4th May, 2017
Starting a business, no matter how big or how small, requires a great deal of planning and hard work. Anyone who begins the process of designing, launching and running a new business venture that offers a product, process or service for sale or hire is considered an entrepreneur. Economist Joseph Schumpeter (1883–1950) stated that the role of the entrepreneur is “creative destruction”–this means launching innovations that concurrently destroy old ideas while creating new ideas and approaches. From Schumpeter’s perspective, these changes and “dynamic disequilibrium brought on by the innovating entrepreneur … [are] the ‘norm’ of a growing and transformative economy.”
New business ventures begin with an idea. When conceptualizing an idea, the entrepreneur must make sure the idea, once realized through the formation of the business, solves an existing problem, or meets an unmet need in the society. As this activity is part of the concept development, it is also key to identify the consumer or customer who will benefit when the business idea is realized, and how the solution will be delivered to the consumer. It is worth noting that if you do not understand and regularly interact with your customer, your business venture will not succeed. According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. While the characteristic of a great business idea is that it is both innovative and unique, it is a deep understanding of your customer and their changing needs that will keep your business from failing.
Research shows that market timing also plays a huge part when conceptualizing a business idea to reality. As Idealab founder Bill Gross once explained, there are many factors that are responsible for business ideas that are implemented and succeed – the biggest one seems to be timing.
Timing has two facets – is the market ready for the idea and is there a need for the solution now? Even if an idea has great potential, if it appears when the market is not ready, the idea will fizzle out. For example, Google Glass’s adoption is not as Google expected because it appears to be before it time. In addition, customers will be willing to invest in new technology that tracks their vehicles if they live in an environment with frequent car theft. Conversely, the idea may come too late, once consumers have either moved to a new trend or the idea has been implemented and is saturated in the market.
Remember, just because you have a good idea does not mean that you will succeed. Conduct competitive research to make sure that no-one has the same idea and is already doing what you intend to do. If you find a competitor with a similar idea, either pull out before you’re too invested, or differentiate your idea enough for it to stand on its own
If the idea passes the concept development stage, it is time to write a business plan. A Business plan has about 14 key areas that an entrepreneur must address. These include: Executive Summary, Elevator Pitch, Company Mission Statement, SWOT Analysis, Goals, Key Performance Indicators (KPIs), Target Customers, Industry Analysis, Competitive Analysis & Advantage, Marketing Plan, Team, Operations Plan, and Financial Projections.
Pitching
Starting a business of any size requires an investment. An entrepreneur can utilize two major financing resources to finance their business – debt or equity. Debt involves borrowing money to be repaid, plus interest, while equity involves raising money by selling interests in the company. Entrepreneurs will often look to investors, called venture capitalists, to finance start-up costs, or growth and expansion costs in exchange for a share of ownership in the company, called equity. Each option has its advantages and disadvantages and the entrepreneur must consider what works for them.
If financing using a loan, the lender does not have a claim to the equity in the business and therefore will not dilute the entrepreneur’s ownership interest in the company. In addition, the lender is only entitled to the repayment of the agreed-upon principal of the loan plus interest, and therefore has no direct claim on future profits of the business. The disadvantage is that apart from paying a loan, plus interest – which you don’t have to pay if you finance using equity – it is harder to get a loan especially since most financial institutions look at the viability and sustainability of your new business as a key determinant for loan approval. This is of particular importance because Harvard research shows that only 18% of new business ventures succeed.
While equity requires you to give a part of your business to an investor for an equity stake, the advantage is that you are partnering with a more seasoned investor who may often have deep knowledge on how to run a business. In addition, most investors will bring resources (distribution, marketing, markets etc), that you do not have and that set the company in a faster growth trajectory. The disadvantage of the investor’s equity stake is that they may want to focus on profits and not the other intrinsic motivators for your business.
The success of being funded very much depends on how well you make the pitch to investors. Most investors have limited time to listen to your presentation so you need to perfect your elevator pitch in order to persuade them to invest. Begin by practicing your presentation. Build a profile of potential investors – their experience, background, what business they have funded in the past, and what they are currently involved in. This will give you an idea of their funding appetite for your business.
In addition, have a very clear understanding of what you are willing to give up as equity stake. Use similar existing businesses to compute a rough estimate of what your business is worth. You should be able to justify the estimated valuation at the time of pitching to the investors.
Have a good grasp of the industry or sector you are in, and be ready to provide comparative information when asked to do so. If you are in a competitive environment, know what your competitive edge is and articulate this to the investors.
Finally, confidence, and articulation during the pitch presentation cannot be overstated. A confident, well-articulated presentation gives the impression that you as the entrepreneur are knowledgeable and understand the business you are in.
Article first appeared in the Standard Newspaper.
