How can I minimize the risk of loss from a new startup?
I want to start my own business. I know that many new businesses fail. How do I best minimize my risk of loss; both for me and potential investors?
Khan, the mere fact you are asking this question signifies you are going into this with your eyes open. My suggestions are: 1) assess the validity of, necessity for and the potential to sell the product or services you seek to offer, 2) assess your own readiness to start this business- carefully consider the things you have, the things you will need and your ability to fill the gaps and 3) be completely honest with yourself about steps 1 and 2. Once you have done this and have concluded that going ahead is justified and that you are ready to do so prepare your plan as Terry Gray has suggested. There are no guarantees but this is a great place to start. I wish you all the best.
Hi Khan, I talk to a lot of founders as they prepare for investors and the main questions I ask are around who your customer is and what pain point you've solved for them - evidenced by the fact they've paid you money for your solution.
Once you've figured out you have a solution to a problem people will pay to solve, then the next step is to figure out market size, then take a look at the business plan. That then tends to point to what your best funding option is (self funded, borrowing money, finding investors).
Up until you've figured out both of those things, your best bet is to spend as little as possible answering those questions.
You've already received much good advice. But before writing your business plan, start with developing a Business Model. You can Google "Business Model Canvas."
Fill in the various segments with in your assumptions. When it's prepared, test those assumptions in real time, i.e., get real validation (information and feedback) from all those who will buy from, sell to, or otherwise will be involved with your new enterprise.
As you determine what will and will not work, you can revise your business model as necessary until it appears to be feasible and actionable. You risk nothing but your time, but you will gain a valid perspective of all of the parts required to start your business.
There are many risk and potential losses which you must plan for to protect your business, your investors and yourself. A business coach can help with that. However, the best thing you can do before "starting" your business is to create revenue paying clients which demonstrate value. Hi value clients will sometimes pay to support the business start-up you need to receive the product you offer if it is perceived as high impact and ROI for them. If you can't create clients, you probably wont have a business anyway. Best, RAP
Khan, As others have noted, create a business plan. What I consider to be essential for a business plan, at the minimum is:
1. Research your market, target audiences, competitors and collaborators. Also talk to potential clients, utilise your networks and secure recommendations. People 'do' business with people.
2. Work out your USP (unique selling proposition). Why would people come to you rather than someone else?
3. Create a 1,2 and 3 year budget, cash flow and P+L
4. Make sure your agreements with Investors are professionally done by a lawyer you have engaged. (I have seen so many companies/partnerships go wrong because they did not do this step.
5. Make sure you have enough money to run the business for 1-2 years without a profit
6. Accept that you may not be able to pay yourself want you want for 2-3 years--that's one of your investments.
7. Think about and plan for 'what if?' If the business does not reach its revenue targets, profitability in planned timeframes, what will you do, in what order. (Again, I've seen way too many new businesses continue in life support mode for too long. Hope is NOT an action plan.
8. Get 1-2 trusted advisers around you. It's very hard to do this on your own and maintain perspective.
Best of luck.
A lot of people are saying business plan, but I think you can start much earlier than that depending on what your business is. You can do lots of testing, with minimal investment to figure out if the plan will work, that your products are actually needed, and the demand for them is there. For example, if you have products to sell, putting them up on ebay will allow you to test the market - you may not even have to have the product to gauge interest in other cases.
Always Be Testing.
Hire an experienced business coach who has actual entrepreneurial experience running a business for many years - not just their consulting business. There are so many things you don't know you don't know that are traps, sometimes fatal. Nothing ever beats "been there, done that" experience in such a complex area, or art really.
See my program here: http://clevelenterprises.com/coaching.htm and still under construction here: http://ceobizcoach.com/index.php/coaching2/strategic-ceo-coach
As a CEO since 1989 and advisors to CEOs for the last 12 years I can help you avoid hundreds of problems and give quick answers and advice to almost any question.
You've got to have a deep business plan, not a superficial one, one that has a full financial model with all the formulas, projections, costs, and "what-ifs" taken into account. You should have at least one financial scenario where your projected revenues are i.e. 1/3 (there are differing arguments on what this theoretical % should be) less than what you expected and yet you would still be able to stay above water.
The other thing you could do is not go it alone. Try and sign up with an incubator or accelerator program (or at least some kind of support network) where there is not only a group of other entrepreneurs working through this together, more importantly there is a support network of mentors, advisors etc to give you guidance, doing deep dives into your business model, exposing weaknesses and assumptions and ideally turning those into strengths, while also honing your pitch to investors and getting your start-up into a fundable position (this is of course assuming you're looking for investors). At the very least, you will get your business model looked into deeply, and that is the first, crucial step because whether you do this on your own or you decide to go the incubator/accelerator route, - deep dives into your business plan and knowing your financials/spreadsheet inside and out - are things you really neeed to do, NO MATTER WHAT. Other perks with the incubator/accelerator route are marketing and sales strategies, business coaching, social media and storytelling workshops, networking, meeting angel investors etc etc.
However, if you do intend to seek funding, I can't emphasize enough how important it is to practice your pitch to other people (AGAIN AND AGAIN AND AGAIN) and hopefully to real investors but who are simply there to help you hone your pitch at first, because when the time comes to pitch to REAL investors, they are going to attempt to butcher you on stage in front of (hopefully) hundreds of people, and you want to know your business model inside and out and know that it's very solid, having addressed all weaknesses (and turned them somehow into strengths ideally), and competently and confidently handle and overcome all objections thrown at you on stage in the heat of the moment.
After reading your responses, and many of them are great. I would like to add a few other points.
1) It's a business so don't get emotional. Be prepared to make hard choices.
2) With your business plan. Don't set it in concrete. And like concrete keep on going back to it, to make sure that the Business plan is working for you. And not the other way round. This way you are in control and molding it.
3) Keep yourself honest . Call it for what it is. and do it early.
That way you can make smaller adjustments, before they become bigger.
4) Seek professional help, free or otherwise, always check it out, keep what works for you. chuck the rest. But always accept and check it out first. even if it hurts, if its right do it. (not if if feels right. It has to be right.)
5) All business should be based on "risk analyses" This is not saying it should be risk free. But you should be repaired to accept the risk. Running at a loss is an acceptable strategy, in order to gain a advantage, but always running at a loss is not.
It all depends on the risk and how much exposure to that risk you can manage.
6) Always plan for "counter measures" each action has an equal and opposite reaction. If you start having an impact, others will react and maybe plot against you. It's always a good idea to have a countermeasure plan. (that's also part of risk analyses or minimization.
There is much more, in fact you could take a 3 - 5 year full time study on this subject alone.
One last thing I want to add. that is.
Do your homework. Look at your competition. Look at the number 1, 3, and 5 in your market. Track their history, find how the grew, Look at the differences between each company. See how they react and respond to customers.
Then decide what type of company you want to be. I.e do you want to be # 1,3,5, 10.
This then will provide some insight as to how you may look like in x number of years.
Then decide if you want to pay the price it has taken for them to reach that point.
Keeping in mind that they all started with a first step.
Trust yourself that you wont lose. Try to keep things simple. go one step at a time. Rome wasn't built in a day. Manage the timelines and keep a professional attitude with your clients.
Don't burn your capital to go all-in for a product or solution until you've proven (by selling some) that the market wants it. Until then (well, after that too!) the less you spend, the less you have to lose; if you can avoid long-term commitments, you won't be paying for things long after the business has wound down.
I would echo what others have said about the need for a business plan, however, I would emphasize that you know your financials inside and out. While you can kid yourself with flowery language and overly optimistic opinions in most every area of the business plan, financial projections justified by realistic assumptions is your best bet to avoid going down a losing path. Have someone knowledgeable review your projections and assumptions with a critical eye that forces you to completely defend the assumptions you have made.
Firstly make sure that you open up a Limited Company through Companies House, using forms 10 & 12. Open a bank account in the name of the company you choose to use as the trading name and place your £100 deposit as paid up share capital in to it.
At least that protects you shoud anything go wrong with the company. Further, once the company is open, if it is not used you can just file Dormant Accounts and Annual Return. Also, if you own your own home, even if you work from it, make sure that you use a Solicitor or Accountant to Act as your Registererd Address for the purposes of Companies House. If you do not you may find that your residence is at risk.
As Nathan says, you have to be very tight on your outlay and costs, only hire people if you really have to, and keep the administration as lean as possible. With an SME Limited Company there only need be one Director, who can double as Company Secretay. Just keep your annual returns up to date, along with dormant accounts. It also protectes the name of the company which you chose to trade under; i.e. no other person or business can user that company name in advertising or trading.
These are only general outlines, but you do need to research your would be pool of potential clients and other businesses [Competition ] which service that market. You may find that the proposition is not viable if there are too many people trying to play a limited number of users for their services.
Focus on generating sales - first most important action for most situations.
This is to keep you survive.
I am late to this party, so forgive me. I am sure most have already indicated that they need more info to answer it. Business Planning is kind of what I do. You heed to have Specific Goals- and there are 3 that I consider key to success: Relationship Management Goal, RoadMap To Revenue Goal, Customer Success Goal. For Each of these, you need Strategies around how you will do it. Too many businesses just start going out there and "Doing" something without having an overall picture of where they want to go.
Validate your business idea by talking with your Primary Target Audience to get their direct feedback. If the people you intend to sell to tell you they want what your offering and are willing to buy it now you know your risk factor is small. Few people will take the time to validate their business ideas or product selection. They tend to start the business before they ask permission from their potential customers. This lack of validation is one of the primary contributors to start-up failures.
Another primary contributor to new businesses collapsing is that the people who start them really have no understanding of how run or grow a microbusiness. A microbusiness is not a little big business. It can not be run or built using the same strategies or perspectives that are designed for large companies. Microbusinesses are solopreneurs and microenterprises (businesses with from 1 -10 employees) According to Census.gov of the 28 million businesses they track 95% of them are microbusinesses. And, no matter how big a business grows to they all start out as microbusinesses. If you'd like to find out more about how to start, run and grow a microbusiness you might find the information available on the Small Business Learning Center website (SBLC.Biz) of use.
Minimize all fixed overheads. Seek guidance from experienced entrepreneurs.
most important develop a business plan ...Also just as important a mission and vision statement, and learn about cash flow...Forecast revenues high. low realistic and know your cash needs upfront
Incorporate the business to avoid personal financial problems and stay as simple as possible. Low inventory, limited products and no staff. Split profits between new inventory and marketing costs to increase traffic. Take small steps and ,make it to the 2 year mark before you change anything major.