Starting up a Business 101- II

In establishing a profitable and well-suited business, the easiest way to fill an endurable need is to tap into one or more of these triggers:

Cost reduction and economy. Anything that saves customers money is always an attractive proposition. Lastminute.com’s appeal is that it acts as a ‘warehouse’ for unsold hotel rooms and airline tickets that you can have at a heavy discount.

Fear and security. Products that protect customers from any danger, however obscure, are enduringly appealing. In 1998, two months afterLong-Term Capital Management (LTCM), one of America’s largest hedge funds, was rescued by the Federal Reserve at a cost of $2 billion, Ian and Susan Jenkins launched the first issue of their magazine, EuroHedge. In the aftermath of the collapse of LTCM, which nearly brought down the US financial system single-handedly, there were 35 hedge funds in Europe, about which little was known, and investors were rightly fearful for their investments. EuroHedge provided information and protection to a nervous market and five years after it was launched the Jenkins’s sold the magazine for £16.5 million.

Greed. Anything that offers the prospect of making exceptional returns is always a winner. Competitors’ Companion, a magazine aimed at helping anyone become a regular competition winner, was an immediate success. The proposition was simple. Subscribe and you get your money back if you don’t win a competition prize worth at least your subscription. The magazine provided details of every competition being run that week, details of how to enter, the factual answers to all the questions and pointers on how to answer any tiebreakers. They also provided the inspiration to ensure success with this sentence: You have to enter competitions in order to have a chance of winning them.

Niche markets. Big markets are usually the habitat of big business – encroach on their territory at your peril. New businesses thrive in markets that are too small to even be an appetite wetter to established firms. These market niches are often easy prey to new entrants as they have usually been neglected, ignored or ill-served in the past.

Differentiation. Consumers can be a pretty fickle bunch. Just dangle something, faster, brighter or just plain newer and you can usually grab their attention. Your difference doesn’t have to be profound or even high-tech to capture a slice of the market. Book buyers rushed in droves to Waterstones’ for no more profound a reason than that their doors remained open in the evenings and on Sundays, when most other established bookshops were firmly closed.

Business tip

Checking the fit of the business

Having a great business idea and having the attributes and skills needed to successfully start your own business are two of the three legs needed to make your business stool balance. Without the third leg, though, your stool isn’t stable at all. You need to be sure that the business you plan to start is right for you.

Before you go too far, make an inventory of the key things that you are looking for in a business. These may include working hours that suit your lifestyle; the opportunity to meet new people; minimal paperwork; a chance to travel. Then match those up with the proposition you are considering.

Starting up a Business 101

Checking Viability

An idea, however exciting, unique, revolutionary, and necessary is not a business. It’s a great starting point, and an essential one, but there is a good deal more work to be done before you can sidle up to your boss and tell him or her exactly what you think of them.

The following explore the steps you need to take so that you won’t have to go back to your boss in six months and plead for your old job back (and possibly eat a large piece of humble pie at the same time).

Researching the market

However passionate you are about your business idea, it is unlikely that you already have the answers to all the important questions concerning your market place. Before you can develop a successful business strategy, you have to understand as much as possible about your market and the competitors you are likely to face. The main way to get to understand new business areas, or areas that are new to you at any rate, is to conduct market research. The purpose of that research is to ensure that you have sufficient information on customers, competitors, and markets so that your market entry strategy or expansion strategy is at least on the target, if not on the bull’s-eye itself. In other words, you need to explore whether enough people are attracted to buy what you want to sell at a price that will give you a viable business. If you miss the target altogether, which you could well do without research, you may not have the necessary resources for a second shot.

The areas to research include:

 Your customers: Who will buy more of your existing goods and services and who will buy your new goods and services? How many such customers are there? What particular customer needs will you meet?

Your competitors: Who will you be competing with in your product/market areas? What are those firms’ strengths and weaknesses?

Your product or service: How should you tailor your product or service to meet customer needs and to give you an edge in the market?

The price: What would be seen as giving value for money and so encourages both customer loyalty and referral?

The advertising and promotional material: What newspapers, journals, and so forth do your potential customers read and what Web sites do they visit? Unglamorous as it is, analysing data on what messages actually influence people to buy, rather than just to click, holds the key to identifying where and how to promote your products and service.

Inflated numbers on the Internet If you plan to advertise on an Internet site it makes sense to check out the sites you’re considering. Be aware that some sites publish a fair amount of gobbledygook about the high number of ‘hits’ (often millions) the site scores. Millions of hits doesn’t mean the site has millions of visitors. Some Internet sites increase their hit rate by the simple expedient of adding the number of pages each viewer must download to view the page.

Another mildly meaningless measure of the advertising value of a site is the notion of a ‘subscriber’. In Internet parlance anyone visiting a Web site and passing over their e-mail address becomes part of that company’s share price! It is rather like suggesting that anyone passing a shop and glancing in the window will turn into hard cash tomorrow. Any real analysis of Web site use starts with ‘page impression’, which is a measure of how many times an individual page has been viewed.

Channels of distribution: How will you get to your customers and who do you need to distribute your products or services? You may need to use retailers, wholesalers, mail order, or the Internet. They all have different costs and if you use one or more they all want a slice of the margin.

Your location: Where do you need to be to reach your customers most easily at minimum cost? Sometimes you don’t actually need to be anywhere near your market, particularly if you anticipate most of your sales will come from the Internet. If this is the case you need to have strategy to make sure potential customers can find your Web site. Try to spend your advertising money wisely. Nationwide advertisements or blanketing the market with free disks may create huge short-term growth, but there is little evidence that the clients won by indiscriminate blunderbuss advertising works well. Certainly few people using such techniques made any money.

A business plan

A business plan is a selling document that conveys the excitement and promise of your business to potential backers and stakeholders. These potential backers could include bankers, venture capital firms, family, friends, and others

Who could help you get your business launched if they only knew what you want to do? Getting money is expensive, time-consuming, and hard work. Having said that, it is possible to get a quick decision. One recent start-up succeeded in raising £3 million in eight days, the founder having turned down an earlier offer of £1 million made just 40 minutes after his business plan was presented. Your business plan should cover what you expect to achieve over the next three years.

Most business plans are dull, badly written, and frequently read only by the most junior of people in the financing organisations they’re presented to. One venture capital firm in the US went on record to say that in one year they received 25,000 business plans asking for finance and invested in only 40.

Follow these tips to make your business plan stand out from the crowd:

Hit them with the benefits: You need to spell out exactly what it is you Hit them with the benefits: You need to spell out exactly what it is you do, for whom, and why that matters. One such statement that has the ring of practical authority about it is: ‘Our Web site makes ordering gardening products simple. It saves the average customer two hours a week browsing catalogues and £250 a year through discounts, not otherwise available from garden centres. We have surveyed 200 home gardeners, who rate efficient purchasing as a key priority.’

Make your projections believable: Sales projections always look like a hockey stick: a straight line curving rapidly upwards towards the end. You have to explain exactly what drives growth, how you capture sales, and what the link between activity and results is. The profit margins will be key numbers in your projections, alongside sales forecasts. These will be probed hard, so show the build-up in detail. Say how big the market is: Financiers feel safer backing people in big markets. Capturing a fraction of a percentage of a massive market may be hard to achieve – but if you get it at least it’s worth it. Going for 10 per cent of a market measured in millions rather than billions may come to the same number, but it won’t be as interesting.

Introduce you and your team: You need to sound like winners with a track record of great accomplishments. Include non-executive directors: Sometimes a heavyweight outsider can lend extra credibility to a business proposition. If you know or have access to someone with a successful track record in your area of business who has time on their hands, you could invite them to help. If you plan to trade as a limited company you could ask them to be a director, without specific executive responsibilities beyond being on hand to offer their advice. But they need to have relevant experience or be able to open doors and do deals.

Provide financial forecasts: You need projected cash flows, profit and loss accounts, and balance sheets for at least three years out. No-one believes them after Year One, but the thinking behind them is what’s important.

Demonstrate the product or service: Financiers need to see what the customer is going to get. A mock-up will do or, failing that, a picture or diagram. For a service, show how customers will gain from using it. That can help with improved production scheduling and so reduce stock holding.

Spell out the benefits to your potential investor: Tell them that their money will be paid back within ‘x’ years, even on your most cautious projections. Or if you are speaking with an equity investor, tell them what return they will get on their investment when you sell the business on in three or five years time.