Read Time: 8 Minutes
Entrepreneurs are an enthusiastic bunch. For some reason, we get excited at the most outlandish ideas. So when the light bulb goes off and you ask yourself “Why don’t they have _____,” most of the time it’s because creating “____” is a horrible idea fraught with high costs and little chance of profitability.
Before you start spending money to buy YOURBILLIONDOLLARIDEA.com, you should read over this checklist to ensure that you’re positioning yourself with the greatest chance of success.
1. Handle Your Personal Finances
If you spend more than you make, carry credit debt, and don’t save, then you shouldn’t start a business. Huh? Wouldn’t a business generate enough money to help me pay off my debts? The truth is, you will most likely adapt your personal habits to your business. You won’t be able to manage the cash flow of your business and will only end up exacerbating your financial problems. There’s a reason Warren Buffett’s license plate says “Frugal.”
Let’s do a quick exercise. Imagine yourself as a stock analyst and your personal finances as the financial statements of a publicly traded company. You’re analyzing various companies to determine whether or not they’d be good investment. During your analysis, you find that the company in question can’t generate enough income or cut enough costs to be profitable and cash flow positive. In all likelihood, you’d recommend a sell rating. If that same company decided to start up a subsidiary, and you were going to analyze the prospects of the subsidiary company, an honest analysis would have to be skeptical at best given your previous analysis of management.
In short, developing a habit of paying off your credit cards in full every month is the first step to having a financial life. You will be guaranteeing yourself an immediate return of 11% – 24% in credit card interest rate fees. This is a higher rate of return than what you’d be able to make in the stock market or through the first months of a new business. And unlike investments, it’s guaranteed.
Although it can cause narcolepsy, I talk a lot about personal finance because it’s so essential to a successful business. If you want to be rich, and you don’t have a jump shot, then this is the one area of your life that needs to get handled immediately. I have numerous articles on personal finance, as well as links to books and blogs that I’ve found to be useful on my resources page.
2. Be Properly Capitalized
The majority of small businesses fail in their first year. Why is that? The simple answer is because they just don’t start with enough capital and as a result, run into cash flow problems. It won’t matter that you have the best idea in the world if you’re suppliers refuse to ship you inventory. If you want to learn more about why being undercapitalized is such a prevalent cause of failure, I recommend reading The E-Myth Revisited by Michael Gerber.
I put italics on the word “properly” because capitalization is just as much about quality as it is about quantity. You have to be capitalized from the right sources. If you have $10,000 in savings, and your business fails, you’ll have lost $10,000. But if you put $10,000 worth of charges on your credit card and you can’t pay that off within 30 days, except to be losing a lot more than $10,000 when you factor in the 11% – 24% interest rate and the hit to your credit score.
3. Make Sure You Have the Time
While startups have a variety of capital requirements, all startups require a lot of time. If you’re working 15 hours a day at an investment bank, you probably don’t have the mental energy to go home and do more work. If you do, then you’re either lying to yourself or you’re from Mars.
For the 9 – 5 crowd, you can definitely squeeze more hours into the day by changing your habits. This might mean using TiVo, waking up earlier, or batching chores like cooking into one day. (Body builders do that a lot as they try to eat 6 times a day. Imagine cooking 6 times a day! The dishes would kill me.)
4. Make Your Business Scalable
This is one of the main reason I prefer operating e-commerce product sites. If I ran a restaurant, and I wanted to seat more patrons, then there would be a lot of fixed costs to incur. It would take several months expand the floor space. Additionally, I’d have to hire more employees. Eventually, the most successful restaurants won’t be able to get any bigger without a lot of headache.
Even a lot of internet businesses don’t have the potential to be scalable. This is why selling on eBay, tutoring kids, or posting your services on craiglist are not viable in the long term. If you need immediate income, you should definitely look into any of those avenues. However, in the long term you’ll eventually run out of stuff to sell on eBay, run out of time to tutor and if you’re selling a service, have to hire more employees who could potentially take your clients with them.
On the other hand, a product based business is only confined to the size of the market. A startup can go from a hundred buyers to a million buyers very quickly if the market can support the growth rate.
5. Start with a Market, Not a Product
Speaking of markets, this is a simple, but often ignored rule. It seems intuitive, but if it were, nobody would make this common mistake. I first encountered this idea in Tim Ferris’ New York Times best-selling book, The Four Hour Work Week.
Basically, what I mean is that if you’ve developed a great product, for example a bike with three wheels to provide more stability, the product won’t necessarily sell if there’s no market. It’s a lot harder creating a new market than it is to create a product to fill the needs of an existing market. Instead, do your research to see if a market exists, and exactly how saturated it is, before trying to design a product.
You can use Google’s Keyword Tool to quickly estimate the size of a market by the quantity of search terms within that market.
6. Make Sure Your Idea Contains Offense and Is Defensible
By offense, I mean most entrepreneurs without relationships to angel investors and venture capitalists need immediate cash flow. The faster we can be profitable the better, so that we don’t keep eating into our startup capital. Again, most small businesses won’t be graced by angel investors or venture capitalists. The way venture capitalists work is that they try to get a 10x return on their investment in only a few years. Most of the time it won’t happen, but they will only invest in businesses where the potential is there. If you’re business doesn’t have the potential to scale, you will be ignored. Therefore, we need be self-sustainable as fast as possible.
When Warren Buffett invests in companies, he talks about the idea of having a “moat around the castle.” Ideally, you want to create something that can’t be immediately ripped off by imitators while retaining enduring competitive advantages. How do you do this on the internet, when everybody ysteals from everybody else?
The simplest way is to create a brand through compelling content and a superior customer user experience. You’ll build trust. Think about amazon. I could start my own online book company tomorrow but nobody would go to it as long as Amazon exists. A great way to start a brand for yourself is through a blog or an e-book.
7. Perfection is Unattainable, So Don’t Try
Your time is very valuable, and the perfectionist in you will try to waste it the smallest of details. I hated this personality trait in investment bankers and I continue to hate this personality trait in entrepreneurs. For entrepreneurs, I think that it’s a tactic we use to paralyze ourselves into inaction. This way, we put off the thing that we hate doing, even if it needs to be done, until tomorrow.
In most cases, having a solution that does 80 – 90% of what you want is good enough. By definition nothing can be perfect. I can’t tell you how many hours I’ve wasted trying to make one aspect of something perfect, only to realize that what I had before worked just fine, and in some cases better. Seeking perfection will only generate diminishing returns on your time.
8. Give Yourself Room for Error
Once you realize that nothing you do will ever be perfect, you’ll soon realize that everything you do will be imperfect. Trying to mitigate every little error can be just tedious as trying to create perfection on earth. Instead, give yourself room to screw up.
For example, let’s say that your product sells for $30, and that you thought it would cost $15 to acquire a customer via pay per cost advertising. It costs you $5 to manufacture and ship the product. In this simple scenario, you’d make $10 per sale minus a small amount of fixed costs.
But maybe you underestimated the cost of PPC advertising in your niche while overestimating your own click through ratio. After testing, you realize the cost of actually acquiring a customer is $27. This would be a recipe for disaster in a lot of e-commerce sites.
If however, you were both able and willing to mark up your product 10 times to $50, instead of 6 times to $30, then you could still use PPC marketing as a viable form of advertising.
On the other side of the coin, restaurants are notorious for having a slim profit margin. Out of every dollar a customer spends, only 4 cents becomes profit. The rest is eaten up by costs. There are numerous reasons to start a restaurant, such as immediate social value. But I would never start a restaurant to try to make money.
9. Prepare for an Emotional Rollercoaster
You’ll probably be very enthusiastic the first month you start your business. Then you’re energy will inevitably wane as you deal with the day to day tasks. Doubt will creep into your head. Pretty soon, you’ll feel slighted when friends good naturedly ask “how are things?” If you’ve hit a particularly rough patch, you might be tempted to punch your loved ones in the face when they look at you funny.
A day later you’ll have a huge sale, hear from a VC and feel like you’re life’s been saved. Hurrah! The VC will call back the next week and say that he dialed the wrong number. Ugh. But he still loves your idea. Hurrah! Just not enough to invest…
10. Set goals, Follow Them
If you’re not a goal oriented person, you’re going to have to be one. Being your own boss is difficult in many ways, least of which is motivating yourself to do work when you’d rather watch Hulu.
I saw a great Nike ad the other day, it simply had the words “Yesterday you said tomorrow.” This is what happens without goals. Set short, medium, and long term goals. Before I go to bed every night, I make a checklist of what I have to do the next day, in order of importance, so I don’t waste time meandering by on Facebook, Gmail and News sites when I should be doing work.
I also create weekly, monthly, and yearly goes. How do you know when you’re succeeding without goals? More importantly, how do you know when you’re failing?
The easiest way to create goals is to use technology. The founders of Google admit to using Google Calendar instead of secretaries. I use Mint.com to set my personal finance goals and Google Calendar to set my business goals.
Extra Credit:
Make sure your business idea is not one of the following: Funny T-shirt Website (inventory and design issues), a premium version of a free service (hard convincing people to pay), already been done (social networking), no chance for monetization (you need cash flow)
