So you have a great idea. You can’t wait to leave the boring day job, collaborate with a few of you friends and start a company. You will be living the dream. You create a 5 year plan showing $80 million in revenue in year five, calculate valuations based on current comps and plan your retirement. Life couldn’t be better until you wake-up from your dream and face the reality of how hard it will be to survive the first 18 months. The first instinct is to get a war chest of other people’s money, but without a product, a seasoned team, a prototype, customers or any revenue it is either unlikely you will get funding, or, if you do, it will eat up much of your equity. Generally a combination of personal savings, friends and family funding and possibly angel investing will keep the lights on. This can be coupled with some innovative early revenue generation opportunities and very tight cost controls to give you the best chance of survival until either significant revenue or funding occurs. The following are ideas and guidelines to help you get through the early days of your exciting start-up.
- Be Prepared: Do as much as you can before leaving the security of the day job. This includes building up personal savings and liquid assets to support your needs and the company needs for the first 12 months. To determine the cash needs you need a detailed plan itemizing all anticipated expenses. You also want to have back-up plans to cover unanticipated expenses. These buffers may include a line of credit, credit cards, a rich uncle, partners with personal savings and other means of getting through hard periods. A good rule of thumb is to estimate every expense you will incur prior to offsetting revenue/funding and then double those expenses.
- Develop Your Funding Strategy: Develop your strategy for acquiring funding very early. For most organizations I like a funding in phases with specific milestones and use of funds within each phase. For example, an early seed round or friends and family round may get you a prototype and your first full-time employee. When this is accomplished you will be in a better position to get some more significant angel funding at a better valuation.
- Network, Network and then Network: Over the first 18 months you are going to need so much help in so many areas. Establish your networks, both formal and informal. Communicate via Linked-in, Twitter, Facebook and other social networks about your ideas, needs, updates on the company and so on. Then start focusing on the key relationships that will help you the most. For example, the top engineer you want to hire once funding comes in, your friend’s Dad who is an Angel investor, A CEO you know that could be a potential advisor and others that can be helpful now or in the future. Also look to industry groups, trade associations and non-profits that can be helpful and gain you additional credibility in the space you are focused on.
- Develop a Detailed Financial Plan: Cash is safety. Treat cash like your most prized possession. This starts with a detailed understanding of every possible expense in the foreseeable future. Develop a model that estimates expenses and then update these assumptions with actuals on a daily or weekly basis (depending on the urgency and your cash outflows). Tie this into a regularly updated cash flow model that also projects your cash position for at least the next 6 months. This modeling will make or break many start-up companies. You always need to know how long you can last if you expect to properly mitigate risk.
- Innovative Revenue Generation: One of the ways to last longer and give you a better chance for success is to figure out how to generate revenue even before your core product is ready for prime time. For example if you and your partners have in-demand skills you can help support your company with consulting revenue. This has the added advantage of developing trust relationships with prospects for your full product. Another revenue generator can be a trimmed down version of your full product perhaps targeted at a specific market segment. In addition to revenue generation, this could give you real customer input for your full product. The trick here is to generate enough revenue to lower your risk while spending sufficient time on your core product/strategy.
- Execute on Your Funding Strategy: If possible, you should be working on your funding strategy 6 months before the funding is needed. I’m not saying that you should be pitching VC’s before you are ready (see my top 10 list of what not to do when seeking funding), but you should be taking the steps to be ready including networking, working on the investor pitch, getting the prototype completed, signing up the first customer or whatever is important to achieve your next round of funding well in advance of the date you actually need funding.
If you follow the steps I’ve outlined, you will be better prepared to avoid the dilemma I’ve seen many entrepreneurs face…being forced to acquire funding to keep the lights on. This is like being backed into a corner and having to take any funding you can possibly get including suboptimal terms and a low valuation, or, not getting funding and abruptly ending your dream. While I have learned that there are no absolutes in business, I do believe that thinking about the steps I’ve outlined will improve your odds of success. Please feel free to comment adding your ideas, input, experience or suggestions.