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In my a previous I mentioned how the most frustrating part of starting a business was simply finding the right idea to pursue. This may sound ridiculous to some people, since “thinking of the initial idea” should be the simplest part of starting a business.
Just about all the media, along with most entrepreneurs they interview, reminds us to “find our passion” and then start a business based on that. Although this is true, for most people this statement is close to meaningless.
If you are considering to start a business you should analyze several different factors to determine whether or not that business is the correct fit for you. Some of these factors should include:
1. Passion For Your Idea
2. Revenue Viability or Cash Flow
3. IPO or Merger; Acquisition Possibility or Can You Sell it for a Profit?
4. Location-Based – Can you Move or Multiply it elsewhere
5. International Or Local
6. Self-Employed vs. Business Owner
Whether you are starting a surf shop in Brazil or developing an advertising firm with your dream of being on Madison Avenue one day, these factors apply to all your start up ideas. Many businesses fail because they do not fully consider and evaluate these factors before they commence their venture. Tony Robbins, the famous personal development guru, has always admonished “ignorance is not bliss” and this is true, especially when it comes to your business life. While entrepreneurs have a bias towards action, successful entrepreneurs show a keen balance between action and planning.
1. Passion For Your Idea
This is probably the most crucial factor when deciding to start a business. Passion is the fire that fuels all of us to make a difference in this world and do whatever it takes to overcome the obstacles, creating business empires from little more than basement walls. Your Passion is what makes you get out of bed in the morning and face each new day. When thinking of an idea, your passion should be number one on the priority list.
Could you see yourself going to work every day trying to work on the same old boring idea, year after year? Probably not. The facts is that starting a business always takes longer than you think it will and unless you have an unrelenting passion for the idea, or your driving “fire” will fade and the business growth will wither. I believe that this is the reason why most new businesses fail. A lack in your passion directly translates into a lack of focus, which causes your company to go downhill.
When it came to starting my own business, I had a passion for 1) building a business around who I am and 2) helping others become successful at doing the same. I combined both of these when developing my consulting business. I knew that this was an industry that I had very little experience in. This business would force me to learn everything from scratch, building contacts out of thin air and trying to develop a product and a system from scratch.
After about a year I came up with my first real idea of exactly what I wanted to do and how I would do it. I was passionate about it and that passion is much stronger today than it was even then. This is a positive sign for you, when your passion keeps growing. It is what is required to keep you going.
2. Revenue Viability
This factor is simple to understand, yet the most critical one to answer. The main question with any start-up is; “how does this business make money”? Your answer to this question will end up becoming your revenue model for your company. It can either be a very simple answer (well give surf lessons at our shop) or very complex (we provide initial loss leader products, combined with premium product upsells to limited segment, and alternative services to the other segments that are not direct competition).
Whatever your revenue model looks like, it should be clarified at the start, and then improved upon as your business grows. Once you have your passion in place, you need a clearly defined method to make money with your idea. Without revenue, your business will cease to exist very quickly. Make sure to write down every possible revenue streams you can think of, and then hold on to them until you determine which ones you will apply in your business.
In our business, we knew that most Web companies simply rely on advertising to pay the bills. In fact, a few companies do not even have an implemented revenue model, and made very little in revenue at the beginning, yet are still successful (Twitter, for example – which only recently added its ad revenue stream) We wanted to be different, and run our company as a real person to person business, including leveraging an online platform. So, we came up with several different ideas for revenue streams, and we are constantly updating them as we go along. Revenue is the number one thing to keep in mind, without it you are not around long enough to test the market and learn from that and from your mistakes, because you need them to succeed too.
3. IPO or Merger & Acquisition Possibility (Exit Strategy)
While this section will not apply to most small businesses, I felt that it should be included after the revenue section for those companies that need it. When starting a company that will require investment from either local or formal investors, an IPO or M&A strategy is important. This usually only applies to Web start-up companies, but can stretch across to other sectors.
An IPO, or Initial Public Offering, is when a company turns public, or allows it’s shares to be traded on a public stock exchange. A perfect example of this is when you or I buy stock in Microsoft, Coca-Cola or Google. We purchase a stock at a price that fluctuates every day based on people buying or selling that stock to one another. Using this method, a company can liquidate, or convert stock to money extremely quickly. On the days where companies go public, every stock holder in that company receives an immediate money value based on the price of the stock. IPO’s have dried up in the past couple of years due to the recession. However, it is starting to pick up a little with companies like OpenTable that have gone public in 2009.
An M&A, or Merger and Acquisition, is when one company is purchased, or bought out by a larger company. An example of this is when Google bought out YouTube a couple of years ago for a huge amount of money (around $1.6 billion). YouTube was now owned by Google, and all of the investors in YouTube got a huge return on their investment. Venture Capitalists and Angel Investors decide to primarily invest in tech companies for this reason. If all goes according to plan, a 5 million dollar investment can turn into 100 million dollars in a couple of years. Not bad, considering most people get around a 2% annual return at the bank. An example of the most famous M&A in 2009 can be found at this link, Amazon Closes Zappos Deal, Ends Up Paying $1.2 Billion
When starting a company, it should be considered whether or not an IPO or M&A is possible. This will make your business much more complicated, but could result in a huge payout at the end of the day.
4. Location-Based
Location, location, location, as the old saying goes. This applies not only to real estate, but also to business. While location may not be the first priority on everyone’s list, it certainly is an important element. Entrepreneurs themselves usually determine whether or not they want to have their business at a fixed location or a portable one.
Many entrepreneurs are opting to choose the “Internet lifestyle” rather than the old 9-5 system with a cubicle. This lifestyle usually includes sitting at home in your pajamas and watching the checks roll in, or sitting on a beach somewhere sipping piña coladas and suntanning. This is very possible, and is happening all over the world. Through the use of Internet Weblogs, (or blogs) electronic-books, affiliate sales and content writing, entrepreneurs are able to generate more than enough revenue to sustain themselves in whatever climate they would like.
The Internet is changing the way that people around the world operate and work. Employees can now work remotely from anywhere in the world, video conferences are beginning to replace old boardroom meetings and mobile smartphones are beginning to replace computers for many businesspeople. However, there is still a huge percentage of the population that work from a location-based business. If you are an entrepreneur and you want to open up a bakery, restaurant, cafe, hardware store, printing business, etc… then you obviously need a storefront. This will limit you to the location that you choose.
So, now while choosing what kind of business, you would have determined that you had a burning passion for the idea, it could make money, and where the business was going to be located. Once you have determined whether the business is going to be an online or an offline business, you then need to determine where to start that business.
5. International or Local
Certain areas of the world are more friendly to certain types of businesses than others. Generally, Internet businesses end up near San Francisco, real estate companies migrate to New York or Chicago, and financial companies target New York, London or Tokyo. That’s not to say that you can’t start any one of these businesses in another location, but it will not have as many advantages. Companies usually migrate to these areas due to an influx of educated workers, high job demand, technologically advanced cities, good working and living conditions and the ability to interact with like-minded individuals.
If you do decide to go into business for yourself and create an “Internet lifestyle” then the location does not really apply to you. You can choose to work wherever you would like! For most people, the location is key. Many decisions are family-based, and require the location to be quite close to the home. This is alright for a local business, where the business owner can decide their hours and where they work.
If you have the opportunity to choose where you work, you can choose to work locally or internationally. Local may be good because of the familiarity, support network and an immediate contact base. International locations may be scary or difficult at first, since you will potentially not know anyone and not be familiar to the area, as well as a potential language barrier. Certain areas in the world, however, present excellent opportunities for starting businesses for very cheap. For example, starting a surf shop would not make much sense in Northern Alberta, but on the coast of Brazil, you would be in high demand. In order to truly run a business that you are passionate about, you may have to move internationally.
Keep in mind the nature of your business, and if you are prepared to move. Some businesses can work anywhere in the world, yet certain locations are more conducive to them. Our business, using it as an example, could potentially be run anywhere, seeing as it is online. However, a location such as New York or San Francisco would greatly increase the possibilities of success, due to the talent that is congregated in those areas.
We are currently researching where the best possible location would for building and developing a team. One thing that we know is that our team will not be housed locally, but rather internationally. We have also realized that the business model that we have selected will eventually allow us to expand with satellite offices around the world.
The key is to realize what kind of business you are trying to run right from the beginning. Making that decision will drive some of the decision making that you make along the way.
6. Self-Employed vs. Business Owner
This section is based off of the ideas presented in the book “Cashflow Quadrant” by Robert Kawasaki, and is extremely important when considering what kind of business to start.
You have to make the decision from the beginning whether you are going to run the business, or if the business is going to run you. There is a distinct difference, and it is crucial that every potential start-up realize the differences. Here is the difference between a business owner and someone who is self-employed.
A business owner creates systems within the business that allows the business to run, even when the owner is not present.
Someone who is self-employed needs to be present for the business to run, and if they leave, everything stops operating. There are no systems present.
Let’s look at the two types of leaders in detail.
Business Owner
A business owner starts a business with a certain mindset from the start. They want to build a company, not a mom-and-pop. The owner wants to build systems that scale, while hiring employees that carry out tasks, solve problems and create opportunity. The owner will purposely hire employees smarter than them, and then manage them carefully. The purpose of starting a business for them is to create a company, not a job. Reread this again, as it is very important. When you start a business, are you doing it to create a job for yourself? If so, that is fine, it will just be a different type of business. Businesses are created to supplement income, but owners must be willing to work for nothing until the business is up and running. When starting a business, the owner is the last person to get paid. When selling a business, the owner is the last person to get paid. To create a long-lasting and successful company, the owner must be willing to work for free.
The business owner runs the business, creates systems that scale and keeps their personal salary in check at all times.
Self-Employed
Someone who is self-employed is also known as a “technician” by the book “The E-Myth” by Michael Gerber. A technician is someone who knows a specific skill that they can turn into a business. An example of this is a mother that can bake pies really well.
Mary knows that she makes the best pies in Colorado, and all of her friends and family tell her that she should start her own bakery. So one day, she decides to. Mary raises money from her local bank in order to renovate a building and create a beautiful storefront. She opens “Mary’s Cakes and Pies” six months after she decides to start the business, and she is extremely excited! Mary advertises in the local paper that she is having a grand opening on January 1. That date comes, and with all of her excitement, Mary shows up at 3:00 AM to start baking! She bakes lots of her best pies and cakes, and the whole town shows up to try out her pies! She is a hit! Mary works until 11:00 that night cleaning up, and doesn’t care because she is so excited. She then has to do the accounting for the day, which takes her until 1:00 AM. What a long day! Oh well, Mary thinks, because I am running a business! I am in control of my life! No more boss for me, no more set hours, I pay myself when I want!
Skip ahead six months, and Mary is a different person. She hates all pies, never wants to see a pie again for the rest of her life. She is dead tired, hates getting up in the morning and doesn’t do her accounting anymore. She hired a bookkeeper to do that, who eventually turned into her manager. That manager, Fred, then was given the responsibility of hiring and managing employees. Mary, since she was so busy, never spoke to her employees. She really didn’t know who they were. That was Fred’s job anyway. She was far too busy making cakes, dealing with employees, finding new contracts and cleaning the bakery. Mary wishes she had never started this business, it was taking over her life. Not only that, but she was losing money. Sure, she had her steady clients, but it was hard to attract new customers in this economy. If only she could sell it, and go back to a normal job where she worked 9-5.
Why, you may ask?
Well, Mary is not an entrepreneur, she is not a business owner. She is self-employed. Notice the difference between what we mentioned before versus what Mary is doing now. She does not run the business, the business runs her. She works because she has to keep the business running, not because she wants to. She works incredibly long hours with very little results. She is like a hamster stuck on a wheel.
Mary has never even thought about scaling or systems. What do those words even mean? She hired Fred to do her books, and assumed that he knew how to manage. She has no relations with her employees, because Fred is taking care of them. What happens if Fred decides to leave? Well, Mary is in trouble, because she doesn’t know her employees or what they do. No systems are in place for her employees to follow. If Mary is sick or goes on holidays, the business stops. She is controlled by the business.
Do you know anyone like this?
Overall, the self-employed individual is run by the business, does not create any systems, does not think about scalability and takes a personal check in order to treat the business like a job.
When considering what kind of business to start, make sure you keep this comparison in mind. Mary could have avoided many pitfalls by following the principles of a business owner, but this is obviously easier said than done. Any business can be run with the proper ideals from the start, which will save the owner a lot of grief and anger. Keep in mind what kind of business you are trying to start. Even when creating an online business, the goal is passive income. This means that you earn money while you sleep. This only happens when you have the proper systems in place.
Overall, the six points to consider once again when starting a business are:
1. Passion For The Idea
2. Revenue Viability
3. IPO or Merger & Acquisition Possibility
4. Location-Based
5. International Or Local
6. Self-Employed vs. Business Owner Keep all of these points in mind when you are trying to start a business. This certainly would have focused our business from the start. Many people go blindly into a business that they feel would be fun to start, which ends up being a nightmare. Do your research at the start and you will have a company that will have a much higher probability of success.
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