D'Arcy from Winnipeg
Solution Architecture, Business & Entrepreneurship, Microsoft, and Adoption

How To Start a Company

Monday, January 2, 2012 12:55 PM

I read Dave Rosenberg’s recent article on CNET entitled “What you should do in 2012: Start a company”, which focussed on interacting with venture capitalists to raise money.

I think this is jumping the gun a bit though. The reality is that you don’t need VCs to run, or even start, a company. You also don’t need to quit your day job to do it, or hire employees right away, or put up huge capital to start it.

An Idea that Provides Value…or Don’t Be an Underpants Gnome

The most important thing you need is an idea that provides value to someone. Many people fall into the trap of trying to come up with “the next big thing”, that *something* that will make incredible money within a few months. I watch Dragon’s Den and am amazed at how delusional people can be with the valuations of their companies, suggesting that a company with no sales can be worth upwards of 1 million dollars – but its a great idea that people will love!

That’s because its easy to fall into the Underpants Gnome syndrome. Some context – there was this episode of South Park (no really, keep reading, this is important) that featured gnomes that would sneak into people’s homes and steal their underpants. Why were they doing that? Well, they were working from this formula:

The sad thing is that this isn’t unlike what many small businesses start with:

Phase 1 – I have an idea!

Phase 2 – Who knows, we do something I guess?

Phase 3 – I’ll make loads of money!!!!

But when starting a business, especially in the first year, your focus can’t be on profit. Most businesses won’t hit profitability for 3 – 5 years which means for those first years a business either breaks even or suffers losses (obviously if the losses are too great, the business may not be worth seeing through the initial hurdles). Even if there is some profit made in the first few years, that will typically be re-invested back into the business as it continues to grow.

The true focus needs to be on the first two phases, and we need to alter the words associated with them.

Phase 1 – Define the Value and Put Your Idea Out There

Successful businesses are ones that provide actual value to their customers. Many businesses miss that its not about making money, its about making money doing something for someone else. Businesses aren’t about dollars, they’re about people. The dollars are an end product of the interaction with those people. The more valuable your idea is to people, the more dollars will be produced. So before you start thinking about profitability or operations or any of that, you need to define what the value is for your idea. Your elevator pitch is your value statement – define it!

Now just because you think something is a great idea doesn’t mean everyone feels the same way. You need to test your theory that it truly is great. There are many techniques for doing this, which I won’t get into detail in this post, but a shortlist is using online surveys, soliciting direct feedback from focus groups, and doing market surveys. The point is, you need to vette out your idea before you jump in and make any investment.

When I did my first Prairie Developer Conference back in 2010 in Regina, I engaged the local community to ensure that I had their support and that they felt holding a technology conference was worthwhile to the technical community. Their feedback was crucial to ensure that the conference would be a success and they were instrumental in helping promote the event. If I hadn’t engaged them, I would have failed miserably.

Phase 2 – Do It!

The next important step is to actually do something! Note that there isn’t a defining line where phase 1 ends and phase 2 begins, and in fact you might find yourself “doing it” alongside your phase 1 activities.

Take one guy I worked for. He was in the automotive industry and saw a need for a better way for salespeople to generate quotes. So while still at his day job, he picked up a book on programming and wrote the first version of what would become a large software platform. While defining the value and soliciting feedback from colleagues and potential customers, he was actually building the software as well.

The balancing act, and its more art than science, is to determine *when* to invest in the doing part. The example above illustrates this: Let’s say he thought it was a need and a great idea and built a huge quotation system and then went to market, but the market responded negatively or the need wasn’t as great as he thought or other competitors were already established? The investment would have been wasted.

It goes back to businesses being about meeting the needs of people – define the value, put your idea out there for validation, and do it!

Phase 3 Profit! Just Kidding, its Actually Solicit Feedback, Review and Assess!

So now you’ve done something – you’ve made your idea a reality, you’re officially offering your product or service, and you have customers or perspective customers. Time to watch the dollars roll in? Hardly! Now the real work begins! Remember that businesses are about providing value, meeting needs, and above all people. So begins the feedback and assessment loop.

Things move fast in life. What was a need one day may no longer be a need the next, and the value your product or service provided today may be replaced with a competitor tomorrow. This is why its so important to continue connecting with people considering or using your product/service. This is also where many people feel tension due to emotional attachment to their business.

I was watching Kitchen Nightmares, the show where Gordon Ramsey goes into troubled restaurants and tries to help them. One was a burger restaurant in LA. The customers all had very strong opinions about how bad the burgers were, that the meat was dry, that there were things that should be changed. The owner was oblivious though, insisting that his burgers were fantastic and that people who disagreed were just trying to damage his business.

What people forget is that businesses exist to provide value to people. Even if that need is to enjoy a burger and the value provided is a good tasting beef patty on a bun, asking for feedback from customers, reviewing it and making adjustments is crucial for any business to survive. Personal preference and emotional attachment can’t factor in – its about them, not about you.

When I get someone giving me negative feedback for one of my conferences, I don’t take it personally; instead, I read and assess the feedback and see what I can learn to make the conference better. If possible, I’ll connect with the person directly to solicit even more details. Critics aren’t a danger to your business, they’re actually to be cherished; its the ones that aren’t happy but never tell you that you need to worry about.

Ok, But What About Profit?!

A business is built on value but runs on profit. The reality is that money does factor into the equation, and a healthy business will return a profit. Let me repeat that:

A healthy business will return a profit.

The danger of too much focus on profit is that it clouds the reasons for running a business in the first place. In my opinion, this is why so many companies are focussed on appeasing their shareholders than their customers. A healthy business is one that focuses on providing a valuable product or service and ensures that they’re adapting to the changing needs of their customer base.

When profit becomes the sole focus there’s a danger of doing things that maximize profit while undercutting value…when this happens, value decreases and the overall business suffers.

So You’re Saying I Should Start a Business But Not For Money?!

That’s not what I’m saying at all. Remember, businesses are built on value but run on profit. A business that doesn’t produce profit is not healthy and is not sustainable. And individually, there needs to be some payback for the time, effort, and energy that we put into our businesses.

But profit should never be the *starting* point for a business. If someone says “I know how I can make a lot of money by doing x” then in my mind there’s either a high probability of failure, or money that is made is done somewhat unscrupulously.

So Go Start Your Business!

Starting a business doesn’t require VC money or a bank loan. It requires an idea that provides value to people, confirmation from your market that its valuable, action to put your idea into the market, and gathering feedback to review, assess, and adjust.

You need to be realistic about profitability over the first few years and focus on your quality, value, and your customers.

Keep emotions and personal preferences out of the business as much as possible. Realize that for every time you choose yourself you could be sacrificing a customer.

A healthy business will return a profit, but the health of a business is not determined by the profit it achieves.

Good Luck!




Feedback

# re: How To Start a Company

Your focus can’t be on profit. Most businesses won’t hit profitability for 3 – 5 years which means for those first years a business either breaks even or suffers losses.
Chirobizacademy
8/12/2012 11:13 PM | dfcsewcf

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