Step 3: Money, Money, Money
Keep Your Mind Where the Money Is:
Once we have an outline or a rudimentary understanding of what our start-up will do, what our markets would be like, who our consumers are and what our goals are, we need to look at how we can fund our dream. To get an enterprise up and running, and to keep it growing, we. Need. Money.
I often feel that entrepreneurship is somewhat like having a child - the sheer joy, the absolute frustration, the unpredictability, the highs and lows. Also similar are the hours, the exhaustion, and the mandatory increase in breadth and scope of associated skills that years of experience bring with them.The amount of care and attention required during the beginning stages (or "childhood") of the start-up is also reminiscent of trying to feed and raise a child the way that is most suitable for his or her growth.
Starving a start-up of funds that are needed for the initial phase of setting up, and for every phase of growth thereafter has the same effect as starving a child of nutrition would have - it becomes harder to attain good health and proper growth.
On the flip side, throwing money at a start-up when (and where) it is not necessarily required may also have more or less the same effect as overfeeding a child.
I am of the opinion that no two start-ups are alike, and this is true in terms of finance too. The financial needs of start-ups would vary depending on their type, scope, size and environment (e.g. location, support system, access to markets and ease of doing business).
I did my postgrad in management for the express purpose of learning more about how I can give my start-up the best chances of financial survival. It helped, especially since I am a first generation entrepreneur, and my start-up is the first time I am experiencing the world of business.
However, great gobs of theoretical knowledge might be good - haha - in theory, but at the end of the day, actually trying to get a start-up off the ground and keeping it up and running is a whole different ball game.
We need to approximate how much money setting up our start-up will need. How can we go about it?
My personal go-to method is to sit down and write it out. Business-people and entrepreneurs around the globe might be going "nooooooooo!". This is what works for me - choose the method that works best for you.
What are my initial expenses?
Remember to include costs of registering your organisation as a company, partnership or any other form of entity. Include expenses that may be incurred for registering your firm's name, brand etc. with the local authorities (please check resources relevant to where you are for more information on the same).
Money will be required for permits, sanctions and certification (e.g. my start-up needed clearance from the local government before we could begin setting up our laboratory -- check out what you might need -- THIS IS IMPORTANT!). Make sure you find out as much as you can about statutory requirements before you start, and make sure to comply with all those that are needed.
You might need licenses to start marketing or selling your product or service. You also would probably require to pay an advance on the rent or lease for your office space, manufacturing unit, and so on. You'd need to pay the consultants who help you set up your start-up. You might need to find funds for electrical work, or a paint job to spruce up your office space (and for those personal touches).
And you definitely would need money to buy equipment, furniture, and office supplies.
Salaries and allowances:
You would also need money to pay your team, and yourself/selves. Marketing usually involves travel too, so you might need to factor in travel allowances.
These include (but are not limited to!) utility costs, such as electricity or power, water and phone bills, cost of raw materials, consumables or parts required to make your product, license fees for software, databases or technology you need to access to provide your service, transportation costs, marketing costs and so on.
Do keep in mind that our expenses should not overwhelm our income. That way danger lies.
Now that we've written down all the expenses that we can think of, we need to extrapolate this to get an idea of how much money we would need for our start-up's first year of operation. Got that figure? Great. Add at least fifty percent of your initial total to the figure you've arrived at. Now, we're ready to think about how to get these funds.
An entrepreneur can bring in his or her own money as capital, raise funds through loans, get seed funding, apply for a grant, have an interested investor, or be funded by another company to start a subsidiary unit. If you have already identified customers, marketed your product or service to them, got them on board, and have managed to get an advance from them to start working on your product or service - congratulations! You are a very rare breed of unicorn! 😄
Kidding aside, calculating the estimated expenses for the first year of running a start-up helps us focus on the level of investment, both financial and otherwise, that is required. Step three also helps us get a sense of how much risk is involved, and gets us thinking about how we can mitigate those risks. More about that later.
The third, and arguably most important "Money" is the one we stand to make from our business. The money we make from selling our product or providing our service, by making and retaining customers, and by meeting their requirements. Having a fantastic idea, product or service is valuable, but in most cases not in and of itself. If our fantastic idea cannot be translated into sales and revenue, then we are, in effect, losing money. And most entrepreneurs do not - and more importantly, should not - have that luxury.
It is my belief that the most important aspect of a start-up, and indeed, of any business, is selling your product or service. Why do behemoth companies that have been industry pioneers, leaders and lauded successes close down operations? The boiled-down version of the answer is almost always that they are no longer able have/attract/retain customers. Every department, function, or "level" of a company, especially that of a start-up might be important. But none of them matter if you are not selling whatever it is that you have set up shop to sell. Marketing matters. Selling is vital. Revenues = goals.
Unfortunately, identifying a customer base willing to spend money on what you are selling alone is not enough. Often-times, market research data can be misleading, and people who said they would definitely buy your product might turn out not to want them. It could even turn out that 80% of people we met during our market research survey loved our idea, and said they'd be willing to spend money on it, and when we come to market with our product it turns out that the 80% we banked on does not have the money to buy it.
So make sure you have not just information, but the right information regarding your potential customer base and market size.
And, as in the case of individuals, multiple revenue streams (e.g. product sales, consulting services, investments, and contract work can be four different sources of income for a technology start-up) help increase income and shore up cash flow when necessary.
To sum up:
- Get an idea of how much money you need to run your start-up
- Figure out your options and identify the best source of the funds you need
- Have a clear picture about the customer base, markets, and revenue streams for your start-up, and make sure that these are viable.
[WARNING: I am not an expert in any area, and all views expressed in here are only my opinion, or my take on things based on my experiences, to be remembered if useful, and promptly forgotten if not. This article is NOT meant as a substitute for expert advice in respective domains as required.]