In this guide, we ask Wade Myers, serial software entrepreneur and multi-industry investor, six of the most common questions asked before launching a startup. Read on to learn his expert advice.
1. What does an ideal business look like?
The ideal business would look like this…
…it has a seasoned, high-integrity, well-educated, entrepreneurial and fully-developed management team with excellent leadership and communications skills that have successfully built other companies together, have unmatched strategic, analytic, and financial prowess, that forge warm, deep relationships with all stakeholders, and rarely miss their plan…
…while managing a successful business in a large, high-growth, non-seasonal addressable market that is experiencing favorable macro trends in an unregulated industry with little or no competitive threats, low competitive rivalry, low supplier switching costs, and low competitor and supplier concentration…
…with a capital-efficient business model that has few fixed assets, an efficient cash cycle, high gross margins, low fixed costs, outsized earnings, and high comparable valuation multiples…
…with a sharply-focused highly scalable and repeatable operation that runs like a well-oiled machine with very few operational risks and favorable labor pool characteristics…
…that delivers a proven, non-perishable offering with iron-clad intellectual property protection, few substitutes, a highly-distinctive, disruptive, and highly-automated value proposition that meets a real and unmet market need with demonstrable success that is priced lower than competitive offerings, while offering higher quality and better service…
…and sells through a broad set of highly-motivated channel partners into a fragmented, delighted set of referenceable customers that are easily identified, sold at a high price point in a short, low-cost sales cycle to one key decision maker with little or no price sensitivity whose need and purchase timing are clearly understood, while creating a strong network effect, that results in a deep, long-lasting, contractual, recurring revenue, captive relationship with high purchase frequency, and an opportunity to cross-sell and up-sell many other offerings, all of which can easily be deployed into multiple adjacent markets with little or no modification or additional cost.
2. What types of businesses will scale the fastest and easiest?
The answer is really about which “business models” scale faster and easier rather than which “businesses” in general. You can be in the same business as someone else but have a different business model that is far superior.
For example, if you are in the software business, you’d rather have a packaged product than be a custom software developer and you’d rather bill quarterly in advance than monthly in arrears.
The question of a scalable business model is one of the most critical questions that sets the stage for a really successful and profitable business and one that I learned the hard way. Therefore, it is paramount that you figure this out at the business plan stage.
The most critical aspects of a business plan that make it scalable are the following (it’s really important to focus on “easy to scale”, because that enables “fast to scale”):
The ability to sell the same offering over and over again to all customers with the same product or process content in a cookie cutter fashion
The ability to create an offering once and sell it to an infinite number of additional customers with little or no incremental COGS or direct labor for each additional customer (think software, books, videos, digital music, etc.)
The ability to increase the number of units produced and delivered and experience a decrease in the average overall cost of each unit (including G&A costs)
Scalable financial model:
Short cash cycle: The ability to get paid by the customer prior to, or at the same time as, you experience the cost of creating, selling, and delivering the offering which enables you to growth infinitely without external capital
Recurring revenue: The ability to develop a contractual, recurring relationship with the customer that creates more predictable revenue growth and higher LTV (lifetime value)
Less time to develop:
Fewer capabilities: Very few distinct internal capabilities or different business processes that are required to be developed to execute upon the opportunity
Short development time frame: A very short amount of time required to bring the new offering to market (create, test, perfect, etc.)
3. What are some good business ideas for a startup?
The best startup business idea for you will be at the nexus of the following critical items:
- The business solves real customer pain and meets unmet needs in a new and unique way
- The business and its offering(s) are clearly your calling and your purpose – you must have a crystal clear purpose, vision, mission, and strategy that all are aligned with every fiber of your being and with your values
- The business leverages your skills, training, education, experience, professional training, and industry networks
The more new things an entrepreneur is experiencing while attempting to launch a new venture, the greater the risk and the higher the likelihood of failure
- The business is within the scope of what you can deliver in the near-term in order to get launched and in terms of the resources you currently have or that you can gain control over, such as the initial investment of time and money
- The business fits the context of what you are trying to achieve in terms of the work, the lifestyle, the level of potential earnings, etc.
- The business has a high-quality business model in terms of the market opportunity, the financial characteristics, the operational characteristics, the offering characteristics, and the customer relationship dynamics
4. How do I get investors to take me seriously?
The best way to get investors to take you seriously is to make it crystal clear that you do not need them.
If you are in the position where you can communicate very clearly based on your startup’s performance, financials, and traction that you are fine on your own and do not “need” them, but that you merely “want” them to scale faster, then you will have instant credibility and even have them begging you to consider an investment. You know you have credibility when they start trying to sell you on why you need to grow faster with growth capital.
In other words, you need to demonstrate the following three characteristics:
- A proven offering with a compelling value proposition that serves a large addressable market
- Enough highly-satisfied customers to prove the first point
- Sufficient revenue and earnings that you can survive and grow slowly given your current cash flow and working capital dynamics (and, importantly, you can clearly survive without any external capital)
If you have the above going for you, then I recommend that you have a few different scenarios modeled out in different Pro-Formas as follows:
- Your slow and steady growth scenario – the one you are currently pursuing that you are happy with and can sustain
- Your $1m of growth capital scenario – showing a higher growth ramp and how you would use the capital to grow faster (think sources and uses in terms of how you would effectively employ the $1m)
- Your $5m of growth capital scenario – same as above, but with a steeper growth ramp
- Your $10m of growth capital scenario – same as above, but with even a steeper growth ramp
Your core message is that you are really onto something good, but you are merely exploring the idea of taking on capital to grow faster.
You are now in the position of evaluating what the growth capital means in terms of potential growth and what happens to your equity value and you are really in a great place to understand for yourself whether or not you are better off with a venture capital investment. And, of course, you are playing a little hard to get. This type of communication and approach will make you a very attractive target for potential investors.
5. What kind of employees should I have in my startup?
Because startups are absolutely fraught with unknowns, high pressure, high-anxiety, and a fast-changing landscape due to everything you are trying to accomplish as fast as possible and with as few resources as possible, it is critical that you hire right.
Here are a few things I’ve learned over the years as a serial startup entrepreneur and venture investor:
- One bad management team hire can tank your company
- There is no time for on-the-job training or to learn a new toolkit
- Always evaluate hiring vs. contracting
- Contract first if at all possible to test the relationship
- Hire slow, fire fast
- Surround yourself with excellent advisors that fill in the gaps of your skills and experiences
- While you should expect your advisors and existing team to have a lot of input, you should always make the final decision on strategy and then hire to that strategy; for example:
- You should determine the tech-stack strategy and then hire to that strategy, rather than allow the team to go in the wrong direction with the toolkit with which they are most comfortable
- You should determine the go-to-market strategy and then hire to that strategy, rather than allowing the team to simply implement sales, marketing, and alliances strategies with which they are most comfortable
“My ideal CFO would have an undergrad in accounting and finance, would have spent a few years on the audit side of a large audit firm to learn those disciplines, be a CPA, have an MBA, and would have been a senior controller or CFO of a similar firm with a similar business model in my target industry…”
- Hire strategically, not opportunistically, based on the company strategy, a detailed organization plan, and an ideal candidate profiles for each key position; for example:
To sum up: you will get maximum leverage if you only hire people that…
…have held the same role you are hiring them for and have had demonstrable success…
…by using the same toolkit your startup employs…
…by implementing a similar strategy to yours…
…with the same business model…
…at the same stage…
…within the same context and at the same pace…
…in the same industry and with the same customers…
…with high integrity and that shares your values…
…that have excellent leadership and communications skills…
…that are capable of forging warm, deep relationships with all stakeholders…
…and that have rarely missed their plan because they are mission-oriented
6. Is it possible to start a business with little to no money?
The short answer is yes. The key is to select the right kind of business model and roll up your sleeves. The good news is that it is absolutely possible. Here’s how…
In terms of business model, service businesses usually do not require any investment in manufacturing infrastructure, nor do they require any inventory that chews up working capital. Instead, services startups are the types of businesses that require a good dose of humility and hard work. While these business models are not as scalable or repeatable as tech-based businesses, you can still achieve significant leverage through employees, and your ROI (return on investment) will be higher and faster due to the little to no up-front investment.
I’ve spent decades as an entrepreneur and advising entrepreneurs and I could go on for days on this topic, but consider the following examples of entrepreneurs that I personally know that should encourage those with nothing more than a heart to serve:
- One man started a window cleaning business with less than $100 in sponges, squeegees, rags, and cleaning solution. His operation grew into a company that netted him a six-figure income, all while allowing him to work from home with his family – which was important for him.
- Another entrepreneur started a pool cleaning company with less than $200 in supplies to put himself through grad school and he ended up hiring someone to manage it after graduation. The company continued to provide him with income for over 30 years, freeing him up to pursue many other projects and opportunities that he otherwise could not have followed without the ongoing earnings from the company.
- In another pool cleaning example, an entrepreneur that had lost everything in a previous failed venture, bounced back and with a spirit of humility and cheerful diligence, moved to a new city with literally no money, and bought a few pool cleaning supplies. He went on to build a pool cleaning route and sold it for over $50,000 just ten weeks later. He told me he didn’t even have enough money for a direct mailing campaign, so he just went door-to-door to build his customer base. He then kept doing that over and over again, realizing that he was really good at building a route of customers and that there were plenty of existing pool cleaning companies that were not that good at growing that would happy buy a route from him. He could build and sell about four routes per year.
- In another case, I called a yellow pages ad for a company to clean out my HVAC vents and ducts. The hard-working immigrant that showed up to do the job had only been in the U.S. for 18 months, having arrived from Eastern Europe with nothing more than the shirt on his back. Yet, he was busy supervising three crews that day he was at my home with an average billing of $2,500 each. He had started out cleaning ducts by hand and saved enough money to buy sophisticated wet vacs out of his initial earnings. His only other investment over time was a used service van per crew (he already had three only 18 months in) and cell phones so he could direct the crews’ work.
- In another case of marveling at the simple business model of someone I hired for my home, I hired a man that worked with his sons to replace several window screens. Just a few hours after showing up, he drove away several hundred dollars richer, having installed several window screens at around $40 each. His only investment was a slick little mobile screen cutting and framing machine he had picked up at Home Depot for a few hundred dollars. His supplies consisted only of rolls of window screen material and aluminum frame that he cut to measure onsite with a power hacksaw.
- One Saturday while I was working in my yard, a man stopped his truck and jumped out to tell me that he noticed that I had a dent in one my cars in my drive way. Maybe I’m just a sucker, but he had a good sales pitch about how much cheaper he was than a body shop and thirty minutes later he drove away with $200 in his pocket and I had a job well done. His tools consisted of two different types of dent pullers, two different styles of hammers, and a drill. His supplies included putty and several grades of sand paper. I must admit, he did a really good job. For the final painting, he referred me to an auto paint store to pick up a small can of matching paint to finish it off myself. He worked for an auto body shop during the week, but he said he could easily pick up an extra thousand dollars or two every Saturday when he cruised neighborhoods as he was doing that day. That equates to $4k to $8k per month if he worked all four Saturdays – that’s not just chump change for an hourly auto body worker with an entrepreneurial spirit.
- In another case, a pastor started a home health care business with his family. They converted old farm outbuildings on their small farm into living quarters and earned $12,000 per month to house and feed four elderly clients (the state pays them $3k/month/client). The family cooks and cleans for their clients and have plenty of time to pursue other projects and opportunities.
- Another entrepreneur started a restaurant supply and repair company with absolutely no money by offering to repair commercial kitchen equipment to customers that paid him in advance so he could buy the necessary parts. That business has since grown into a $50 million business with operations in several states that he eventually sold. Prior to selling, he enjoyed a net income of over $3 million per year while checking in periodically from his condo in Hawaii. His ROI was infinity, having built a very valuable business out of nothing.
- A young married couple from Eastern Europe landed in the U.S. with $1,500 in their pocket and no educational credentials. After trying their hands at a few odd jobs, they got down to only fifty cents. They bought a Coke and sat on the curb in a mid-sized Midwestern town in a moment of despair and shared the Coke while discussing whether or not they should return home. With a common resolve they vowed never to return, borrowed $150 from a friend, and continued to soldier on. They walked past a Karate studio and noticed that it was full of kids and looked like an interesting business that didn’t require any training other than knowing Karate. They both got cleaning jobs, fastidiously saved money, and enrolled in the school to be trained. Once they both got their black belts and had saved enough money to buy a franchise, they relocated to a large metroplex to a very high income suburb and started their own Karate studio. They now run one of the most successful Karate franchises in the U.S. and are amazingly successful. Their customer service is phenomenal and they are now both 5th degree or higher black belts and the husband just won a national tournament in sparring. So not only do they have a successful business, but they are literally among the most successful and talented in their entire industry. It was only 9 years ago that they were sitting on a curb, having spent their last fifty cents.
The list goes on and on, including lawn service companies, cleaning services, etc.
Here’s the consistent theme in these stories:
- The entrepreneur(s) started with very little money
- The entrepreneur started out performing the service themselves and then hired others, training them to do it their way
- The entrepreneur did not wait for customers to come to them, but they went out and sold directly
- The entrepreneur did not have an MBA or any formal business training (in fact, that kind of training would likely not have humbled them enough to start off as they did)
Are you launching a high-growth startup and looking for the smartest way to raise capital? You’re in the right place. With the Pro-Forma Startup Kit
, you’ll gain free templates, tools and cap table planning that will enable you to create a thorough financial forecast that will not only impress investors, but empower you to make the right decisions for the future of your business. Get started today.