How to startup as a first time founder - part 1 (the how)

November 22, 2017

One of the most common questions I get asked by first time pre-start founders is "How?!?" I used to reply "Erm, how what?" Not helpful, I have  since learned, as the real question is closer to "How and where do I start, what do I need to do, in what order and how do I know if it's right and how on earth will I find the money I need to make it happen?" 

 

A better response on my part would have been to ask "what specifically is stopping you from starting right now?" Because once those barriers are precisely identified, they can usually be overcome with support if the underlying desire is there. 

 

I have previously outlined my view of the fundamentals for founders who go into a startup with the specific goal of 'go big or go home'. But starting up with global scale both in mind and realistically attainable is the exception, not the norm - especially amongst first-time entrepreneurs.

 

Most of us startup on our own or at least start very small. I’ve founded both high-growth and so-called lifestyle businesses (a term I hate), and it was the lifestyle business that was more profitable, more successful at exports and more skilled in retaining customers. It was just as much hard work (harder in fact, as it was easier to take a holiday from my larger firm). But it was not taken as seriously or supported in the same way as my next tech business because it did not tick the standard boxes of investment raised, job creation and turnover thresholds.

 

Having to start very small is not a weakness. Nor is it a reason not to try. Most businesses start as micro-businesses, and many of them stay that way, being both very successful and very small. There is absolutely nothing wrong with that. 

 

Others start small and grow organically - some founders are happy with that path. Some entrepreneurs, though, look back with extreme frustration that lack of financing options constrained their growth, while other better-funded businesses overtook them. (This is why if scale is your primary goal or a personal ambition, I think you should start with it at the heart of your plans).

 

Common reasons for starting a business include relocation, redundancy, unhappiness at work, inability to thrive economically or personally within the life/work constraints you face - and also, of course, the burning idea, passion, or unsolved problem that you've spotted and the just won't go away.

 

There are three challenges when you're starting from this place:

 

1) The learning curve is more of a precipitous learning cliff. Whether you are starting a hairdressers, a PR agency or a biotech company - the thing you learn very quickly as a founder is just how little you know. Yes, you know your thing - but suddenly that seems to be a very small part of the mix. 95% of the day to day work - from business model generation to financial management, marketing and sales to calendar/schedule management (I still hate this one) - is usually all new, all hard, all important and nothing to do with what you went into business to do.

 

2) Finance (or more specifically extreme lack of it). It is possible, really not uncommon and yet still very daunting to start a business with nothing. I started my last tech company on £400 and that lasted about 3 months. It is possible, at least in the UK, to startup on under £20. In developing countries access to micro-finance is deeply connected to successfully enabling entrepreneurs to succeed - investing $50 in a women founder can transform an entire community. But starting tiny and cheap requires embracing a different mindset and toolset to the one that you'll typically find with the formal advice channels, such as banks and business advice networks.

 

And as you soon tend to discover, it is not the startup cash that tends to be the biggest problem, it is getting cash into the bank on an ongoing basis, and having access to enough working capital to let you actually keep working and growing. More on that in part two of this post.

 

3) Your networks may feel very thin on the ground, if you have any network at all. It is no surprise that people are more likely to, and confident in, starting a company if they already have family or close role models as examples. But many people don’t - so meeting networks of potential customers, suppliers, advisors, employees become an extremely important activity - and a time-consuming and potentially expensive one. I’ll cover customers, networks and advisors this in part three of this post.

 

How to start and what to do first?

 

As a reminder, while I more typically write about the high growth type of tech startup, this article is about starting very small, potentially as a one person, or part-time business. I mention it because while the perspective I offer here is based on my personal experiences of both, there are important differences.

 

1) It doesn’t have to be all or nothing - in fact until you meet certain proof points, it shouldn’t be all or nothing. Your personal losses incurred by simply trying should be as minimal as possible. This means you only spend on the really critical stuff to prove (or disprove) that someone will buy what you are proposing to sell.

 

To reinforce that and hopefully quash any scepticism, I do understand it all gets very chicken and egg very quickly. What I am saying is you do not need to buy chicken farms or egg production lines on day one. Do not raise money yet. You need to test your basic assumption any way you can, and with as little expenditure as possible, to see if it generates potential customers who are willing to part with cash.

 

An entrepreneur I know validated whether there was a market for high quality, human grade dog snacks - by baking at home in her kitchen then selling them locally. Long before making any decisions around scaling up production lines or pursuing the necessary regulatory requirements, she had at least proved that people were willing to pay premium prices for premium dog food.

 

2) Validate it as both sellable and buyable, as cheaply as possible, before committing any significant money and significant time on creating it. Do customer interviews, listen to what they say and how they prioritise your various potential features and benefits. Are there common objections? What/who do they currently use instead of you? How big and urgent is the pain or inconvenience that you plan to solve? (It is always better to be a go-to solution that solves a unique pain or brings something special that others don’t).

 

Figure out where your customers congregate (their watering holes) and be cunning in thinking how you will reach them and communicate with them in these places. Many businesses live or die according to their cost of acquiring a customer - you must have a sense of who your customers are going to be, where you will find them and what you will need to spend to get them long before you start making or building anything.

 

Because if the unit economics and basic numbers don’t stack up (for example there aren’t enough customers in the area you can reach or you simply cannot afford to reach them) then your idea and your plan still need a bit more work before you have a viable business.

 

3) Do what you know something about. First time around the block as a startup founder, I strongly recommend you do what you already know, solve a problem you have directly experienced personally or in a previous job, or provide goods/service to a customer group you both understand very well and have access to.

 

There is so much else that you will have to learn insanely quickly, so many other unknowns, so much time spent thinking “I literally have no idea what I am doing” that for your own comfort and efficiency you need that special little thing that you know how to do. It will be your personal superpower, and it tends to be where your energy, passion and unfair advantage comes from. And customers really buy into that authentic aspect of brand “you”.

 

4) Slow down, apply your brain and focus. Specifically focus on delivering the biggest possible gain to the biggest possible pain, using only what you know and what you have to work with. Sure, every business in the whole world could be a potential client of your PR company, but it really shouldn't be. Who will easily be able to and want to buy from you? Get specific and then get more specific again and then call some people who match your target customer and validate your assumptions with them.

 

Take time out and read The Disciplined Entrepreneur Workbook (in case there is any reader of this blog who still hasn’t bought it!) Although this is a roadmap for technology startups planning for scale, many of these 24 steps - especially 1 to 6 - are appropriate for all first time founders of businesses of any size and type. Not knowing your customer well enough and errors in the key unit economics of business (eg selling for less than it costs you to make, or spending more to gain a customer than they are worth) are amongst the biggest dangers. But they can be reduced significantly and without spending money, just by doing your homework first.

 

5) Tie your efforts to outputs and measurable steps forward. Being a busy fool is a huge risk for a very early stage founder and one that you can’t sustain for long, especially if also juggling your entrepreneuring around family and/or another job. If the plausible-sounding (I can’t find a source) statistic is correct then 80% of a founder's time gets consumed by non-critical stuff, and just 20% is spent on the important stuff that delivers value. By the same logic is 80% of work time is wasted.

 

So what is the important stuff? Damn you’re making me work hard here! The important stuff gets you closer to customers/sales/cash in the bank - or keeps you out of jail. (Yes, tax/financials is important, but as long as it does get done in good time and you are not incurring fines/charges as a result of delays, working a sale always takes precedence. But doing an investor pitch deck when you have no real traction definitely does not count as important, sorry! Nor does going to a generic partner/networking event without a specific objective.

 

Your time is your most precious asset you have to invest in your business - track success outcomes back to activities to make sure you are getting a measurable return on that investment.

 

6) Set up a limited company as early as practical (UK). OK - first a caveat, I am not a qualified tax, legal, financial advisor etc. I am not giving formal advice here. I am simply sharing my own experiences. That said, in the UK most types businesses can be set up as a limited liability company (ltd) - this means that unlike being a sole trader, the company bears the risk, not you the individual, you are separate legal entities. Structuring this way certainly helps me sleep better at night.

 

Nearly as important as sleeping, setting up your limited company also lets you access banking, support, and to separate personal and business costs - and of course, you can also start charging customers. Don’t forget, you can always bill your time and services through the company, while you are working on launching your new business - that is what I am doing right now.

 

A word on setting up UK companies - it costs about £12 to do this yourself through Companies House. The main thing to understand is that when you create the share capital is that this is money you now owe the company. So if you create 100 shares at £1 and you are the only director/shareholder, you now own the company £100. If you do 100 shares at £0.01 you now owe the company £10 - and if you set up a million shares at £1 each because you think it sounds cool to have a million pound company on day one - congratulations, you now owe your company £1million. This share capital needs to be paid up in full and is recognised in the accounts. I think I started with 1000 shares at £0.01 for both this and my last company.

 

And while I do definitely believe in good legal advice at the right time, setting up a company directly with Companies House is so easy I really do not personally see the need to pay others to do this for me.

 

Once you have a limited company you have certain annual filing requirements to do, even if you never actively trade, but that is about it. When you actively start to trade in the UK you need to register for tax. (Which ones depend on whether you are an evil global corporation or a good citizen, have employees and how much you are turning over, but at a minimum, it is corporation tax).

 

This is a weird one - and I will again stress the above caveat but not being an advisor - but I like to register for VAT (sales tax for non-UK readers) as soon as I start spending any money, even if I am not remotely at the minimum revenue threshold. Why? Because it is cash flow. If you are pre-revenue, you will be spending significantly more than you are earning, which means every quarter the nice tax man/woman gives you back your 20% VAT on all the things you spent on. And the nice tax man/woman always pays on time (unlike customers). I can’t tell you how joyful and universally just it feels when a well timed tax reclaim saves your backside!

 

7) Log all your receipts and practice good financial management and accounting from day one. I know it sounds boring but it is actually massively advantageous to you. This is how you get personal money back out from your business in the very earliest days. Keep and log absolutely every receipt for absolutely everything you personally spend while working on starting up your business (you can do this through Freeagent or Receiptbank for example).

 

Once you finally sell something, you can claim the cash for all those personal expenses back. If you work from home you can also claim for a proportion of household costs, like heat and broadband, as legitimate business expenses (in the UK). In all my businesses, including my current one, this meticulous approach from the start means I have been able to run a surprisingly long time without paying myself a salary, or at least not anything beyond the legal minimum requirements.

 

I should stress that there is nothing cool about no pay or low pay, it is not the end goal or in any way desirable/sustainable for long - but at the beginning, it is usually necessary. And I personally find it stabilises my comfort in taking early stage risks to have measurable skin in the game in a format which isn’t generating debt.

 

8) Take advantage of the free stuff. Spend as little as possible at the early stage, but do invest in the important things. Next week’s post is all about funding sources and money, so I won’t labour it any further here, but you can use free tools and do smart deals to get you everything you need to set up a UK company on under £100 (including registration, domains, hosting, banking and accounting). It won’t stay free forever (and free can become a time burden eventually) but at the beginning it is essential.

 

Some examples: with my latest company I got completely free business banking + 6 months of free Freeagent accounting software by choosing the Royal Bank of Scotland. I used WIX to build my site, free until I was ready to go live and then still very affordable. I use Google Drive, Docs, Calendar, Gmail, Google Analytics, Google Data Studio to manage pretty much everything - all free. I even used the local library as desk, office, wifi for a while. My main month 1-2 costs were travel and coffee (though I have discovered Starbucks do free refills on tall filter coffees).

 

9) Tell your story to everyone and anyone, but don't become a full-time performer on the coffee/pitch circuit. If your business involves IP or some kind of powerful secret sauce, you must protect those trade secrets both legally and by not talking about, presenting or showing exactly how they work. (Important, this can wreck your patent filing).

 

Apart from that, it is my view you should talk to as many people as possible about your idea. And I am really not a fan of the NDA (Non-Disclosure Agreement) at early meetings. People ask and I will occasionally sign but it feels a bit like someone bringing a prenuptial agreement to a first date - slow down tiger, I’m not that into you yet! There are times you will need an NDA - but a meeting to enthuse someone about your general idea is not one of them.

 

Ideas are cheap - I suspect there are no original ideas left on the planet. It is the execution of those ideas into a profitable business that is very hard. Almost all of the people who you fear may steal your idea are likely to be unwilling or unable to put in the work necessary to do so. BUT, don’t accidentally join them.

 

It is way easier to talk about your business than actually execute your business - so don’t fall into the trap of permanent pitching or cups of coffee, because if all the talking isn’t taking you specifically and measurably forwards then it is damaging your progress. Time (even more than money) is your most precious and limited resource.

 

10) Relentlessly pursue customers and customer feedback above all other things. There are so many distractions. Knowing where to focus is the hardest thing - and supporters, advisors, accelerator and incubator programmes can inadvertently add to this confusion and suck your time. Suddenly you’re pursuing someone else’s goals and interests not your own. If you can only do one thing today, then focus on your customers - getting to a no is just as helpful as yes, provided you get feedback and learn something.

 

Once you have paying customers you have a business - you can figure out everything else as you go along because customers and their cash buy you time. Provided they do actually pay!


 

Part 2 of this post is all about funding sources and getting the money in

 

Part 3 of this post - networks, advisors and meeting people

 

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