Startup Basics

How to Start Your Business

Startup 101

Entrepreneurship Beginner's Guide

Here you'll find some of the basics to starting your own business. Rules of thumb, things to do. Think of this as Basic Business 101.

Sections

Do I have a Product or Business?
Business Vision
Feasibility
The Business Plan
Being Realistic
Financials
Business Type
Finding Investment
Networking
Making the Deal

Do I Have a Product or a Business?

So! You have your idea for a business! Excellent. Now it's time to be honest with yourself. Ask yourself, "Self, do I have a business idea, or a product idea?" Many times, people attempt to start businesses, when in reality they have a product. There are no hard-and-fast rules about this, but there are a few things to consider:

A business is expandable: It can grow and add additional products. For example, a boat dealership could add maintenance, jet skis, or even RV sales.
A business will last. Will your business go away when technology changes? Or can it adapt to changing technologies?
Is your business dependent upon styles or cultural trends?
Can someone else copy your business and do exactly the same thing easily?

These are just a few considerations. If you determine you have a business, not a product, the next step is to determine its feasibility.

Vision

It is important to have a clear vision of what you want your business to be. Knowing whether you want to have a corner store or an empire of industry is an important step to developing your business plan.

Developing a vision statement can be helpful in formulating your business strategy. If your vision is to start the next Amazon, Google or Facebook, you're going to need lots of resources and millions of dollars. Conversely, a chain of gas stations, while still needing lots of money, will need different resources and skills.

Feasibility

There are some critical factors to determine feasibility. First and foremost, can you sell the product or service for more than it costs you to make it? Maybe you can make your product in the basement, one at a time, and make money at it. Maybe you'll need to rent a workshop or office space. Perhaps you'll need to find capital resources and set up a warehouse, factory, or other facility. The question isn't, "Can I make this right this moment and make money?" The question is, "Can I get the resources to make this product profitably?"

The next step in determining feasibility is figuring out if you have the technical knowledge to make your product. If you're going to sell firewood, you'll need to be able to swing an axe. If you're going to offer tax help, you might want to at least take a class in accounting. If you want to sell computer software, you'll need some knowledge of computer programming. Don't worry if you don't personally have the technical knowledge. Again, the question is, "Can I find the expertise to help me make this work?"

One of the most important steps in feasibility is determining if your product has a market. Nothing else matters if you can't find people who will buy your product. Just because you will buy something for $1, $10 or $100 doesn't mean everyone else will. Again, this is a time to be honest with yourself, and to seek the counsel of people you trust. Often, local colleges will have general business, marketing and entrepreneurship programs who would be more than willing to help in the form of a class project. Just remember what the value of "free advice" is.

Another resource for determining your market and market size would be a business intelligence service. Often, a lot of useful information can be found on websites like Hoover's or Mintel Reports. These sites require a subscription for in-depth analysis, but useful information can be found for free in many industries.

A formal written analysis isn't always necessary, but it is often helpful later in writing your business plan.

The Business Plan

The business plan is both your best friend and your worst enemy: It is important to have a well-written, thought-out business plan, but it can consume lots of time that might be better spent building sales. Further, most Angel Investors and Venture Capitalists will not read the whole thing. It's probably a good idea to have a couple of different versions, depending on your audience.

Banks and formal VC firms want a full-fledged, 20 to 30 page business plan, complete with three- to five-year financials, marketing plan, and venture capital proposal. Angel Investors and many VC firms usually want something smaller that they can digest quickly, perhaps 5 to 10 pages or a two-page executive summary. In the 1990s, some Angels would invest based upon an outline sketched on a napkin. Those days are almost gone, but it does occasionally still happen. No matter what, if seeking investment or a loan, your business plan must be memorable, professional and compelling.

The One-Pager

If you're just starting out, the One-Pager (sometimes Two-Pager--front and back) will probably be your best friend. It's easy to carry in a valise and should get your message rapidly in the hands of a VC or Angel. The One-Pager is not meant to be a complete business plan. Rather, it's more of a brochure, designed to get that Angel or VC interested in your business and asking for more information. The One-Pager commonly includes several of the following:

Business Overview
Business Status (if applicable)
Market Strategy
Management Team Profile
Completed Milestones
Financials
Investment Proposal

Remember, it's a "One-Pager." The idea is to get it on one page if you can. Text is often condensed (normal documents are 10pt or 12pt; One-Pagers are often 8pt). The One-Pager is usually formatted into two columns, with your company's name, location and logo in the header. Some quick, relevant visuals like charts and graphs are often helpful here.

The Executive Summary

The Executive Summary is a two- to five-paragraph general description of your business. This is often submitted to business plan competitions (yes, they exist!) so that the reviewing panel can select which full-fledged business plans they want to review. Sometimes these are also used by Angel and VC firms in the same manner. The Executive Summary should provide a basic understanding of what your business will do and why it's a compelling business idea, but will leave out detail about specific milestones, financials, the investment proposal, or the management team.

The Short Plan

The Short Plan is much like the full-sized plan, but with the visuals, specific details and supporting documentation and appendix removed. The Short Plan may be 5 to 10 pages, depending on your writing style, but shorter is often better. It is better to be concise. Put in the most compelling parts of your plan, and leave out the rest. Shorten your management bios to the most critical experience and descriptions of increasing responsibility. You should be able to hand this to your twelve year old neice and she should be able to describe the basics of how your business works.

The Full Business Plan

This is the one you've probably heard or read about, and it is what is most commonly taught in business schools. Business students learn to write these in class, often presenting them to professors or actual VCs as if looking for money. It is usually about 20 pages, longer than that with supporting documentation. There are many configurations, but one that is often used is:

Executive Summary - Same as above. Be concise and descriptive, but professional.
1.0 Business Overview - Describes the foundations of the business. Ownership, brief description of products/services provided, and marketing channels.
2.0 Industry Overview - Describes the basics about the industry you wish to enter, its history, current status, and likely future.
3.0 Competitive Outlook - It is important to understand who your competition is. Identify your competitors, their strengths and weaknesses, and how you can respond to them.
4.0 Target Markets - To whom do you wish to sell your products/services? Can you describe your typical buyer? What are their spending habits? How large is that market?
5.0 Marketing Plan - You know who you want to sell your products and services to, so now how do you reach them? Are you an internet-only business? Do you need to advertise on TV? Go to trade shows? You'll need to know this to be credible.
6.0 Operations - How are you going to deliver? You don't need to be specific about how your product is built, but you'll need to be able to describe how your product or service works.
7.0 Management Team - Who is going to start this business? Are you working with an expert mechanical engineer? Do you have some key advisors or mentors who are helping you? Who will you need to hire once you've started production?
8.0 Financials - This is where you talk about how much you're going to earn, how fast you're going to do it, and the money you seek to make it happen. You can list the full financial data here, but it is better to summarize and have the full financials in the appendix.
9.0 Risk Management/Future Growth - There are always risks in starting any business. What are the most important ones you will face, and how will you deal with them? How do you plan to grow the business after you get your capital? Don't forget to deal with positive risks, like growth being so fast that you'll need more funding just to keep up (as long as that's realistic)! It also frequently contains a "to do" list of some type, explaining how to address the risks.
10.0 Appendix - This is where you list, well, just about anything else. Full financials. News articles about what you will be doing. Milestones achieved are often listed here, if not elsewhere in the plan.

Again, the most important thing here is that the plan be compelling. You want to be memorable without being overly cute (unless your business is to be cute!). You want to show your potential investor/lender that you are informed and have a good idea about where you are going and what you'll need to do to make the business succeed.

One important thing: Do not get caught up in building the Perfect Plan. I have made this mistake, and it has kept me from launching on more than one occasion. It's true that people don't plan to fail, but rather fail to plan. It is also true that people spend so much time planning that they never get off their duff and go build their business! I am a firm believer in the 80% solution: You'll never get it 100% right. Make the most important points as perfect as you can, get the rest 80% satisfactory, and then get up and DO IT!

Finally, remember that your plan is good right up until the moment you ink your deal and/or launch your business. Not that your plan is useless, but situations change and new information becomes available. New challenges and opportunities arise. You need to remember and be faithful to your plan basics, but you need to be flexible when the plan turns out to be imperfect.

Being Realistic

One of the most critical aspects of writing your business plan is to be realistic. If you are opening a restaurant with 20 tables in a town of 10,000 people, it is unlikely you'll be preparing a meal for every single person each week. You'll be facing competition from other restaurants, fast food counters, and home cooked meals, plus you won't be able to fit everyone!

Being realistic means knowing your market. You'll want to scout out competing restaurants. How full are they on given days at given times? It's likely your restaurant will experience similar highs and lows. You'll want to know your industry: How long do people stay at restaurants like yours? Do they eat and leave, or do they sit and chat? This will make a difference in how many people you can serve, and so how much revenue you can generate.

The same goes for starting any kind of business. Starting a kayak rental business in Maine will face different challenges than starting one in Florida. Maine has a long winter and cold seas compared to Florida, shortening the period when kayaks are appropriate and popular, but Florida probably has more competition. Starting a kayaking business in Nevada presents entirely different challenges. A business plan for one will need to be adapted and changed in the other two.

Financials

You don't need to be an accountant to write your financial statements. When we developed the business plan for Green Dragon, we wasted a lot of time and energy writing detailed, perfected financials when we could have used that energy elsewhere. Financials have to be realistic, but they should only be as detailed as you need to show that the business is viable to the business plan's audience. If they are simply to convince your wife to go along, your Financials could be as simple as this:

Fred's Furniture P&L
in Thousands

Year 1

Year 2

Sales

$ 222

$ 398

Cost of Goods

$ 155

$ 286

Gross Profit

$ 67

$ 112

Overhead

$ 37

$ 53

EBIT

$ 30

$ 59

Fred's Furniture Balance Sheet (Year1) in Thousands
Assets		Liabilities
Cash	$ 47	Accts Pay	$ 53
Inventory	$ 53	Debt	$ 35
Accts Rec	$ 17	Liabilities	$ 88
Assets	$ 117
		Equity	$ 29

I'd suggest having a bit more detail if presenting to anyone else. You'll need a statement of cash flows for most Angel/Venture deals. For most businesses, you'll want this to be monthly (that is, every three months) for the first three years, then quarterly for the next two, so you'll have five years of financials. However, until your business is cash-positive (that is, is making more money than it is spending) you'll need monthly statements.

If you're starting a multi-million dollar venture, you'll need to detail what some of those "overhead" costs are and be more specific about taxes. Most business plans estimate tax rates at 30%, 35% or 40%, no matter what, though some will calculate our complex tax structure. Once again, it's all about what is most important to your audience.

Business Type

There are three basic types of businesses: Corporations, partnerships, and sole proprietorships. Partnerships and sole proprietorships can be traditional or Limited Liability (LLP/LLC).

Sole Proprietorship

Sole proprietorships are the simplest and easiest to start. Generally, all that is required is to file for a business license. Sole proprietorships are owned by one person who uses their own money or a personal or bank loan to start the business. Sole proprietorships are easy, but have one major drawback: The owner is personally liable if it declares bankruptcy or gets sued. In other words, if you borrow a great deal of money and the business fails, the bank can take your house!

Partnership

Partnerships are the next simplest type of business. Essentially, two or more people write and sign a partnership contract, file their business license and generally get a Federal Tax-ID number. They use their own money or a bank loan to start the business. Partnerships, like sole proprietorships, leave the owners personally liable for the business' debts, and must come to an agreement on how to close the business if they wish to end their partnership.

Limited Liability - LLC/LLP

Limited Liability is a recent development for sole proprietorships and partnerships. A sole proprietorship becomes an LCC or Limited Liability Corporation, while a partnership becomes and LLP or Limited Liability Partnership. These two terms are essentially the same thing with distinctions varying on a state-by-state basis. This type of business provides some protection for the owner's personal property in the event of a bankruptcy or lawsuit. The protections are limited and fraud or willful negligence committed by the owner(s) essentially eliminate those protections.

Corporations

Corporations are businesses that are owned by one or more people, called shareholders, but the business is a legally separate entity with more protections for the personal property of the owners. Most corporations hire professional managers to operate the busienss instead of the owners running it on a day to day basis. There are two types of coporations, and their difference is largely tax-based: S-Corp and C-Corp.

S-Corporations distribute their profits to the owners in the form of dividends, and this income is taxed based upon the owner's personal income tax rate. This allows an S-Corp to delay taxes early on in its business cycle and use the profits to grow, rather than be taxed on profits each year. Oil exploration companies and pharmaceutical firms are often organized as S-Corporations. C-Corporations are taxed at the corporate tax rate, then distribute their profits to the owners, who are then taxed at the Capital Gains rate. Most public corporations are organized as a C-Corp.

How to Organize

Each advisor you meet will probably have an opinion on what type of business you should start. Your accountant will probably want you to organize as an LLC, and can help you do this. Others may suggest another type of organization. The fact is, it does not matter whether you are a C-Corp, S-Corp or LLC until you are making enough money to pay taxes. All the advice given before you start your business will largely be the personal preference of the advisor. Very few will know how you should organize before you're actually making money.

Finding Investment

One of the biggest struggles for any entrepreneur is finding the resources needed to build the business. In the case of this website, I simply needed $15 and a lot of free time. In the case of Green Dragon Pest Solutions, Jay Mullis (my partner and the primary owner) needed several hundred thousand dollars in three rounds of funding. So the question is, how do you find that capital?

Self Funded

The first and most obvious place to look is in your own pocket, er, bank account. Many businesses are self-funded, at least at the start. Self-funded businesses are often started by people who have just been laid-off and received a severance package, or who were just fired but had some savings. Sometimes a windfall, such as an inheritance or even a small lottery jackpot has provided the funding for a new business. That's not to suggest that you should go out and buy lottery tickets, but self-funding is an option for many entrepreneurs.

Personal Loan

Another place to look might be family or friends who have some money to spare. People frequently borrow money from those close to them to start a new business.

There is also a market for personal loans in the open marketplace. Websites like Prosper and Vigin Money offer a way for individuals to borrow from one another instead of through banks.

Bank Loan

If you can't find money from a personal loan or still need money after that, you may need to get a bank loan. This is another place where your full business plan will be important. Bank loan officers are continually amazed at the number of people who walk through their doors with no plan, no vision, no nothing. At the very least, you should have something the bank loan officer can read right then and there, but it would be better to have your short or full business plan for them to keep and analyze.

An important note about the bank loan: If you are a traditional sole proprietorship or partnership, the bank can easily use legal force to regain its money. Banks are also less forgiving than individuals or family if you fall on hard times.

Angel Investor

Angel investors are people or groups of people who offer money for businesses in exchange for a portion of the business, called an "equity stake." These investments are usually small, between a few thousand dollars and a few hundred thousand. Generally, Angels are more generous, requiring smaller stakes than a full Venture capital fund, though not always.

One of the most important aspects of Angel investing is that they do not invest in businesses, per se. Angels invest in people. If your business idea is sound and the Angel believes you are of good character, you may just earn that investment.

Another important factor with Angels is that they tend to invest in particular "market space." This means that an Angel will choose an industry, such as internet media or transportation, and focus their investments there. Again, this is a general rule, not a hard-and-fast, and some Angels will even invest in unusual places if the idea is compelling enough.

Venture Capital

Venture Capitalists also trade money for an equity stake. They tend to invest in established businesses, but also invest in Angel space when the opportunity is right. Venture Capitalists invest large sums of money, from several hundred thousand to several million dollars. Generally organized into funds, VCs will have certain rules about where and how to invest, and often have limits on the amount of investment they will make. Some will work to find other VC funds to invest more than their rules allow, others break their own rules. Each one is different.

If seeking Venture Capital, you will need your full business plan. Again however, Venture Capitalists invest in ideas and people more than they do in plans. Give them a compelling business concept, a fair equity stake and a person of character, and a VC fund is likely to invest.

Networking

The obvious question here is how to find Angels and VEnture Capitalists? While most Angel and Venture funds have a website that can be found with a quick Google search, it is unlikely that you'll be able to barge down the door. You'll have to find another way to meet potential investors in your business.

The power of networking is virtually unlimited. In the early 1990s, the movie "Six Degrees of Separation" popularized the previously little-known concept that every person on Earth was separated by only six steps. In fact, the likelihood is that you are connected to someone you wish to meet by only three or four steps. Making an introduction could be much easier than you think!

Don't be afaid to utilize any possible method of networking. Perhaps you donate your time to a charity, have a church group or are a member of a sports club. You never know, you kids might play little league together!

Someone once said, "Ninety percent of life is just showing up." Networking events such as business seminars, charity fundraisers, parties and other events where business associates will be are a good start. A great book on the subject would be The Heart of Networking by Ricky Steele. It will introduce you to the techniques and methods of effective networking.

Making the Deal

Details of the Deal

In your plan, you'll want to describe what kind of venture/angel investment deal you wish to make. There are many different ways to value a business. Some of the most common are to use industry standards for a multiple of sales (Price-Revenues Ratio) and multiple of earnings/net income (Price-Earnings Ratio). There are many others, but these two are common and easy to calculate.

It is very unlikely that when you are ready to ink your venture capital deal you will know what your actual sales are. This is where your financial statements come in, plus a little research. You'll want to know the common ratios in your industry. Let's say you want to start a highly targeted website that will attract a few thousand regular viewers. Just for the sake of argument, let's also say that your common multiples are Price-Revenue of 3:1 and Price-Earning of 20:1.

Now, let's say that you have revenues of $300,000 and earnings of $25,000. In your industry, a mature company would be valued at $900,000 on the P-R ratio, and at $500,000 for P-E. Obviously, you'll want to value the business at P-R while a potential investor will want to value it at P-E!

You can negotiate within this framework. If you're asking for a $100,000 investment, you'll probably be offering to give up between 10% and 20% of the company's equity. This is simple division, from a low of 100,000 / (100,000 + 900,000) = .1 to a high of 100,000 / 500,000 = .2. It's far more complex with companies with no revenues, and you'll be working off of your projected financials and intuition. Companies that are using money to expand and grow are given something of a discount for their equity, but again, you have to be realistic.

Inking the Deal

There will probably be a number of caveats you'll have to accept before an Angel or VC will put pen to paper on the contract. You may have to offer seats on your board of directors, agree to stay with the company for a certain period of time after the investment or give the Angel/VC first right of refusal to any additional funding deals. You may only be given a portion of the funding at first, with the rest to follow after meeting certain goals. The VC firm may have rules preventing it from providing the full amount of financing, and will provide only partial funding or join forces with other VC firms or require you to borrow/issue debt.

Once you've gotten funding, your trial isn't over. You will certainly need to get the resources that venture capital was intended to provide! You may know that you'll need additional funding, and so you'll have to be looking for that, but at least now, you're starting and running the business!

It's a good idea at this point to talk to an accountant. You'll have to know the tax implications of your ownership of the company. Almost certainly for corporations, some of your ownership will be in the form of stock options or warrants rather than actual stock. Knowing the tax implications of such ownership will be helpful when you file your taxes the following spring!

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