We love working with start-ups. This is a list of both legal and practical tips (in no particular order) compiled from our years of experience of advising Australian entrepreneurs.
“The best way to predict the future is to invent it” – Alan Kay
1. Choose the right legal structure to suit your objectives
- Sole trader: an individual trading on their own;
- Partnership: an association of people or entities running a business together, but not as a company;
- Trust: an entity that holds property or income for the benefit of others; and
- Company: a legal entity separate from its shareholders.
Each structure has its pros and cons. It is also important to remember that registering a business name is not the same as registering a company.
We are on hand to assist our clients make this important decision and further information can be found on the Australian Securities and Investments Commission (ASIC) website.
2. Take the time to develop a Business Plan
“That which gets measured gets managed” – Drucker’s Axiom
Developing a business plan is critical for communicating your idea to potential partners, including advisors and financiers. It is also critical for clarifying certain aspects of your idea that you might not naturally focus on, such as risks and exit plans.
Developing a sound business plan can often be a stumbling block for would-be entrepreneurs. These two important points can help you get your plan completed as efficiently as possible:
- Find the right template. First search for a template suited to your industry. Otherwise, the major banks provide good generic templates, such as Westpac. Keep in mind that your ideal structure may be combination of sections from different templates.
- Write your first draft fast.
There is also an emerging school of thought called “lean start-ups” which recommends favouring experimentation over elaborate planning (see Why the lean start-up changes everything [registration required]). This technique uses a Business Model Canvas which is like a mini-business plan consisting of nine components, all on one page.
3. Understand your numbers and have them at your fingertips
As well as drawing up financial projections as part of your business plan and working with your bookkeeper/accountant to complete your P&L, cash flow statement and balance sheet on a regular basis, it is critical to know, think about, and articulate your key business numbers. These numbers can include:
- Pipeline coverage
- Cost analyses of your products/services
- Break-even analyses for each product/service, customer and the company overall
If you are not comfortable with developing and explaining your key numbers, it is critical that you work closely with someone who is. If there is one thing that is guaranteed to put yours in that large percentage of start-ups that fail (75% according to a recent study by Harvard academic Shikhar Ghosh), it is not being on top of your numbers.
4. Find a mentor genuinely experienced in what you’re trying to achieve
If your new business focuses on disciplines different to your previous work, chances are your ideal mentor may not be within your existing network. Pre-determine the skill sets you require and then draw-up a list of people (within 2 or 3 degrees of separation) who have these skills (LinkedIn is an excellent tool for this process). It is likely that the person/people you end up asking will be flattered. But remember, it’s easier saying yes to being a mentor than it is to put time and effort into the relationship. For this reason, Tim Ferriss advocates in the 4 Hour Work Week giving your mentor a small equity percentage (say 3-5%) to ensure they have “skin in the game”.
5. Don’t let your costs become disproportionate to the size of the business
Many large companies have cost control committees which heavily scrutinise the business’ cost-side to ensure all spend is justified. Ensure your start-up has this sort of discipline from day one. It might mean that those fancy looking business cards or the company car need to wait to until a certain level of growth has been achieved. Always explicitly know your largest costs (it may even help to chart your 10 largest costs, for example) and regularly assess ways to minimise this spend. One very common feature of successful entrepreneurs is a history of (at least initially) having run a lean ship.
6. Develop a great culture from day one
“It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett
In his seminal 1997 Harvard Business Review article (and the Review’s most ordered article of all time, according to mgmtblog.com), The Parable of the Sadhu, Bowan H. McCoy argues that most of us have very clear personal values and processes for values-based decision-making. But put a bunch of individuals with great integrity together and the resulting organisation’s culture can often be inferior to its individuals. Therefore the role of the company is to support and reinforce these personal values, rather than allow individuals to override their personal beliefs in the hope that the company’s culture will take care of it. The early days of a start-up are critical for setting this tone. Most importantly, as a start-up entrepreneur, your personal values provide the foundation for the company’s values. As McCoy states, “[e]ffective managers, therefore, are action-oriented people who resolve conflict, are tolerant of ambiguity, stress, and change, and have a strong sense of purpose for themselves and their organisations.”
7. Be proud of your offering but don’t fall in love with it
We all have a proven psychological bias towards products we create. Ask yourself this question: which end product is more personally satisfying, buying a ready-made chair or buying the parts from IKEA and building the chair yourself? Most people would say the latter. That is why Tulane University marketing professor Daniel Mochon calls the psychological bias to fall in love with your products “the IKEA Effect”. According to Lifehacker:
“…Mochon's experiments actually have serious big-picture implications. The world over, companies and managers fall in love with their own ideas - and reject better ideas from the outside because they were not designed in-house. [...] It's a good reason - and this is true whether you are running a big complicated project involving millions of dollars or finishing a third-grade craft project - to have someone from the outside, who isn't invested in you or your work, give you some objective feedback before you show your project to the world.”
How do you conquer the IKEA Effect? Objective evaluation. It can take the form of a simple online survey (Survey Monkey or Amazon’s Mechanical Turk are great tools for this), interviews with potential customers or a soft launch.
8. Are you the right person to be selling your product?
Are you comfortable and adept at persuading others to buy your product or service? If your answer is no, determining who is going to sell on your behalf is a fundamental early step. An obvious solution is to employ a sales person. However, you may be better off giving up margin to allow a distribution network to sell on your behalf (Affiliate Marketing is a particularly useful tool for this in the online world). Alternatively, you can invest time in building up your own sales skills. Dan Pink argues, in his recent book To Sell Is Human, that persuading others is an essential skill that no one can avoid in a successful business career. Reading this book is a good place to start consciously developing these skills, but there are many other great books and online resources on the subject.
9. Cash collection is critical
“Cash is king” is a common cliché in the entrepreneurial world. But what does it actually mean? Like the proverbial “bird in the hand”, receiving cash through the door is far more important than the promise of receiving cash in the future. Therefore, we stress the importance of cash collection. It’s not a glamourous thing to focus on but it is critical. So, what are your payment terms? How are you incentivising customers to pay on time? How do you respond to those who don’t? What is your strategy for managing cash flow on the cost-side and does this complement your revenue-side strategy?
10. Invest in professional services from the outset
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” – Aristotle
Receiving professional services (e.g. accounting and legal) advice may seem like a discretionary luxury in the early days of starting a company but we argue that it is imperative for three key reasons:
- Efficiency: your time is your most important resource and has a dollar value. So don’t waste your time researching something that a person who provides that same advice daily can give you instantly. The real cost will often end up being less, particularly as these services are usually tax deductible.
- Risk-management: receiving professional advice greatly minimises your risk and the chances of something slipping through the cracks. Again, this can save you money in the long run.
- Not hiding the true cost of running your business: a mature business will require on-going professional services assistance. Start-up entrepreneurs will often be tempted to avoid receiving advice by researching themselves or seeking free or cheap advice from knowledgeable friends. Doing so hides the true cost of running your business which can be problematic during evaluations or when you wish to sell or bring on investors.
We can provide entrepreneurs with broad range of legal and consulting services. For those services we cannot provide, we will happily recommend reliable professional advisors to suit your needs, both in Australia and internationally.
Please contact James Groom if you have any questions regarding this article.