A powerful way to build our local economy is one business at a time. We have lots of homegrown talent here in the Inland Northwest, and it often just needs to get nudged in the right direction. Still, a great idea for a new business is only step one in the process.
With that in mind, I offer a few guidelines based on my experience, which includes not only a handful of success stories, but also a certain number of flame-outs. One disclaimer: If your goal is to create the next Amazon or Google, don't follow my advice. Just like winning the lottery or being struck by lightning, an inordinate amount of pure luck, incredible timing and/or extreme risk-taking are required. My advice ignores the presence of these elements.
To start, let's assume you aspire to generate $25 million in revenues in seven to 10 years. While this may sound tame by venture capital standards, if you delivered this amount you'd be a stand-out success by comparison to most newly formed businesses — just the kind of business we need.
The first question is why are you doing this? Ideally, it's because you have an idea you are incredibly passionate about and have unique insight into. If it's because you're seeking to get rich quick, stop right there. The founders of Microsoft, Starbucks and Nike, for example, had relentless belief in what they were pursuing, yet never dreamed they would become over-the-top wealthy.
Research your idea using independent sources to verify why it's uniquely differentiated and why a growing market for it may exist. Don't ask for feedback from family or friends because they may not be honest about it. I tend to like ideas that have one or more of the following characteristics: (i) can generate revenues while the founders are sleeping; (ii) can be sold through multiple channels of distribution; (iii) can tap worldwide markets; (iv) can initially work through niche markets that can be expanded into adjacent segments; (v) can add value to the customer rather than only reducing costs; and (vi) can trigger recurring sales.
Next on the checklist is your business model. How will you make money? Ideally, you've identified a business that requires low capital expenditures and generates high gross margins. Many successful companies have business models that are not obvious to the consumer. I like those. Classic examples are HP with cheap printers/expensive ink, Costco, which makes most of its income from membership fees, and Value Village by procuring used inventory from charities.
Starting a company is not easy, so it takes teamwork to succeed. Tenacity is required to endure the inevitable ups and downs. Ideally, you have a co-founder who is equally passionate — and whose skill set complements yours. Secure office space, establish consistent hours and establish a positive, creative culture that encourages risk taking, employee empowerment and fun. Perhaps one that reflects "work hard, play hard, don't mix the two, and don't do either half-assed."
Now for the boring part. Prepare projections for three years, on a monthly basis, including an income statement, balance sheet and statement of cash flows. This will force you to think very specifically about your plans, business model and cash requirements. Many entrepreneurs resist this because they claim they cannot predict the future, but generally it is because they don't want to be held accountable or don't understand accounting. Having detailed financial plans are essential to objectively monitoring progress and to making educated pivots.
I further advocate that financial plans be prepared with the goals of at least meeting, and preferably exceeding, forecasts and becoming profitable as soon as possible. These are often very challenging aspirations, as founders tend to have overly robust expectations and prefer focusing on sales rather than profits. Yet not allowing for excuses in missing forecasts and striving for near-term profitability ensures peak performance.
Plan for growth, but spend according to cash flow. You'll likely have limited capital and need to balance aggressive expectations with the reality of your bank account. As you evaluate funding, pursue the cheapest forms first — bank lines of credit, customer advances, grants, etc. If you raise capital from angel or venture investors, strive to do so with the intent you are only going to raise equity once. A second round of equity capital should be raised to fuel even faster, profitable growth rather than to fund ongoing losses.
Don't spend much time developing an exit strategy. Instead, endeavor to become a leader in your market, grow your revenues at a rate faster than the growth of your market and increase your profits annually. If you achieve these, your company will always be an attractive target.
And as always, keep a close eye on your competition. As they say: "Only the paranoid survive."♦
Tom Simpson is an entrepreneur, angel investor and advisor to startups and other businesses in the Spokane region. You can reach him at [email protected].
