After launching five startups, including a software business acquired by IBM in 2003 and a company that went public in 1995—later acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003—I have had a good startup success rate.
However, not all of my ventures have been so successful which allows me to be candid and knowledgeable about the highs and lows of being an entrepreneur. Here are seven things you may not know, steps required to successfully start and run a business:
Do your homework (the right way).
If you try to learn everything about your industry and a market before you start your company, you will never launch it. Instead, study the most important aspects of the market and your competitors.
Start with a checklist. John Mullins, the author of The New Business Road Test: What Entrepreneurs and Executives Should Do Before Launching a Lean Start-Up, offers a great resource to help build that list. But concentrate on showstoppers (i.e., reasons why you, perhaps, should not start the company).
State your business idea and set of assumptions.
Since you cannot possibly know everything about an industry and your market, record all of the assumptions you are making about your business. What products will you sell? At what price? How large is your market? How many will you sell each year? How much will it cost you to purchase and/or manufacture the product? How many employees will you eventually need? How much will you pay them, and so on?
There are dozens of assumptions that an entrepreneur must make. The reasons why you’ll want to record your assumptions are:
a) It forces you to think through every aspect of your business idea. You don’t want to be 6 months into a business and say “Oh, I wish I had thought of that earlier!”;
b) Numeric assumptions can drive the creation of all your pro forma financial statements, which you will need anyway;
c) You can assign a red flag to each assumption that is not yet confirmed. Remove flags as assumptions are confirmed.
Assumptions that are critical to success, and still have red flags, become targets for experimentation. Build and deploy prototypes, run focus groups, do anything it takes to find out—as early as possible—if your assumptions are true or not.
Determine if your business idea is financially sound.
Pro forma financial statements enable you (and others) to easily assess the expected financial health of a company. As a result, they are extremely useful in assessing the likely outcome, if all your assumptions prove to be true.
So, the next step is to transform your assumptions into financial statements and confirm that the company makes financial sense. Some of the checks you want to perform are: When is it profitable? How much cash does it need to get started? Can it grow fast enough? When will we breakeven? How much of a return will investors make (if you’re raising capital)?
Refine your assumptions.
If the financial statements fail any of your checks, you need to decide how critical the failure actually is. For each failed assumption, you can change it. You may even find good reasons to ignore the assumed problem. If so, make sure you fully understand the rationale and can articulate it because investors and other stakeholders will ask you about it.
Launch and run the business.
As you start to run a business, you will discover that some assumptions you made during the planning stage will prove to be false and you will need to make adjustments. If you are smart, you will actually run a myriad of experiments with customers to explicitly prove or refute the most crucial assumptions.
Change assumptions and prove if your idea is still financially sound.
Whenever you determine that a stated assumption is no longer valid, change that assumption based on what you just learned. Next, check that the company is still on solid financial ground using the same techniques you used in step 3. If so, continue on the current path.
Pivot when necessary.
If not, revise other assumptions to compensate for the new reality. Verify that this makes financial sense using the techniques you used in step 3, and then manage your company in the new direction, as defined by the new assumptions. This is called a pivot.
The odds of success for a startup are very low. Improve your chances by diligently planning and being ready to adapt when new information emerges. These seven steps will help you balance both.
This article has been edited and condensed.
Dr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is the co-founder and CEO of Offtoa, Inc., an Internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Dr. Davis has also founded or co-founded five other startups, including a software business acquired by IBM in 2003 and a company that went public in 1995, later acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. Not all of his ventures have been so successful which allows him to be candid and knowledgeable about the highs and lows of being an entrepreneur. Connect with @Offtoa on Twitter.
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