributing, selling and managing the product may be worth a lot more than the idea itself.
Consider time commitment. Founders who also hold a full-time job and are getting compensated are not the same as those who have a full-time role at the startup with no compensation.
Finally, those who provide the major funding source typically command a larger portion of equity, although this might not always be the case.
Remember, deciding who gets what is not a question to be dodged, but to be addressed early on.
Set a Pricing Strategy
New ventures want customers and are tempted to price at the low end to attract demand – and then increase prices as they get more business. This is a dangerous approach. Low prices mean you struggle to cover costs. Worst of all, a low price usually signals low quality so your brand is impacted.
Entering an industry at a low price point might ignite a price war. And if there are big players in your industry, chances are you lose. Established companies have the slack to slash prices and still have some margin. Cash-strapped new ventures cannot do the same.
Pricing strategy demands a careful look at the price elasticity in your market. Lower price elasticity is related to a small number of competitors, buyer perception of quality and buying behavior not focused on price. Take into account your costs and profit goals. The unique attributes of your product that are part of your customer value proposition will substantiate a higher price and, hopefully, a larger margin.
Based on the market you are in, selecting a higher price point positions you as better quality and will ensure adequate profitability from the get-go.
Understand Revenue Recognition
It is great when you have sales as a new company – and you need to report the revenue on your income statement. Simple, right?
Although it seems straightforward, a sale is reported during the same period it is made. Maybe not.
When should, as accountants like to say, revenue be recognized? Do you record revenue on your income statement when:
- A contract with a customer is signed?
- When the product or service is delivered?
- When your company sends the invoice?
- When the bill is paid?
Ideally, revenue is recorded when the product or service is delivered. But what if the product includes a maintenance contract? How much of that total purchase is included all at once versus spread over the time of the contract? Technically your company hasn’t delivered all of the purchase. And what if the customer hasn’t paid you yet?
These are examples of the judgment calls that accountants make.
The bottom line is that the bottom line is typically fraught with assumptions, and you need to understand those assumptions as they have implications for your strategies moving forward.
Establish a Routine
The atmosphere of a new venture is typically vibrant and chaotic. Creating the new product or service, acquiring customers, securing funding, finding the right employees – all of these activities and more consume and overwhelm. And the dynamic atmosphere of a startup, the lack of structure, the spontaneity all contribute to the innovativeness and flexibility that epitomizes entrepreneurship.
And while this dynamic atmosphere energizes the company, as the company really starts to grow in terms of sales and employees, there is a need for process. Yes, the dreaded “bureaucracy.” Like it or not, an attribute of success is the streamlining of business processes – the routine of how things are done within a business. Every company has processes, some are overt and some are more informal. The point is that processes and routines increase productivity, reduce costs, and can generate better outcomes. Processes create predictability and that is a good thing as your company grows. It facilitates a way to measure and improve outcomes and can help with planning.
Business needs that stable core – the performance engine – that consistently does what needs to be done to keep the business on track.
Determine If Business Incubators or Accelerators are Right for You
If you are considering an incubator or an accelerator for your company, think carefully. An incubator, generally, is a real estate operation supported by tenants paying rent. The incubator’s top priority is to make sure that the space has enough paying tenants. There may be other benefits such as networking, coaching, and shared resources.
A business accelerator makes equity investments in groups of companies. Like a venture fund, accelerators make money from the management fees they charge investors and earn returns on their investments in the companies. Accelerator companies receive an equity investment. Unlike incubators, accelerator companies are required to participate in programs that usually run from 10 to 12 weeks and provide training, space, funding and networks. At the program end, entrepreneurs make presentations to a significant number of potential investors.
Since accelerators are active and involved investors, consider whether or not the goals of your company are compatible with those of the accelerator, if your company is at the appropriate stage of development, if your team is prepared to operate in a co-working space, and most importantly, if your management team is in a learning mode – that is, ready to embrace intense learning and advice.