Key milestones for all businesses at this stage are completing a prototype product or service and having early adopters employ it in the real world – something we call Proof of Concept (PoC).
There’s some gray area here caused by overlapping terminology, such as “minimum viable product” (MVP) and “product-market fit”.
We mentally organize them as follows:
The interest I have to believe a thing is no proof that such a thing exists.
In parallel with proving that the concept works and building your MVP, you must also lay the groundwork for becoming a functional business.
While it’s tempting to spend as little time as possible on administrative stuff and focus exclusively on fine-tuning the product, you probably don’t want to fall flat on your face right after the proof of concept celebration.
To help you get the basics in place, the following sections will cover:
Before we dig into anything that sounds like a product, a market, or raising (and spending) money, we like to make sure the business has some fundamental pieces in place.
This makes sense for all the same reasons we ask a building contractor to lay foundations before throwing up walls or a frame.
Most fundamental of all is to understand why this business is being formed in the first place. Understanding and articulating Purpose, Mission, and Vision will help you make more effective decisions, hire motivated and loyal people, and stay on track when life does its best to derail you.
There’s widespread confusion about the difference between purpose and mission. Some organizations prefer one over the other, while others confuse them completely.
Leadership comes when your hope and your optimism are matched with a concrete vision of the future and a way to get there.
Here’s how we differentiate them:
Whereas your purpose may never change throughout the life of the company, the mission statement might evolve as the business grows. Since it describes what business the organization is in – and what it isn’t – the addition of new products, services, and markets will eventually justify a re-write.
Armed with clarity of “why”, it’s time to think about “what” and “how”. Whose life are you setting out to change and which of their needs are you planning to meet? How sure are you that what they say they want is what they actually need?
Spend the time to identify and validate customer needs, and then pick the one (notice we use the singular here) you’re better placed than anyone else to solve.
Ready to solve that challenge on your own? Probably not – at least, not for long.
According to an African proverb, it takes a village to raise a child. Raising your business from infancy to adulthood might end up taking a small city, but for starters you'll need to find the right co-founder(s) and partners.
And, as odd as it may sound, you should discuss what a breakup might look like if it ever became necessary. Pre-nups are totally cool in this sort of marriage.
Finally, while all that foundational concrete sets, let's talk about culture.
Now is the time to decide what sort of workplace you’re going to create and lead.
Modeling yourself after Google or LinkedIn might sound great over coffee but is that really who you are? What vibe will attract the sort of future employees you will need and want?
If you are not embarrassed by the first version of your product, you've launched too late.
Having invested time in validating and selecting a customer need, it’s time to put some flesh on those bones by assessing the market need in detail and developing specific value propositions.
This will quickly leave you asking: what is my product going to look like and do?
We find the concept of Minimum Viable Product indispensable at this point.
There are likely dozens of features that will one day make your product the most desirable kid in its class but pursue them at your peril! Learn from the bitter experience of many entrepreneurs by first building the simplest possible incarnation of your idea that still meets the basic customer need.
Then, take your idea for a test drive. Gather feedback from potential users and allow that to direct further product development.
In this way, rather than discovering too late that no one wants to pay for those sparkling features you’ve spent months cutting and polishing, you’ll be working towards product-market fit in real time.
And, like the perfect LBD or a properly tailored suit, product-market fit looks good on any business.
Eventually, there’s no better way to silence the critics in your own head than building a prototype and letting potential customers take it for a spin.
The feedback you get won’t all be positive. Some of it, however, will be very useful. And some of that useful stuff will be critical to your success.
Listen carefully and beware the dual pitfalls of selective hearing and confirmation bias.
Adjustments made now to ensure the product aligns properly with your customers’ needs will save you from false starts, re-work, and even financial ruin later.
At some point you must make the decision to freeze your design and go into production. Yet, achieving what entrepreneurs and investors like to call “proof of concept” is a nebulous thing. In truth, you can only disprove a bad concept (and head back to the drawing board).
We prefer to think of gaining enough positive feedback to feel comfortable taking the risk and moving ahead with your business.
Once potential customers are saying “I’m not sure it’s possible but, yes, if you can make it, I’ll buy a dozen”, or an equivalent that’s meaningful in your market, that’s proof enough for us.
A few more questions worth answering are:
The answers to market size estimation, market segmentation, and target market selection necessarily come from getting in front of potential customers.
Another way that can be useful for companies to estimate market size is to use Facebook (for B2C businesses) and LinkedIn (for B2B businesses). Within each platform’s advertising tools, you can slice and dice market segments to get a feel for the number of individuals that meet your target demographic.
In the next section, we’ll talk about building awareness and obtaining customer validation.
Before you can close a sale, you need a qualified lead. To nurture a qualified lead, you must generate that lead somehow.
Leads generally come from two sources: people searching for solutions that find your business, and people with whom you engage who later decide to evaluate your solution.
The organic search group also divides into two: people searching for generic keywords for whom the search engine decides your business is a relevant result, and people searching specifically for your company or product. The first group isn’t necessarily aware that your company exists whereas the second group has heard about you somewhere.
There are things you can do to generate more leads from each of the three channels:
Validate your direction, verify your results. Make resistance work for you by motivating you to continue the path you are on, to continue the journey to your very best.
Awareness happens when someone who was previously unfamiliar with your company, brand, or product encountered it somewhere and took notice.
The last part is important. We’re exposed to a cacophony of companies and brands every day, in person, in print, online, and in all manner of display formats in the built environment. So, we necessarily apply a rigorous filter, ignoring everything that fails to catch our attention.
Your ability to catch the attention of prospective customers will depend on putting an attention-grabbing message – visual, audio, or text – in front of them in a context that makes sense.
For most businesses today, this means growing an online audience by publishing content (posts, articles, documents, ads) on channels like LinkedIn, Facebook, Instagram, YouTube, and Twitter.
Old-school media, such as magazines, billboards, and lately, trade shows, can still be effective if that’s where your prospective customers are receptive to new ideas.
In our section on Gaining Traction, we will talk in greater detail about analyzing your ideal customer and mapping their buyer’s journey. This will help you identify the optimum channels and messaging for generating awareness and beginning to engage your audience.
Once you have built an engaged audience – whether they are prospective customers or have already purchased from you – it’s time to ask them some questions.
Before you do, take a moment to write down or revisit the key assumptions that underpin your business.
Which assumptions about your customer – their needs, budget, preferences, product usage etc. – are you least confident about?
It’s common to think we know our customers because we regularly only ask high-level questions. But, when we drill down into details and specifics, we notice that maybe we don’t know as much about our target customers as we thought.
So, ask! Look for opportunities during in-person conversations, phone calls, online exchanges, and when posting on social media to validate what you believe you know.
And, finally, listen to the feedback. It will probably be messy and inconsistent but, if you gather enough data, a pattern should emerge.
Be prepared to change your point of view, even if that has fundamental consequences for your business.
Unfortunately, we see too many entrepreneurs becoming fixated on their solution and losing sight of their customers’ needs and wants.
It’s much better to accept reality and adapt to it than to plow on as if everything’s OK. Your business results will eventually reveal the truth and your stakeholders won’t take kindly to discovering a major bust in your story.
For a shocking, real-life example of how this can happen at a grand scale, read Bad Blood: Secrets and Lies in a Silicon Valley Startup, by John Carreyrou.
On the other hand, when customers wholeheartedly validate your value proposition, use the data to support your marketing efforts and when pitching investors for funding.
Nothing speaks louder than a customer testimonial, especially if it comes from a marquee, name-brand buyer.
Your company brand is the image and personality of the product or service that you provide.
Importantly, the brand’s features – such as logos and messages – differentiate you from others in the same market.
Customers will evaluate you in much the same way as people size you up as an individual, based on what you look like (appearance), what you say (words), and how you say it (actions).
There are many ways to go about building a brand but all of them focus on qualities such as:
Your brand is a story unfolding across all customer touchpoints.
We think of a brand in terms of seven major elements:
Let’s briefly touch on each of them, through the lens of minimum requirements as you’re getting things together.
Even if you only establish the basics at this stage, capture them in a brand guidelines document so that they’re easy to apply. This will help you achieve greater consistency than companies who don’t invest the time and effort.
This was probably one of the first things that you spent hours debating before filing your company formation documents. Hopefully, those hours were well spent.
Key things that you should have checked – and had better check now, if you didn’t before – include:
We like to run an exercise with our clients where we hand them a stack of flashcards, each featuring a different adjective. We ask them to sort them into piles, separating words they would want associated with the style of their brand/company from those they would not.
Example adjectives might include chic, rustic, modern, traditional, edgy, conservative, loud, aggressive, smart, passive, pushy, and so on.
This only takes a few minutes. Then we ask them to repeat the process using just the “would want associated” pile, splitting them again. And again, until they home-in on 3-6 adjectives that capture the company style.
The process is then repeated, using a slightly different set of adjectives, for the company voice.
Think about your family and friends. How would you describe the way each of them speaks and writes?
Example company voice descriptors might include bold, calm, optimistic, technical, accessible, arrogant, mature, young, educated, liberal, and so on.
This isn’t comfortable territory for many entrepreneurs, so we recommend working with an experienced marketer who can guide you through the process and on how to apply your selected adjectives.
What are the key messages your business needs to convey?
We’ll talk in the next section about understanding your customer using tools like customer journey maps. Those will give you some strong clues about what a buyer needs to hear to consider purchasing from you.
Look for 3-5 key messages and test them internally to make sure your team agrees with the way they are stated. You want everyone to be using the same words, not 57 variations on a theme.
Next, capture a couple of proof points that support each of your key messages.
For example, Strategic Piece wants to communicate that our engagement model is designed to be accessible for entrepreneurs, early-stage, and growth-stage companies. A related proof point would be that we use a mixture of project fees and success-based fees to keep the initial cash impact down, respecting early-stage ventures’ need to carefully manage their cash burn.
Deploy your key messages wherever you communicate with your target audience, such as on your website, in social posts, in print collateral, and in sales emails.
Colors evoke different responses from the people who see them. Warmer colors are associate with energy and passion; cooler colors with efficiency, calm, and security.
Color is one of the first things that a customer will notice about your logo, and a product’s color has been shown to influence 60-80% of customers’ buying decisions.
Even more than other brand elements, consistently applying your brand’s color palette across everything you produce has been shown to have the highest impact.
You should look at a wide range of color combinations before landing on the final palette.
You will need a couple of primary colors and a couple of accent colors – preferably not more than 3-4 colors in total, using lighter and darker hues for accents. Color is one of those areas where less is usually more.
Think about all the places where your company will print or display text. The typefaces you choose will play just as important a role as the words themselves (or the colors) in delivering a message about your brand.
There are thousands of fonts from which to choose the 2 or 3 you’ll use for your logo, headings, and body copy.
Let’s start with choosing between serif and sans-serif fonts.
Serifs are the little tags on the edges of each letter and are designed to lead your eye across the text, making it easier to read.
Sans-serif fonts look clean – and are currently much trendier – but for large expanses of text, a serif font can improve readability. Best practice is to use a sans-serif font for headings (or any large format text).
Fonts also have a psychological effect on the reader, triggering different emotions.
Serif fonts signal respectability and tradition, whereas sans-serif fonts evoke stability, cleanliness, and modernity. Script fonts (typically reserved for artwork) communicate elegance and creativity, while modern fonts signal progress, stylishness, and technology.
You should pick a set of fonts that work together, in combination with your other brand elements. Make sure they are all “speaking the same language” to your customer.
To work together, your fonts must also have enough contrast. For example, don’t pick one round, sans-serif font for your headers and another round, sans-serif font for your body.
Also take advantage of Google fonts to ensure everything displays the way you intended. Browsers access these fonts directly from Google, rather than looking for them on the user’s device, meaning that every user will see the text displayed in the same way.
Expect that for many email clients, you will need to find a basic font to substitute for your typical brand fonts because they render differently.
Last but not least, let’s talk about your logo and the images you choose for web pages, presentations, social posts, and literature.
A memorable logo helps you connect with your audience. If people connect with your brand, they will be more open to whatever you’re offering them.
An effective logo is distinctive, practical, and simple, and it should work at any size, in color or black-and-white.
Relevant images help to bring your product to life and appealing imagery generates more views and clicks – especially on social media channels.
It’s important to define the image style clearly so that everyone involved in producing your content – both internal and service provider – follows the same overall approach.
Key things to consider here are how you feel about photographs versus illustrations and close-ups of people versus distance. How much diversity do you want to display?
We recommend including both good and bad examples in your style guide, since people have a tendency to interpret image guidelines differently – one designer’s edgy might be another designer’s weird.
“Marketing is too important to be left to the marketing department.”
Marketing isn’t just about advertising and press releases or "going viral."
Those who think they can hire a college intern to be their fractional CMO are missing the point and probably not making much money.
Marketing provides an essential link between product development and sales, enabling both groups and helping the overall business delight its customers.
To begin, we highly recommend setting a few marketing goals, which should be closely aligned with your overall company objectives.
Random acts of marketing might be well-intentioned but are unlikely to generate the sort of results that get you invited back to the business development party.
Aligning marketing goals with the business' overall objectives ensures that any investment – whether time or money – is taking you where you want to go.
When you boil it down, marketing has four generic goals:
Awareness, engagement, and conversion lead to revenue and – hopefully – profitability.
For a while, marketing will cost you more money than it's bringing in because it tends to be a long-term strategy. However, when done well (and correctly), you should end up with a marketing program that has processes and is a core and reliable part of sustaining your business.
When you're starting out, we recommend focusing on one or (at most) two customer segments. Your goal is to get inside their heads and understand them better than they understand themselves.
We recommend getting to know your ideal customer in a way that less entrepreneurial or marketing-minded folks might find creepy.
Give them a name. Understand what motivates them and why they choose to wear yellow underwear on Thursdays. These descriptions, known as Customer Personas, will help you think like they do and, importantly, figure out how to engage them.
If you are successful, a growing number of people who start out blissfully unaware that your company even exists will find out about you, decide to give the product a try, pay for one, then more than one, and eventually tell all their friends to buy some as well.
We call this phenomenon a customer journey (a.k.a. the buyer’s journey), and we’re big fans of Customer Journey Mapping as a method of understanding what it takes to convince potential buyers to move from one stage of that journey to the next.
This is different from a sales funnel, which maps where prospects sit relative to your internal process, and from a user journey, which maps how someone interacts with your website or application.
Customer journey maps are about the buyer, not about you!
The process involves putting yourself inside the mind of the prospective customer and trying to determine what they need from you to progress from unaware of your existence to awareness, evaluating your product or service, purchasing your product or service, and through to becoming a loyal customer and advocate for your brand.
At each step, in addition to their needs, we try to capture things they want to experience that might encourage them forward, their beliefs about the market and solutions like yours, their emotions, and the level of engagement that they expect to have with you.
On the first pass, it’s highly unlikely that you can complete all the boxes with confidence. We hear “I have no idea” a lot during CJM workshops.
Those question marks are almost as valuable as the confident answers, signaling opportunities for market research and customer engagement to help fill in the blanks.
Journey maps should be evergreen documents, updated regularly to capture the team’s latest learnings and insights about what makes the customer move through the buying process or things that help to make it easier for them.
The mapping process continues with an evaluation of communication channels – all of the places and methods, both physical and digital, where you might theoretically communicate with the customer.
From old-school direct mail to the latest social media platform, it’s crucial to understand on which channels you can see – and be seen by – your customer, and on which you cannot.
We recommend early-stage businesses focus their efforts and spend on at most two major channels – typically some combo of LinkedIn, Facebook, Instagram, YouTube, websites, and industry events (previously in-person but mostly virtual of late).
Spreading your efforts across more channels than that will likely result in insufficient or low-quality engagement.
Each channel is also unique in terms of what its algorithm is programmed to reward, so focus on learning what it takes to make one channel really work rather than trying to figure out several at once.
Consequently, it’s vital to get the channel selection right.
Finally, at the end of the mapping process we examine what marketing tactics and technology you should employ to have maximum impact on the buyer’s journey.
Remember, this is about understanding how your buyer views the world, not capturing or justifying the marketing approaches you feel most excited about pursuing!
As much as we’d love to believe them, we shake our heads each time an entrepreneur proclaims that her solution is unique or that she hasn’t identified any competitors in the market.
Conducting a thorough analysis to understand the competitive landscape is as important as looking both ways before you cross the street.
After a thorough reality check (unless you have indeed produced a unicorn-worthy invention), your next question should be something like: how the heck are we going to stand out among this crowd of taller and better-looking companies?
Rest assured, there are ways to achieve differentiation, even in a crowded market. However, if after examining those ways from every angle you still feel too intimidated, it’s a clear sign you should go after a different target market.
Putting together an effective market entry strategy – whether it’s a new product launch or you’re entering a new market segment with an existing product – is crucial to making the best first impression.
At the heart of that launch strategy lies promoting your business and your new product.
They say there’s “no such thing as bad publicity”, but we’re not sold. The theory is that so long as people are talking about you, it’s a good thing. Even if they’re saying terrible things, it keeps your name on the top of their mind, which is exactly what you need. This might be true for bad boy pop stars but, in our view, they’re the exception and not the rule.
There is such a thing as bad publicity and, while we’re at it, counting on 'free' PR as a core piece of your marketing strategy is a fool's errand.
Of course, the most prominent place for you to promote your business is on the internet. Like “pics or it didn’t happen” for business, putting up a website is the modern-day equivalent of flipping the door sign to “open”.
What makes a website effective amid all the online noise?
Website designs are constantly evolving as Internet bandwidth grows and software adapts to exploit it. And yet, whatever image you want to portray for your business, we think there are a few, simple website design guidelines that will keep your visitors from clicking away in horror within seconds of landing on your home page.
Speaking of bounce rate (a.k.a. clicking away to another site too soon), would you like to know which parts of your website are working effectively and which aren’t?
At the risk of being Captain Obvious, using web analytics to monitor and improve your website is an essential step in making the most of your internet presence.
Finally, think about how you will measure marketing performance. To get you started thinking about this, check out our blog post: Managing Your Marketing Metrics.
You've set yourself some marketing goals and marketing spend will probably account for a fair chunk of your monthly budget, so it’s important that you regularly track results and adjust your tactics. (PS - Have lots of questions about your marketing budget? Here's our guide to setting and allocating a marketing budget with a budget tool.)
Suddenly, the countdown is on! It’s time to prepare for launch. Are you ready?
For most businesses, sales don’t just happen. The marketing folks work their magic to generate dozens – or maybe hundreds – of leads but someone must still convert them into paid-up orders. Welcome to sales.
As many successful salespeople have learned to their chagrin, selling a new product is very different from selling something proven. The lack of a track record and dearth of smiling customer testimonials makes the sales challenge a little tougher.
Finding early adopters who are willing to try and buy your product before it gains mainstream appeal is a skill unto itself.
"The unbelievable thing about an idea is it might one day become a real business, and that could mean real customers, real help, and real problems."
Neophiles are people characterized by a strong affinity for novelty. They’re the ones with a pop-up tent in the car, ready to camp outside a big box electronics store to snag the latest consumer gadget before Johnny next door. You’re going to need a few of them – at least, the ones whose affinity is for novel things in your product category – to get the sales ball rolling.
Giving your product away for free can be a quick way to get early adoption going. But does that count?
Pricing strategy is something to consider very carefully.
Does your product deliver the kind of superior value for which customers are willing to pay a premium? Or, are you entering a commoditized market where you must win their hearts with superior quality or service while staying close to an established market price?
And its close cousin, the discounting strategy – whether that means shaving off a few percentage points or giving some of your product or service away for free – is no bargain either (pun intended!)
Many buyers are conditioned to always ask for a discount, even if your offer meets their requirements at full price. But, caveat venditor! Customers who experience your product at a discounted price perceive you to be less confident in what you’re selling and perceive your product as having less value.
Worse still, they’ll delay making a follow-up purchase from you until you make them another “special offer”. Discounts set a strong precedent, and that can be bad for business.
Speaking of follow-up purchases, you’ll want to spend some mental capital figuring out what turns buyers into repeat customers. A high level of customer retention is critical since it helps you to increase lifetime customer value and lower customer acquisition costs, along the pathway to profitability.
One day, an email lands in your inbox and you frown at the unknown sender. Purchase order? What kind of subject line is that? He wants to buy how many? OMG. We’re toast.
Success can be a painful thing. You’ve made all the right moves to develop something people want and now, out of nowhere, they want lots of what you’ve developed. You need people with a plan and a process.
We'll talk at length about scaling-up your business in our sections on Gaining Traction and Growing and Scaling, but here we’re concerned with getting set up, hiring the initial team, and getting first-generation products out the door.
As you add members to your crew – especially the first few – it’s essential to ensure team alignment.
What do we mean by that? Making use of the purpose, mission, and vision statements that you created earlier!
The company’s purpose should provide a steady, guiding light throughout the twists and turns of early company life.
Whether you’re hiring employee number four or starting to question why on earth you ever embarked on such a journey, circle the wagons and remind yourselves of the purpose and mission.
This will help you define three important things: what skills will be most critical to achieving your next milestone, which of those skills you’re missing and need to hire, and what sort of people will make the team stronger.
Then, let the purpose do the talking. People who join your team because they are aligned with why you’re in business are much more likely to go above-and-beyond (and stick around, even when things get tough) than those who join for the what or purely financial reasons.
Incidentally, it’s also okay if someone decides to get off the bus. Although staff turnover can be very disruptive to a small business, it’s far better than trying to continue with a critical team member who has lost focus or no longer buys into the mission.
Pause to reflect on whether you missed something during the hiring process but then close the chapter and move on.
Where are those people going to work? What sort of work environment will they need and appreciate?
This conversation has changed a lot in recent times. The COVID pandemic opened individuals’ and corporations’ eyes to the relative merits of remote and office-based teams.
Remote working was an inexorable trend that COVID dramatically accelerated, and we believe a significant fraction of those who shifted to “working from home” (or even, “working from wherever”) will continue to do so. Time will tell.
If your business requires a centralized approach, office space will be a primary concern. Until issues with disease transmission are resolved, you may need to plan for more space per person, but the impact should be balanced out by reduced occupancy rates driving down rent.
For those who will manufacture or assemble things, room must also be made for raw materials, manufacturing equipment, and finished goods.
If you live in or near a city, you’ve probably noticed an outbreak of co-working spaces. Epitomized by WeWork, these carefully crafted facilities have changed the way individuals and companies set themselves up to work.
By providing everything from open desks for on-demand workspace to private offices and whole floors or buildings, they literally give you the room to expand as your business grows. This can be a great option for startups and early-stage companies.
Again, it remains to be seen how the co-working community adapts to post-COVID attitudes and regulations, but it seems likely that flexible and shared workspaces will continue taking market share from larger premises and long-term commitments.
You’re also going to need some basic systems – think IT, human resources, and finance.
While it’s feasible to run the business on your sister’s old college laptop using her student copy of Excel, there are many fantastic, fully-featured, and cheap – if not free – tools that will make your life a lot easier. Not to mention, making your business look a lot more professional to your customers and employees.
That’s basically all you’ll need to service those first customers, keep the wheels turning, and deliver on your promises. Do that well and you’ll soon be tackling the growing pains of scale-up.
Examples that we use to run Strategic Piece are:
Unfortunately, your fledgling business will come under threat from more than just its precarious financial position. Two of your biggest concerns will be those who would like to steal your ideas and those who prefer to copy you.
Legal documents aren’t only for big corporations. Reading them might send you to sleep, but it’s important to consider which ones are needed to protect your business and what they should say.
Find a lawyer who specializes in companies of your size and type and take heed of their advice.
One of the most basic and widely applied legal protections is the non-disclosure agreement – also known as a confidentiality agreement.
Before divulging your company secrets to anyone outside the business – even if there’s a very good commercial reason for doing so, it’s important to agree how that information will be protected and what will happen if that outsider fails to protect its confidentiality.
Similarly, think twice before accepting another company’s confidential information. Once you contaminate yourself with that knowledge, you will be restricted from doing anything with it – even if you could have developed the same knowledge by yourself.
Another hotly debated topic in this early-stage legal arena is when and how to protect your intellectual property. This begs the questions: what is intellectual property and why should I care?
Intellectual property – commonly known as “IP” – refers to original work that you have developed and that is of some discernible value (and wouldn’t simply be obvious to someone with experience in your type of business).
Common types of IP include copyright on text, music, or code, trademarks and service marks that are part of your company brand, and articles or methods that you have invented.
Each of them can be protected under law, provided you follow the necessary steps to identify and, if necessary, register the IP before someone else does.
Filing for a trademark to protect your company’s name or logo can be relatively inexpensive and straightforward. Filing for a patent on the new widget or production process you’ve invented can be significantly more costly and complex, especially if you decide to seek protection in multiple countries.
We’re happy to provide high-level guidance on how and when to protect your IP, based on our experience, but you should always seek expert legal advice before making any decisions.
We could expound on a multitude of topics related to leadership at the getting started stage. After all, in the very early days, the business is ALL about you. Absent some decisive, judicious leadership, things can go off the rails very quickly.
Actually, let’s start before the beginning. One of the biggest decisions you will ever make as a leader is whether and when to start the business at all.
“Don't be cocky. Don't be flashy. There's always someone better than you.”
For many entrepreneurs, their business begins life as a side hustle. A nights-and-weekends project in their home office, back bedroom, or garage. You are the midnight oil burners who want to make sure your idea works before turning your back on a secure job and predictable paycheck.
Others find themselves in between jobs, questioning whether to look for a new employer or take the plunge and branch out on their own.
Whichever group you find yourself in, deciding when to make the move from side gig to a full-time business is a very personal, uncertain, and critical moment.
As soon as you start talking to people about your business idea, helpful advice will begin pouring in from friends, relatives, and myriad professionals in the “startup scene”. Be a good listener but allow yourself space and time for processing all the inputs.
Much of the advice will be of value but not all of it will be timely. Everyone is (hopefully) trying to be helpful, sharing their experiences so that you can learn faster and avoid pitfalls. Unfortunately, every entrepreneurial journey is different so it will still be up to you to decide which advice to apply and which to squirrel away for another day.
What should you do when mentors or advisors give you conflicting advice?
We’ve seen this happen many times and it can really throw an inexperienced CEO for a loop. We recommend selecting a small group of advisors to whom you will turn when making pivotal decisions or when the messages you’re getting just aren’t adding up.
And, always check your advisors’ assumptions. Differences in analysis and opinion frequently come from having different subsets of the facts or making alternative assumptions about what they mean or how to fill in the gaps.
As you progress, you will likely find one or more advisors especially helpful and want to ensure ongoing access to their insights. Drop us a line if you’d like to talk through setting up an advisory board and the various methods of compensating advisors and mentors.
Another much-debated aspect of early-stage leadership is when to write a business plan and what it should include.
We’re fans of concise, structured documents that capture critical assumptions and are kept evergreen through a regular process of review and improvement.
Oftentimes it’s an investor or advisor who recommends putting the plan down on paper. And, while we understand many CEOs’ complaint that they’re too busy to “write it all down” and can manage perfectly well without a documented plan, we see great value in the process as well as the deliverable.
Writing and refining your business plan is a great opportunity to connect the team on a strategic level and check once more that the pieces are properly aligned.
One aspect of business planning that simply cannot be ignored is financial planning and budgeting.
Hoping the numbers will add up at the end of the month is not a winning strategy! Having a basic plan, setting a budget, and measuring performance against plan each month is the least you can do.
Which brings us to one of the simplest but most powerful axioms in business management: cash is king! Over 40% of unsuccessful startups fail simply because they run out of money.
We’ll talk later about raising funds for your business but for now, let’s assume you have cobbled together enough cash to get things going.
Cash management is a vital function that you or someone on your leadership team needs to perform – all day, every day.
From before your company begins generating revenue until you achieve consistent profitability, your business will be consuming cash. The speed at which the bank balance drops is known as your “burn rate”.
Keeping that burn under control and understanding how it will evolve requires proper forecasting, regular monitoring, and occasionally an intervention.
Stakeholders – especially investors – will want to know how much “runway” your business has left. Simplistically, runway is the amount of cash you have left in the bank divided by your current burn rate.
A more sophisticated answer can be provided if you build a cash flow model, anticipating month-to-month variations in cash inflows and expenditures.
Did we just say bank balance? Now would be a great time to start building a relationship with your bank manager.
Working with banks is a necessary aspect of doing business and you will eventually depend on one or more banks for loans and other financial services.
Meet with representatives from a few candidate banks to hear what they have to offer and give them a peek at your business. Even if you don’t need their services yet, you’ll get a feel for who you like (and who you don’t) and the banks will begin keeping an eye on your company, ready to step in when the time is right.
Cash isn’t the only way of measuring business performance, of course. Depending on the type of business you run, there may be dozens of other leading and lagging indicators to track, trend, and lose sleep over.
You can’t pay attention to everything, so we recommend picking a handful of the most significant metrics and watching them like a hawk.
Some common examples include:
What written policies should you create to help set boundaries within your organization?
A dress code and rules for cleaning the break room dishes might seem important but we recommend consulting an employment lawyer to get the less social stuff covered.
Ensuring legal compliance and keeping yourself clear of disgruntled employee lawsuits should take precedence over occasional lapses in wardrobe judgement.
As far as insurance is concerned, think of it as transferring risk from your plate to someone else’s.
Want to pick up the tab if someone accidentally burns down the building? Fire insurance is a no-brainer – not to mention a legal requirement – in most jurisdictions, but what about business interruption or third-party liability coverage?
Once again, there’s no substitute for consulting an expert on these matters. Find an insurance broker who specializes in the needs of small-to-medium sized enterprises and have them walk you through what’s available and what you might need.
Keep in mind that some clients – especially larger corporations – will require you maintain a certain level of insurance before qualifying you to do business with them. It can be significantly cheaper and easier to put a policy in place ahead of time than scrambling around to find coverage at the last minute when a large contract is on the line.
We’ve talked a lot about the mechanics of getting your business started on the right path, but one very important subject remains untouched. The human spider at the center of the business web. The master puppeteer pulling all the strings that bring the business to life.
That’s right – we’re looking at you.
The life of an entrepreneur and early-stage CEO can quickly turn out to be far less glamorous than advertised. Just a few weeks in and it’s already apparent that you and Elon Musk share little more than a mutual interest in baking cookies.
One of your biggest challenges will be figuring out how to avoid “the hustle”.
We see many – if not most – entrepreneurs running around as if every hour of every day were a fire drill. Apparently, they were told that working anything less than seventeen-hour days constitutes failure.
We didn’t get that memo. The only thing we can see resulting from that sort of lifestyle is burnout (no fire drill necessary), which certainly constitutes failure and sounds utterly unpleasant.
Keep the world in perspective, ignore the “busy braggers”, learn how to plan and manage your time, and pay no heed to those who try to put you down for not living up to their workaholic standards. But, do the work.
Ah yes, managing the overwhelm. Despite your best efforts to tune out the noise and focus on your business, it will inevitably still feel like you’re swimming against the tide (or drinking from the firehose or running in mud … you get the idea).
Fortunately, there are remedies at hand. Learning to say “no”, to ask for help, and to delegate are all very important skills that you must develop.
Locking yourself away and “just doing it”, Nike style, is one way to triage the demands on your time. However, the benefits and importance of a support network cannot be overstated.
You’ll hear great stories about the “entrepreneurial ecosystem” and the vital role it will play in your venture’s success. How true that may be will have a lot to do with where you live, who else is active in your local ecosystem, and how engaged you want to become with that community.
We certainly understand the value of effective networking. A key question though is how much networking and community involvement is too much?
There are only so many hours in the day and the power of connection lies in meeting the right people, not building the tallest possible stack of other folks’ business cards. Ask us about purposeful networking next time you see us.
Maintaining a growth mindset is one of the most important things an entrepreneur can do to help themselves succeed.
In our post on the subject you’ll find references to Carol Dweck’s seminal work, as well as our take on how her findings apply directly to entrepreneurial life and endeavors.
Last but not least, when is it time to say “uncle”? How do you know when to give up the struggle, call it quits, and close the business down?
There are many over-used clichés about the determination and persistence a founder must employ if they want to succeed. We’ve developed an allergy to the word “grit” of late, but starting a business is not for the faint of heart and certainly does require a high degree of conviction. It also requires a generous dose of common sense.
We regularly encounter entrepreneurs who have been laboring away at the bootstrapping and pitching stage for years. They’re often quite bitter people, quick to decry the investor community as short-termist and lacking in vision. In reality, they’ve clung to an idea, a value proposition, and a pitch that simply don’t work.
Others have perfected the art of the “pivot” – another word that gets our eyes rolling. Repeatedly redirecting the same venture towards a new spin on the same basic concept doesn’t constitute making progress, either.
Go back to the drawing board, revisit the purpose, mission, customer value proposition, and each of the assumptions you’ve made along the way. If you’re still convinced that the concept works, get help with your messaging. If you can’t defend your thesis, it’s time to re-think the business altogether.
Raising funds can be a daunting process. Selling part of your business to outsiders in return for their investment can feel threatening and, at times, insulting.
However, over 40% of startups that fail do so because they simply run out of money.
We have experience raising capital from, and working with, all types of investors and lenders. In this section we’ll point you towards relevant information and highlight some key areas where doing your homework can significantly improve your chances of raising capital and feeling good about it afterwards.
Many entrepreneurs rush too quickly into selling equity for investment. Popular TV shows and entrepreneurial memes make pitching your idea to multi-millionaires seem like the first step after sketching your idea on a napkin. Not so fast!
I approached fundraising as an opportunity to align myself with partners who have more varied experience and diverse backgrounds than I do to help bring Glossier to life.
The act of founding and funding a startup out of your own pocket is a healthy sanity check and becomes important if you do decide to seek outside investment later.
Known as “bootstrapping” the business, this is where you decide how much of your life savings to wager on the success of your idea.
Before you take out a second mortgage or sell your family heirlooms, be sure that you’re willing to lose that money. The odds are stacked against you – even if you take advice from the best in the business (present company humbly included!)
Would such a loss leave you and your family in financial difficulty? Ending up homeless shouldn’t be a branch on your tree of potential outcomes.
That being said, putting your money where your mouth is – also known as having “skin in the game” – informs others that you’re serious about making the venture a success and that you believe wholeheartedly in its potential. People will be more likely to support, work for, and invest in you because of that commitment.
For companies that qualify, there are many sources of non-dilutive funding – meaning that the sponsorship isn’t contingent on taking an ownership position in your business.
These are typically grants offered by government agencies and non-government organizations whose mandate is to support the development of new technologies and businesses.
Applying for grants can be a time-consuming, paperwork-heavy process. A veritable cottage industry exists to support grant applications to large agencies such as government departments of energy, trade, or the military.
You might also encounter a significant administrative and reporting burden once a grant has been awarded in your favor, as well as strict limitations on how the funds can be used.
Nevertheless, non-dilutive funding should be given serious consideration as a way to grow your business without reducing your ownership stake.
Once you decide to sell a stake in the company in return for investment capital, there are several types of investor willing to back startups and early-stage businesses at different points in their lifecycle.
These include high net worth individuals (commonly known as “angel investors”), venture capitalists (VC), corporate venture capital (CVC), private equity funds (PE), and single-family offices (SFO).
It’s important to understand the differences between these entities and their investment criteria.
Some are willing to invest before you’re generating revenue while others won’t consider investing unless you’re making a profit.
Some will only invest in companies headquartered in a particular geography or targeting a specific industry.
Whatever their thing, you should only approach investors whose criteria you meet, to avoid wasting their time and your own.
One more tool in your capital raising toolbox is something called convertible debt.
Under a convertible debt agreement, you borrow money from a lender with the intent (from the outset) to repay some or all of the amount by converting it into shares in the business.
The lender will have rights to demand immediate repayment, known as “calling the loan”, if certain business performance criteria aren’t met.
You gain the flexibility of deciding later whether to issue the stock or repay the loan using a different source of cash.
No, this isn’t another virus mitigation measure!
It can be tempting to raise as much capital as possible from loyal – and presumably less onerous – investors such as friends and family. However, while a friends and family investment round is very common, it’s important not to accumulate too many passive investors along the way.
Passive investors are individuals who have no other involvement with the company, but who the company has to track down in order to take and implement decisions requiring shareholder consent.
A capital table (a.k.a. cap table) that includes a long list of small, individual shareholders can be very off-putting to future investors and should be avoided.
Limit your investors to a more select group who can commit a meaningful amount and who will stick with the business as it grows, potentially increasing their investment if you need additional funds later.
What about tapping potential customers for capital?
It makes sense that they might want to invest in products for which they have an acute need or to ensure your survival as the provider of a product that’s critical to their business.
Several structures cater for this type of funding including joint development agreements, joint industry projects, and pre-payment agreements against future product deliveries. They each have their merits but inevitably come with strings attached.
Sponsor companies will want to know that their funds are being spent exclusively to develop and deliver the goods they need, and might even restrict you from working on other projects while their deliverables are being progressed.
What makes a business investable? You could pose this question to a hundred people in the early-stage business community and get many and varied answers.
In our view, there are a set of basic criteria that investors at every stage use to quickly qualify potential investments. These include the market opportunity, maturity of your solution, existing competition, barriers to entry, the team you have assembled, and how open and coachable you and your colleagues seem to be.
More nuanced criteria, such as having the clean cap table that we mentioned earlier, will come into play during the due diligence process. More on that in a moment.
We use a venture evaluation framework to evaluate investment readiness in a structured way. In a conversation with you and your team, we can assess the maturity of your business and compare it to what we think a given level of investor (e.g. seed, venture capital, or private equity) would expect of an attractive investment candidate.
The framework helps us to identify the most important gaps and help you to close them before approaching potential investors. Even if you don’t have the time or resources to close all the gaps, showing an investor that you’re aware of your shortcomings and have plans to mitigate them can be very powerful.
This is, quite literally, the million-dollar question. Unsurprisingly, there are several possible answers – including the business school favorite: “it depends”!
One school of thought is to only raise the amount you absolutely need. This forces you to limit spending to the essentials and maintain a ‘lean and mean’ mentality.
However, it can also cause you to under-invest in the business, slowing growth and increasing the risk that competitors discover and overtake you.
Raising too little can leave you in near-continuous fundraising mode, which distracts you from the important tasks of running and growing your business.
Another approach is to anticipate how much the business will need to keep it fully funded for an extended period. This requires finding a balance between conservative and aggressive assumptions about spending and revenue.
Bear in mind that investors aren’t always willing to cut you a big check. They want to keep you hungry so that costs don’t balloon, and you don’t become complacent.
The bottom line is that, however much you decide to raise, it should be based on business needs and not just vanity.
We see too many entrepreneurs bragging about how much they’ve raised, seeing it as a personal badge of honor. Forget about Shark Tank and focus on finding the most effective, efficient way to properly fund your business and fuel its growth.
Calculating how much capital your business is going to need requires a properly constructed cash flow forecast. An Excel spreadsheet is absolutely the right level of sophistication. What matters is understanding and exposing the assumptions you make in coming up with the numbers.
A monthly forecast is usually sufficient for cash flow planning, with a time horizon aligned to the company’s objectives and milestones.
For example, you might want to raise enough money to cover fifteen months of prototype development, customer testing, and proof of concept, then orchestrate another raise to fund product launch and scale up when the time comes.
A weekly cash flow forecast – typically looking three months ahead – is useful for operational cash management but is unnecessarily detailed for longer term planning.
Armed with an idea of how much capital you need to raise, it’s time to decide how much of your business to offer investors in return for their money.
This requires an understanding of what the company is currently worth, known as the “pre-money valuation”.
This begs a very thorny question: how does one value an early-stage business?
Many founders harbor grossly inflated ideas about what their business is worth. They forget the difference between what it’s worth today and what it might be worth in the future.
Your goal is to establish a fair value for what you’ve created so far, hopefully including some premium for the future value you plan to create, then use investors’ money to make that future value a reality.
Mature businesses can be valued using the replacement value of their assets and the discounted present-day value of future cash flows. The discounted cash flow (DCF) method is widely applied whenever the company’s future performance (for a few years, at least) can reasonably be predicted from past and present performance.
However, early-stage businesses don’t have an established track record, typically aren’t generating free cash flow, and are usually changing very quickly – all of which make agreeing a fair valuation very tricky.
Investors will look at how much it would cost to replicate what the company has achieved so far, as well as a conservative estimate of what the company is likely to be worth if no investment happens. This often involves building a discounted cash flow model based on modest growth assumptions and aggressive discount factors.
Companies that must raise funds simply to survive will – at most – be worth whatever it would cost to recreate them (their replacement value), unless the investor attributes some greater value to intellectual property (patents etc.) that could be sold or licensed to others.
Arguing for a higher pre-money valuation is the founder’s prerogative since it serves to limit how much of the business they must give up in return for investment.
However, unrealistic expectations have led many entrepreneurs to lose great investors – and it seldom works in their favor if they come back to the table later, grudgingly willing to accept a lower pre-money position.
Depending on where you live, this could be practically impossible or as simple as logging onto a local community website.
If you’re not located within an active early-stage investment ecosystem, finding and accessing investors will require you to travel or even relocate your business.
Angel investors often aggregate themselves into groups or networks to help attract deal flow and streamline the evaluation, diligence, and investment processes.
Venture capital and private equity funds are usually visible online, although you may need an introduction from someone familiar to them.
We maintain an active network of angel, VC, and PE investor contacts to help our clients navigate their way to potential funding partners.
Evaluating whether an investor or investment firm is a good fit for you requires some effort. Investment firm websites usually provide enough basic information on focus areas, types of investment, and typical deal size to facilitate quick screening.
After that, advice from others in the community and introductory meetings with the investors themselves are the only way figure out whether it’s worth continuing the conversation.
Another common misconception is that fundraising happens fast. You pitch the idea and if the investor likes it, they cut you a check.
Perhaps this does sometimes happen in the very early stages when a few thousand dollars is enough to get you started, but raising seed, VC, or PE investment takes a lot longer.
The fundraising process is notoriously difficult to predict.
You can expect several rounds of meetings and presentations to increasingly senior decision makers (the bigger the investment firm, the more this becomes true) as they vet the opportunity. After a few weeks, you should receive either a polite “no thanks” – hopefully with some constructive feedback on why they chose not to invest – or an indicative term sheet.
A term sheet is a non-binding summary of how the investor proposes to structure an investment, and the terms on which they are prepared to invest. This includes their pre-money valuation of your business and how much they are prepared to invest for what percentage of ownership.
Assuming you negotiate your way to an acceptable term sheet, the investor will proceed with due diligence on your business. This will typically involve meeting key team members, scrutinizing your legal and financial records, and inviting subject matter experts to evaluate the market potential of your idea.
Due diligence can be a long and intrusive process, especially if your records are poorly organized or missing important information. Putting basic record keeping and accounting systems in place early is a great way to avoid this situation, making the diligence process easier for everyone.
A critical step in the process is when you are pitching and promoting your business. How you describe, document, present, and answer questions about the company will contribute greatly to potential investors’ first impressions and their decision whether to pursue the investment opportunity.
Much attention is paid to the presentation slides you will use when seeking investment – known as a “pitch deck”. Without question, the deck needs to be carefully constructed and polished, especially when it’s your primary means of attracting investors attention, such as during a pitch competition.
However, the real work, where just as much attention should be paid, lies in perfecting the information and messages that the presentation ultimately conveys.
Pretty slides full of attention-grabbing statements count for little unless you can back them up with solid facts and a demonstrable understanding of your business and its context.
How many pitches should you expect to give?
Quite a few! It will take considerable practice before you achieve a confident, seamless delivery. You should also receive helpful feedback along the way, which can be used to improve both the content and delivery of your message.
Like many aspects of entrepreneurial life, there is such a thing as giving too many pitches. First, it takes time away from other important activities and, second, you may get a negative reputation for pitching at every opportunity rather than selecting the ones where you stand to learn the most and meet the most relevant investors.
We see a handful of recurring themes. Misunderstanding an aspect of the business or term sheet, information uncovered during due diligence that fundamentally alters an assumption about value or risk, and failing to reach agreement on how the business will be run after the investment are three common pitfalls.
Misunderstandings are best avoided by asking more questions during the early stages of negotiation. There truly are no stupid questions and it’s far better to say “just to make absolutely sure we’re on the same page” than to discover weeks later that they meant one thing are you understood another.
Material discoveries during due diligence should be rare if you fully and truthfully disclose the state of the business up front.
Many deals that fail during due diligence do so because the founder knowingly glossed over important issues or deficiencies or exaggerated certain numbers to try and pretty-up the deal.
In the end, good investors are thorough and will sniff out any inconsistencies in the information provided to them.
Finally, it’s important for you to have honest conversations with potential investors about how you envision running the business with their money. You should also quiz them on how involved they like to be in the day-to-day management of their portfolio companies.
Some of these answers will get codified into shareholder rights and can become serious sticking points when the final deal documents are being negotiated.
Much like learning to live with your partner after getting married, there’s a natural adjustment period following the completion of an investment round. The euphoria of closing the round wears off, the fatigue from months of intense preparation kicks in, and everyone tries to get back to business as usual.
The big difference now is that you have someone else to worry about, and they have an opinion on (and a vested interest in) your decisions and activities!
Learning to manage your investors is all part of the adjustment. You’ll get to know their habits and preferences, such as how frequently they expect to receive updates and in what format they prefer to see the information. You will also have to decide just how far you want to let them into your business.
Some investors manage their portfolio with a light touch, letting the management teams operate with considerable autonomy and only providing course-correcting guidance at schedule meetings.
Others prefer to roll up their sleeves and get involved in internal meetings at a tactical, rather than strategic, level.
Hopefully, you will have figured out which type of shareholder you’re getting before the deal is struck, but there may be times when it’s necessary to adjust. You might invite a hands-off investor to spend more time interacting with the business or tell an over-involved shareholder to respect some limits and let you and your team do your jobs uninterrupted.
Cheery term, huh?
While raising funds is usually a major step forwards for your business, it doesn’t necessarily mean you’re off to the races. Early-stage ventures that raise a seed round still don’t have the resources to buy everything they would like or hire everyone they want on the team.
During the proof-of-concept and early sales phases, you need to keep costs as low as reasonably possible and make use of pro bono and part-time resources to avoid hiring any non-essential staff.
Ideally, you’ll defer any major decisions – such as leasing an office or warehouse or hiring a high-profile executive – until you’re sure the business is going to take off.
To help businesses survive this tricky stage – often called the “valley of death” because the companies’ cash balances dwindle and bankruptcy frequently befalls them – investment firms and some private organizations run accelerator and incubator programs.
Accelerators, as the name suggests, are designed to expedite the ventures’ learning and development by providing them with relevant content, mentorship, co-working space, and access to free or discounted services.
They typically take in a new cohort of companies once or twice each year, coaching them through a 3 to 4-month curriculum that culminates in a demo day where each company pitches to potential investors.
Incubators generally accept companies on an ad hoc basis and do not offer a structured curriculum. However, they still provide access to relevant content, mentorship, office space, and services.
Companies typically remain longer in an incubator and there is no formal graduation process or pitch event.
Might an accelerator or incubator be right for your business? It depends on your experience level, the maturity of your business, support needs, funding needs, and how close you are to proof of concept.