You may think starting a new business has many hurdles to jump over, and you’re right, however, it’s the 1st hurdle that’s most crucial, and the most challenging, for most business start-ups but set yourself up in the right way to get over this one and the others will be much easier. The 1st hurdle is, unfortunately, a multi-layered one…
The starting block
Preparation is your best friend – the reason a lot of start-ups fail is because they haven’t done the work before getting started. It may sound obvious, but the first step is that you need to find out if there’s a market for your business idea. If you don’t do the background research you’ll never know whether there is a pain that your idea will fix. You also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have). Identify which of these it is and you’ll then be able to establish which type of market your idea fits into.
Get your timing right
Markets follow trends, which both influence customers, and are influenced by customer needs. Often products are launched before technology is available widely enough to cope with it. Researching the market your product fits into is the foundation for any business model, because you can then see if it’s viable, and more importantly – is it the right time to launch it.
Managing your time is also an important factor. So often new businesses take up too much time to run at this initial stage. Concentrating on what needs to be done before the ‘nice to have’ things kick in. The best advice here is to set aside 30 minutes every day without any distraction whatsoever, to take a holistic view of the business, and make key decisions with clarity. Many business owners and successful entrepreneurs choose to do this at the start of the day, often before the working day begins. These are your 30 minutes, no phone calls, no meetings to prepare for, no distractions, and can be the most productive and important 30 minutes for achieving success.
When to speed up
You’re approaching your 1st hurdle – taking your idea to market, and because you’ve done all of the groundwork listed so far, your business model will kick in. A few revisions may be needed before you start to see results, and you’ll also need to know when to ramp it up a gear. So many companies grow too fast, taking on, or increasing a sales and marketing team before they are financially able to support it is a common mistake. A good CEO will know when to take the lead on this and ensure there’s no burn out, but here’s a simple formula for working that out…
Are you onto a winner?
There’s a very simple equation to use here, it’s called the CAC/LTV rule:
CAC = Cost of Acquiring a Customer
LTV = Lifetime Value of a Customer
CAC must always be less than LTV
To compute CAC you need to add up the entire cost of producing your product, this should include marketing, salaries, sales, travel, etc.
The LTV of your customer is worked out by looking at the gross margin over their lifetime. So if your business model id based on a one off cost this is really simple, but for subscription based businesses with recurring charges, you need to take the monthly recurring revenue, and divide that by the monthly uptake of subscribers.
Running out of cash
So you’ve successfully made it off the starting block, and over the 1st hurdle, your business model is working hard and there are some stats to prove it. However, the majority of start-ups fail due to lack of funds, so what happens if right at the start, you have a negative cash flow? It may be that your business model is robust, but market trends are in a natural dip, or you need to expand into other geographical areas where demand may be higher. Very often a business model milestone has not been met which skews your predicted targets and lowers the CAC/LTV ratio.
Raising cash is the obvious solution, and it can come from a variety or sources, including angel investors; individuals or companies who have the funds and expertise to get you over the 1st hurdle, and keep the momentum going. Having a back-up plan ready in case you do need an injection of cash, or commercial knowledge will give you peace of mind.