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Start-up Advice

The 3 M’s of Starting a Business

Market demand. Market size and structure. Money. Explore them all before diving into your start-up.

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You’ve got a great idea for a business. But before you manufacture that product or set up your ingenious new service, you need to do your homework. So says Elizabeth Thornton, chief diversity officer at Babson  College, and president and CEO of training and consulting firm, The Entrepreneurship Advantage. Thornton addressed some of the same issues in an IBM webcast during Global Entrepreneurship Week in November 2008. Thornton discussed what Babson calls the “three M’s,” beginning with:

1. Market demand.

This involves understanding the customer.
Thornton poses these questions a would-be entrepreneur has to answer:

  • Who is your target customer?
  • What is your value proposition?
  • How strong is your customer’s pain point?
  • What value do you provide that will make the customer buy your particular product or service?

“That’s what you’ve got to get really clear about,” Thornton says. “You have to be very objective about trying to evaluate who’s the right target market and what’s going to provide them with a willingness to pay for your product above all other products that might satisfy the need in a similar way. “Just because you think it’s a good idea – that you might pay for it – doesn’t mean that everyone else will,” Thornton says. “You’ve got to quantify the number of people in your particular market.”

To find that data, don’t ask your friends, Thornton warns. You won’t get an honest response. Instead, get creative. Depending on your product, you might approach people at the mall, at the gym or at your local coffee shop. You also could create an online survey using SurveyMonkey.com and send it to whatever group you think would give you a valid response, Thornton says. She cautions, however, that you can only trust a survey to a certain extent. “People will say, ‘Yeah, I’ll buy it.’ But when it’s time for them to choose between your product and something else, are they going to choose your product?”

Bottom line: Be really clear that this is something people are willing to buy, Thornton says. It has to be something they need and can’t get from other places, and it has to be sustainable over time. Once you define your market and how your product or service fits that market, you’ll be ready to tackle the next “M.”

2.  Market size and structure.

This focuses on the industry itself. Is it an emerging industry or a declining industry? Is it a fragmented or a concentrated industry? Thornton suggests you have a higher probability of success if you’re in a fragmented industry because more players means more opportunities to differentiate your business.

Here are the questions you need to answer:

  • Who is your target market?
  • What are they offering their customers?
  • To what degree can you provide something different that’s going to allow you to capture market share from this industry? What’s your sustainable competitive advantage against all others?

Don’t think your product is so new or unique that you won’t have any competitors, Thornton warns. “You always have competition. And you need to find out who your competition is, even in a local market.” You have to differentiate your product by adding some sustainable competitive advantage, so customers will switch from where they’re getting their product now, she says. Knowing market demand, size and structure, you’ll be able to home in on the third and final key to your start-up.

3. Money.

How much is it going to cost me to produce this product or service, and can I charge enough to make money?
“At the end of the day, your revenue minus your cost of goods should be around 40% or more,” Thornton says. “You want to have a decent gross margin because you need to be able to fund your operating expenses out of it.”
A corollary to that is how much it will cost to start the business. Suppose it’s going to cost R100 000, but you just lost 20% of your portfolio. Can you afford to put R100 000 into this venture? “So looking at your start-up expenses is part of the margin analysis when you’re evaluating the opportunity,” Thornton says.

Money considerations are not to be taken lightly, Thornton emphasises. “The No. 1 reason businesses fail in my mind is because they run out of money,” she says. “It takes longer than you think, it’s a lot harder than you think, it costs more than you think, and people might want to pay less than you think. All those things are going to impact your bottom line.” The reality is that it’s likely to take months before you generate any revenue. Let’s say it’s Day One of your business. You might spend the first 60 days filing papers, printing business cards and building a website.

The next month, you’re going to networking meetings and making contacts, but you have no sales. “Here you are, 90 to 120 days out, and you still haven’t generated any revenue,” Thornton says. “A lot of entrepreneurs will underestimate how long it will take to start their business and actually generate a cent of revenue. So I always recommend, if you cannot support yourself for at least a year – if you don’t have that in the bank – then you’re putting yourself at risk.”

Especially in today’s volatile economy, “give yourself the opportunity to be flexible, because market forces change. You have to have enough stamina from a cash flow perspective to be able to ride those waves, be flexible, execute intelligently in the moment, and try to seize and shape the opportunity.” Even if you can sell the product on Day One, Thornton says, it takes time to produce and ship it, and then wait for payment. “They might pay in 60 or 90 days. Even when you’re selling a product and generating revenue, do you have enough cash flow to be able to collect the receivables and be able to sustain your operation?”. Understanding cash flow is even more critical today, Thornton says, because access to credit isn’t flowing as well in the economic downturn. “So today you have to be even more discerning, and really understand what your cash flow needs are to sustain the business through the launch.

That’s especially true for women entrepreneurs. Research confirms that women have a more difficult time gaining access to capital and contracts. “Networking becomes increasingly more important,” Thornton says. “Having relationships with the decision makers in every single account and developing those ahead of time becomes important. You’ve got to call that person, you’ve got to meet that person – they need to be able to connect with you in a way that’s not the traditional way of doing it. Women have to leverage a different approach to business because there are obstacles.”

Evaluate the Three M’s

Here are the issues to be considered before taking the plunge into an entrepreneurial venture:

  1. Market demand: Determine who your customers are. Are they reachable? Are they receptive? How many are there?
  2. Market size and structure: Is the industry fragmented or emerging? Who are your competitors and what is your sustainable competitive advantage?
  3. Money: How much will it cost to produce the product or service? Can you charge enough to make a profit? Do you have the cash flow needed to sustain your business through the launch?

 

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Start-up Advice

Put On Your Wellies: It’s Time To Wade Into Risk

Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…

Chris Ogden

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You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.

Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.

It is also unrealistic to assume that it isn’t worth taking this risk.

There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…

Step 01: Do your research

No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.

Step 02: Understand the costs

Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.

A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.

Step 03: Know when to walk away

As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.

You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.

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Start-up Advice

Mind The Gap

The entrepreneur’s guide to finding the gaps and building the right solutions.

Chris Ogden

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Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.

Here are five…

1. Network

It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.

2. Look for pain

Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.

Be the Panado that fixes these pains.

3. Luck

luck

This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.

4. Luck needs courage

You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.

Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.

5. Pay attention

This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.

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Start-up Advice

5 Things To Know About Your “Toddler” Business

As you navigate this new toddler phase of your business, here are five things to bear in mind.

Catherine Black

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Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.

Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”

As you navigate this new toddler phase of your business, here are five things to bear in mind:

1. This too shall pass

Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.

2. Appreciate what this phase brings

The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.

3. Establish boundaries

Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.

4. Take a break

Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.

5. Give it space to make mistakes

While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.

During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.

While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.

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