Zero to Something: Where Startups Start
The decision to start a business is daunting. It starts with a eureka moment to solve a problem or invent a need. You gather up enough passion to fill an Olympic-sized pool and off you go!
But after the initial excitement comes the grind.
There are an overwhelming number of factors to consider when starting a business. Know-how, time, resources, scrappy attitude, and working capital, to name just a few.
Limited resources are a huge burden on bootstrap businesses. Meeting your goals requires grit, hard work, long hours, and support. As a young company, one of Digitile’s goals is to share a glimpse into the bootstrap startup world peppered with positive and negative insight. We hope our story will simplify the road for others considering a new venture.
Once the idea takes shape, founders realize their expertise isn’t broad enough to manage every aspect of the business well. You have to consider how to fill the gaps.
FIND THE RIGHT MENTORS
It’s invaluable to pick the brains of trusted advisors with startup experience. Luckily, people love to tell war stories. These can illuminate unconsidered details, unexplored avenues, and unseen landmines. As the business evolves, mentors can serve as a sage sounding board for business decisions and a friendly networking go-between.
Through informal, unguarded conversation with trusted advisors, we learned that, for instance, law firms offer services in exchange for equity. Considering the cost of incorporating the business, researching and applying for trademark protection, and setting up partner agreements, the exchange of legal services for equity gives you a great option to preserve cash.
Also, consider that raising venture capital is extremely time-consuming. The process can take six months to a year before your first yes. This pressure forces founders to shift their focus away from building the business.
Our advisors played a significant role in shaping the future of the product roadmap. Their feedback offered unbiased opinions around user experience with constructive comments to make the solution more powerful and competitive.
EXTRA HANDS IN THE RIGHT PLACES
While you can outsource foundational Legal and Accounting activities, other responsibilities intertwined with core implementation require extra resources.
It can be hard to judge if more personnel should be in-house or outsourced. It depends on the severity of the gap, ongoing vs. one-time activities, the importance of the role in the organization, cost, and willingness to dole out equity.
In Digitile’s case, the founders came to the table with a software idea that solves an industry pain point. But we lack certain skills to bring the product to life. It made sense to give up equity for product development.
But we also hired contractors to complement and supplement our own skills. In Digitile’s case, two of three founders are experienced sales and marketing professionals. Though we have a deep appreciation for the collateral needed to guide prospects through the buying journey, we’re not graphic designers, copywriters or SEO experts. Developing marketing materials that demonstrate a professional, established business, optimize SEO and ensures brand consistency was well worth $18,000 of our precious startup funds.
For reference, you can see our logo, colors, and font here.
KNOW THE TERRAIN
To get a business off the ground, you have to calculate the capital you need to get through the first few years. More often than not, businesses fail because of flawed capital planning.
During the ideation phase, business models are hard to quantify. Somehow, you have to estimate fees associated to start and run the business.
Cost factors to keep in mind include product development, marketing, resources, legal, accounting and operational cost. Before you can identify the best channel to raise capital, there are a few business decisions to consider.
- Identify your long-term business goals. Is the goal to build a high growth startup with an exit plan? Or are you building a lifestyle business? Each requires a different level of capital commitment. High growth companies need significant cash to kickstart development, sales, and marketing. The attitude of a lifestyle business, on the other hand, will yield a patient revenue forecast with less aggressive spending. After an initial infusion of cash, lifestyle businesses tend to reinvest company cash to feed growth.
- A thorough analysis of competitive headwinds. Are you entering a competitive ecosystem or breaking new ground? Each poses a unique challenge. Being a newcomer in a competitive landscape means relying on sales and marketing to generate awareness to steal market share. Breaking new ground requires market education, which means your sales and marketing efforts will be directed at convincing and converting customers. In our next post, Surveying the Battlefield: A Entrepreneur’s Primer we’ll share a copy of the competitive analysis Digitile used.
- Be realistic about the type of product or service you plan to deliver. Does your product or service solve a pain point? Does it save companies’ money, improve employee productivity, or operationalize manual processes? Is it a must-have a solution? Or does the product close a gap on an existing process that’s a nice-to-have? The difference between marketing a must-have and a nice-to-have plays a big role in sales and marketing to drive demand.
MONEY, MONEY, MONEY
Identifying and selecting how to raise cash is almost as important as the business concept that started the process. Armed with your directional business decisions, you’re in a position to develop a comprehensive operating budget. With the completed budget, the next step is to evaluate funding options.
“It’s important to explore various funding sources, says Kristine Ouzts, commercial banking veteran and founder of Echo Lean. Investing your own funds in the new venture shows you are committed to making it successful.
Ouzts says, there are multiple options worth exploring. It’s especially important for new businesses with no track record of revenue or profit. New businesses usually do not meet the necessary criteria banks require from borrowers”.
Your options are:
- Fund the business yourself
- Leverage a small business loan
- Engage VC’s
- Convince friends and family to invest in the business
The ultimate decision comes down to your ability to get a loan and your willingness to pay interest versus surrendering equity. There’s no right or wrong answer. These are individual choices. The right answer may be a combination of options.
Armed with our operating budget, the Digitile team learned we could invest two-thirds of the funds to start the business. We turned to friends and family for the remaining cash. We held majority control of the business and minimized third party risk, which helps us sleep at night.
