The Startup Process in a Simple Nut Shell
- Published March 5, 2020, by Seven Parallel Consulting.
The essential plot of ANY startup story is the following. YOU quit your job, spend your money to prepare an offering for a TARGET AUDIENCE. Your company connect with the audience. The audience value the offering, and pay you a price for it. If the price they are willing to pay is above your cost of producing the offering, you have a profit for each transaction and offers value. Overtime, you build a business with positive constant cash revenue stream. Your company should grow. Your competitor will try to copy you.
In the simplest nut shell, you (the founder and entrepreneur) recognize a unique opportunity to provide a special audience group (target audience), build a company which provide an offering, market the offering to the audience ($$), who perceive the offering with a certain worth (value) and pay you a asking price. (This is often called Value Proposition). The price they pay is always below the worth, hence they are buying a bargain. The audience consider this a fair price. When there are enough people who pays you the said price, you derive a net gain from each transaction, and viola, you have a "cash flow". You buy from your upstream and add value, and pass the result to your downstream.
You are the first person to quit your job or forego a formal job. This is costly and very uncomfortable. Hence you are the first investor. If you don't quit your job, every investor will ask you to quit.
You (alone) build a company which employee staff (workers, engineers, salesmen, and designers). The company has a name, and preferably a physical address. Company builders are sometimes called enterprise builders, businessman, and founder. You can call yourself CEO or president, or Chairman, whatever. However, with the title comes responsibilities. You need to keep staff fed and motivated (management). Your operation must earn enough money to pay for their salaries, leaving some for research (continuous innovation). Sometimes there is even small amount left to pay for your own salary. But that is rare. The price charged for the offering should be significantly over the cost of providing the offering - allowing a profit margin. (What is healthy margin?) This would be a healthy company. If you make enough money over several years, you may qualify to list the company in the stock market (IPO). There are financial people who can help you with listing if you are a star in their eyes. Otherwise, you run a privately held company and becomes a private business owner. You may get rich, or super rich, or not. You will attract copycats and competitions, the minute you start to make money.
The hardest is to find what others demand, and tap into a revenue stream. It is the equivalent of finding a gold deposit. You want to keep it to yourselves. You can provide value and respect your audience all you want, but the revenue stream is gold. To find a revenue stream is something that no one can help you and no one will.
If you run the company for over 10 years, and maintain a monopoly position to offer high quality and value, you have a brand ($$). In today's world, not all companies have a brand, and not all companies have profit. Some companies listed in the New York Stock Exchange are unhealthy. But the world is fair. No one can be a pretender forever.
This is the simplest process. In an ideal world, you are rich enough yourself, knows technology, knows markets well, and have patience to build the following over time.
However, there are virtually no one who knows everything and have enough cash to burn during the startup stage. Hence you need partners, and you need investors. And you need to use the investment to build the company up. If you can do something without investor, other people can beat you easily because they can pile on money and resources to fight you.
A partner is someone who quit his/her regular job. A partner is not an employee (CEO, or engineer, or custodian). Bill Gates had Mark Allen. Steve Jobs had Steve Wozniak. Even entrepreneur geniuses need partners. The case of Elon Musk of Tesla is a very rare specimen. It is not a plan anyone could copy.
An investor is someone who sees your plan as having potential to GROWN his/her money. The investor is not a friend or a moron or a philanthropist. They are certainly not a cofounder. They want their money back and beat the returns from other types of investment. They will evaluate your plan (in the first paragraph) and decide if they want to invest money. Investors may include rich individuals (angels), VC's (venture capitalist), PE's (private equity, which means private stock market), and investment bankers. They want their money returned, and leave you as soon as they can. Some investors are friendly at first, others are harsh. But invariably, they all do the due intelligence and check you out from head to toe.
If you have a small plan about making small money and small impact, you won't have a partner and you won't have investment. Investors are not someone who invest happily if you ask for small amount. They only invest the right amount to get your company machine established.
There. Viola!! This is the startup process in the simplest nut shell. It is the most pure form of "startup".
Text coloring scheme: Green $ indicate something takes money. Red text indicates something takes long time.
In the United States, companies try to maintain a 25% margin and up. In other countries such as China, people would ran a company or factory at 2-5% margin and significant borrowing.
Startup is lonely, uncomfortable, and disorienting
When you start, you are either (1) ahead of your time and hence in a very lonely place or (2) in busy competition with big companies who outruns you with money and staff. I would argue that option (1) is better. No investors would fund your campaign to fight with two industry giants. When you are new, and unknown, you don't have money to advertise, hence no one will be attracted to you and it takes long time to educate the few people you attract. Your success scenario have two options. (1) Your great offering instantly conquer the world! and (2) your value converts fans through word of mouth. I can tell you that you won't instantly conquer the world. At this point, you are lonely, either you are married or not. And you are financially on a tight rope, whether you are rich or not. And the world does not seem to embrace your offering, either because your message is heard by no one, or because you are not that competitive.
In startup, you are trying to tap into a revenue stream. Everyone competes for any revenue stream. Because fixed revenue is vital to any company, no one will tell you where the revenue stream is. In many countries, good revenue streams are all occupied by national companies with heavy monopoly. Since revenue streams can only be found, it is akin to a discovery. Hence this is where startup is like science - you make mistakes and stumble across. There is no book that tell you where the gold is buried, because no one knows.
If you happen to make the ball rollings, and eventually people know your business by name and like your offerings and no one can duplicate your offering, then you are called a rich man, a visionary, a leader, and so one so forth. But no you know how hard it is to make it a Steve Jobs or Elon Musk.
The name of the company, which you happened to make on the first day you start, is actually quite important. It is like the name of a person. You cannot just find an average name or a "cool" name. A name like "Google", "Facebook", "McDonalds", and "Apple" takes craftsmanship. It represents the companies value. It is easy to remember and hard to forget. It represents what the company does. It should not be a name already registered by someone else, or is used heavily on the internet already. A six character .com domain name would easily cost 100,000 dollars.
You will have competition! even if you cannot make a profit, people with more money will join you, people with more experiences will join your field, people who cheat to win for a living will compete with you. (Actually, it is very likely that OTHERS will consider you an upstart competition anyways). You need to think about the competition aspect BEFORE you start. There are always people willing to do a money-losing business, or cheat customers. Good things do not always win. This is the "dirty" side of business, but you cannot shun the business or money aspects if you want to start. You cannot be someone who does not care about money or cares too much about other people's dirty tactics.
In future posts, I will explain how long it takes to build a startup, and how much money it takes. Please stay tuned.
Written by Dr. Chang Liu, founder of SPC. For any questions feel free to contact me by email. If you have any questions, ask them in the forum.