Whether you are just starting a new venture or have been working on one for some time, it’s important to go through some very basic exercises. Recently, angel investor Vanessa Wilson, who teaches entrepreneurship for the Athena Program at Barnard College, shared some of those first steps, based on her experiences with new entrepreneurs. Before becoming an investor, Vanessa had a distinguished Wall St. career at several blue chip firms; as an equity analyst she participated on teams which led 15 initial public offerings; she was selected a member of Institution Investor’s All Star Research Team for 10 years. Currently, as an investor, mentor and teacher, Vanessa observes that all start ups face one overriding issue: accomplishing a lot with scarce resources. Below are her five recommendations, which emerged from the interview on how to get started on the right foot.
- Organize a realistic Personal Plan before you do a Business Plan. Many entrepreneurs start up with great ideas, tons of enthusiasm, but also with $50,000 of student loans and no plan for how to pay for food and rent! Start-ups rarely reach cash flow break-even in the first 2 years --- particularly if they are big ideas which may grow quickly. For an entrepreneur to make the 110% commitment required to get an idea up and running, they don’t have time to worry about how to pay their rent. Don’t count on outside funding early on; even seed funds often require proof of concept.
- Create an organizational chart with four essential boxes: CEO, COO, CFO and CMO for Chief Marketing or Medical Officer. Even if you are alone and have to put yourself in the boxes, it forces you to analyze the needs of the business as you move forward as well as to take a hard look at your strengths and weaknesses. If you have two or three co-founders, an organization chart requires that you determine who the key decision maker is. Eventually you can in-source or outsource these positions, but be sure to cover those four critical areas with sufficient attention and expertise.
- Surround yourselves with credible people early on. If, like so many start ups, you begin with a round of investment from family and friends, remember they know you and therefore are confident in your ability to do what you promise. But no one else does, including suppliers, clients or potential investors. They’ll all look closely at the people around you. Who are your other investors, advisors, and mentors? And when you hire employees, it’s not worth hiring someone because they don’t cost much if they don’t bring sufficient expertise and project the professionalism or right image for your venture. It’s better to have part time help with good credentials whose presence will validate your plan, than fulltime help who may not add sufficient value.
- Forecast your cash flow for at least 12-14 months, and then for three years once you get going. So many companies get caught up in the development and marketing of the product that they ignore their current cash position. Six months of cash to fund your business provides many more options than 6 weeks do. Figure out what milestones you can achieve with the cash you have and allow time to raise funds—often much longer than you anticipate. Founders must determine how much they will need for day-to-day operating expenses, including rent, salaries, and consultants; capital investment in machinery and office equipment; software programs or development costs; growth capital for sales and marketing At the bottom of your cash flow chart, put the amount of cash you have available in your bank account as a constant reminder of your current finances.
- Make accurate, not wishful, projections of your sales cycle and allow yourself enough time to execute your plan. From the day you cold call a client to the time you deposit their check in your bank account will always be much longer than you anticipate. Most start ups fail NOT because the idea wasn’t good enough, but because the founder runs out of cash earlier than expected. Remember too that in n this economy, clients are slower to pay than ever
The next Primer for Starter Uppers deflates some common myths about the “great ideas.”