Our in-house expert, and Grid Law founder, David Walker returns to expose the biggest business mistake commonly made by new founders, and provides a six-point plan for putting a company on the best possible footing.
It’s Global Entrepreneurship Week, and I have a request for anyone who is thinking of starting a new business: Please stop chasing unicorns and focus on becoming a real entrepreneur.
What do I mean by this?
As a solicitor I advise many startups, but recently I’ve had less and less people coming to me saying they want to start a business. Instead, they have an idea for an app which they want to launch and in the vast majority of cases, they’ve never even considered the business case for it. This is the biggest mistake they could possibly make.
Their dream is to grow the number of users for the app as quickly as possible (probably by giving it away for free), raise as much funding or investment as they can to develop it, and then sell out to one of the tech giants.
Most of them haven’t given any thought to how the app will make money. If pressed on this issue, the sale of advertising or collecting a commission on sales made through the app are stock answers given. However, the numbers used to generate the forecasts and projections are usually guess work and are reliant on the huge user base being achieved.
All startups are risky, but by chasing this dream, these would-be entrepreneurs are cutting their chances of success to a fraction of what they could be.
So, what should these entrepreneurs be doing instead?
I believe that real entrepreneurship is finding an opportunity and then building a profitable business around it. There’s still absolutely no guarantee of success, but you can stack the odds in your favour by following the six-point plan I have outlined below.
Stage 1 – Find an opportunity
The easiest way to find an opportunity for a new business is to look around you and see the problems people are facing. People face problems in all areas of their life so there will be no shortage of ideas.
Ideally, find a problem in an area where you have expertise and experience. This will make your life much easier. It will help you to solve the problem in your own, unique way and then give you greater credibility when you sell the solution to your target market
Stage 2 – Find a way to solve the problem
There are countless ways to solve a problem. The solution could be a new product, service or it may very well be the app you wanted to develop in the first place. Gather ideas and talk to your potential customers to get feedback so you are absolutely clear about the problem and their reaction to the potential solutions.
At this stage, you still don’t have a business and you shouldn’t even have a fully developed solution yet. These will come in the following stages.
Stage 3 – Find a group of people who are willing to pay for your solution
This stage is vitally important because it’s the first stage that separates the real entrepreneurs from the dreamers I mentioned above. However, even the real entrepreneurs can run into huge problems at this stage if they don’t identify a very specific target market.
It’s natural to think big and believe that the solution to the problem has universal appeal. It may well have, but no start-up can possibly reach a global audience. You’re not going to solve everyone’s problems straight away and if you try, you will end up helping nobody.
Not even Facebook was launched to the World. When it started, it was only open to Harvard students. Then access was opened up to other US and Canadian universities before it started expanding internationally.
Starting with a small target market also means that your sales and marketing can be extremely focused and this will give your message the best chance of being heard.
But remember, you must select a target market that has the ability to pay. If they have no ability to pay, then they are not the target market for you.
Stage 4 – Sell them the solution
The best way to know if you have a solution to a problem that people are willing to pay for is to sell it to them. Go out and get pre-orders for your product or service. Learn to pitch it to your target market and if they’re not buying, find out why.
Keep adjusting your pitch until you get your first pre-orders and then you’re ready to start producing the first version of your solution.
Stage 5 – Build a minimum viable product
When you have real orders for your product you can start building your minimum viable product (MVP).
At this stage, you are not aiming to produce the perfect product. You need an MVP. By producing an MVP, you are by no means selling your customers short. The MVP will absolutely deliver all the value and solve the problem you said it would. However, you’re accepting that it will require further development before it’s finished.
But now, rather than just guessing how to develop the product, you can develop it based on feedback from real customers who are actually using your product. This will turn it into a far stronger product than if you were developing it based solely on your intuition.
Stage 6 – Build a profitable business
Once you have proved you can sell (not give away) a product that solves real problems for real people, you can start building a profitable business around it. In simple terms, you will want to increase sales and cut costs.
Initially, your MVP may not be profitable to make and sell so this will be factored into the development process. This may well be something you need investment for, but now, you are in a very different position because you’re seeking a smaller amount of investment for a specific purpose.
There will be far less risk for the investor so you will be giving away less equity in your business. You may even be able to fund it through loans and borrowing in which case you won’t need to give anything away.
You also need to increase sales which means selling more of your solution to existing customers and finding new customers for it.
Also, having proved that you can solve one problem for your customers, you’re ideally placed to find out what other problems they have. You can then solve those too. When you can do this, you have an integrated suite of products and a real, profitable business.
If you have an idea for a new product, service or app etc., think very carefully about how you’re going to turn it into a profitable business. If you make building a profitable business your priority, and follow the six stages above, you will have a much greater chance of success.
If you have any questions about this process or about starting a business, email me at editors@businessadvice.co.uk and I’ll happily answer them for you.
Also, check out my startup series which is filled with essential legal advice for anyone starting a new business:
- Starting a new business? Make these your legal priorities
- Choosing the best business structure for your company
- Why it makes sense to adopt a limited company structure
- Overcoming branding issues for a new business
- How two identical brands can coexist
- Last minute legal questions before you start trading
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