Research the types of ownership structure and the implications of each specifically on tax, liability, and ownership transfer.WHEN YOU MOVE OUT OF the Idea phase and into Phase II, Startup, your hard work will begin. You will have invested a lot of time in mental preparation, and soon, your business will be born. For me, the end of my Idea phase marked the close of a long period of frustration, of wanting to become an entrepreneur but not having an idea—I should say an I.D.E.A.—strong enough to act upon. Once my E-Formula had all the right elements, I was anxious to be on my way. I had much to do to establish my business plan and gather all of the critical information I needed in order to incorporate. I was impatient to begin, but I still had to understand the legal and administrative aspects of setting up a company before I began actually working on my entrepreneurial idea. The planning and preparation I was about to undertake would have been much easier if I had put myself through some Entrepreneurial Exercises ahead of time. The information in the next chapter of this book will take you through your first steps in the planning and preparation necessary to launch your own startup. The exercises in this chapter help you get ready for that process.
These exercises won’t be of much use to the accidental entrepreneur who has a great opportunity fall into his or her lap, but they will help those who know in their heart that entrepreneurship is their desire and who are committed to finding (or creating) their opportunity. Entrepreneurial Exercises can help you prepare for the work ahead, before the opportunity even presents itself. By working through them, you’ll shorten the time between the Idea and Startup phases and eliminate some of the difficulties involved in launching your business. These exercises require no financial expenditure and are centered on the types of pre-startup research applicable to any business or service. With a deep understanding of the industry you are targeting, you can adapt the exercises to make them more specific to your needs.
WARM-UP: DEDICATING SPACE
The research you’re about to conduct will lay a strong foundation for entering into the hard work of the Startup phase. You may be tempted to rush out and begin searching for office space and equipment or designing a logo, but please don’t—not yet. Start with these exercises, then move on to the preparatory work I outline in the next few chapters of this book.
You do need to arrange some dedicated space to conduct the research involved in these exercises, and you’ll also need a system and some space for organizing and storing the results of your research. You will gather a lot of material related to your idea, and you need to be organized for future reference. You will forget why you tore out that newspaper article or copied that URL months later, so you need to be sure that you’re collecting and labeling all of the information you gather according to its type and topic. When you are ready to act on your idea, you’ll realize that the time you spent organizing your storage of entrepreneurial ideas and material was a great investment.
Even though we live in a digital age, you’ll still be collecting some print materials—articles, newsletters, and so on. I prefer to use a physical file cabinet with hanging folders to hold printed matter, but you might prefer to use a simple multifolder portfolio. If you don’t want to collect any printed material, you can electronically scan the printed information you’re gathering and organize a series of folders on a portable drive or desktop. The exercises that follow will help you set up and organize the folder and file topics for containing all of the ideas, examples, news clippings, industry data, experts, resources, and potential competitor profiles that will help you get ready to enter your Startup phase.
Before becoming an entrepreneur, you need to conduct lengthy administrative research into the legal aspects of activating your idea. Establishing a business is a multistep task that can feel like a dive into unchartered water for the new entrepreneur. Researching this information in advance and filing it in an organized fashion will pay big dividends for you down the road.
Here’s a checklist of legal research items and activities you can conduct before Startup:
Research the types of ownership structure and the implications of each specifically on tax, liability, and ownership transfer.
Using the Internet, library, or local Small Business Association (SBA) office, learn what is involved in incorporating a business in your desired location and what laws and practices dictate the acquisition and use of these legal items:
Articles of incorporation (the governing management rules you create and file within the state you incorporate)
Federal Employer Identification Number (FEIN) (necessary to pay withholding taxes on employees)
Certificates (if there is great certainty as to what industry you may enter, explore what certifications or permits may be required, their benefits, and how to obtain them)
Start seeking recommendations for a law firm that can guide you on your startup requirements and advisory needs. Typically, friends and family can direct you to a trusted source, as can the local chamber of commerce.
There are several resources you will need to draw upon in your Startup and Running phases, regardless of the type of business you start. For instance, most likely you will need a website, and you’ll need a developer, hosting service, and source to buy a domain name. So much information is free on the Internet today that a bit of time invested in online research should yield answers to your most basic resource questions. Documenting information online and identifying experts you will want to involve in your Startup will take a lot of pressure off of you as you activate your idea.
Here is a checklist of research activities you should complete as you gather resource information in advance of your Startup phase:
Obtain and review business plan templates.
Develop social networks now to expand your reach to resources and to communicate awareness of your company when ready (LinkedIn, Plaxo, Facebook, Twitter, and so on are excellent sites for establishing your presence).
Seek out experts, coaches, and mentors who own businesses or are in your desired field.
Read actively and retain anything you feel is relevant for your journey.
Seek out information on best practices and global business topics such as search engine optimization, social networking, technology, cloud technologies, mobile applications, and communication tools that you feel may be relevant down the road. Consider subscribing to magazines like Fast Company, Entrepreneur, Forbes, the Wall Street Journal, Businessweek, Harvard Business Review, or Inc. (some of my favorites).
Subscribe to Internet-based news services, groups, societies, clubs, and so on that are relevant to your idea, market, industry, and competition. And remember, the most powerful competition arises from unexpected places, so be as broad as possible in your research and activities.
Understand your own knowledge gaps. Most entrepreneurs are not accountants, for example, so taking a basic course in understanding financial statements at a community college may be a good investment. Even though you’ll have to invest some time and money into this type of research, furthering your education is always a good investment. You also need to identify and evaluate these resources prior to launching your business:
Most startup businesses are self-funded—otherwise known as “bootstrap” ventures. You also may plan to obtain loans from banks, family, or friends. Start to investigate and understand the financing methods, limitations, and conditions you’ll be working with, as well as their resulting obligations and requirements.
Here’s a checklist of activities that will help prepare you in advance for financing and funding your new business:
Talk to a banker to understand the business loan process and requirements.
Make sure you understand business bank/checking account fees, services, and so on.
Start building personal savings, and establish your current personal living expense budget.
Reduce or eliminate your personal debt.
Investigate credit union and “micro loan” establishments, along with their fees and requirements.
Determine how to structure your personal assets from the business entity to protect yourself. Look into the benefits of creating a will and personal trusts.
Understand what is involved in declaring—and emerging from—personal bankruptcy, as well as its implications.
Examine pro forma financial statements from sample business plans (found abundantly on the Internet), and learn their components.
Few startup businesses will attract or require sophisticated funding; however, if you think yours will, then start now to investigate the pros and cons of funding via angel, venture capital (VC), or private equity. An increasing number of entrepreneurial funding events are taking place, especially in major metro areas. You can subscribe to an angel or VC user group via LinkedIn or similar sites to find sources for learning more about these events and opportunities.
The actual running and administration of a business will involve a number of operational aspects. Researching these aspects of your future business can be a somewhat more specialized process than the other Entrepreneurial Exercises in this chapter. The information you gather here, however, will prove to be highly beneficial to you during startup, even if you ultimately adopt alternative operational tools and processes.
Here’s a checklist of the operational services, suppliers, and information you should look into in advance of the Startup phase:
Communications (phone systems, cell, virtual capabilities)
Office space and rents (location, county tax differences, lease terms)
Support capabilities of available business services, such as FedEx Kinko’s, temp staffing, US Postal Service, UPS, and so on
Cost-saving/efficiency tools and processes used by other business owners
Offshore development, services, and manufacturing knowledge (if applicable)
Sources for new and used office furniture, copy machines, or computing equipment
Merchant banking for e-commerce
Outsourcing opportunities and how to leverage them during startup
Internet marketing techniques, including search engine optimization (SEO), social media, cloud applications, and mobile technologies
Your faith in yourself and in your idea moved you through the Idea phase, but now you need to visualize a business model with a means to monetize your idea and to prove that you can make it happen. The most comprehensive method to position yourself for planning and preparing to launch your idea is to conduct a three-pronged feasibility analysis. Let’s take a look at the activities involved in this critical Entrepreneurial Exercise.
Financial Feasibility Analysis
This exercise might seem like it came straight from a textbook, but financial feasibility is the area where most entrepreneurs get hung up. As a result, they use it as an excuse not to move forward if they can’t (or choose not to) use bootstrap financing. I’ve found the vast majority of business ideas can be launched without professional funding if the entrepreneur is willing to put some skin in the game. Here are some questions you can ask yourself in advance to be prepared for the detailed financial work involved in preparing the financial sections of your full business plan (which you’ll learn more about in chapter 6):
Product/Service Feasibility Analysis
If you didn’t have the greatest confidence in your product or service idea, you wouldn’t have made it to the end of the Idea phase. But a feasibility test can help you be certain that you actually can produce your idea and that there is a customer demand for it. Ultimately, you’ll have to identify your target market and its specific need for your product or service. You can prepare for this analysis by creating prototypes, conducting focus groups and surveys, gathering demographic data, and even doing in-person sampling.
Industry/Market Feasibility Analysis
Often the most difficult analysis you’ll have to perform is on the industry in which your new product/service will reside. That analysis is difficult because the kind of information you’ll be looking for tends to be well guarded and especially difficult to access by anyone who isn’t already in the industry. Here are the types of questions you’ll need to ask:
To create a fuller and more detailed set of questions for exploring this area of your feasibility analysis, you can use an analysis tool developed by Michael Porter of the Harvard Business School called the five forces model. In essence, the five forces model states that the following elements influence any particular industry to greater or lesser extents:
Competition thrives within and between these forces as firms find innovative ways to differentiate themselves based on one or more of the elements in the model. Consciously or not, many entrepreneurs abandon their ideas because they lack knowledge about the influences outlined in the five forces model, and many companies that fail can trace their demise back to those knowledge gaps and deficiencies. The better you know and understand how your entrepreneurial idea addresses or dramatically impacts these forces in its own industry, the better able you will be to fund, launch, sustain, and scale your new venture.
Back in chapter 1, I mentioned that the disruptive entrepreneur introduces technology, processes, or models that literally destroy the old way of doing things in an industry. In doing so, the entrepreneur reinvents how the game is played in one or more of the elements within the five forces model. Investors love to back new business models that enter industries with a large number of homogenous firms where no one competitor has dominance. That chemistry creates an industry ripe for an innovative business model to enter and disrupt the status quo. In fact, that’s the same disruptive formula that Circuit City followed to create CarMax in 1993.
Seeking diversified opportunities outside its core business, executives at Circuit City were attracted to the vulnerable elements of the five forces model in the used-car market. At the time, that market had no dominant leaders; it was made up of many small players, all following the same business model. Circuit City launched CarMax to leverage the ease of entry into that market, and to take advantage of the lack of buyer strength and confidence in existing players, the abundance of supply, and the long history of an unchallenged business model. Your idea may not have the same opportunities before it that Circuit City enjoyed with its launch of CarMax, but familiarizing yourself with the model as it applies to the industry you’ll be entering gives you a powerful knowledge base from which to begin planning your strategy.
This is the last gate you’ll pass through in the Idea phase of your entrepreneurial journey. In reaching this gate, you’ve learned what it means to be an entrepreneur in the way you think, innovate, and look at the world. You’ve learned how to master risk by recognizing the walls of fear and doubt that surround you, and by understanding how to limit the strength of your Risk Box, rather than letting it limit your effectiveness as an entrepreneur. The Entrepreneurial Exercises you’ve worked through in this chapter will help prepare you for the challenges of managing risk and laying the strong foundation of information and preparation on which you’ll form your new organization.
In Phase II, Startup, you’ll begin the actual work of bringing your idea to life. Emotion and the passion to create have powered you through this phase. You’ll need all of that energy, in addition to commitment, determination, and physical and emotional stamina, to complete the demanding tasks that lie ahead. But the ideas, techniques, and exercises you’ve gained and practiced in becoming an entrepreneur will help keep you on track as you continue your journey.