eSTARTUP EPISODE 0: The Rise
After I wrote the 4th article of the series I realised that I missed the fundamentals. Ok, I advice on how to create the online environment for a new business with less than 200 EURO/year, that may be cool, it can be done even for fun. But we are talking business here so, why should anybody put some money and fun (I don’t want to say work!) into something without having a business idea?
From the beginning I want to say that I did not start to dig into this subject because I am cheap and I don’t want to spend. I totally agree with that famous saying: “spend money to make money”. The truth is that I was forced to find a solution for myself … after 15 years of hard work, mostly holding top management positions, I found my self in the situation of starting from zero. When I say zero I really mean zero. In fact it was below zero, I experienced that situation of not having enough money to pay for my monthly expenses or that fear that the bank will come and take my house … not joking! So, it was about me, my brain and my computer … by the way, this is an old Mac from 2011! I will never get rid of this computer … 😊 even when I will get a new one eventually. Anyway, I started to dig and I found that it is possible … and this is how the idea of this series of articles was born also.
The technical details are in all the other episodes … the subject of this one is related to the business case that anyone shall have before starting something. There are tons of articles on the internet about how to build a business case or business plan, I really don’t want to compete with others on this topic nor to claim that I am better than the others … I just want to share a bit of my experience and also to offer some guidelines and resources (of course, for free!) that anyone can use.
So, in this episode I will talk a little bit about business ideas, about how to create a decent business plan, about some ways to finance the business, about exit strategies and about growing the business. The baseline from I start is that the business idea exists but no money to finance it … well, 200 EURO/year to be spent for the IT environment cannot be considered as real financing.
Of course, the starting point of all trouble is the business idea and this may be complicated. I remember very well the marketing module from my MBA, our professor was a very experienced guy (I don’t want to say old). He started the class by asking us if we know what marketing is. After about half hour while he was listening the ‘corporate’ vision about marketing, full of fancy words as outdoor, ATL, BTL, media, etc., he was giving us the advice to forget about these. Marketing is about few very simple things … what you are selling, to whom are you going to sell, what competition you may have and at what price you can sell. The rest is details.
During your journey you will have a lot of hops to pass. Some you have to solve so you could move ahead, some you can jump and come back later to solve it. The choice about what, to whom, competitors and prices you cannot skip. Do not move forward until you get clarity on these, doing so will be probably much too late to come back and to repair something. Once you solve this, you can think on how you will sell.
We are living very interesting times, the good part is that (almost) everything can be online, the bad part is that everybody knows that. So, you have to be creative or, as it is trendy to say, be innovative. Innovation has a real value (maybe you can find some time to read this … ). Innovation can be applied in at least two areas, of course, the most important is related to what you want to sell but the area related to how you will produce what you want to sell cannot be ignored since innovation in this area has a direct impact on how competitive your products/services will be. In other words, it is of equal importance how attractive and innovative your portfolio will be but also the innovative way of how you will produce your portfolio. I cannot talk about innovative products/services since this topic is so specific for each industry or business, I am afraid that this is 100% up to you. Of course you can get inspiration from various sources, market studies, trends analysis, etc … but be aware! … if you have access to this information it means that everybody has access to it and this will not make you different from the others. I don’t want to minimise the quality of the information you can get from these sources but do not expect to find inside your way to success. On top of this knowledge you will get you need to put something extra and this extra is often called “disruptive thinking”. Innovation and disruptive thinking must always go hand-in-hand . The only piece of advice that I can give in relation with the products or services you want to sell is not to try to become the best of the best because you will not succeed with this. Better focus on how to become “one-of-the-kind” – the only one (or among the few) doing whatever you are doing.
(please allow a small diversion here, it is about disruptive thinking. The concept is not new at all … the internet is full of articles about it, there are important events and conferences dedicated to this concept and really important personalities promoting it. The funny thing is that I found some articles which defines even some algorithms to guide you to think disruptive … 😊 and I really wonder now, how disruptive can you think if you apply an algorithm? So, my friends, my advice for you is think disruptive before this will become – as many other concepts – an ordinary thing! )
Now, back to the topic … to summarise in several words the takeaway related to your products/services I can only say:
That’s about all I have to say about this and, by now, let’s suppose that we solved one of the basic things, we know what we want to sell. It is time to think on the business plan. Yeah, you may say … so, what will be so complicated about this? Well, you may laugh, but I believe that the answer lies in the exit strategy. In other words, before starting to build your business plan, ask your self why do you want to start the business journey? What’s your final purpose? After all, nobody lives forever! Many will say that the technical word for this matter is “business strategy” or at least that this is part of the “business strategy” but I prefer to say that this is a much more personal-related objective and that’s why I named it “final purpose”. Why is this so important? Well, simply because there is a way of designing your business if you want to grow it faster and sell it (or sell at least part of it) and there is another way to design it if you want to leave it to your children. For the first approach you may need to think of attracting investors to finance operations business growth while for the second approach you may think of ensuring finance for operations and grow in an organic manner. My own experience revealed me that an equal weight combination of the two approaches will not lead to good results and it is necessary to opt for one of them or at least to alternate it at relevant periods of time. The main takeaway for this can be summarised as follows:
So far, so good … by now we have clarity on what we want to sell and why we want to enter in the business. It is now time to see how we will do the business, it is now the time to go in details with the business plan. Many say that a business plan is an Excel file, full of numbers arranged in pre-defined templates. Well, I think this is wrong … yes, eventually you have to play with numbers and yes, all the numbers shall be put in known templates so anyone (mostly banks and potential investors) could understand it. But the Excel is only the result of the first and most important stage of a business plan … the narrative part of your business plan. Do not ignore it, not because it may be fun to write a story but mostly because is the story of your business and will help you to put some things in order. I can tell you, after many years of experience and after drafting many (too many 😊) business and transformation plans that you may be really surprised by observing how your initial ideas will be transformed (always in a good way) while you draft the narrative part of the business plan. And the most interesting part of this is that nobody will force you to transform your ideas, you will do it by your self and you will actually be very happy with this!
Here are some tips that may help you at this stage:
Put your business in a context
As much as disruptive you may think, your business cannot survive outside a context. The context consists of various factors, macroeconomics, social and technological trends, needs, threats, predictions and forecast and other factors. As much as you can, find your place in this context because the context will be actually the ecosystem in which your business will live. Do not insist too much on numbers at this moment, there will be enough time for numbers later during your journey.
(please allow another diversion here, it is about forecast and macroeconomics and again, about my MBA. I remember the macroeconomics module, it was in that times when Greece was entering in the first financial crisis, the professor was of Greek origins but he was actually working for a famous university in UK. I cannot recall his exact words when he started the class but it was something like: within this module we can discuss about patterns, algorithms and macroeconomic formulas but the truth is that even us (he was referring the community of academic researchers and professors) we have no idea about what’s going on)
As much as you can, describe the interaction of your business with the context. Review your portfolio, identify those unique features which can make you one-of-your-kind and do not move forward before you have enough clarity on this
Describe your business model and identify the revenue streams as well as the structure of costs
Here you have to focus on the products/services you want to sell, these are the real assets that will produce your revenue. I know that, at least when it comes to accounting, the word “asset” is used in a very large scope. A car that you buy is an asset, a server, a software license, etc. Be very careful and smart, think business and not accounting … most of these “assets” are in fact liabilities and will hang like mill stones on your neck when business will go harder (make no mistake! you will face difficult times, have no doubt about this). The only real assets that you have are your products, your services, your knowledge + intelligence + innovation skills = your intellectual property (IPR) and from these you have to produce revenue. Focus on recurring revenue streams, this will ensure a healthy cash flow and also may attract potential investors. So, go back to the portfolio and to disruptive thinking in order to see how can you generate recurring revenue.
OPEX is better than CAPEX
Outsource everything that you can. IT, accounting, HR, production, logistics, all of these can be outsourced. Keep product development, marketing and sales inside and outsource everything else. Do not put your money into IT infrastructure (servers, licenses) and find out 6 months later that what you have is not enough, IT is never enough. To put it into simple words, all that you need is your laptop, smartphone and internet connection. At this point be aware that your potential clients may think in the same way so maybe it is a good idea to revise your portfolio and see if you can turn traditional product sales into “as-a-service” sales.
Direct costs must prevail
Your cost structure must be focused on direct costs. Indirect costs (or, as professionals will say, the overheads) shall stay to minimum. That’s why you need to try to automate as much as you can. Yeah! It is again about IT and about another nice, modern concept, the ”digital transformation”. I will not enter into more details here, the next episodes are exactly about this subject.
I am sure that you already figured out that the chain portfolio ➜ business model ➜ cost structure is, in fact, a circle and you may need several iterations until you will be happy with the outcome. That’s another strong reason for which you shouldn’t ignore the narrative part of the business plan. There is no better way to clarify all these!
The Market is your master
By now you should have a good picture of what you want to sell and how you will produce and deliver what you want to sell. It is now the time to identify to whom you want to sell, what market you will have and how big is that market. As usual, this is a combination between public information that you can find within market research studies and your disruptive thinking. While the market size, customer behaviour and market forecast are things on which you cannot have any significant influence, the market segmentation depends a lot on your disruptive thinking. And don’t forget, your competitors are integrated part of the market! So, the best advices I can give you here (also main takeaways on the topic) are:
Identify those market segments where you can be “one-of-the-kind”
Challenge your competitors to race against you rather than start a race to catch them Click & Tweet! because it is always easier to start something in a right way than to transform a mature business in order to compete with the “new-kids-in-town” (that’s you!)
Ok, finally you are at that point when you must start playing with numbers. All what it was described above shall be reflected in numbers. Plan these numbers for at least three years ahead, the best is to plan for 5 years.
The focal point of this part of the business plan is the Cash Flow statement. If you take a look to the picture below you will see that I connected the focus points of the business model with the cash flow (that orange dotted line). This is just a way to tell you that if the business model will focus on those aspects you will have less trouble with maintaining a positive cash flow. There is also a major shift in the management paradigm in the last years saying that the managers primary concern must be the cash flow and not the turnover, not even the margin.
Another important point of your financial is to find out how much your new business must be financed from external sources (investors, banks, your own resources, different grants, etc.). Here is the moment to remember what I wrote above about the exit strategy and your “final purpose”. Anyway, let’s review the options a little bit …
This is probably the best option. There are two categories of investors at this stage of your business journey: business partners (willing to share the business risks and to contribute to the business growth, what they usually request is an equity share) and financial partners (willing to finance you against an interest + the famous ROI, this will add an extra pressure on your expected financial results).
Most probably banks will finance a part of your operations but against collaterals (in the best case scenario the bank can accept your contracts or future receivables as collaterals). It is unlikely (at least in this part of the world) to find a bank available to finance your business plan (operations and business growth).
Good, if you have it. In my case was not at all applicable. However, think twice and cut once! After all, you and your family must have a life, with or without the business.
Here I can only talk about the situation in EU countries, I don’t have enough knowledge about other countries. So, there are several ongoing programs for startups and SMEs but you need to assess them with care and against your business objectives. Most of these financing programs will finance CAPEX instead of OPEX (such grant cannot be used for financing your 200 EURO/year for the online environment). Go in this direction if there are some CAPEX without you are not able to start your business. But have always in mind that:
- CAPEX can turn into liabilities if the business go wrong
- from financial/accounting perspective a grand is a liability because of the risks associated with these financial instruments. So, later on, if you would like to attract a financial investor, you may find your self in some difficulties
- Usually, the grant agreement limits a lot your flexibility in the sense that you need to follow letter by letter what was approved with the grant agreement. It does not matter that the technology evolves, you cannot get the latest and the best available, you have to stick to the initial plan.
Despite the above, different grants can be a good option to start your business journey provided that you are fully aware of the limitations. On the other hands, there are multiple options to finance your innovation and R&D through specific grants. I don’t want to enter here into more details about this topic but you can find out more by reading this article or by visiting our website.
A picture can tell more than thousand words … all that I wrote above is shown in the following diagram.
I tried to show a logical approach of how you should build a business plan, not very disruptive thinking, isn’t it? 😊
However, you can notice the two circles (of course, not in the geometric representation of a circle), just follow the red dotted lines. These arrows indicates you that building a business plan is not a “one-shot” job, except if you are a genius in which case there is no reason for you to read this article … 😊
What I wanted to point out is:
The big circle: Numbers are a logical consequence of the story. If the numbers are not satisfactory, go back to the story and do changes.
The small circles: The focal point is what you want to do (portfolio). If the business model cannot accommodate the portfolio, go back and adjust it and be aware that any change of the portfolio will trigger changes in the market analysis.
And beyond all …
What will keep you alive is a positive cash flow, focus on that and identify the financial resources you need in order to always have your cash flow positive
Now you are set for the next episodes. Although this episode can have a larger audience because what is described here fits to (virtually) any new business, the next ones are about a practical way to put your business online. You may think that this is not for you but mark my words, any business which will be not online (at least parts of it) will die. The forecast about the internet traffic in the next years (not too many, probably less than 5 years) is that the most important part of the traffic (close to 90%) will be generated by eCommerce (that’s online business), Social Media (that’s about online promotion of the business), IoT (that’s about automation of the business) and mobile (that’s about accessibility to the products and services). Traditional websites will become almost insignificant so, if you believe that having a website means that you are online, you are wrong.
However, I hope you enjoyed and you will read also the next episodes … feel free to ask if you believe that I can help more.