startbizup http://www.startbizup.com 8 steps to a successful start up Tue, 16 Jul 2019 13:08:43 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 http://www.startbizup.com/wp-content/uploads/2019/03/cropped-supnewicon2-32x32.jpg startbizup http://www.startbizup.com 32 32 How to Create a Startup in an Industry that Doesn’t Exist Today http://www.startbizup.com/?p=1920 http://www.startbizup.com/?p=1920#respond Tue, 16 Jul 2019 13:08:43 +0000 http://www.startbizup.com/?p=1920

If someone suggests that you create a startup in an industry that doesn’t exist today, you would probably think that its a conundrum. After all, if the industry is not in existence today, you envisage great difficulties in doing the financial projections, costing and coming up with the business model. In your mind, there is no way in which you can work out the viability of the startup even with a useful app like StartBizUp.

The approach to create a startup in an industry that doesn’t exist today needs to be different. Very different. Here is where it is useful to look at how two technology giants, Facebook and Google started. Facebook was founded by Mark Zuckerberg together with fellow Harvard University students Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes. When Facebook started, it was intended as a social media platform for students of initially Harvard University and then expanded to other Ivy League institutions. Google has its origins as a search engine using an algorithm developed by Larry Page and Sergey Brin at Stanford University.

If you were Mark Zuckerberg or Larry Page, there was no way in which you could do your financial projections or come up with a viable business model in the early stage of the startup. Their startups were in industries that didn’t exist in its present form at that time. Yet today, Facebook and Google under its parent Alphabet, are some of the most valuable companies in the world.

The secret lies in putting customers first before profits.  Facebook and Google did not start to make serious money until their customer base expanded to a critical mass. Then when the money came rolling in, it was like opening a floodgate.  They experienced exponential growth similar to the graph at the top of this page.

What does this mean for the would be entrepreneur? Simple, the approach has to be changed to one in which building customer base to a critical mass is the first step for the startup. At this stage, it is certain that the startup would suffer losses. However once the critical mass is reached, it is easy to first recover the running costs and after that start generating profits. The problem lies in the period of time needed to build the customer base.  If the customer base fails to build up to the critical mass needed, the viability of the startup may be in doubt. Thus the focus of the would be entrepreneur should be on ways to create a strong customer base before thinking about profits.

Some startups try to enter new industries using the traditional method of projecting costs and profits. This approach is doomed to fail as customers tend to be wary of paying too much for something new. At the early stage, costs tend to be high while customers are few and far in between. Even an attempt to make a small profit projection could result in overpricing the product or service resulting in its premature demise. Therefore it would be better to throw out any attempts to make a profit before the customer base reaches a critical mass. Giving away the product or service free is one way of speeding up the build up of customers.

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Be Conservative in Projecting Income, Margins and Costs http://www.startbizup.com/?p=1913 http://www.startbizup.com/?p=1913#respond Tue, 02 Jul 2019 14:01:23 +0000 http://www.startbizup.com/?p=1913

Before I started my first business many years ago, I did some financial projections. I worked out 3 possible scenarios for the internet cafe venture that was planned. They were the best, expected and worst case scenarios. The projections showed the internet cafe business to be viable even in the worst case scenario. With that, I confidently embarked on my first startup.

After operating for several months, I realized that my financial projections were way too optimistic. In fact, the best days that the internet cafe had were closer to the worst case scenario in my financial projections.

This brings me to this week’s topic. We human beings tend to be overly optimistic especially when our intentions are to start a business venture. Of course, the advantage of being optimistic is that it gives us hope to persevere with the aim that things would improve and work out in the end. However it would be good if one is prepared for situations where things do not work out as planned.

One major cause for over optimism is the overstating of profit margins. I went through the topic of profit margins in some length in my earlier posts. Say you are able to purchase a category of goods for sale at 30% of the selling price. It would be a mistake when doing the financial projections to state that the cost would be 30% of the sale price.  You can read the reasons at Don’t Count the Profits Until All the Stocks are Sold and What are the Profit Margins for your Products?. Thus a more conservative estimate of the profit margin could be 50% or even less.

Another cause of over optimism lies in the over estimation of the quantities that could be sold at the stated selling price. It is possible that the quantities that you expected to be sold could only be achieved at a lower price. However, for the price that you wanted, the quantities that could be sold would fall far short of expectations.

Over optimism also extends to other areas like rental and cost of employing workers. Perhaps the rent for the premises you expected to pay would result in a less favorable location that you desired. Insisting on the desired location could put the asking rent for the premises way above what you anticipated. The same goes for good employees.

In  conclusion, it would be better to be more conservative when doing your financial projections for the start up. Perhaps a good way would be to do the 3 scenarios stated earlier, the best, expected and worst case scenarios. Then throw out the best case scenario as unrealistic, rename the expected case as best case and the worst case as expected case. Then do another worst case scenario which is even more pessimistic than the earlier one. That to me would be a more realistic financial projection.

You can always do your financial projections using the free Android StartBizUp App.

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Don’t Count the Profits Until All the Stocks are Sold http://www.startbizup.com/?p=1909 http://www.startbizup.com/?p=1909#respond Thu, 27 Jun 2019 13:48:14 +0000 http://www.startbizup.com/?p=1909

 

Recently, I spoke to someone who expressed great happiness in successfully selling products online for a good profit. The person had procured batches of various products for sale at a seemingly low price. After a good markup, these products were offered for sale on some online platform. The person showed me the reasonable range of the products available for purchase.

When I inquired further, the person mentioned that the stocks yet to be sold were kept in two boxes. Herein is the crux of the matter. This person’s joy at being able to sell a product for a good markup would be a cause for celebration if the entire lot could be sold for the same price. In some cases, this could happen. In most cases, a certain percentage could be sold at this lucrative price. Another percentage at a lower price and so on. I explained this process in an earlier blog titled “What are the profit margins for your products?”

The reason for revisiting this topic is to stress the need to dynamically price the products so as to maximize the profit. What this means is that if, after a short period of time, you are no longer getting orders for the products at the desired price, you should start to reduce the asking price. However this has to be done quickly especially for certain products which either go out of fashion or face stiff competition or just the result of waning interest by consumers.

However, you may want to manage this price transition creatively. One way is to leave the price as it is but to offer the purchase of a second item at 20% less. This is equivalent to a 10% discount on the price. Another way could be to offer a voucher of a certain value which could be used to purchase your other products. If the products are still not moving as fast as you expected, you need to further revise the price quickly.

The danger of not doing so is that the unsold products tie up your cash. Furthermore delays in selling them would lead to further price declines and eventually lead to losses. Once you reach a certain threshold when it is imperative to get rid of the stock, the price that you paid for it no longer matters. It is sunk cost. What matters is to get rid of the stock at whatever price you can get before its too late.

There is another benefit in this approach. Selling your products at a good markup meant that the profits are also good. Thus your profit and loss accounts would show a good profit before tax. This means your firm would have to pay a sizeable tax bill even though the cost of the unsold stock remained in your balance sheet. If you get rid of more stock even at a loss, then the profit before tax could be significantly reduced. Many firms fail to see this need and end up going bust with all the cash tied up in old unsaleable stock.

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Don’t Mistake Change of Employer for Entrepreneurship http://www.startbizup.com/?p=1904 http://www.startbizup.com/?p=1904#respond Mon, 10 Jun 2019 01:42:27 +0000 http://www.startbizup.com/?p=1904

 

Suppose you had a job as a driver for a company ferrying executives and employees to their destinations. One day, you decide to quit and become a Uber driver. Overnight, you change from being a fixed salaried employee to one with a variable income in the gig economy. Are you then an entrepreneur?

The short answer is No. What changed is that instead of working for a single employer, you now derive your income, piecemeal, from multiple employers. These multiple employers are passengers taking your Uber ride. The reason why you are not regarded as an entrepreneur is that you did not take considerable risk in making this move. It is true that you did take some risk in that your income is now variable. However that is not sufficient to be regarded as entrepreneurial.

Now suppose that instead of becoming an Uber driver, you decide to buy a limousine and provide a service to transport passengers from the airport to the city’s hotels and vice versa. Now you may say that it is not much different from being a Uber driver. One part of it is true. The part where you now derive your income from multiple employers who are your passengers. The other part is not. However instead of relying on Uber to provide the bookings, you now do your own marketing. This may include posters at the airport and hotels to advertise your services, a website or an app to inform and receive advance bookings and so on.

When you first started, you probably do all the driving as well as all the other aspects of the business. Later, you decide to employ another driver to take care of the hours when you are not driving. Then another driver after you got bogged down with all the other work. Then as business expands, you decide to purchase another limousine and with it, 2 additional employees.

These steps count as entrepreneurial as there are 2 distinct risks that you took. The first is to begin taking in employees. The second is the capital risk involved in the purchase of another limousine. Furthermore when you started, you probably worked from home or shared premises. In time to come, you probably had to rent premises to conduct the business.

It is all right to start in the gig economy and then make an entrepreneurial move later. In the example above, the startup used such a step approach.

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Speed is Important but so too is Price http://www.startbizup.com/?p=1897 http://www.startbizup.com/?p=1897#respond Sun, 26 May 2019 13:19:21 +0000 http://www.startbizup.com/?p=1897

In today’s fast paced world, many people’s expectation of delivery times have become just as rapid. This is particularly true if we live in a metropolitan city where such services are abundant. We order our food online and the website promises delivery within an  hour. Place an order for a pair of shoes and expect to receive it in maybe 2 hours or so. We are promised a download of a movie in a few seconds when 5G becomes available.

Does this mean that as a startup, you have to be as fast or even faster than the competition? Well if you are competing in the food delivery business, the answer is probably yes. Or for that matter, in a number of businesses where speed is crucial. However, having said that, it is not true that speed is everything.

I recall ordering something from Australia about 2 years ago and being charged a princely sum of $11 for shipping for an item costing $25. Since the item was not readily available locally, I had no choice but to pay this amount for shipping. To be fair, the item arrived in less than 5 days. I would have been glad to settle for a delivery of 2 or 3 weeks for a considerably lower rate for shipping, say $3 if given a choice. However the supplier did not provide any shipping choices other than the one I mentioned.

This brings about the argument as to whether everyone wants their items fast. Presumably the supplier in Australia thinks so. However as I mentioned earlier, he could not have been more wrong. Let’s go back to the people living in the metropolitan city. Travelling to and from work daily during the weekday, people have a choice of driving a car, taking a train or a bus or even call for a taxi or Uber. In a city like London, driving a car to work is prohibitively expensive especially when parking charges are included. So too is the cost of a taxi or Uber to bring you to work. Thus the majority of people either take the train or use the buses. This example clearly illustrates the tradeoff between speed and price.

The significant thing to note here is that the majority of people favors paying a lower price for slower speed in going to work. While many firms are obsessed with faster deliveries, startups can take a more rational view that most people would prefer to pay a lower price than have a faster delivery.  The solution could sometimes be as simple as giving a choice like the example I gave earlier. Either way, startups could be comforted that in doing so, they are catering for the majority.

 

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Give Your Startup an Edge by Going the Extra Mile http://www.startbizup.com/?p=1860 http://www.startbizup.com/?p=1860#respond Wed, 08 May 2019 13:10:44 +0000 http://www.startbizup.com/?p=1860

Don Quijote, or commonly referred to as Donki, claims to be the largest discount chain store in Japan. One of the key success factors for Donki is the low prices it charged. The company’s discount business took off in the 1990s with the bursting of the economic bubble in Japan. However what is noteworthy is its attraction to tourists who are seduced not only by its low prices but by getting a tax refund on the spot. This happens not at the airport store but elsewhere such as its stores in Tokyo or Osaka. Furthermore tourists need not make a sizeable purchase to qualify for the tax refund, unlike many other outlets providing such services. Even those purchasing groceries for less than ¥2,000 (about $18) can claim for the tax refund. However Donki too has a floor for branded goods like handbags at its outlet.

What proportion of Donki’s business comes from tourists is not known. However, the fact that tourists make a bee line for its outlets when visiting Japan is testimony of the attractiveness of its tax refund service. Since the minimum purchase amount for the tax refund is relatively low, one can only imagine the volume of paperwork that Donki has to process in order to claim back the tax paid from the Japanese government.

Many companies refrain from incurring expenses to do such work with what they perceive to have low returns. As a result of their myopic views, they are unable to compete with Donki. In the 1990s, non-fast food restaurants providing home delivery services were relatively unheard of. Today, with the proliferation of food delivery services, it is soon becoming the other way around. The reason is simple. If everyone is doing it and you don’t do it, you are at the losing end.

When starting up a business, look for areas where you can provide a service which competitors refrain from doing. In other words, if everyone is not doing it and you are the only one doing it, you are a winner.

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Use Your Knowledge and Skills to Shorten the Learning Curve http://www.startbizup.com/?p=1855 http://www.startbizup.com/?p=1855#respond Sun, 21 Apr 2019 13:05:30 +0000 http://www.startbizup.com/?p=1855

There are 2 basic aspects of skills and knowledge required in a startup. The first is the technical aspects of the business. By technical, we are referring to the knowledge and skills fundamental to the nature of  the business. For instance, the technical aspect of a bakery refers to the baking and other skills required to produce good products for sale. The other skills would be necessary to make savory buns and pastries to entice customers. If the business is to develop android apps, the technical aspect would be the programming and other skills. The other skills could be related to the aesthetic and functionality of the app.

However, good technical skills and knowledge alone would not be sufficient to make a startup viable. You could be making delicious pastries and buns for sale in the bakery but due to lack of promotion and marketing as well as mispricing, the business could be doomed to failure.

This bring us to the second aspect which is the management skills and knowledge needed to make the business profitable. There are many areas under management which includes marketing, human resource, finance, operations and so on. In the bakery example, pricing products correctly as well as promotions especially during the startup phase are key to the business success. Employing the right people for the business is critical. Ensuring adequate capital especially the cash flow during this initial period is crucial. Also, you have to ensure smooth operations with minimal disruptions to customers while trying to get things right.

Entrepreneurs experience a steep learning curve during the initial phase of their startup. Thus if an entrepreneur enters a business in which he or she had no technical and management experience at all, the learning curve is going to be especially steep. Therefore think twice about entering such a business. If you had technical experience, for instance as a baker in a bakery shop, you have a distinct advantage. Though you may have the technical skills, you probably do not have adequate management knowledge and skills needed to run a bakery successfully. However your learning curve is dwindled down to learning the management aspect of the business. With a shortened learning curve, your chances of success are much better than another entrepreneur who lacks both technical and management skills.

On the other hand, an entrepreneur may have been the manager of a bakery shop before taking the plunge to open one himself or herself. It is true that he or she may not have the baking and other skills needed to come up with savory buns and pastries. However the experience in running a bakery had provided this person with the management knowledge and skills required to make the startup a success. In  fact, he or she probably had experience in recruiting bakers and other staff needed for all aspects of the business. Still, this entrepreneur would need to experience a  learning curve to come up with a range of products to make the bakery stand out in the eyes of consumers.

Therefore think about the learning curve before you take the plunge to startup a business. Make sure that you are well equipped with the technical or management aspect of the business you are getting into. The best business to get into is the one in which you have both the technical and management knowledge and skills required to make it a success.

 

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Lower your startup costs by buying used items http://www.startbizup.com/?p=1844 http://www.startbizup.com/?p=1844#respond Wed, 03 Apr 2019 13:37:47 +0000 http://www.startbizup.com/?p=1844

Startups tend to have the false belief that everything that they need for the business have to be brand new. I had personally seen startups which invested considerable sums of money to renovate the office, purchase new costly furniture, laptops, office equipment, and other capital items. This happened even before these startup received sufficient revenue for their services in the initial stages. In fact, they only had an order or two at this stage. Two years after, I heard that one startup had closed completely, while another downsized to a shared office.

The time needed for the startup to build up the business can be considerable. Nobody is an overnight success. Therefore it makes much sense to reduce the burn rate as much as possible. This would make the capital invested last as long as possible in the initial stages.  This requires reducing the amount to be spent on furniture, laptops, office equipment and so on.

If you are equipping an office, chances are that you require partitions, office tables and chairs. Although the paperless office appear to be closer to reality than before, my guess is that most people would still need cabinets for files. Now these furniture need to be sufficiently durable to withstand the rough and tumble of an office. However they need not be brand new. You may be asking what if clients drop by and see the used furniture. Well, my reply is that the client probably would not be bothered unless the furniture is really in a dismal state. So what if the used partitions do not totally match the color of the other furniture.

One should be able to locate a used office furniture outlet near where the startup is going to be located. In all likelihood, you could save up to 50% in purchasing used furniture.  The reduction in the amount invested should help to reduce the losses likely to be incurred in the initial stages due to the lower depreciation amount. This means that the chances of the startup turning a profit are very much higher than another equipped with all brand new furniture, all else being equal. At the same time, the breakeven point when cash flow turns positive would come considerably earlier. Therefore the probability of the startup being viable is significantly higher than another startup which invested in brand new furniture. And to top it all, you could launch the startup with much lower capital.

If you are not convinced, download the StartBizUp App and do the sums.

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Locate your operations at cheapest premises if location doesn’t matter http://www.startbizup.com/?p=1840 http://www.startbizup.com/?p=1840#respond Mon, 18 Mar 2019 12:54:42 +0000 http://www.startbizup.com/?p=1840

I vaguely recall reading a book on investing in the stock market many years ago. In that book, the author recommended buying stocks of companies which operate from premises which are, to put it nicely, not stellar. In the same breath, the author advised against investing in companies with new and impressive premises. The rationale is simple. Those companies in mediocre premises are paying low rents and thus have low overheads. As a result, their profit margins tend to be better than companies with monumental assets.

The same strategy can be used for startups. Of course, startups in businesses like food and beverage and certain retail which rely heavily on foot traffic have little choice but to pay high rents for premium locations. Even then, new ways of reaching to customers online without the need for these stellar premises are turning the location need upside down.

Many startups are not in businesses where their locations are critical to the success of the endeavor. It is tempting to have an address on your calling card that impresses the potential client. However you should resist the temptation even if you have adequate capital to do it. Making losses due to high overheads which come with the good image may give the startup a short lifespan.

Clients usually requires that you or your associates visit them to pitch your stuff rather than the other way around. What you fear is the client making a visit to your premises just before awarding your startup the contract. In  any case, the client is likely not to be bothered by the shabby premises that you operate from in the event of a visit. That is unless the contract is worth millions and impression on image counts. For a startup though, that is not probable.

Therefore it pays to look around for the cheapest premises to house your startup. That way, you have a headstart in term of low overheads due to the bargain rent that you need to pay. This will give you leverage in terms of competing on price for your first year of operations. As your startup is not well known at this initial period, charging a low price for market entry is a reasonable strategy. With the low overheads, you should be able to still make a decent profit with that low price strategy.

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Start a Business that Helps Others Make Money http://www.startbizup.com/?p=1827 http://www.startbizup.com/?p=1827#respond Thu, 28 Feb 2019 13:18:52 +0000 http://www.startbizup.com/?p=1827

It is normal human instinct to follow the crowd when there is money to be made. For instance, when the stock market reaches new high, the tendency for investors is to jump in and buy more stocks. The same can be said for property, cryptocurrencies, gold, and many other investments. However, not everyone who puts money into these investments make money. Usually the early birds make the most while those who come in late are left holding the baby when the market turns.

Thus a good strategy would be to spot the trend early and enter the market before it gets too hot. However this is easier said than done. Which is why most of us are not billionaires or even multi-millionaires. There is however an alternative strategy which surprisingly has less risk and could end up giving spectacular returns.

I recently came across an article about Levi Strauss which got me thinking. Instead of joining the California gold rush in the United States in the mid 1800s, Strauss made and sold jeans to those panning for gold. Given the harsh environment that these miners were in, they appreciated the durability of the blue jeans made by Levi Strauss and Company. As a result, sales boomed.

In a more recent period, the rise of Bitcoin and other cryptocurrencies had fueled the sales of specialized computers used for their mining. This led to high demand for makers of graphic processing units or GPUs which excel in the mathematical calculations needed to mine these cryptocurrencies, When Bitcoin price reached its peak in December 2017, GPU manufacturers  like Nvidia benefited greatly from the high demand.

The alternative strategy is obviously to enter a business which supports those who are at the frontlines of the money frenzy. However this is not about entering mundane businesses which support almost every type of business like stationery, personal computers, copiers, etc. The support provided should be unique and generally not available at that time. Durable blue jeans were not available for miners before Strauss introduced them. GPU were initially used for computer games before someone reckoned that their advanced mathematical processing capability could work out the algorithm for cryptocurrencies much faster.

Thus it pays to look at what people are getting into to get good returns for their money. Then consider how to facilitate these people’s process of making money. Generally it involves making the process faster or cheaper or easier. If you manage to solve the problems that these people face, you may have a winning idea for a startup.

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