The business plan needs to answer some concrete questions. (Image via blog.luz.vc/en/)
Launching a startup can be daunting, but if you break the process down into steps it becomes a much more manageable task.
In a previous article, I shared some thoughts on ideation with the aim of launching a startup. After following that process, you may have a rough business idea, so in this piece I’ll address the next steps: finding adequate resources and building a team.
You will now need to put a business plan together in order to raise funds and identify recruitment needs. It normally covers:
Size of the opportunity
Business model (how you will make money)
Fit of the team for the project
Work done to date and next steps
Monetary and other needs
The goal of the business plan is to answer the following: what are you doing? Is it a huge opportunity? Can the team you are putting together pull it off?
Showcasing the market need and your proposed solution answers the first question.
The second question is about the size of the market you will be going after: how many customers can potentially be interested in your product? Which geographical areas will you be targeting? How much money can you make from this?
Do your market research
The simplest way to assess market size is through reputable research. You can find this online or by accessing business databases.
The second option will require making a best guess using either a top down or a bottom up calculation.
Top down may look as follows: “I will sell a widget everyone can use, and since there are 300,000 people in my area, even if I only manage to land 5 percent of that market I'll make 15,000 sales”.
A bottom up approach is usually preferred by investors, and may consist of: “if I am selling real estate listings to brokers and there are a total of 10,000 real estate brokers in my market, of which 1,000 real estate brokers are sellable, where I can charge them $1,000 per month, then my addressable market is $12 million”.
Then do your business analysis
Other market research buzzwords include: PESTEL, Five Forces, and SWOT.
The PESTEL framework is an analysis of the Political, Economical, Social, Technological, Environmental, and Legal situation in your chosen area. Is there any upcoming legislation that can impact on your business? Are labor costs too high? Are there any political risks that may jeopardize the entire project?
The Five Forces framework aims to analyze competition in an industry in order to decide on the most appropriate business strategy. It answers questions such as: what is the concentration and diversity of competitors? Do they compete based on price or product differentiation? And what threat do new entrants and existing companies pose with regard to introducing similar products or significantly cutting prices?
SWOT is about the Strengths and Weaknesses of your own envisioned company, as well as the Opportunities and Threats it may face.
Moving from a PESTEL, to a Five Forces, and then a SWOT analysis is a structured approach to understand the economic environment, the industry, and the ability of your company to face difficulties and harvest its advantages in order to thrive.
Talking to investors: how badly do you need to raise money?
The business plan will help you engage with investors, and on that front a few things need to be highlighted.
More may not necessarily be better. As Fred Wilson of Union Square Ventures says: “The amount of money that start-ups raise in their Seed and Series A rounds is inversely correlated with success”.
The reality is that excess cash may make entrepreneurs lose focus.
It is critical to make sure every dollar spent is, based on best knowledge, a positive iteration to refine the offering. The ultimate goal is to acquire customers and make a profit, and not just recruit people and open up an office. All efforts should be directed at that prize: get customers, and get enough of them.
Raising too much can also take away from founders’ ownership in the company, with the ultimate pitfall of owning so little in the pie that interest of founders in their venture fades away.
Every fundraising round is based on a certain valuation, which will supposedly go up in time as the company grows and gains market share. Seeking too much investor money early on is therefore a suboptimal strategy.
You must also choose the right investors: you need to look for “smart money”. You shouldn’t only seek a check, but also an individual or organization who can provide you with proper mentorship and advice, as well as offer the right connections to allow you to secure meetings with target customers, other investors and suppliers.
A great leader makes a great business
I discussed recruiting and retaining talent in a previous article, but founders’ abilities to choose those people is also important.
Successful entrepreneurs build a team, and not a followership.
It is very easy to fall into groupthink by pushing away critics in the team, and ending up with tunnel vision. Conflict is not only good it is essential. The goal for managers is to prevent personal conflict while encouraging the discussion of ideas in a structured manner that will harness team members’ diversity and contributions into novel approaches.
Lastly, entrepreneurs should stick to their vision but also be flexible enough to grow based on market conditions, cash flow constraints, and other unforeseen situations.
This includes the ability to let go when necessary. That can be in terms of delegating responsibilities, abandoning a product concept regardless of the efforts that were put there so far, and even closing shop and moving on.