Okay. You have your idea. You've sized your market and you're ready to start.
Now you should choose the structure of your business and the type of funding you'll need. Going back to why you're starting a business, what is your overriding motivation? I posed a few questions in Part 1, but of these, what is your priority?
Now you should choose the structure of your business and the type of funding you'll need. Going back to why you're starting a business, what is your overriding motivation? I posed a few questions in Part 1, but of these, what is your priority?
- Do you just want a decent income that can support you, your employees and your family, giving you independence?
- Do you want to get rich?
That's not to say that you won't get rich with (1), but if getting rich is your primary motivation, then your approach will be quite different.
Let's start with (1). You want control, independence, and a decent income that can support you and your employees. If an IPO is in your future, it's at least 4 or 5 years off.
If control is a priority, then most likely you won't want outside interference in your business. You probably don't want to go the route of seeking seed funding followed by larger venture capital investments. Your choices then include the following (in order of the degree of control you maintain):
I'll discuss Bootstrapping in the rest of this post and the others in future posts. Note that borrowing funds can be risky. You can borrow from friends and/or family, but you might be surprised how much they want to help. Getting loans obligates you to payments which you need to be sure you can meet.
Crowd Funding sounds good, but new SEC rules make this less attractive. See I Would Still Pass on Crowd Funding.
Angel/Private Investments offer an attractive possibility though you will give up some control. We'll go into that in a future post.
I must admit that my favorite way to start a company (I did it three times this way) is bootstrapping. In reality, even if you decide to go big with full-on Venture funding, you'll probably need to bootstrap at least enough to get a prototype built or to demonstrate the concept of your product/service.
With the tools available today, you may be able to kick off your startup while you're still working at your present job. Of course you need to be careful to ensure that your employment agreements, in particular patent and confidentiality agreements, don't prohibit you from doing this. Be very careful here. You also need to be careful in contacting clients of your existing employer. In California, again depending on agreements with your employer, this is usually allowed if your contact is informational and doesn't solicit - "I just wanted to let you know that I've left XXX and am now working for NewCo. My contact information is..."
Note that even if you've left the company, you may be subject to restrictions on information you use or even skills you've learned. Check your employment agreements!
Ultimately, in an ideal scenario, you start your business while continuing your previous job. This means you don't have to pay yourself a salary or benefits.
Often, a good way to start is to begin by offering services - consulting or software development. This makes you profitable from day one. It can also be a good way to do additional market research - consult for your target market and you'll get real insight into what your customers really want/need.
In my first startup, I began by consulting to enterprises who needed unique networking and security products. This involved assessing their requirements in detail, researching what was available in the marketplace and making recommendations for specific products and services, noting the current market deficiencies.
People talk about luck and I guess I was lucky. But I believe you make your own luck by positioning yourself to be ready when opportunities arise. In my case, after a few contracts, I found customers willing to pay for development of products that weren't found on the market in exchange for unlimited licenses (in that case it was software) or for a much reduced guaranteed price (a hardware/software product).
I bootstrapped my second startup through a combination of consulting and contract software development. I hired employees and contractors to do development and banked the profits until I could afford to leave my then-current employer and fund our own product development.
Bottom line: if you have a product or service you can offer use that to raise your initial funding and you'll be in a much stronger position if/when you decide to raise additional capital.
Let's start with (1). You want control, independence, and a decent income that can support you and your employees. If an IPO is in your future, it's at least 4 or 5 years off.
If control is a priority, then most likely you won't want outside interference in your business. You probably don't want to go the route of seeking seed funding followed by larger venture capital investments. Your choices then include the following (in order of the degree of control you maintain):
- Bootstrap the business.
- Borrow funds to get started.
- Crowd Funding.
- Angel/Private Investment.
I'll discuss Bootstrapping in the rest of this post and the others in future posts. Note that borrowing funds can be risky. You can borrow from friends and/or family, but you might be surprised how much they want to help. Getting loans obligates you to payments which you need to be sure you can meet.
Crowd Funding sounds good, but new SEC rules make this less attractive. See I Would Still Pass on Crowd Funding.
Angel/Private Investments offer an attractive possibility though you will give up some control. We'll go into that in a future post.
I must admit that my favorite way to start a company (I did it three times this way) is bootstrapping. In reality, even if you decide to go big with full-on Venture funding, you'll probably need to bootstrap at least enough to get a prototype built or to demonstrate the concept of your product/service.
With the tools available today, you may be able to kick off your startup while you're still working at your present job. Of course you need to be careful to ensure that your employment agreements, in particular patent and confidentiality agreements, don't prohibit you from doing this. Be very careful here. You also need to be careful in contacting clients of your existing employer. In California, again depending on agreements with your employer, this is usually allowed if your contact is informational and doesn't solicit - "I just wanted to let you know that I've left XXX and am now working for NewCo. My contact information is..."
Note that even if you've left the company, you may be subject to restrictions on information you use or even skills you've learned. Check your employment agreements!
Ultimately, in an ideal scenario, you start your business while continuing your previous job. This means you don't have to pay yourself a salary or benefits.
Often, a good way to start is to begin by offering services - consulting or software development. This makes you profitable from day one. It can also be a good way to do additional market research - consult for your target market and you'll get real insight into what your customers really want/need.
In my first startup, I began by consulting to enterprises who needed unique networking and security products. This involved assessing their requirements in detail, researching what was available in the marketplace and making recommendations for specific products and services, noting the current market deficiencies.
People talk about luck and I guess I was lucky. But I believe you make your own luck by positioning yourself to be ready when opportunities arise. In my case, after a few contracts, I found customers willing to pay for development of products that weren't found on the market in exchange for unlimited licenses (in that case it was software) or for a much reduced guaranteed price (a hardware/software product).
I bootstrapped my second startup through a combination of consulting and contract software development. I hired employees and contractors to do development and banked the profits until I could afford to leave my then-current employer and fund our own product development.
Bottom line: if you have a product or service you can offer use that to raise your initial funding and you'll be in a much stronger position if/when you decide to raise additional capital.
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