In my last post I introduced the two questions my small business counseling generally covers:
1. Can you do this profitably? (Unit economics.)
2. How can you do this now? (Bootstrapping.)
I dealt with question 1 last week. Proving that your opportunity is really profitable, when considering all sales, costs, and cash flow timing, is the first step. Once you are reasonably certain of profit potential, you can begin putting together an action plan. The key is not to confuse the two: just because you can work 100 hours a week for free now does not mean you should build a business that will never pay you. But the free labor is vital to getting the business off the ground.
How can you do this now?
These questions define the first next steps and the measurable goals the venture must hit in order to get off the ground. The actual goals will be different for each business, because they are based on context, but they will be something to do with making sales, operations, profit, timing, and people.
What is the minimum sellable product?
I'm a firm believer in 'sell first, ask questions later.' The initial goal should not be to build a perfect product or solution, but rather build something you can sell to your first customer. Make the sale and figure out how it could work better--iterate with real feedback. So the first step is to figure out what it wil take, in terms of time, resources, and people, to get to a sellable product. This is where free labor, improvised production, and other cunningly simple ideas matter most. It's a whole lot easier to invest time and energy for the first sale than raise and invest dollars from someone else for the first sale. Even if you end up giving away the earliest version of your solution, the customer should need it, be willing to pay for it, and (perhaps most importantly) be willing to talk with you about making it better.
Who is the best first customer and how to we reach that person?
I'd much rather build a cool operation and awesome company than go out and sell something (most technology folks would rather build the perfect code, etc.). But without a first customer, you don't have a company. Building a list of people/companies that need your product/service and finding connections to decision-makers is the first step of the sales process. A founder should be able to make the first sale based on his or her existing relationships. If not, the first people added (to an advisory board or as partners) should bring first sale potential with them.
What infrastructure do we need to build to make more sales at a cheaper cost?
The first few sales may be vastly unprofitable: little cash from the customer, major cash and time to the customer. If the sale proves the concept, the next step is creating a process that makes the product/service happen at a lower cost. This could be hiring people, buying machines, or allocating founder time. You need to define resources required to figure out who you need and how much money you need.
What people do we need to help me sell and deliver the product?
The last two questions help map out what the venture needs to accomplish in sales and operations. Partners and early employees should be assessed based on how they can build either side of the business. A technical co-founder may need a sales/business co-founder to round out the team--giving away equity may be the cheapest way to capture the talent you need. Assess what you can accomplish and when you need to add staff as the business grows.
What resources do we need to raise and invest to build the business?
If the sales cycle is long and cash payments wait, or if major operations investments much be made before the product is sellable, then the business may require significant investments of cash to startup. This adds a huge layer of complexity--instead of focusing on real customers, the founders' attention will be spent on investors. Raising money can be long and expensive, and it's not directly related to the core functions of the business. Ideally, I think businesses should focus on making initial sales and delivering a real solution, and wait to raise money until they do. However it's not always possible to achieve that goal. Founders should map out when and how they will raise money.
When will we reach profitability?
As the founders build a roadmap for building the product and making the first sale, adding in operational improvements, people additions, and raising money, the ultimate goal should be building a profitable business. This means building an incremental projection for cash put into the business and cash flowing from the business. Ideally, the business will iterate towards the initial unit economics of the opportunity. The key is building a roadmap that demonstrates when and how this will happen. As you build the timeline, sales and cost goals will become clear. The goals and their documents will be very useful in keeping everyone (staff and investors) connected with how the business is performing.
Goals
Simplicity. As the business's key problems and key goals become clear, it's essential to keep it simple. Investors, staff, the sales cycle, and operations will all create complexity. Getting mired in those issues causes many businesses to stumble. A resilient focus on what matters most is key to success.
Bootstrap. Do everything you can to improvise and keep costs within your means. The less equity you give away, the more potential you've got.
Profit. This seems obvious, but it's easy to lose track of the goal in the midst of day to day decisions. Keep track of those initial unit economics and take steps to hit those numbers.