By Ed McLaughlin and Wyn Lydecker
How much do you need to know before starting up? You may never launch your business if you get caught up trying to answer every single question that pops up. On the other hand, launching your business without answering essential questions can put you on a path to failure. Recognizing this challenge, I have developed a short punch list entitled, Don’t Start Up Until… The items on this list center around your business model but only require “the back of an envelope” to figure out. The following brief video (under 20 seconds) gives you an overview of the essential questions you should answer before starting up:
Don’t Start Up Until…
Coming out of these questions are the bases you need to cover if you want to increase your probability of long-term success. Once you’ve invested the time obtaining the information, answering the questions, and setting your course, you will be armed with the confidence you need to start up.
1. Don’t start up until you know how you’re going to generate revenue (back of the envelope).
- How many customers do you expect?
- How much product will each customer buy?
- How will you price your product (share of value, cost-plus, market pricing)?
- Calculate revenue by estimating monthly sales (customers x units x price)
- Calculate revenue per quarter and revenue per year.
2. Don’t start up until you understand how much it will cost to run your business (back of the envelope).
- How much will it cost to produce your product (manufacturing & distribution)?
- Who will be on your management team, and how much will it cost to compensate them (equity and/or salary)?
- How many employees will you need to start up, and what will it cost to compensate them (salary & medical)?
- Where will you work and how much will it cost (rent per month/year, furniture costs, utilities, & supplies)?
- How will you communicate with your customers and how much will it cost (computers, printers, mobile phones, internet access, website, & hosting)?
- How will you brand the business (business cards, brochures, letterhead, & signage)?
- How much will it cost to sell your product (marketing, travel, & entertainment)?
- How much will it cost for risk management and compliance (legal, accounting, & insurance)?
3. Don’t start up until you know how you’re going to make a profit (back of the envelope).
- Revenue minus the Cost to Run Your Business equals Profit or (Loss)
4. Don’t start up until you have pre-orders to validate your business model and liftoff plans.
- Pre-orders are commitments from customers to buy your product or service once you have launched. These pre-orders can help you forecast revenues and costs.
5. Don’t start up until you have a crystal-clear understanding of the impact of your choice of startup funding on your costs and control.
- Self-funding or bootstrapping will maximize your control and let you avoid answering to outside partners or making interest payments
- Selling equity will avoid interest payments but reduce control by introducing outside partners
- Raising debt financing will let you maintain control by avoiding outside partners but will require interest payments, which can drain cash.
6. Don’t start up until you have lined up the funding you need to reach breakeven (typically 18 months of operating capital).
- Your financial projections will help you know how much runway you need and how much capital is necessary to carry you to breakeven
- Understanding the costs and benefits of the various forms of startup funding will help you find the right source and amount of funding to raise.
Lessons from the Trenches
I completed the financial modeling portion of my planning in my kitchen with my two founding partners. We hashed things out with a flip chart and markers to get comfortable that we had a financial model that would work. It took about two months to figure things out and feel that we were on the right track. I completed the pre-order portion of our planning by meeting in the field with my first two customers. Once we had these orders in hand and a solid financial model, I made the decision to bootstrap. Then we were ready to launch.
We reached profitability in our fourth month of operations and never looked back. I grew my business, USI, into an Inc. 500 company and sold it after 14 years of operation to a Fortune 100 company.
Now it’s your turn to get going and cover the bases necessary to put your new venture on the path to profitability and success!
Ed McLaughlin is currently co-writing the book, The Purpose Is Profit: The Truth about Starting and Building Your Own Business, with Wyn Lydecker and Paul McLaughlin.
Copyright © 2015 by Ed McLaughlin All rights reserved.