Join 100,000 entrepreneurs who read us every month
2020 caught most of us off guard. A seemingly booming economy now seems to be headed towards a recession, which will inevitably leave a lot of people unemployed across many industries.
More importantly, 2020 is likely to represent one of the most essential 'resets' the economy will go through. Suddenly, online shopping is the ONLY way to shop, rather than a complement to brick and mortar. Suddenly, working from home is the norm, rather than a nice to have.
Likely, these changes in the dynamics of how people interact and spend money will have echoes for months and years to come. Some industries may completely disappear, and others will be forced to reinvent themselves.
This instability, this chaos, is a ladder; for witty entrepreneurs to find opportunities, to create or evolve their business and monetize this revolution. Thousands of jobs will be affected or disappear at all, and the world will need us to develop new ones.
Alright, so we've created a bunch of content around starting a business, most importantly, our Udemy Course, which we just released for free. Much of it, especially around incorporation and founder agreements, still applies today. I'll drop links to everything in the description.
In this video, we are going to focus on how approaching a new business is different these days, and how to navigate the murky waters of the 2020 economy.
We have to learn to draw a line between the types of businesses that we have, and the different routes for each one of them.
On the one hand, we have the fast-scale, usually tech-related businesses that we read about in TechCrunch and Mashable. These are capital intensive businesses that carry a lot of risks, with the opportunity for massive earnings. Those are companies like Airbnb, or Stripe, and Square, which actually got started during the last financial crisis, in 2009.
This is the kind of business that has a chance to raise investor capital, and to continue funding their fast growth with new rounds of funding.
While the term is not precisely accurate, we'll call them tech startups for the purpose of this video.
On the other hand, we have 'traditional' or 'less scalable' companies. That includes everything from a restaurant to consulting firms, marketing agencies, all the way to online stores.
These businesses can't scale the way a tech startup can: they usually require a proportional amount of team members to scale their revenue, and don't get me wrong, some fantastic companies like Starbucks started this way, they just don't have access to the same type of capital that a tech startup can get.
Again, for the purpose of this video, we are going to call them 'traditional businesses,' even though the term might not be entirely appropriate either.
Both types of companies can raise investor capital if needed, but the way they approach their funding is entirely different. We'll get back to this soon.
Regardless of what type of business you have, you will need to get started on your own. Most companies, even high-scale startups, raise capital by the time they have something to show, so you should never assume that money will come first.
A team and a proof of concept should ALWAYS come first.
Let's talk about that proof of concept first. How do you prove this idea you have is worth something? How do you find out if customers will buy it?
The wrong way to approach this is by asking your friends and family because their judgment will always be skewed. You need to ask strangers.
In today's world and even more on today's socially distanced economy, it's likely your business will require an online presence. Few exceptions like, I don't know, a gas station or a local deli, are excluded- but the rest of us will need to position ourselves online.
You probably don't need a developer to build that first MVP (Minimum Viable Product). The first concept could be as simple as an explainer video, a fake sign up button, a newsletter subscription, or even a Facebook/Instagram page.
Anything that gives you information on the potential performance of your business is a step in the right direction. The cheaper and faster you can do these experiments, the better. I am talking days here, not weeks.
You just need to find out if people want what you are selling, but the product itself doesn't need to be ready. I've seen founders spend thousands of dollars on a prototype without testing a simple web page to find out if people are willing to sign up, or click 'buy.'
We have a beta product called Slidebean Sites, that lets anyone build a simple landing page, taking advantage of our templates and our Artificial Intelligence design. Check it out here.
Other fantastic platforms for websites are Shopify and Squarespace, and neither of them will require you to hire anyone. Just put the site out there, get some traffic to it (social media or ads, neither of which requires you to hire anyone either) and measure what happens.
This approach to starting a business is called 'The Lean Startup.' That's a fantastic book that every single entrepreneur should read. I'll drop a link in the description.
To me, the rule is that the founding team should have the skillset to make the first $100,000 in revenue, or get the first 100,000 users.
Think about it? If you lack one of these skills and need to hire people to get to that mark, then those people shouldn't be your employees, they should be your co-founders.
Think about that validation test we talked about. If you simply can't figure out how to build that first site, or how to drive the first few visits to your page, then it's evident that you need somebody else in the team.
I'd be surprised if you can't solve it on Slidebean Sites because it's just too easy! But remember, that is just the first step.
If you lack one of the needed skills, then you can't build the company. Period. The idea is worthless if it can't be executed.
I think the most common mistake founders make is approaching potential co-founders like they are hires. 'I'm inviting YOU to be part of THIS idea, MY idea.' You are doing it wrong.
The approach should be, I have a few ideas to start a company. I'm great in these areas, but I need someone great in these areas. Let's chat and see if we can come up with something.
See the difference? You are not hiring them. You are not standing above them. It's not your company. It's our company. You both need each other, and therefore, you have an equal say.
When I got together with my co-founders, we all brought a bunch of different ideas to the table. We only committed to the one that excited us all, and most importantly, the one where we all had enough expertise to build a better product.
Notice how I haven't gotten into the legal aspects of starting a business. We have a video on that.
We also have a video on founder agreements, and how to negotiate stock, salaries, and decisions between co-founders.
These might come sooner or later, but inevitably, the next step in this process should be... more validation.
Your first test should have had a goal. Something along the lines of 'percentage of people who pressed the fake buy button, or 'number of leads generated.' And if that worked, it's time to bring it to the next level.
Try closing your first sale, or try getting letters of intent.
For tech startups, that next step might require a very basic product, a beta version. Once again, your founding team should be able to build it and get a few hundred users in it. If you can't solve that, then the person you are missing should be a co-founder.
Other fantastic ways to validate if a product is worth anything, is on platforms like Kickstarter. My first company launched as a Kickstarter project: we made a simple video explaining how this really could game 'worked' when, in reality, we hadn't written a single line of code.
We used Kickstarter to understand if people would buy into it, and they did. We doubled the goal, raised the money we needed to develop it, but, most importantly, figured out if the product made sense to our potential customers without having to build it first.
Let's go back to the tech startup vs. a traditional business case. Each company should approach different investors for different reasons.
Say a chef wants to start a new restaurant. Establishing a restaurant costs tens, if not hundreds of thousands of dollars. In an ideal scenario, the chef should have some track record, should have done some market research about locations, and should be bringing a small portion of the capital.
He or she needs a partner/investor to finance the location. That investor is likely to be an equal partner, first, because the business cannot exist without his contribution and second, because of ROI.
Say the investor brings in $100,000 to establish the location, and to fund a few months of operations. The agree on splitting the business 50/50. How is the investor going to make his or her money back?
It's likely going to be through dividends. The restaurant might lose money the first year, but the second year, let's say it generates $1MM in revenues. Revenue is great, but the investor only gets an ROI from profits, and profits might be, say, $100,000.
After taxes, they might get around $40,000, which is about 40% of their original investment.
That means it will take three years for the investor to recover his investment. It's only after year four that the investor will collect any actual earnings from their investment, and all through that process, the money is 'at risk.'
That is why in 'traditional' businesses, investors come in for a much more significant stake in the company.
On tech startups, there is more risk involved, but at the same time, more reward. The first investors in Airbnb invested $600,000 for a 10-15% stake in the business. The difference is Airbnb is now worth Billions of dollars. Their investment was multiplied by more than 100x.
Few restaurants or consulting firms can grow so fast, so quickly. On the other hand, most tech startups aim for this kind of accelerated growth.
A financial crisis affects both kinds of businesses the same way, but I am still confident deals will continue to flow.
Investors and venture funds are likely going to be more strict and careful. They are likely going to require more validation and traction before they invest. Valuations might be lower. But deals will continue to happen.
According to Tom Tunguz, venture capital at RedPoint Ventures, who has a fantastic blog on startup funding, the number of seed and Series A round deals that happened during the last financial crisis was not reduced.
That's encouraging news. Remember, many of these funds have already raised their capital and already have the cash ready to deploy; regardless of the state of the market.
That being said, the question of the impact of the market in the business is not to be taken lightly. Your business should be ready to navigate this uncertain market, or, even better, prove that you have adapted your company to thrive in the current conditions.
Here are some free, or extremely cheap resources I recommend checking and using as you begin this journey.
Hit our channel's subscribe button for our weekly video on business tips. See you next week.