So, you want to start a business. Let’s assume that you have a great idea for a product or service that you would like to bring to market but don’t have any money for it. Here is a step-by-step guide to get you from idea to launch with limited funds.
STEP ONE: MARKET RESEARCH
We need to determine whether your product or service will sell and the only way to determine that is to do some effective market research. This market research must not only convince you, but others as well, that your idea is workable, solves a problem and that there is a place for it.
How to research your market
The first thing you should do is prepare what I call a marketing map.
- You do this by writing your idea for the business down in the middle of a piece of paper and then drawing at least four arrows from your product and attaching names of potential customers or groups of customers at the end of each arrow.
- If you have more than four potential groups of customers, add additional arrows to your drawing. This exercise really focuses you on determining who your market is. Let’s assume you are selling cricket equipment. Your four arrows could then be the general public, schools, other sporting goods shops and exports.
Once you have identified the various marketing sectors you can then prepare a market research action plan for each one and later you can specifically aim your marketing at each particular sector. This is a useful way of thinking through your business and you will gain a lot of information simply by doing this exercise.
Start your market research by:
- Writing down what you know about your product. Include industry, major players, special niche and so on.
- Google what you can and make notes. If your market is local or for a specific geographical area you can gather information from local associations, such as the chamber of commerce, and you can get out there and ask questions directly to your potential customers.
Market research is a very important part of your process — don’t assume that you know everything about your market, the competition, or your potential customers. While you do your research you will realise that there are many gaps.
Your market research should focus on several key areas, with the following being the most important questions you want answered.
- What problem does this product solve?
- Why do my customers from the identified groupings need it?
- What differentiates my product from what is already available?
- What are the features of my product that make it special or unique and will make people want to buy it?
- Describe your customer — age, gender, education, income category, location, other factors about the customer.
- Do this for each grouping as per your marketing map.
- Identify them and gauge their specific strengths.
- Do a product comparison.
Critically, your competition has the jump on you as they have an established market. You must go out there and take market share from them. Most importantly, you must get the message out that there is a new game in town. That is not an easy thing to do without money.
- Can you do most of your marketing over social media?
- Do you need to establish a website?
- Can you market it through associations or professional networks?
- What about your brand? It may be worth joining the increasing number of small business associations who, for a membership fee, will assist you with your business.
- Check out all your options bearing in mind that you must advertise as effectively as possible with limited available funds.
The following represents a basic market research checklist, which should keep you focused and on track. You should keep in mind your customer groupings from your marketing map when drawing up the research.
Market Research: Basic Checklist
|1. What industry body exists for your industry?
What information on your market is available from that body.
|2. Is there available data on your industry?
Can you get this information from Stats SA, Local Government SA?
|3. have you identified a gap or opportunity?
This needs to be confirmed by contacting potential customers and asking them directly about their need for the product.
|4. Understand your customers:
This helps to decide on pricing and builds relationships, which increases sales and loyalty.
|5. You need to profile your customers:
Describe your customer by characterising them, their spending habits, why they need the product, their location and behaviour.
|6. What questions do we ask our customers?
The above should be set up in a scorecard.
|7. Is your business location close to your market?|
|8. You must research suppliers for:
Quality, availability, price, terms, reliability.
Compare using these criteria.
|9. Assess your competitors:
|10. Social media
Social media is very powerful, and you can get a lot of information from searching the Internet.
STEP TWO: PRICING
The price at which you sell your product can be key to your success. Pricing is a very important part of your business.
- The customer must be happy that he is getting value for the price he is paying, but also, that you, as the business owner, are making sufficient margin to cover your overheads.
- Therefore, the selling price of your product, less the cost price of that product, known as the gross profit or margin, must be large enough to cover your expenses such as advertising, rent, salaries, travelling expenses etc.
- If the margin is not high enough you will go out of business because you will have negative cash flow.
- Not only do you need to make sufficient margin, but your price has to be attractive to the customer and must be competitive.
What is the next step once you have determined that, according to your market research, your product solves a problem and is something your customers want? You need to determine how you are going to go about starting your business and an important question that needs to be answered is, ‘how much money do I need?’
What do you need the money for?
- Develop the product
- Source the product — perhaps imported goods
- Pay for infrastructure
- Operational costs.
This information goes hand in hand with determining your price point. The best way to determine how much you will need is to prepare a business plan.
Related: Register A Company In South Africa
STEP THREE: YOUR BUSINESS PLAN
Anyone who is serious about starting their own business needs a business plan. The business plan is the most informative document you will produce, and it will be the basis for everything you do within your business. I don’t buy into the concept of one-page business plans. The idea of a one-page business plan is to keep you agile — you need to look at your plan as a living, breathing document, and not as a huge file on a shelf gathering dust.
There is no business plan that ever met the market and didn’t need to be adjusted. However, it’s essential for you to do the work for a full business plan. You can then distill it into a one-pager to keep you on point — but keep going back to the full plan.
You need to thoroughly research and test the elements of your business, before embarking on operations. Your business plan must be robust enough to stand the rigours of testing.
You need to have:
- Researched your product
- Tested the market
- Calculated the cost of the required infrastructure
- Determined the price barriers
- Understood the profitability
- Calculated how much money you will need to start and run the business.
It’s important to understand that a business plan is not prepared specifically to meet the needs of potential stakeholders such as lenders or investors, but is your guide and enabler. It should cover all the key parts of your business and should be amended and updated as the business grows, or circumstances change.
Related: Business Plan Format Guide
The simple checklist alongside will help you to ensure that you cover all the steps in building your business plan.
It’s not easy to start any business and much harder to do so if you have no money. However, if your business plan is sound you will be able to obtain interest in your business. In most instances it requires a determined mindset with the eye on the medium term. It’s also a blessing in certain instances that money is not readily available, as it allows you to start slowly and have more of an understanding of what is required to succeed. Once the business becomes profitable you can scale it up.
|CHECKLIST FOR A BUSINESS PLAN|
|Business objectives and vision|
|Product or service|
|Location of business premises and market|
|The business vision|
|What product or service|
|To whom are you going to sell|
|What is the benefit for your customer?|
|What are your unique selling points/differentiators?|
|After sales service|
|Gross profit margin|
|Protection of your intellectual property or brand|
|Who is your target market?|
|Where is your target market?|
|Why do they want your product?|
|Who is the competition?|
|What is the price and is it affordable?|
|What quantities can be sold?|
|Is this a cash or credit market or both?|
|Infrastructure and staffing|
|Suppliers and their terms|
|Funding the business|
|Purchase of raw materials|
|Accounting and IT considerations|
STEP FOUR: FUNDING
How do I go about finding money to start and run my business? You are satisfied you have a good product that will provide value for your customers.
Your best option would be to:
- Persuade a customer to give you an order on terms that are very favourable to you. If we refer to our marketing map, our product was cricket equipment and we had determined four customer groupings. One of the groupings was the schools market
- It would be an idea to approach them individually as to whether they would be prepared to buy from you. If you get a positive reaction, you could put orders together and offer them collectively or individually, a really good deal with perhaps some free articles, or major discounts in return for them paying you upfront or providing you with a deposit.
- You would then use the upfront payment or deposit to obtain the product and, if you have got your pricing right, cover your overheads for a period of time.
In summary, you need to get an order that will enable you to get the business off the ground and running.
Do this by:
- Approaching potential customers with your product.
- Potential customers could also become investors.
- Keep pressing — you are going to get many no’s before anyone gives you a yes and you may only need one yes to get your business off the ground.
- What you want to do is structure the terms of the order in such a manner that you are able to buy or produce your product.
Other ideas would be to stay in your current employment and save until you have sufficient money to start the business. You could in the meantime still try to source orders and sell without owning physical infrastructure.
Try to get a supplier to give you extended terms for your first few orders to ensure you get your business started. Suppliers need to get their stock out there and may, under certain circumstances, be prepared to help.
Explore the possibility of crowdfunding, which allows you to take your product to the masses and if they like it, they will wish to invest. The biggest advantage of this is that you remain in control.
If you fail to raise finds via any of these methods, you can resort to more traditional methods.
Finding an investor
This assumes that you would be prepared to give away a share of your business in return for funding.
To find an investor, you need to do several things:
- Make a list of the players in your industry.
- Is your product in direct competition with theirs or could it complement their range?
- Approach each one of them to see if there is any interest in your product.
- Make a list of equity investors who may wish to invest in your business — these are players who will want to invest to make money from their investment and then exit your business.
- You will need formal documents, such as a business plan and the back-up detail for them to even consider investing. By giving away a share of your business, you will lose a certain degree of control and you may be required to do more formal and onerous reporting than you would have reasonably considered.
Finding a lender
Your other option would be to borrow money. This means that you will need to pay interest and that you will need to ensure your business can make the loan repayments.
To find a lender:
- Make a list of banks
- A list of government and quasi- government institutions
- A list of relatives and friends
- Note that you will need all the formal documentation referred to above
- Should you approach a relative or friend be aware that this can be dangerous to your relationship. Ensure that everything agreed to is in writing and that both parties are clear about expectations.
You can start a business with no capital. If you follow this framework, you can gain an enormous amount of knowledge about your product, your market and your competition, as well as what it will take to run a successful business.
As the business owner, you must realise that running a business is a marathon and not a sprint and you may suffer many hard knocks on your way to success.
Why Failing Is A Necessity Proven To Guarantee Success
We should always have this at the back of our minds whenever we have that nudge to give up on our dreams.
There comes a time, especially after a terrible defeat, when we feel like giving up or even quitting. The defeat clouds our minds and make us forget completely what victory feels like. We forget the successes and judge ourselves solely on the defeats. This feeling isn’t unique to a single individual as even the most successful businessmen, inventors, politicians, world leaders have experienced failures at different points in their lives.
We all love success stories. It’s a matter of fact that behind every success story is a large amount of failed attempts. The notion of overnight success is a myth. It took the Wright brothers between four and seven years of scientific experimentation and several failed attempts before their maiden flight covering a distance of 852 feet which lasted a mere 59 seconds was achieved.
History is replete with instances of individuals who were written off after a terrible fall from grace. These individuals, against all odds, didn’t give up.
Tiger Woods, for example, has for the most part of his adult life being in the public eyes. That’s why when he went to his very public divorce, tales of womanising, dabbling with prescription drugs. Also plagued by injuries, his golf was seriously failing and in danger of being a “has been,” analysts advised he should just retire. It was obvious Tiger had a different plan up his claws by winning his first PGA tournament in five years.
His recent resurgence in form is testament to the fact that no one has the stop button to our life or life’s dreams and ambition. No one but you. It’s only when we stop innovating and trying that we’ve failed. Having lost a business deal that had the chance to change our lives positively forever isn’t the end of the world. Hence we need to reinvent and innovate.
If achieving success was easy, the vast majority of people would be successful. We have to put in the work and our skill to be able to achieve success because the most worthwhile things don’t come easy.
Defeats, if seen from a positive perspective, bring out the best in us. Victories don’t. Victories swell our egos, fill us with the air of invisibility, and this is dangerous. Hence we need a large dose of failures and defeats to bring us down to earth, to make us learn and better appreciate success the moment we’re able to achieve it.
What then do we do when we experience a poor run of defeats that make us doubt our abilities. Being fixated on the defeats for one, isn’t the solution. It has the tendency of making us forget what it felt like to win and totally derail us from our set goals. This, in itself, is a problem as it may lead to a state of unhappiness.
The bad results we might have experienced isn’t an indication of our inabilities, it’s an opportunity for us to look at the venture from a different perspective and take necessary action to improve or try a different approach towards achieving our aim.
Defeats can be depressing when we have dependents who rely on us for guidance and in some cases sustenance. Dependents could be in the form of a spouse, children, wards, parents, even staff. The pressure can be enough reason for some to give up and settle for the safer option.
With the decision to settle comes the likelihood of regret which may be more depressing than the expectations of dependents. Fortune they say favours the brave and nothing worthwhile was ever achieved without the possibility of failure.
Why You Need Smart Legal Foundations For Your Start-up
The legal background to a start-up might not be the most exciting area for an entrepreneur, but it’s your foundation for growth. Are you aware of everything you need to have in place?
One of the best parts of what we do is helping start-ups — the right legal foundations can mean the difference between a start-up that’s geared for scale, and one that needs to retroactively put agreements, checks and balances in place. If you’re aiming for growth, you want to get these foundations right from the get-go.
When Benji Coetzee launched EmptyTrips, a hot up-and-coming start-up 16 months ago, Legal Legends was on the ground floor with her. Although your start-up trajectory may not be identical to that of EmptyTrips, many of the foundational principles canvassed in this article will apply at some point in the lifecycle of your business. They highlight what you should be thinking of from the word go.
Laying the right legal foundation
By the time we were introduced to EmptyTrips, they had already registered their entity as a company and had started to prepare for their first beta public launch in April 2017. When our dealings with the start-up began, the business had already enjoyed a quick and accelerated cycle.
As with all start-ups, the founders had a clear vision and objectives. Unlike too many start-ups however, Benji understood how important the right legal foundations would be, particularly as the business matured and required different support structures.
The following three actions are a good example of the legal foundations all businesses should consider, particularly if growth is a part of the founder’s vision:
1. Why you need trademark protection
Given that EmptyTrips is a digital solution, with limited physical assets, protecting intellectual property as ‘soft’ assets was critical to its differentiation and valuation given the recognition of brand value over time.
At first, we set out to ensure that EmptyTrips’ marketing materials and properties, such as company name, slogan, and product names were protected sufficiently from use by others. This was done by filing for various trademark registrations.
A trademark is a sign or symbol that is unique to your business, and which distinguishes it from other businesses. The most common forms of trademarks are business names, product names, logos and slogans.
By registering a trademark you are granted exclusivity over the use of the name, slogan or logo, and may prevent others from using similar names, slogans or logos in their business in the future.
When it came to EmptyTrips, they had already filed a trademark for their business name, so we focused on protecting the names of the different service offerings on the business’s platform as the solution evolved and pivoted. These included Trip Exchange; Freight Open Exchange; SureFox and RailFox. As the business grows and product lines are added, we will continue to update this list.
2. The importance of website legal documents
EmptyTrips is predominately an online marketplace solution to enterprises. It is a digital transport brokering agency that has been developed to source, match and market available transport capacity (empty space on trucks, trains, vessels and so on) to commercial freight with on-demand supporting financial products (insurance etc).
Each company’s Terms of Service will be unique to that business, market and customers, but privacy policies are universally required by law.
3. The legal frame work around outside investment
Like many high-growth starts-ups, Benji and her team reached a point where outside investment was needed. This is an area where your legal partner is key. Apart from attending to various due diligence meetings and ensuring proper governance controls, we were tasked with ensuring that the contracts for external investment were prepared in a manner that sufficiently protected the interests of EmptyTrips and its founding members.
It’s common during a seed or series A round of funding for an investor to present the start-up with a term sheet detailing the nature or basis of the intention and extent of their investment, as well as all the terms relating to the governance of the company that they would like to put in place.
In this case, the institutional investor presented EmptyTrips with a term sheet that detailed the monetary investment that the investor would provide over a number of years, the monthly draw-downs of the investment that EmptyTrips would be entitled to, the number of shares that the investor would be issued for their investment, as well as the manner in which the governance of the company would be changed in order to protect their investment.
Often, and this applied to EmptyTrips, the terms contained in the term sheet require a new shareholders’ agreement and/or memorandum of incorporation in order to protect the interests of the minority shareholder (the investor).
A shareholders’ agreement governs the relationship between the shareholders of the company and their ability to administer the company.
A memorandum of incorporation governs the relationship between directors, shareholders, prescribed officers and the company. A standard memorandum of incorporation is issued when a company is registered, but it will often need to be amended at a later stage if, for example, measures to protect the minority shareholders are introduced.
A memorandum of incorporation can regulate the same aspects as a shareholders’ agreement, however, the main difference is that it is a public document available for inspection by anyone, whilst a shareholders’ agreement is a private document.
In addition, if there is any conflict between a shareholders’ agreement and a memorandum of incorporation, the shareholders’ agreement will not apply and will be voided to the extent of its inconsistency. This often means, as was the case with EmptyTrips, that certain aspects of the shareholders’ agreement that provided for protection of the investor required a redraft of the memorandum of incorporation so that the two documents were aligned.
A shareholders’ agreement might not be enforceable until a memorandum of incorporation has been aligned with it.
Read next: 5 Lessons From The Legal Legends On Pivoting
7 Factors That Influence Start-up Valuations
Figuring the valuation on a company that isn’t making money is subjective but not arbitrary.
Every startup founder dreams of launching the next Airbnb, SpaceX or Uber. The glamour of these $1 billion+ valued start-ups motivates countless founders to chase after that coveted “unicorn” status with their own valuations. However, the obvious question few can answer is, “How exactly is a start-up valued?”
Valuing a publicly traded company is very straightforward. Its market capitalisation (or market cap) is simply the number of shares outstanding multiplied by current share price. The share price itself depends on known strengths of the company and market forces, and is therefore, seldom way off the mark.
However, the value of a (rarely profit-making) start-up is not at all easy to calculate. In fact, it is at best, an estimate. In layperson language, you could take it to be the sum total of all the resources, intellectual capital, technology, brand value and financial assets that the start-up brings to the table.
Very often, start-ups’ valuations far exceed the sum of their parts, and there’s no universally accepted formula that you can use. VCs, for example, start with the amount they want to exit with and go on to factor in the expected ROI, the amount they invest, the stockholding percentages they can negotiate with the founders to arrive at what’s called the “pre-money valuation.”
That’s just one method, though. There are a ton of widely used methods to arrive at a start-up’s pre-money valuation.
That brings us to the next logical question for founders – “What’s pre-money valuation and why should I care?”
Pre-money valuation is essentially how you value your business. It is the value you’ll quote to a potential venture capitalist or other funding source to get funding for your business. The higher (and more accurate) your valuation, the better is your capacity to attract funding.
Unfortunately, research from CB Insights shows that the chances of the average start-up hitting a billion dollars in valuation is less than one percent. So what, you ask? Even if your start-up doesn’t become the next unicorn in the Start-ups Hall of Fame, there’s no stopping you from getting a strong valuation from your investors.
All you need to do is mind these seven things before your next pitch to a potential investor.
1. Paying customers who actually use the product
Be it a search engine, a social network or even a dating app, every user loves a free-to-use service. However, most investors aren’t so thrilled about freebies. Not a single one of the top five US startups is a free-to-use service. Each one has paying customers.
Pinterest, which is a free-to-use social media network, comes in at number seven, but that too has its own clear revenue model. Even though the platform is free for members to use, it has customers who pay good money to advertise their products to Pinterest’s members, thus ensuring a steady revenue model.
No matter how potentially world-changing your idea might be, you need customers who pick up the tab for the work that you do. That’s the first thing that draws in discerning investors.
2. Traction: Where are you going and how fast are you getting there?
How long has it been since you founded your start-up? How fast have you been growing relative to your competition? Where does the company seem to be headed in the next 12 to 24 months?
These are all valid questions investors expect answers for when they evaluate a start-up. Am ideal candidate for investment is a fast-growing start-up in the initial stages of its lifecycle with a growth curve waiting to happen.
Some start-ups to hit a billion-dollar valuation remarkably fast. Scooter start-up Bird hit the $1 billion mark 1.25 years after being founded; its valuation grew by mind boggling numbers in a matter of months. Valued at $400 million in March 2018, it nearly tripled in valuation in under three months!
3. Profitability: Show me the money
Anyone can show a lot of revenue by burning through a ton of funding. Discounts, sales and freebies are easy ways to reel in the buyers and grow your revenues.
However, simply focusing on revenues with nary a thought about margins, profitability or cash flows is a shortcut to start-up disaster, as many failed ecommerce businesses have repeatedly demonstrated.
Africa’s first unicorn startup Jumia showed us that it’s possible to focus on ROI and profitability even in an intensely revenue-oriented industry like ecommerce.
Instead of focusing on just conversion optimisation, Jumia targeted revenue optimisation through a strategy of aggressive retargeting ads. The results were stupendous. From a 57 percent ROAS (Return On Ad Spend) in Egypt to 120 percent in Nigeria, Jumia’s is the largest ecommerce player in all of Africa.
4. Brand value
As a new entity, consumers first need to be aware of a start-up to use its products or services. Brand awareness and recall are critical to the success of any start-up. However, not all brand value comes from spending big marketing dollars. A lot of it can come from word of mouth, PR and other sources.
SpaceX, currently valued between $20 and $25 billion, has outpaced revenue growth year on year.
It’s true that SpaceX has pushed new boundaries in terms of low cost satellite launches, giving established players a run for their money. But the outsized valuation the company enjoys is in no small part to the halo effect the SpaceX brand enjoys from its founder Elon Musk’s personality cult.
5. Frequency of capital infusion
Consumers are not the only people with a fear of missing out (FOMO). When investors see a startup that’s received funding multiple times in the past, their interest is sparked.
Clearly the start-up’s earlier investors had faith that it would do well; letting a chance to invest in it go by might be a missed opportunity. And that’s how money follows money in the startup world.
While the amount of funds raised by a startup can be a factor of its founders’ ability to pitch and close a deal, a start-up’s past funding is often the prime motivator for new funding to come in.
Ask any founder – it’s toughest to get early investors to believe in your vision and offer seed capital. Once the company has started off and proved itself, subsequent rounds come in on the basis of previous funding rounds and buzz about the company in the investor community.
6. Competition and maturity of market
First mover advantage may sound fabulous to a copycat business but it can be terrifying to the start-up taking those first steps. When companies enter a new market or develop a market through a novel business concept, founders have two tasks ahead of them. First convince investors and then convince the consumer that their business idea is fabulous.
On the flipside, entering a mature market that’s crowded with established players means a start-up is another me-too and its potential for growth will be limited. Funding will reflect this harsh reality.
However, if you’re a disruptor like Warby Parker, you have nothing to worry about.
Warby Parker pulled off three compelling feats with consummate ease. Not only did it create the very first ecommerce business with a vertically integrated supply chain, it also dared to carve a niche for itself in the eyewear market that was monopolised by Italian giant Luxottica.
Better still, Warby Parker even managed to raise $215 million at a valuation of $1.2 billion in just five years.
7. Understanding of business model
Finally, the amount of funds you raise and the strength of your valuation, boils down to the business you are in and how strong a grip you have on making it work. Hindsight is always 20/20, it’s taking a sound decision in the moment that makes all the difference.
Take Facebook for example. In its original avatar, Mark Zuckerberg and his co-founders spent considerable amounts of time and effort on getting advertisers for their site.
Thankfully, Facebook did not become yet another publisher site for one-size-fits-all advertising. Instead, Facebook eventually realised that the company’s real value lay in their rich user data and gigantic user base that they monetised later to spectacular results.
No matter how big or small your business. As long as you know the mantra that makes your project sing, you can count on investors jumping in and joining the chorus.
This article was originally posted here on Entrepreneur.com.
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