[The following is an edited excerpt from David S Rose’s book The Startup Checklist: 25 Steps to a Scalable, High-Growth Business.]
Because you are undoubtedly raring to go out and change the world, I’m going to start by providing you with a crash checklist in “starting smart,” so that you can avoid the biggest, most bone-headed errors made by many bright-eyed and enthusiastic first-time founders. I’ll give you a quick overview of each of the steps that will take you from an idea to an exit, and then point you to the full book for all the details, as well as the appropriate tools that Gust has to offer you.
1. Educate yourself.
Just as you wouldn’t start on a trek to the North Pole without reading at least Arctic Exploration for Couch Potatoes, so should you start your entrepreneurial journey by at least getting oriented to the basics. If you’re typical of most hyperactive entrepreneurs, you are already off getting your parka and snow shoes. But if you can eke out just a bit more patience, there are a few books that have become known as classics for a reason. They deal with everything from “what is entrepreneurship?” to “how can I start cheaply?” and “how do I turn an idea into a company?”
Therefore, after you finish The Startup Checklist, the next thing I’d suggest you do is take the time to read at least a few of the other basic books on the whole “starting a company” thing. While my book deals with the hands-on, practical aspects of starting up, there are several others that will provide invaluable context, advice, and theory, as well as detailed help with specific challenges many entrepreneurs face. I realize that the thought of reading even one book, let alone more, may sound boring or painful, or like a big waste of time. But when you stack the task up against the vital future of your entire enterprise, it begins to look like the best deal in town. I’ve prepared a Startup Reading List of classics that are full of mission critical information that I can’t hope to cover in a single book, let alone one blog post. Read them.
2. Define your business concept.
A business is created in order to execute on an idea. Not having a clear picture of that idea is virtually guaranteed to result in an extraordinary amount of wheel spinning. While you will spend the rest of your business career refining your idea, there must be something at the core, or you’ll have nothing to refine. In particular, it is crucial at the very beginning to distinguish the business concept from the product concept. It is all well and good to come up with an idea for a cool new widget or app or website, but much more important is to understand what value the product brings to which customer, and therefore understand who will be willing to ultimately pay you for your work in developing it. At this point, you don’t need a full-fledged business plan, but you do need the ability to be able to clearly explain what you’re doing, and why—and that’s your business concept. One tool that many people have found helpful in sketching out their concept is the Business Model Canvas.
3. Perform a reality check.
I am constantly surprised by the number of enthusiastic entrepreneurs who approach me with bold new ideas for online platforms for angel funding…when they’ve never made or received an angel investment, started a company, or have any idea whatsoever about the industry. All I can do is shake my head in wonder.
With your concept sketched out, I strongly suggest you invest the time to get some pre-feedback. Take your nascent idea around and talk to several domain experts in your field to see what they think about it. Don’t worry, they’re not going to steal your idea (really, they won’t!). What they will do, however, is to give you the beginning of a reality check to see if your idea makes any kind of sense to people who know the industry you’re preparing to enter. Whatever they tell you shouldn’t necessarily be dispositive (because it is true that sometimes it takes a fresh creative look from outside an industry to make a conceptual leap), but it should absolutely be taken into consideration…and not just given lip service. It is far, far better to find out before you start that your idea has already been tried multiple times with no success than it is to find out after you’ve spent two years of your life trying fruitlessly to smash a round peg into a square hole.
4. Analyze the strategic landscape.
Once you’ve identified the competition, you want to keep an eye on them—not as an obsession, but so you can be up-to-date on what they are doing.
With an idea in hand that seems promising, take a look around to see who else is working on the same thing. That’s because—as much as I hate to spoil the surprise—someone else is. Consider this: On the Gust online platform for the early stage industry, as of this writing, there are over 1,250,000 companies who have created their startup profiles. Do you believe that there are 1,250,000 different business types in the world? Hint: No, there are not. How about 125,000? Nope, not that either. 12,500? Nope again. 1,250? Maybe, but I don’t think so. 125? Maybe there are a few more than that, but at least we’re now in the ballpark. So what does this mean to you? It means that, right at this moment, as you are about to start pouring your soul into a new venture, there are somewhere between 100 and 1,000 other founders doing the same (or similar) things!
That said, just because there are competitors is no reason that they will succeed and you will not. Counterintuitively, experience has shown that a business arena with no competitors is often considerably more difficult to conquer than one in which a few other people have already paved the way for you (a lesson I painfully learned in the mid-1990s when I had a brilliant, breakthrough product for which we could never actually find a market). But it is important that you are aware of what the field looks like, so that you won’t be unhappily surprised down the road.
5. Develop your first plan.
Assuming the feedback you’re getting indicates that you may be on the right track, now is the time to start organizing your business concept into a more detailed roadmap for your venture. While it was helpful creating a visual business model using the Business Model Canvas, it’s now time to discuss how to prepare and use a lean written business plan. Whichever one you choose (or both), doing this exercise up front will give you the framework for everything that you will be doing down the road. It provides the context that will let you assess each new opportunity, product, option, and even employee in light of where you are trying to go and how you plan to get there. Equally important, although most investors these days don’t read business plans, they do always ask detailed questions of you…questions that you can answer only if you have already carefully thought through your business to the level of detail required to do a plan in the first place. For writing a lean business plan, a great introduction is Tim Berry’s free site at leanplan.com, the online tool from the experts behind Business Plan Pro.
6. Get feedback on your plan.
“Mentor” is a very special term that has been corrupted by overuse. Most people will be extraordinarily lucky if they find one or two real mentors during their entire careers. Realistically, what you want to find are advisors who will help steer you onto the right track.
When you’ve got something you believe in, run it by a few mentors or advisors in the early stage field. In contrast to the previous set of feedback (which was in the context of the domain), this set will give you a reality check on the idea as a business. All too often, I meet entrepreneurs who are in love with a product, or a slogan, or even an industry, but who have never really considered their business from the perspective of a long-term, operating venture.
Part of the challenge of getting valuable feedback in the startup world is that those whose advice would provide the most value are often those with the least time to provide it. In contrast, there are many well-intentioned people happy to provide you with advice that can be useless at best, and harmful at worst. Rather than trying to cold-call famous people and ask for advice, your best bet is to take advantage of the many programs that have done the work for you and already lined up advisors who have offered to provide feedback to startups. These include entrepreneurship professors, accelerator mentors, successful serial entrepreneurs judging pitch events, angel investor group screening sessions, VCs who hold office hours, etc. As they have allocated the time for precisely this purpose, make the best use of it by presenting your plan concisely, and then listening closely to their comments.
7. Dip your toe into the water by testing the market.
Assuming that all signals are still “go,” at this point you know that you’ve at least got a plausible shot at a venture. Now it’s time for your initial market testing. Following the lean methodology and the process of customer development, the goal here is to see if any of your potential users might really be willing to pay for what you want to sell. If your landing page, crowdfunding campaign, or other market test comes back positive, you’re good to go. (On the other hand, if, at any of the above stages, reality or sage advice suggests you’re off target, reformulate the concept or pivot the business model, and try again.)
8. Incorporate as a Delaware C corporation.
Everything you have done so far can (and probably should) take place before there is an actual business in existence. But as soon as you are ready to bring on partners, hire employees, develop intellectual property, raise capital, or generate revenues—in short, anything that creates or shares value of any kind—you need to establish an entity to be the owner of that value. In the book I discuss the various types of possible business structures, including sole proprietorships, partnership, LLCs, and corporations.
In the real world, however, there is only one serious option. If you plan to do anything involving employee or advisor options, venture capital, or serious angel funding, you need to be established as a C corporation so that ownership of the business is divided into shares of stock. And while the corporation can theoretically be formed in any state in the US, for a number of practical and economic reasons, it almost always makes sense to set up the “official” home of your company in the state of Delaware.
On one level, incorporating a new entity can be cheap and easy: Read the state’s instructions, spend a couple of hours of do-it-yourself time and $89, and you’re all set. Alternatively, there are a number of online services that cater to small businesses that will do much of the work for you for a few hundred dollars more. But that is where danger lies. It’s one thing to incorporate a simple, one-person company for a hobby business. It’s a different thing entirely to make sure that your company’s by-laws, stock option plans, shareholders’ agreements, and myriad other documents are done correctly to set the stage for the scalable, high-growth business that you are destined to become. That’s exactly what we’ve done with Gust Launch, which is why you should check it out before doing anything else.
9. Get yourself a good lawyer.
Because a few dollars saved by incorporating “on the cheap” are almost guaranteed to cost thousands—or even tens of thousands—of dollars the minute you begin dealing with investors or option holders, it is critically important that you begin working from the very beginning with a good startup attorney. I discuss how to find and work with one in the book, but let me just note in passing that if you’re a Gust Launch subscriber we will connect you with a pre-vetted, experienced, startup attorney who has already agreed to waive their retainer fee and provide you with credit for an hour a month of legal consultations. Just saying.
10. Divide the equity with your cofounders.
If your founding team consists of more than just you, there will come a time when equity—that is, ownership of the venture—needs to be clearly established. In the same way that “good fences make good neighbors,” a clear, rational, and mutually agreed-upon equity structure sets a company up for success, whereas a poorly thought-out or implemented one can be a recipe for failure. I walk through the intricacies of equity allocation in the book, but for now, the important things to remember are that (a) “equity is forever,” so once it’s in someone’s hands, there is no way for you to get it back; and (b) equity is all about the future enormous upside of the business, and thus should be held by the people most likely to be instrumental and indispensable in making that upside real, rather than people whose services can be purchased on the market for cash. Probably the single best tool for allocating equity among co-founders [he says modestly] is Gust’s Co-Founder Equity Split Calculator.
11. Become part of the entrepreneurial ecosystem.
Back in the Dark Ages, around 2000 AD, there was no such thing as an “entrepreneurial ecosystem.” Today, however, entrepreneurs are as highly regarded as baseball players, and the world in which you are starting your business is replete with the equivalent of Little Leagues, coaches, sporting goods stores, and back-lot Fields of Dreams. While it is certainly possible to survive as a loner, you will give yourself many more allies (and get access to many more benefits) if you proactively put yourself in the middle of the action. Whether it is going to Meetups, applying to an accelerator program, pitching in business competitions, or participating in online forums, embracing the ecosystem will likely pay off in the long term more than you realize. One quick way to find kindred souls near you is to seek out Meetups (in-person gatherings that are organized online) for startups in your area. Search www.meetup.com with terms like “startup,” “entrepreneurs,” and “tech.”
12. Recruit top-flight talent.
As the demand for your products or services grows, so will your business, and that means you’ll need help. Recruiting, hiring, and training A+ employees is a challenge that many entrepreneurs aren’t fully equipped to handle in their first venture, and mistakes here can have lasting repercussions. In the book I discuss the key things you should be looking for when bringing together your team, and how you should treat them once they’re on board.
The smartest thinker on this subject that I’ve come across is Lex Sisney, author of How to Think About Hiring (Amazon Digital Services, 2014). It is a short, seminal book that should be mandatory reading before you decide who to hire, and for what roles.
13. Recruit your board of directors and advisors.
A world-class coder? Plan on $150K+ a year. A world-class chairman of the board? Priceless. Although it’s an established fact that all entrepreneurs know everything (present company not excepted), in the real world, I have found that other people have often been both smarter than I am, and more insightful at identifying issues that were too close to my nose for me to see. But unlike employees you will hire for their skills, and cofounders you will partner with for their entrepreneurial energy, advisors and board members are typically the kinds of people you would not be able to hire at any price. Whether they are angel investors in your company, CEOs of other companies of your size, or grizzled veterans in your industry, great advisors and mentors are truly worth their weight in gold.
14. Consider outsourcing.
In the so-called “gig economy,” there are many online platforms where you can find freelance designers, coders, engineers…even product managers. One of the oldest and largest is www.upwork.com, which I’ve used for everything from designing logos to doing telephone research.
As the business grows, you’ll also want to think about the option of outsourcing particular functions rather than hiring employees to handle them—an alternative that offers both advantages and disadvantages. Some companies get started by outsourcing virtually everything. But to develop real value in your enterprise (the kind that other companies or the public markets will be prepared to pay for), you will have to increasingly bring key parts of your operation in-house.
15. Make the most of professional help.
You’ll need to augment your founding team with a supporting cadre of knowledgeable professionals who can advise and assist you in dealing with the myriad small things you might otherwise miss. In theory, a determined, smart entrepreneur could handle by herself most of the legal, accounting, and administrative details that are a necessary part of business operations. But in reality, these are too important to “just wing it.” Like the Lorenz Butterfly Effect (in which the flap of a butterfly’s wings in Brazil can set off a tornado in Texas), getting one or two seemingly insignificant details wrong at the beginning can lead to immense pain and suffering (or at least tens of thousands of dollars in costs) just a few years down the road, when the company is seeking investors or considering an exit.
16. Choose your supporting services.
One of the advantages of starting a company in the 21st century is that it will not be operating in a vacuum, but will instead be able to take advantage of an extensive world of Cloud-based platforms for banking, human resource management, payment processing, and more. Figuring out which ones are best for your particular needs—and then how to get set up with them—is something that I discuss in Chapter 15 of The Startup Checklist.
17. Manage your business with analytics…on everything.
As quality guru H. James Harrington wrote, “Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” While terms like “big data” and “customer analytics” have become so common as to be almost clichés, in my experience, they are things that are routinely ignored by first-time founders. But if you are truly planning to found a high-growth business, I can assure you that “analytics” are critical: First, to figure out how to run your business; and second, to answer the questions that you will hear from the very first (and second, and third…) investor when you start looking for funding.
18. Establish and manage your credit profile.
As a brand new startup, your business has no history or financial track record, which means that you may find it challenging to do business with other (particularly bigger) companies who might not even be sure that you exist. Because of this, it’s important that you start thinking of your company’s credit profile right from the start. Indeed, one of the first things you’ll do as soon as you incorporate is apply to the IRS for an employer identification number (EIN), which is a bit like a social security number for businesses. You’ll be using this to identify your company to anyone who pays you money or receives money from you, to file your taxes, and open bank accounts. You’ll also want to get a D-U-N-S number, which is managed by Dun & Bradstreet and identifies your company’s credit profile. While it’s generally a good idea to know what your business credit looks like to potential partners and customers, you’ll find that D-U-N-S numbers are required to do business with companies like Apple, Walmart, and other major players.
19. Set up your employee stock option plan.
As an angel investor, I routinely deal with startups that are just coming out of the “garage” stage. They’ve hired a few people, and are getting ready to launch their first product. When I ask about salaries, I’ll hear “so much in cash, and so much in equity.” But then, when I ask how the company actually issued the equity to the employee, all I get is a blank stare. Suffice it to say, you can’t simply “promise” your team that they’ll get equity! Instead, you need to work with your lawyer, set up an employee stock option plan, reserve shares of stock in your certificate of incorporation to back up the options, have all option grants officially approved by the company’s board of directors, and then actually issue grants to your employees. There are no shortcuts here! Luckily for you, Gust can handle the whole process for you with Gust Equity Management, which is included with Gust Launch Raise.
20. Identify and attract investors.
Banks don’t fund startups because banks are not in the “risk” business; they’re in the “renting money” business. They’ll loan you cash as long as they are absolutely sure you will be able to pay it back…which isn’t always the case for startups.
While bootstrapping is a great way to start your business, the more successful your company is (or, conversely, the longer it takes you to find the correct product/market fit with your minimum viable product), the more cash you will need to fund your growth. Since banks will not lend money to startups (did I mention that a majority of all startups fail?), you will need to attract the right investors, win their support, and work with them to ensure a long and mutually satisfying relationship.
If your MVP works and develops initial traction, you may be ready to raise money to help fund your nascent venture. For most people, this initially means taking small amounts of cash from friends and family. But if you really appear to have a tiger by the tail, there is a chance that you could successfully approach professional angel investors…or even, in rare circumstances, venture capital funds. Unfortunately, this is often where I see the biggest disconnect between perception and reality.
Historically, most “friends and family” investments have been very informal (and usually in violation of SEC regulations.) But the new crowdfunding options under the JOBS Act of 2012 will soon make this a viable vehicle for many startups’ initial funding.
If you read the industry blogs and breathless stories in the popular press, you might assume that everyone with a good idea for a startup simply walks in to a VC’s office and walks out with a check. In reality, however, it is nothing like that. Less than one quarter of one percent of real companies each year that incorporate, hire employees, and open for business actually receive financing from venture capitalists! So before going out for funding, you should make it a point to understand how the entrepreneurial financing world really works. Chapter 19 in The Startup Checklist give you an overview of the process, with a behind-the-scenes look at angel investors.
21. Learn how to pitch.
The days when a starry-eyed entrepreneur could spin a tale of riches to a well-heeled patron over a napkin in a coffee shop are long gone. Today, the art of the pitch is a fundamental one for anyone hoping to engender outside support for a new venture. You’ll need a bunch of different pitches in your arsenal, including stand-up, verbal, and elevator pitches, and the canonical 20-minute PowerPoint presentation aimed at angel investors and venture capitalists. I’ve laid out what you’ll need to have in your “presentation wardrobe” in The Startup Founders Pitch Toolbox, and my TEDtalk on How to Pitch a VC has become something of a classic.
22. Preparing for due diligence is a perpetual activity.
At every stage when you are dealing with third parties who are interested in the company’s ownership—whether because they are planning to invest in you, lend to you, acquire you, or be acquired by you—they are going to ask detailed, probing questions about everything the company has ever done. Not only that, but they are going to ask to actually see your books and records, your certificate of incorporation, the written minutes of every board meeting you’ve ever had, the copies of your stock option grants, the board resolutions authorizing you to sign on behalf of the company, the signed employment agreements with everyone who has ever worked for you, and the intellectual property assignments from every contractor you’ve ever paid to do something for you. And that’s just the first half page of a 10-page list of questions! In my experience, fully 80% of the time and cost of doing any kind of corporate financing or acquisition is spent cleaning up all of the things that should have already been done, and finding the elusive paperwork that proves you actually did it.
I walk you through doing all this stuff right the first time in the book, discussing how you keep the correct kind of records and get everything ready for your inevitable due diligence examination…even before your investor asks. While this may not result in an instant marriage proposal or bonus on the sales price, it will certainly put you at the top of the investor’s “heroes list.” Luckily for ventures that use Gust Launch, much of this is taken care of for you automatically, reducing your diligence prep by up to 90%!
23. Raise funds through online platforms.
In the old days, funding for startup companies came solely from the founders and the founders’ families. By the 20th century, “angel investors” began to appear—rich business people willing to take risks on startup entrepreneurs. But they were few and far between, and you had to know one personally in order to get funded. After the stock market crash in 1929, the US government established the Securities and Exchange Commission to regulate how companies could raise money. This made the process more organized, but also included a rule saying that you while you were allowed to sell shares of your company privately to rich people…you couldn’t tell anyone about your company, or ask them to invest! In fact, it wasn’t until 2012 that the laws were changed to reflect reality: Namely, that you can reach a lot of potential investors through the Internet. Today, raising startup funds online through “equity funding platforms” is still in its early days, but already accounts for hundreds of millions of dollars annually. Here on Gust you can search through hundreds of angel investor groups and accelerators, and then apply to them for funding with a single Gust profile…all at no cost.
24. Manage your investors.
One of the biggest mistakes that first-time entrepreneurs make is to think of funding and investors as a “one and done” task, when in reality nothing is farther from the truth. Once an investor puts money into your fledgling venture, that investor is your partner for life (or at least until the company has an exit). As such, the nature, content, and timing of your investor and other stakeholder communications are critical, and will often determine whether you are able to raise follow-on rounds when you most need them.
25. Head for the exit.
There are four possible endings for the business venture upon which you are currently embarking, all of which end up having to do with turning the value you have created into cash:
- You can continue running the business in perpetuity and take out cash to fund your lifestyle.
- You can sell the business to a larger company and walk away with cash.
- You can register for an IPO and “take the company public,” thus converting your ownership to publicly tradable shares that can be sold for cash.
- You can shut the company down and lose the cash you (and your investors) have put into it so far.
While no one likes to imagine the fourth scenario, which one of the first three you are aiming for can have a significant impact on everything from the type of business you enter to whether and how you will be able to finance it, and even what options you might have for an exit
So that, in a nutshell, is the quick guide to how to conceive, start, and scale a high-growth business. Full details, discussions, links and tools to all of the above are included in The Startup Checklist: 25 Steps to a Scalable, High-Growth, Business. I hope you find it helpful!
Gust Launch can set your startup right so its investment ready.
This article is intended for informational purposes only, and doesn’t constitute tax, accounting, or legal advice. Everyone’s situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.
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