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The Three Keys To Starting Your Own Successful Business

* The Three Keys *

There are 3 key ingredients to starting a successful business:

- Good people

- A wanted product

- Low overhead

If you can achieve these three things your business has a great

chance of succeeding. Lacking in one of these key areas will

almost ensure that your business will fail.

If you look at a business plan these three items are highlighted

as the backbone of the plan. Management, use of funds, and the

products and/or service or competitive landscape sections of a

business plan show that you have looked into these three areas

and done your research.

This is why it is recommended by so many that you write up a

business plan. If you fudge the numbers, lie to yourself about

the items or do inadequate research, in the end it will come

back to haunt you.

* Good People *

What do I mean by good people? Good people for your business are

those who are knowledgeable and hardworking. These people put

their nose to the grindstone and get things done. When I was in

the Navy they called it "attention to detail". In other words

people who will not stop until the task is done and done well.

Some may think I am describing a perfectionist. That is not

entirely the case. A perfectionist never quits but they also

never fully finish anything either. They endlessly toil away

never knowing when they have reached a point of stopping. A

perfectionist on your team can kill your business.

For example, say you're running a technology company that is

rolling out a new Internet product. If your lead programmer is a

perfectionist they may never get to the point of completing the

project and giving the green light. They'll run past deadlines,

run your expenditures through the roof and never end up with a

completed project.

The other side of the coin is getting someone incompetent. In

our Internet product example above, having an incompetent lead

programmer is just as bad as having a perfectionist. First, they

won't know when to declare it complete and doing so prematurely

with bugs in it could doom your business from the start. This

was seen time and time again during the dot-com boom when

companies would bring in millions and never complete their

actual product. Many went belly up never having actually

launched a product. Most of this was due to incompetent people.

The final litmus test for the people involved is in personality.

Can the people involved actually get along together? It's

surprising the number of businesses with good people that fail

because they simply can't get along.

The most important person to ask questions about is yourself.

Are you ready to undergo the stress and strain of starting a

business? Are you willing to call investors and ask for money?

Can you make it financially?

If you are a procrastinator or hate doing any work outside your

immediate field of knowledge you may not be the right type of

person to start a startup.

However if you love trying new things, don't mind putting in

some hard work and sacrificing both time and energy, running a

startup may be a fun and rewarding experience for you.

* The Right Product or Idea *

You don't have to have "the better mousetrap" or "the next great

thing" for your product or service. There's an old saying that

"ideas are a dime a dozen" and it is very true.

There's no real secret to finding the right product or service

to sell.

All you have to do is provide what a business or individual

wants and needs.

By right product I mean something that is needed or wanted by

people or other businesses. If your potential customer base is

male and you come out with a pink dress then you've failed in

doing your research. Granted there are some men out there who

may like to wear pink dresses, but the market isn't large enough

for your business to succeed.

If you are providing a service you should definitely do your

research on the "competitive landscape". If you come out with a

mediocre product compared to your competitors, you have just cut

your company off at the knees from the get go.

Improving upon an existing product, service or system that

already works can make your company fly. It has already been

proven to work.

For more on researching your product and the competitive

landscape see the article "The 5 easy steps to researching your

market".

The hardest part of settling on a product or service is

determining what a client wants or needs. Don't expect your new

company to become the next big name brand. With a lot of new

businesses they project heavy volume as if they are going to

become the next Nike within the first year.

Don't do this.

Keep your growth numbers conservative. You don't have to be a

huge company to make a lot of money. Settling on a smaller niche

market can make you a fortune.

* The Money Game *

Andrew Carnegie said the sole purpose of being in business is to

make a profit. If profit is not your goal from the start, then

you are probably looking at starting a hobby and not a business.

There are a number of sources for funding your company.

These include:

- Self-funding, such as credit cards, savings, personal income

or friends and family

- Traditional financial, such as banks and financial institutions

- Venture Capital

- Sale of stock

Self-funding is usually a bad idea. With the failure rate of new

businesses you stand to risk losing it all on one mistake. By

self-funding you are taking all of the risk onto yourself.

Traditional financing and Venture Capital both come down to your

reputation. If you haven't started a successful business in the

past and have an active and working relationship with these

groups your chance of receiving funding is virtually nil.

Sale of stock of your new venture comes down to the old quote of

"would you rather have all of a small pie or a smaller piece of

a large pie?"

Without adequate funding you could end up having no pie at all.

Your company will not succeed without adequate capital. A sale

of stock, while lowering the amount of the company you own,

dramatically increases the chance of its success in the long run.

We'll take a more in depth look at fund raising later. For now

though let's talk about the other half of the coin... fund

spending.

As noted above one of the three keys to a successful business is

low overhead. Running out of capital by hiring too many people,

having an expensive location or spending too much on unneeded

goods, can run you into the ground immediately.

Keeping down costs is a key part of financially managing your

company and as we'll see below lack of financial knowledge is a

key reasons businesses fail. Don't be cheap however. Sometimes

it's worth it to spend the extra on something that will save you

money in the long run.

Clearly defined long range goals and planning will help you keep

your overhead down, your efficiency up and your business running

within it's budget.

I'm a firm believer in automating as many tasks as you can. With

automation you don't need to hire personnel to fill those rolls

and it lowers your "burn rate" and capital requirements. When I

started a sports news website in 1998 we were competing with

companies that had 150-250 employees. Through automation and

smart design I was able to keep our total overhead down and

reduce our actual hands on employees to about 6 for all 24 hours

in a day.

Take a look at your business and see where you can streamline it

and automate things from the start and you'll reap the benefits

of needing less capital and the ongoing monthly "burn rate".

If you need office space and won't be meeting a lot of clients

face to face you may look into renting an apartment and

furnishing it with cheap used furniture. A lot of people work

from their homes. There's no standard that says you have to have

an office. You can get a P.O. Box or mail store as an address.

Don't hire a ton of people!

For each person on the payroll you have then incurred a monthly

cost and added to your "burn rate". On top of their pay, there

are the payroll taxes, workers comp insurance, office space and

equipment and other expenses that you have to pay for each

employee.

Don't go overboard with your capital. Right when you think you

have enough is when you'll run out.

* Business Failure *

SBA statistics tell us that 60% of small businesses fail within

the first 5 years and 90% fail within 10. So how do you get to

be the 1 successful startup left standing? Well there are a

number of answers to that question. Knowing what the key reasons

businesses fail is a start.

Let's look at some of the main reasons businesses fail.

1. Under-Capitalization This is the number one killer of small

businesses. Not having the capital needed to keep the business

going snowballs. Without capital you stop fulfilling orders,

customers get fed up with you and sales fall off or stop

completely. Not only will you need initial capital, but later

you will need it to expand.

2. Bad Debt Grasping for any type of financing you can for

capital can also come back to bite you. Taking a high interest

or balloon payment loan can put a company under relatively

quickly.

3. Not enough or too many sales Not having enough sales is

self-explanatory. How can too many sales kill a company though?

An example would be taking so many sales you don't have the cash

to produce the inventory or personnel required to fulfill.

Things back up and the company's reputation is damaged beyond

repair.

4. Financial mismanagement Not understanding the financial side

of your business can kill you. Really small businesses with low

costs initially are easy to understand on paper, but as you grow

things can quickly get out of hand. Lack of understanding the

roots of the finances of your business can take its toll.

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5. Acts of God, disasters and economic downturns There's not a

whole lot you can do about a major economic downturn or a

natural disaster. If you are selling high-end vacuum cleaners

and people don't have the money for luxury goods, your business

is going to be hit hard. If you are running an Internet business

out of your basement and it floods it can kill you off pretty

quickly. Having adequate insurance is a necessity. Planning

ahead for such instances will give you a leg up on not seeing

your hard work go down the drain.

6. Death and disability Having a key member of your team die or

become disabled can crush your small business. Long term

disability and life insurance can be a key to avoiding this.

7. Owner and personnel burnout Working entirely too hard and

expanding at a great pace can kill a business due to burnout of

the people involved. Proper planning for expansion is a must.

All of these failures can be avoided through planning. While

disasters such as a fire in your main office cannot be avoided,

it can be planned for so that your business can continue running.

* Forming Your Company *

How many founders do you have? How many shares should you issue?

How much stock does each person get? Is everyone working

full-time on the company? Has everyone signed an NDA

(Non-Disclosure Agreement) and IP (Intellectual Property)

agreements? What is the company's address and phone number? Make

sure no one has signed an NDA or IP rights agreement at another

company!

Some of these sound like unnecessary questions to address. Why

should I have a friend I trust sign an NDA? Why should we make

employment agreements?

I'll tell you now from experience that it is necessary. You may

be friends now, but you never know what will happen in the

future. In addition, when forming your company it is an entity

unto itself, which means it can be sold, traded or dissolved.

Who knows who may be in charge of the company in the future?

Having all of these loose ends done from the beginning will help

avoid future headaches and conflicts.

Actually forming your company legally isn't that difficult. A

company really is only some paperwork in a filing cabinet. There

are a number of places you can go to and actually form a company

online. Just remember there are tax requirements for a company

and that you should look into all the legal and tax issues when

you form it.

One of the main reasons you would want get all of these things

completed and get incorporated is in preparation for the next

topic.

* Funding Your Company *

Funding your company is a necessary step to getting it off of

the ground. Sure, you can try and bootstrap it along in hopes

that it will succeed, but the point of all of this information

is to give you the best chance at success, not to start a

business on hopes.

This is probably the scariest part for those engaging in their

first startup company. Having all of your ducks in a row through

proper planning is a necessity. You don't have to go overboard

and end up in "analysis paralysis", but you sure better know who

your people are, what your product is and how it can be sold and

what proper amount of funding you need.

A common source of startup funding comes from investors known as

"angels". "Angels" are people who have made money in business

and are looking to put their money to work. Most "angels" will

require a business plan and possibly a description, prototype or

demo of your product or service and how you intend to implement

your plan. "Angels" will be looking at your three keys above.

Your product, your people and your funding uses.

A key step to raising funding is determining the value of your

company. How much is your company worth now? Remember that you

are not only determining the current worth, but the future worth

of the company as well. This is a hard number to determine.

There are some investors that won't even look at a company that

values itself at less than a million dollars. Investors aren't

going to put money into something that is going to remain at the

current valuation, they are looking towards the future.

Once you have settled on a value for your company, you have to

determine how much startup capital you will require. Let's use

an example.

You value your company at an even $1 million dollars. You have

also done your homework and you have determined you will need

$100,000 in startup capital to purchase equipment, pay salaries,

acquire insurance, etc... Breaking the numbers down shows that

you would need to give up 10% of your company to get the needed

capital.

Just remember that when you approach an investor that you are

offering them an opportunity. You aren't simply panhandling, but

are giving them the opportunity to profit off of your hard work,

research and know how.

About the author:

Dan Amato lived through the dot-com boom and bust in Santa

Clara, CA. He is the co-founder of numerous companies from the

ground up and currently maintains http://www.startuphints.com, a free resource for those starting a new business. He can be

contacted on his blog at http://www.diggersrealm.com or via email at danamato@gmail.com