The Great Myth: “If You Build It, They Will Come”
by Salmeh Fodor
September 19, 2008
This new column focuses on you, the entrepreneur. We’ll start with whether you have what it takes to be the next great idea, or whether you should stay where you are – somewhere in middle management. As we progress through the articles, we’ll discuss positioning yourself for growth, moving up through the myriad of stages of financing, and taking your company from that $5 million mark to the $100 million mark and up.
Are you peering over the cliff and deciding whether to jump? That cushy corporate job pays the bills, but you have a dream and the itch to pursue it. The question is: Do you have what it takes?
Most people don’t grow up thinking, “I want to be in middle management for a huge corporate conglomerate when I grow up.” Or, “Oh, gee, I can’t wait to work nine to five and report to 10 bosses.” Most people want to run their own show, be their own bosses, and be the next Warren Buffetts or Li Ka-Shing’s of the world.
You can do it, but make sure you are prepared. Preparation is the key to success in the early stages of entrepreneurship. Now, let’s talk about three keys to preparing for the jump:
1. Family Buy-In
You and your family need to be ready to commit all resources to your dream. All of your time, energy, and, most importantly, money will disappear. Your spouse had better be onboard and fully bought in to your dream because he or she is not going to see you – or any money – for a while. Set the expectations early and save your business and your marriage.
2. Be Realistic and Study the Terrain
If you build it, they will not necessarily come. It makes for a great movie, but not always a great life. Most start-ups fail, not for the lack of passion but for the lack of preparation.
There is no better way for you to discover new ideas or pitfalls for your business, than to write a plan. We’re not talking about a formal, $20,000 business plan, but a preliminary written analysis of your ideas. Perform intensive market research to determine if there is an unmet need for what you will offer. Is that unmet need a cheaper price or an untapped geographical market? Perhaps there’s an unmet need for products and services that are complimentary to those already on the market.
Part of your research should also include analyzing the competition and determining where your company will have the edge. As you research and analyze the data, you can then determine if anyone will actually buy what you plan to offer.
There are great resources out there for market research and analysis that are free or available for a reasonable fee. You may wish to start with Hoovers or Jupiter Research to begin your research. And look at industry-specific analysts. For example, Gartner is a great site to check out for timely IT and telecom research, and if you’re in the e-learning industry, Brandon Hall is the site to visit.
3. The Money – How, When and Where
Once you have determined that you can offer something that people will want to buy, determine your funding strategy for the first five years. Try to avoid unnecessary overhead expenditures. Work out of your house, which is quickly becoming today’s trend even for large corporate employees. Also, hire only those who are critical to the success of your company and seek out creative compensation strategies. Your goal is to keep the cash in the business as much as possible.
As for funding your venture, contrary to popular folklore, friends and family don’t want to give you their savings. There will be lots of promises to help in the beginning, but getting people to actually sign that check will be a struggle; I guarantee it.
If at all possible, plan to self-fund your venture for the first couple of years through your own savings and through loans. Loans are tough to get right now, but they are still out there. Next, get firm commitments from your friends and family as to the amount they will give you and when. By firm, I mean in writing.
As for their ROI, don’t give away your equity if you can help it. Be creative – consider performance-based returns to offset equity. Be stingy with your equity and try to structure the investments as loans or, at worst, a loan/equity combination.
What’s coming up… The all-elusive angel investors and the potential piranhas that will be circling.
Salmeh K. Fodor, Esq. is a Partner of Marchman & Kasraie, LLC with 17 years of financial and legal experience. Her practice focuses on corporate, business and securities law, and her clients have ranged from start-ups and emerging growth companies to publicly held corporations.
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