Considerations When Starting a Business - Explained
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What should I Consider When Starting a Business?
Use this article to understand how to use our resources. It will walk you through the early path of becoming an entrepreneur. It shows you the considerations at each stage of business creation and links to the extensive learning material where you will acquire the knowledge you need at each stage of the business venture.
Encountering an Idea
Entrepreneurs enter business by any number of methods. Perhaps most commonly, individuals leave industry and start businesses in areas of familiarity. Some entrepreneurs (particularly serial entrepreneurs) actively generate business ideas in any industry. Others join with other entrepreneurs or with an inventor to create a new venture. In any event, the essence of business regards a value proposition for the customer/client/end user and for the entrepreneur.
The Value Proposition
The essence of business regards mutual value propositions (learn more). You provide value to a customer/client/end user by addressing a hurt, pain, need, or want (learn more). In turn, that activity provides some form of value to you as well. While this concept seems obvious, so many businesses never get off the group because entrepreneurs fail to fully understand or misjudge the nature and strength of the value proposition. The coolest products or services in the world may not be a sufficient value proposition to the recipient(s); while the simplest or most basic of business concepts may do so incredibly well. As you will learn, understanding the value proposition will drive everything you do as an entrepreneur.
Generate a Business Idea
Ideas come about in any number of manners. A business idea does not have to be novel. In fact, most entrepreneurs do not come up with novel concept; rather, they effectively assemble resources around a well known and understood concept. With this in mind, purposely generating ideas is possible through many ideation techniques. The essence of ideation revolves around addressing a value proposition for the customer/client/end user. Innovation is employing these ideas to create novel value. See our Ideation and Innovation library of startup resources.
Team with an Inventor?
Believe it or not, the entrepreneur is rarely the inventor of a product or concept. The entrepreneur's role is generally to assemble resources around a business concept to transmit value to third parties. As such, entrepreneurs often associate with the creator of an inventor to turn it into a business activity (learn more).
Is the business idea feasible?
Many researchers attribute the failure of entrepreneurial ventures to the underlying feasibility of the business concept. Feasibility is based upon whether the idea or concept coincides with the value proposition of the market, the resources of the entrepreneur, the competitiveness of the market, and the objectives of the entrepreneur.
Amount & Type of Value
Success in entrepreneurship will require extensive effort. You will only put in the effort if you are appropriately engaged of motivated. This will only happen if the business produces the desired type and amount of value. To gauge whether a business idea will produce the amount & type of value, you must understand the market, your resources, and other competitive factors. See our Ideation and Innovation library of startup resources.
Size of the Market
Part of determining whether the business will provide the amount and type of value involves learning a great deal about your market. How many customers/clients/end users are in the relevant market. What are they willing to pay? How many will they buy? How may users do you need to generate value? etc. All of these are relevant questions in specific types of industries. All will affect the amount and type of value the entrepreneur reaps from the business activity. See our Market Research library of startup resources for more information on understanding the market.
Your Resource Potential
Do a preliminary (but in-depth) determination of what resources it will take to start and carry out operations. The last year has been a great time to enter the consumer airline industry. Unfortunately, most people do not have the resources to startup and and operate in that space. This example illustrates the importance of assessing the resources required and available to effectuate a business concept. Our Financial Projections and Business Model libraries of startup resources is a good staring point for identifying and allocating your resources.
Lots of things can affect the ability or desire to enter a business field. Perhaps most notably among these are the internal weaknesses, industry competitors, industry trends, the micro-economy, personal risk preference, personal reasons, and any number of other factors. See our Strategy and Competitive Advantage library of startup resources for information on assessing the industry.
How will it make money for you?
The ability of a business idea to make money for the entrepreneur requires an understanding of the value proposition for the customer/client/end user and the business or revenue model to reap the return on delivering that value proposition.
Delivering Value to Others
Understanding the ability of your concept to generate the amount and type of value desired requires an understanding of the extent of the value proposition. Ask yourself some of these questions: What is the hurt, pain, need, want? How bad is it? Does it completely solve the problem or relieve it? How driven is the customer/client/end user to your product? As you will see later, understanding the value proposition ties in closely to understanding the customer, client, or end user. See our Market, Research, and Analysis library of resources.
Value for You
In this stage you are trying to come up with a model for how your business will produce revenue. Traditional, for-profit businesses sold a product or service to customers or clients and non-profits accepted grants and donations. Now companies employ all sorts of strategies to generate revenue. This includes combination products and services, products that serve as loss leaders, and the internet age has ushered in all sorts of business models. To come up with the best revenue model, continue to focus on the value proposition of your business. See our Business Model library of resources.
Who will be your customers
Identifying and understanding one's customers/clients/end users is essential to creating and going a viable business. Everyone has differing degrees to which they are affected or drawn by a value proposition. That is, the hurt/pain/need/want that a business addresses differs in degree between every market participant. Further, the trade off that anyone must undergo to receive that advantage varies among individuals. Addressing who will be your customers requires understanding the markets and, then, identifying what characteristics of the market that make them a suitable target for your business activity.
Understand Your Market(s)
Understanding the market means to understand any number of demographic, psychological, and sociological characteristics of individuals in the market. This will allow for the segmentation of individuals in the market into identifiable groups based upon shared characteristics. These characteristics must result in a shared view toward your business's value proposition. The more you understand, the more adequately you can orient and market your business to meet their value proposition. See our Market Research and Analysis library of startup resources.
Why These Markets
There is some attribute (or multiple attributes) that cause a market segment to value your business activity. Considering the nature of your business and operational realities, the attributes of each market segment will allow the entrepreneur to make the decision of whether to orient and market the business activity to these individuals. Will answer questions, such as: How many in the segment? What is their priority to patronize your business? What will they pay (if at all)? How can you reach them? What will it cost to reach them? etc. The entrepreneur will strategically assess each identifiable market segment to determine which segment will most closely create the amount and type of value desired. Use our Market Research and Analysis and Strategy and Competitive Advantage libraries to develop an argument for when and how to address a given market segment.
How will you address these customers?
Successfully carrying on a business activity requires consideration of how to overcome barriers (e.g., competition) in addressing the pain/hurt/need/want of a particular market segment and how to effectively reach or create awareness (market or generate sales) within that market segment.
Lay Out Your Competitive Strategy?
Businesses cannot be all things to all market segments. You will inevitably choose to serve one or more segments over others. In any segment there will be barriers for your business in serving or gaining awareness of customers/clients/end users. Most notably, competitors and substitute products/services create an enormous barrier that the business must overcome. Competitive strategy is the business' orientation that allows it to compete. For example, the business a luxury, a low-cost, a high-value, or nice market strategy to appeal to third parties. See our Strategy and Competitive Advantage library of startup resources for more information on developing a competitive strategy.
Market to Achieve this Strategy?
How will you want the world to see your business (or specific product/services/concepts)? The answer is what determines your desired business brand. Achieving a certain level of awareness and perception of your business goes much further than simply how you carry out business or how you market to third parties. Entrepreneurs must develop a strategy for marketing their business that creates this desired perception in the mind of third parties. The marketing strategy must meets with the company ability, market demand, and entrepreneurial objectives. Further, the specific actions, tactics, or techniques employed will all need to fit with the greater marketing strategy. See the Marketing Plan library of startup resources to learn more.
What operations are required?"]
Setting up business operations depends entirely on resources. Every business is unique in its use and availability of resources. Start by outlining the step-by-step process for your business to transmit value to third parties. Then develop a plan for who will carry on the activities for the business and the outsiders that will be involved in the operational process.
Step-by-step Business Process
Begin by making a flow chart of how your business will deliver value to third parties. Start at the earliest stage of business activity (e.g., production of raw materials). You will include things such as: production, sales logistics, operational space and location, customer service, etc. Use the business model canvas to organize all of the moving pieces for delivering value to customers. See our Operational Plan and Business Model libraries of startup resources to learn more.
Business Insiders & Outsiders
Use the Business Model Canvas to identify the operational needs and key relationships with third parties necessary to carry out the business. Then use the Building a Team material to plan for bringing on co-owners, employees, and contractors to carry out the necessary steps. Regarding third parties, what outside entities or individuals will be involved in transmitting value. For example, who will supply raw materials? Will there by third-party manufacturing? Will there by third-party sales outlets (outside sales force, wholesalers, retail stores)? Who will ship and deliver goods? Will there by warehousing? Who will facilitate third-party payments (credit cards, letters of credit, etc.)? What location, technology, and utility providers are necessary (real estate, copiers & equipment, internet & phone systems, server & hosting, gas & electricity, etc.). See our Strategy and Competitive Advantage and Business Model libraries of startup resources to learn more. You may also want to review the Startup Law material regarding Contract Law (contracting with employee/contractors) and Business Entities Law (ownership structure, control, and authority).
What setup does every business need?
Every business activity undergoes several basic regulatory and procedural steps to get the business off the ground. Below we introduce some of the common legal and procedural steps to getting the business set up to carry on activity.
The Legal Requirements?
Some of the common legal considerations include: entity selection, early ownership structure, initial contracts, intellectual property rights, employment laws, and consumer protection regulations. Later the business may be concerned with security laws when seeking to raise money from investors. Some of these legal considerations may appear straight forward, but can be quite complicated. We strongly advise that you thoroughly study the legal and regulatory steps that arise at each stage of the business venture. See our Startup Law library of startup resources to learn how to address these issues. See our Startup Law library for in-depth explanations of startup legal issues.
Other Common Setup Needs
Most businesses will need to register with the state; obtain licenses, space to operate, insurance, set up accounting, bank accounts, credit relationships, etc. Visit our Initial Steps library to learn about each of these steps. See our Initial Steps library of resources.
What does it cost to start operations?
Startup costs generally regard the costs to purchase the assets and provide the infrastructure necessary to carry out business. In addition, startup costs will include all of the costs associated with initial business setup. Further, you will need to account for the working capital necessary to fund early operations. To determine the funding necessary to set up and sustain operations, you will need to draw up a budget from the legal setup and operations plan.
The Startup Costs?
To estimate startup costs, begin by working through the operational requirements. You will need to estimate and attribute a cost to bringing about or acquiring that aspect. Next, you will work through the initial setup requirements common to all businesses and attribute a cost to those elements. Finally, you will need to estimate the funds necessary to carry out operations until the business either becomes self-sufficient (i.e., revenue is sufficient to support operations) or until the business acquires equity or debt financing necessary to fund the immediate stage of growth. Together, these costs make up much of what is required to startup the business. Be very liberal in your assessment of costs. Most people dramatically underestimate the costs associated with each of these aspects. See our Accounting and Budgeting library of startup resources to learn more about this process. See our Accounting and Budgeting library of resources to learn more.
Draw Out a Budget
Once you understand what it will cost to set up the business and establish the operations, you will need to project the costs of operation of these assets to produce value. You will go through the operational requirements and attribute operation costs over a specific time period (day, week, month, quarter, year). You will need to allocate funds from your expected revenue or from your capital reserves or from debt or equity funding to meet these costs. See our Accounting and Budgeting library of resources to learn more.
Getting Money to Start Up
Obtaining money to start up a business begins with determining available sources of funding. Then the entrepreneur will have to prepare personally or prepare the business to undertake the steps to secure that funding.
Sources of Financing
Each entrepreneur and business will have varying levels of access to various sources and types of funding. For example, there are personal and commercial loans (secured and unsecured), equity funding, pre-sales, creditor financing, and grants. Start by learning about the types of funding that are available for lifestyle and startup ventures. See our Sources of Financing library of startup resources.
When, Where & How to Finance
Each type or source of funding may or may not be available at each stage of the business venture. It is incredibly important to understand what types of funding are available at each stage of the business venture. For example, early debt from a commercial lender may only be available with extensive collateral and a personal guarantee from the entrepreneur. Obtaining finance can be a difficult and frustrating process. As such, pre-planning for available financing options is highly advisable. See our Funding Sources library of startup resources to learn more about this process. See our Financing and Funding library of startup resources.
What do you expect of your business?
Not every business is bound to be a billion-dollar corporation. Entrepreneurship includes small business (lifestyle business), social enterprise, franchising, and growth-based ventures. Start by focusing on what you expect out of your business. A small business requires unique effort and abilities of the entrepreneur when compared to a growth-based venture. In either event, you will have the difficult task of projecting your business's performance. Whether you are using the projections for planning, obtaining a loan, or obtaining equity investment, you will use the financial projections to tell the future of your business.
Lifestyle vs Growth Venture
The type of business venture intended will change your entire approach to the evaluation, planning, and operations process. It is particularly important to understand the difference between a lifestyle business and a growth-based venture. These are dramatically different businesses, which require remarkably different skills from the entrepreneur. From the perspective of entrepreneurial skill set, it comes down to whether the entrepreneur will work "on the business" or "in the business". Perhaps equally notable, one is susceptible of outside equity investment while the other is not. See our lecture on the difference between a lifestyle and startup venture.
Project Your Growth & Revenue
Regardless of the type of venture, the entrepreneur must draw out financial projections for the business. The projections tell the story of what you expect your business to accomplish in the near future. They can be used for planning purposes and are incredibly important for attracting outside lenders, investors, and donors. Building projections for a new venture can be very speculative, while projections for an operating business has more certainty and credibility. Projections for a new company start with startup costs and demonstrate the projected costs and revenues for a state period of time (usually 2-3 years). Try to use as much detail and evidence as possible to substantiate the projection of revenue. Investors commonly remark that early-stage, business projections are overly optimistic and bear little resemblance to the true revenue potential of the business. Visit our Accounting and Budgeting library of startup resources to learn more.
What if things are not working out?
Business ventures almost never immediately perform to the expectations of entrepreneurs. In fact, approximately 75% of new ventures fail within the first two years of starting up. The top reason for business failure is a lack of sales, followed by funds, and then discrepancies between owners. While appropriate planning can greatly reduce the risk of failure, it is important to understand the contingency options. Start by reviewing the strategic plan and business model to determine the likely cause for poor performance. From there, you can focus on making the necessary improvements to carrying out the business model. If the strategy proves to be unsound or untenable, there may be opportunity to pivot in your strategy and model. Lastly, you will need to plan to exit the business.
Can you Pivot?
Many early ventures fail to gain traction with their product/service/concept. While there may be any number of causes, a common reason is that the business fails to achieve market fit. This means that the business fails to address the value proposition of target customer segments in a manner that effectively drives sales or users. In fact, many of the most well-known, startup corporations began with completely different value propositions, objectives, operations, target markets, etc. To address their shortcomings, these companies pivoted strategically to orient their operations to their current industries. A strategic pivot can change the any number of things about the business, from the value proposition provided (i.e., the specific services and process), the target market segments, the brand positioning, etc. See our Strategy and Competitive Advantage and Business Model libraries of startup resources to learn more about strategic pivots.
Exiting the Business
In some cases, the only viable option for the entrepreneur is to exit the business activity. This can take place in a number of manners. The liquidation of the business is controlled by business entity law, contract law, security interests, and possibly bankruptcy. In some cases, one or more owners may exit the business, while other owners continue on in the venture. In this case, the existence of a Buy-Sell agreement in the corporate governance documents becomes relevant. The process of exiting or liquidating a business is very complicated and can be fraught with legal issues. See our Startup Law library of startup resources to learn more.
Things are going well, so whats next?
Take the Profits and Keep Going
As discussed above and in our lifestyle and startup venture material, the lifestyle business focuses on finding market fit and turning a profit as soon as possible. This is called turning the corner in the business. Once the the business successfully turns this corner, it is likely that the business will be sustainable and provide gainful employment to the entrepreneur into the future.The entrepreneurs in a lifestyle venture may seek growth, but they also depend on distributing profits from the business to support them. The downside of the lifestyle business is that the orientation limits the ability to obtain outside capital financing or to sell the business to a strategic acquirer (large company or equity firm). Equity investors seek growth-based ventures that will eventually sell and strategic acquirers hope to grow by acquiring growing venture. The operational structure, allocation or resources, marketing efforts, and financing options may be different for the lifestyle venture as apposed to the growth-based venture. For example, growth-based ventures rarely show a profit and often incur extensive losses throughout the growth phases of the business. See our Startup Concept & Theory library of resources to learn more about this strategic orientation.
Forget Profits, Lets Grow
Entrepreneurs may decide early in the business venture to pursue a growth-based strategy. It may be that the business activity is only viable if it grows to a massive user or customer base (e.g., think of social media sites or WebMD). Alternatively, it may be that the entrepreneur wants to build a venture and exit, rather than work in the business for the foreseeable future. In any event, the objective of the growth-based startup is to reap a major benefit from the sale or public offering of the business ownership. As such, investors seek to invest in growth-based ventures for the same reason. Often outside investment, combined with revenue from operations, is absolutely necessary to achieve the desired or necessary business growth. The deployment of all available resources to grow the venture generally leads to immediate and extensive losses. The concern is to grow revenue, as the business will ultimately sell at a price derived as a multiple of the revenue produced. See our Finance and Funding Transactions library of startup resources to learn more about investor, growth funding.
How will you grow the business?
Growing a business requires extensive and constant work in developing an appropriate operations, marketing, sales, and finance strategy. It may require new strategies within your current market or exploring new markets. In some cases, it may mean completely changing your revenue model to better take advantage of your value proposition.
New Strategies for Your Market(s)
Marketing strategy is how you orient your products or services to address given markets. Perhaps there are alternative strategies for how you should position your product or service offering or brand to better appeal to the current market. For example, this could mean repositioning your product as a luxury item, rather than a low-cost option or efficiency strategy. See our Strategies and Competitive Advantage library of startup resources to learn more about competitive strategies.
Marketing techniques are methods for implementing the market strategy and making the customer/client/end user aware of your business and its offerings. This may include tradition techniques (signs, radio, commercial, print ads, etc.) or new age methods (SEO, social media, Pay-Per-Click, Direct Sales & CRM technology, etc.). Effective use of these techniques must align with an overall strategy that relies on an understanding of the target market segments. See our Market Research library and Marketing Plan library of startup resources to learn more. See the Marketing Plan library of startup resources to learn more.
Exploring New Markets
Most businesses must focus resources on reaching a primary market segment (target market). In some cases, the product/service/information offering will appeal across multiple segments. This is rare, as the defining characteristic of a segment is their value proposition for the product/service/idea. In any event, there may be a valid business opportunity created by diverting focus and resources from the current market segment to appeal to an alternative market segment. Again, addressing a new market segment must meet within the operational capability of the business and strategic objectives of the entrepreneur. See our Market Research library of startup resources to learn more about identifying market segments.
Don't Build It - Buy It
Some businesses reach a barrier to growth that threatens exists. When strategies are not available to overcome these barriers and alternative market segments do not appear promising, businesses may need to look to alternative revenue models for the original business activity's value proposition. This may include seeking out strategic partnerships or repurposing business assets. For example, businesses that have a solid customer base or valuable intellectual property, may seek to merge with another business. Alternatively, it may be worthwhile to seek to lease or license assets to another business as a method to grow operations. See our Strategies and Competitive Advantage and Business Model libraries to learn more. Further, you may want to review the Startup Law library to learn more about business combinations or use of intellectual property.
What's the cost to grow the business?
Marketing efforts are generally the greatest cost driver for startup ventures. Further, the growth generated from the marketing efforts will create a need for greater operational capacity. This may include new assets, more personnel, etc. Ultimately, growth will require greater resources, which begins with a need for additional capital.
Revisiting the Business Model
Start planning for growth by revisiting the business model. The entrepreneur will account for the additional physical and human resources needed to achieve the desired growth. See our Business Model library to learn more about the components of the business model.
Completing Financial Projections
Financial projections have a number of uses. Most notably, they can help you plan for the future by understanding what resources will be needed. Further, it can be used as a tool to present your businesss expected performance to prospective investors or lenders. As part of the growth process, the financial projections tell about the plans for the businesss future. What are the growth (revenue) targets? What will be the costs? What funding will be necessary to meet these growth projections? See our Accounting and Budgeting library of startup resources to learn more.
How will you pay for the growth?
As previously mentioned, options for financing vary at each stage of the business venture. At some point, personal assets and company revenue will not be sufficient to fund the growth objectives of the startup venture. As such, it becomes necessary to look for commercial lending or equity financing sources.
When, Where & How to Get Money
Businesses entering the rapid-growth phases have exponentially more financing options. Once a business has significant revenue or user-base, these options are generally not tied to the personal wealth or credit of the entrepreneur. The business becomes financial self-sufficient. The growth strategy of the startup venture creates unique issues for the entrepreneur. She likely wishes to retain as much control over the business as possible. Unfortunately, the only manner to acquire resources for scaling out operations (particularly hiring people and undertaking marketing) does not lend itself well to commercial loans. At this point, equity investment may be the only option for the entrepreneur. If the business is showing positive growth and performance, early-state angel investors and venture capitalists may become interested in investing in the business. See our Financing and Funding library of startup resources to learn more about funding options and the equity funding process.
Where do you go from here?
A startup business firmly establish and in growth-mold generally has a few strategic options. Growth typically comes at the expense of incurring extensive loses. The losses are generally absorbed by the equity investors who seek a return on investment through an exit event. This begs the question, what are the options for exiting personally or providing investors the ability to exit the business venture?
Exiting the Business or Sticking Around
Growth-based ventures seek to maximize revenue (or other size-based performance metrics) to achieve a higher valuation at some later exit date. A growing business with some unique competitive advantage is often a target for purchase by larger companies seeking to expand in that market. Other options for exit include selling out to other capital investors (such as a Private Equity firm). Lastly, companies may continue to grow and offer ownership of the business for sale to the public. In this situation, the current owners may exit the business by selling their shares on the market. Alternatively, some entrepreneurs will retain their ownership percentage and maintain their status as corporate directors or executives. See our Exiting the Business library of resources.