Three years to build a business? ✶
Jacques Mattheij explains that it takes three years to build a successful business, so new entrepreneurs shouldn't be surprised that the first couple of years are really tough:
Typically it goes like this:
- in the first year you lose money. Earlier on more than later in the year
- somewhere during the second year you break even.
- in the third year you finally make back all the money that you had to add in the first
The reason why it works this way is simple enough (even if that doesn't explain the timing). Customer acquisition is a time consuming process and a new business does not have several things that help a lot in gaining new customers:
- a reputation
- a network
- existing customers
I have a slightly different viewpoint on this, based on my own experience and observations. Since we work with quite a few tech businesses at GrantTree, and I've been part of the startup community for some years now, I think I've got a reasonably wide cross-section of sample businesses and entrepreneurs.
Here, then, are my observations:
- A lot of new entrepreneurs (myself included), do take several years (2, 3, 4, it depends) before their business starts taking off (as in, making enough money to pay the bills from sales rather than funding). Some people never get through that initial process, and that's not always because of lack of perseverance.
- Once that first period is out of the way, though, the time it takes for them to build a functioning business seems to change dramatically. I know people who regularly build functioning, highly profitable businesses in a span of months. GrantTree itself has had a highly profitable first year (though the first few months were ... interesting.
- The only shortcut for that process seems to be either tremendous luck, or an existing client base before the company is founded. Some of our clients jumped straight from corporate job into running a profitable business - but the previous employer was the main source of income at the beginning.
My conclusion, then, is that it doesn't take three years to build a business, it takes three (or some number higher than 2 in most cases) years to build an entrepreneur.
Being a successful entrepreneur takes more than a client base, a network and existing customers. It takes experience, sales/hustling skills, the ability to focus on what matters to the business and drive it forwards despite a million distractions and no one to tell you what you should be doing, to make mostly correct entrepreneurial decisions quickly, the ability to make do with extremely limited means. It also requires a network (something most new entrepreneurs don't have) and a personal reputation, very often, but those are far from sufficient.
So, my way to look at this is that what's being built over the first three years is not a business. It's a person, with personal assets like a reputation, a personal network, experience and knowledge, and so on.
Once the entrepreneur has been successfully constructed against all odds, businesses can and do get built much, much faster - even services-based businesses like GrantTree.
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Yesterday, someone emailed me, asking about how to find good ideas to start a startup.
Every founder who's been in the game a few years has clouds of potential ideas floating around that they can't find the time to work on. They might not all be good, but there are always too many of them. At the same time, though some people have this cloud of ideas following them even before they run their first business, many start off with few ideas. Before I started my first business (and for a year or two afterwards), I was one of those people... I didn't have that many ideas. But now? I spot (and ignore) new business opportunities on a weekly basis.
Why is that? I think it's because of a shift in perspective. Few businesses are actually started based on an "idea". Instead, entrepreneurs start businesses because they spot opportunities. That is the shift in perspective that occurs after a few years running your own business: because your job is, basically, to identify and pursue opportunities, you become very good at noticing and evaluating opportunities for business.
Can this shift in perspective happen before running a business? Perhaps, but I don't know of any tried-and-tested methods to induce it. Perspective shifts don't usually happen merely by reading an article or hearing a good story. Articles and stories are just one part of a long series of experiences that lead to someone to change their view of the world.
That said, I think there are a number of things you can do to drive towards that shift in perspective. It might still take years, but getting there in years is still better than not getting there at all. Here are some suggested activities:
- Go out of your way to meet entrepreneurs and talk about opportunities (rather than ideas) with them. You can meet them for lunch, at startup meetups, etc.
- Realise that almost everything you can lay your eyes on was built and delivered by a business - even the trees in your local park are probably being tended by a business. Most of these businesses make money. Some make a ton of money. Make it a constant habit to pick out some of those things and figure out how they make money. In the same way that a programmer will try to figure out "how they did it" when exposed to a cool new piece of software, an entrepreneur will have a habit of trying to figure out the business model, constraints, effort and so on, whenever exposed to a cool new business. Keep asking yourself "how would I build this business from scratch?"
- Learn to sell. Once you know how to sell, the space of opportunities that you can spot grows tremendously.
- In fact, learn as much as you can from the startup skill set. Each of those skills grows your reach in the opportunity-space.
- Finally, read the right kinds of blogs/sites. Swombat.com is a good example, but there are many others that provide insight from the point of view of experienced entrepreneurs. Many of those are found in the Founder's Library. With the right kind of daily reading, you can probably brainwash yourself into a different state of mind (whether that's a good thing or not is up for debate).
Ultimately, if you want to achieve this more quickly, jumping in at the deep end and starting a business will always be the quickest way to achieve this perspective shift. Running (and failing at) a business shakes you to your roots, and this kind of painful experience is the stuff perspective shifts are made of. As they say, it "builds character"...
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Iqbal Gandham acts as a C-level executive or as an advisor to companies, in the web and mobile space. Whether it's understanding the technology to build a product or service, or creating and executing sales and marketing plans, he has extensive experience in both product and customer development.
Over the course of his career, Iqbal has founded, co-founded, advised, and taken companies from one man entities to valuations exceeding $50 millions, and employee counts eclipsing 100+. Most of those companies are still in operation today.
In this article, he shares some advice for how to go about getting that crucial list of early leads for your startup, when you're starting as an industry outsider.
Lead generation is difficult. We are all required to do it during the lifecycle of our startup. We imagine it’s easy, and often it’s the one thing we get wrong.
Traditional lead generation was a little easier than it is today (I know the old-timers will not agree, deal with it!). You selected a vertical, or approximately divided the world's population into groups you thought may like your product or service, purchased a mailing / calling list, and then started cold calling.
Over the call you would attempt to deduce if there was any interest, and spin-sell your product into their requirements. Times have changed. Cold calling, although still used, is being phased out in favour of a more strategic approach.
Today, we are told to ‘guess’ less, and instead ascertain where consumers are talking about the problem your product solves. Instead of just narrowing down to a vertical and then jumping on the phone, drill a little deeper, and see if those people are discussing the
Besides the ‘sale,' lead generation is also needed if you wish to carry out customer discovery. They all require you to reach and interact with people whom you do not employ, and who most likely are outside your immediate networks. You're not likely to bump into them at Geek ‘n Rolla.
So how does one go about breaking into an industry, in the modern age?
Basics: Why are you contacting?
Unless you figure this out, you will end up contacting everyone, and on the day of the ‘pitch’ you will not really know what you want from them. Never go to a meeting unless you know what you want from the meeting.
The best way to do this is to answer two simple questions:
- What do you want from them?
- What can you give them in return?
You may be contacting a person for a ‘sale’, for a ‘review’ or perhaps just some ‘customer discovery’. So, ‘What you want and what you give’ may differ in each scenario.
Once you've got this figured out, the next step is to find those leads.
Who to contact?
Now, we need to build the list. This is akin to buying mailing lists and calling lists. There are several methods you can use to aid you in building a list of potential contacts:
Networking: This is the obvious one, but one which we all get wrong. Why? Simple: we tend to network at events where we feel comfortable. Unfortunately these events are rarely places where our customers are.
Online search: Hit google, see which companies come up, send them an email... and receive no response. Or, see the tools listed lower in this article.
Referrals: Although, strictly speaking, a subset of the aforementioned, it is the optimum method. It's also the most problematic to apply, especially if selling in an industry where we have scant knowledge.
I have found all these methods have their own space, but I find offline networking more appropriate for B2B and online preferable for B2C.
Generating B2B leads
Here are some steps to get started:
Write down a list of companies that you would ideally like to be your customers.
Create another list, this one of companies which have sold something to them (tangential to your offering - not your competitors).
Create a list of events which they (have) attend(ed).
Discover new people who have joined those companies or who have left them recently (use Linkedin to find this out).
2, 3, and 4 all give you one thing: access to the company, without specifically asking for access.
Network with 2, 3 and 4. I find ‘4’ to be the easiest, since people who have just left a company are open to speaking to everyone (especially if unemployed), and those who have just joined will take calls, since they have no idea whose calls to reject.
Use the network you build in 2, 3 and 4 to work your way into the company, with each meeting bringing you closer to the ‘target’. I would never go direct to the individual you need to speak to. Why? The chances are that your idea and pitch are so poor that what you describe will make little sense. Speak to people on the ‘edge’, and learn the language (both of the market and of the company). Use that to refine the pitch.
This takes effort. You can't just type in a few words in Google and magically end up with a list of leads. But where B2B is concerned, this type of systematic personal networking is an effective way to break into the market.
Generating B2C leads
To generate B2C leads, you should use online tools to discover where people are discussing:
- Similar products;
- Problems you solve or gains you provide;
- Generic industry trends.
Here's a selection of tools you can use:
- Google: always a good start, but very poor at deep diving into forums, where the real discussions occur.
- SocialMention.com: allows you to search by keyword, and see whether the sentiment of the discussion is positive or negative. This is good for an overall view, and to collect a few urls.
- Technorati.com: search those blogs to build a blogger list of who to contact.
- SproutSocial: this great little tool allows you to add multiple twitter, facebook and linkedin accounts, and then search for keywords across the web/twittersphere and string keywords together. You can also mark tweets, and reply to them later.
- Twitter: create lists of people which have your keywords in their profile, or are discussing that topic currently. The best method is simply to find pre-generated lists and just follow them. Try Formulists: it will help you create lists, and even filter them based on how many posts have been made in the last 30 days and how many followers they have.
- You can then filter the lists of people further, by using 140ctr.com, which highlights the click-through rates of each person, and choose those which could help you spread your message more quickly... in theory.
- Quora: The 'new kid on the block’; someone somewhere will be discussing your problem, find out who and add them.
- Linkedin Discussion: I personally find linkedin discussions of little use; they all seem to be discussing ‘life improvements’ or ‘funding’ but you may get somewhere in your niche.
Lead generation is difficult to do, especially if you cannot clearly explain what you need from that lead, and what you can offer in return.
Once you can define this, there are several tools which can help in the B2C space. When it comes to B2B, traditional methods based on referrals are still trumps.
I hope this list of tools and methods will be useful to you in your own startups.
This article is part of a series.
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Last week we covered how to deal with your corporation tax. One of the things I mentioned is that as part of your system to deal with CT, you need to track expenses correctly.
There are a million different systems to track expenses, ranging from "stuff all the receipts in an envelope and get a bookkeeper to track them" to using accounting software and tracking everything yourself. It doesn't really matter which system you use so long as you're comfortable with it and you know that it works and how it works.
At the end of the day, as the business's founder, you are personally, legally responsible for your company's record-keeping. If you screw it up, you can't turn around and blame someone else. You're the Director, it's your fault, and "not knowing" is not considered an excuse. If the bookkeeper screws up, it's still your fault.
Keeping track of expenses is really not hard at all, so if you do screw it up in a big way, it is really through your own sloppiness. Read this article, and this hopefully won't happen.
Many books about accounting (and many accountants) end up recommending a horrendous, antiquated system like SAGE or QuickBooks. This is often because they're written by accountants who are familiar with those systems and would rather everyone used them so they don't have to learn new systems. That's fine for the accountants, but from personal experience, most of those legacy accounting systems make me prefer to stick a sharp pencil in my eye rather than launch the horrible software.
What I'm going to recommend should work until you get to the stage of having a few (up to 10 or 20) people on (profitable) payroll - a small, profitable company. If you're VC-funded and you've hired 50 people, you probably won't be allowed to do this, but for most people bootstrapping their own business, or who have taken a small amount of seed capital, this system will work and will be relatively little effort.
My expense tracking system is based on a web-based product called FreeAgent (referral id included). It's slick, it's modern, it can track transactions and receipt scans together, and it's cheap (if £30/m breaks your bank, you have other issues). I don't normally recommend that people take on fixed, recurring expenses early on in their business's life, but this is one that is worth spending money on right away so your accounting is entirely sorted out from day one.
However, a tool is not a solution all by itself. "Buying FreeAgent" is no more a solution to your expense tracking than "Buying FogBugz" is a solution to your bugs. People, processes and tools, in that order, as I've said before.
So let's look at those three aspects of a possible expense-tracking system using FreeAgent.
What people do you need involved in solving this?
Well, when you're by yourself, it's just you. And yet, even then, you might find it helpful to get a virtual secretary to spend an hour a week doing the manual, boring part of the work (linking receipts to transactions), so that it happens even when you're distracted or simply can't be bothered. We (GrantTree) pay £30/hr (inc. VAT) to a freelance personal assistant to spend one hour a week doing this (I'm happy to recommend her if you email me). Even (or perhaps especially) if you're by yourself, you may wish to hire such a person to get rid of the drudgery. However, I recommend doing it yourself for at least a month or two so you fully understand what's involved.
However, even with a PA doing the reconciliation work, the rest of your team (that includes you) needs to be committed to the idea that expense tracking is not optional. If you don't scan your receipts in time, there's nothing your PA will be able to do for you.
So, the "people" side of this process includes anyone who's capable of paying for things out of the company account, or of charging expenses to the company. They need to understand that having messy accounts is not acceptable, and so they need to be diligent about scanning invoices and receipts correctly and on time so that they can be reconciled with banking transactions without too much fuss.
This is the way GrantTree's expense-tracking process happens, which you can use as a model for your own expense-tracking.
First of all, all business expenses are, ideally, made on the company card. This ensures that they're not missed in the reconciliation. Of course, you should only give a company card to people who can be trusted not to misuse it - but even if they do charge inappropriate expenses in, you can always deduct those from later payments. FreeAgent supports tracking this type of mishap.
The second step is that any payment should result in a receipt scan in a pre-agreed "new receipts" directory. This is actually very easy to do without fuss, by using an iPhone app called MobileAgent, which costs a whopping £2.99. Go on, treat yourself. What MobileAgent allows you to do is to point to a DropBox folder and scan receipts directly into there, on the move. This means you don't need to keep paper receipts. Hurrah! So, every person with access to the company bank account should be scanning receipts into there as soon as possible after making the expense. MobileAgent will include the date in the file name, so that it's easy to reconcile later.
Thirdly, on a regular basis (e.g. once a week) you should import expenses from your online bank account interface into FreeAgent. So long as your bank support export in QIF format (which pretty much all of them do), you'll be able to do that.
This import needs to happen before the reconciliation (done by yourself, your virtual PA, or someone else), which is the fourth and final step. Once a week, your PA should go through all the unexplained transactions in FreeAgent, and match them with receipts in the common folder. Unless you've got a lot of transactions, this should not take more than one hour a week.
As part of this final step, any transactions that can't be explained, and any receipts that can't be matched, should be highlighted to the people with access to the business card. Since we're still only a week away from the oldest unexplained transaction, it should be easy to figure out what happened. What you don't want is a situation where an expense from 3 months ago is unexplainable. That sucks, and ends up causing you worry, especially when you need to file a VAT return.
Does this process need to be weekly? Not necessarily, but the more regular it is, the less problems you will have. I recommend weekly, but it's up to you.
If you just implement those 4 steps, your expenses will be tracked properly so that you are well prepared to file correct accounts. There are other things to think about too, like capitalisation, categorisation, and other such concepts, but those are things to know rather than things to do. The process above can remain the same for quite a long time into the life of your business.
We've already covered this, but basically the tools to support this process are:
- an online accounting tool (FreeAgent, Xero or KashFlow - any of them should do);
- a mobile app that can scan receipts as they happen, either directly into your accounting system or into DropBox; all three of the solutions mentioned above have iPhone apps.
Part of the process of reconciling expenses is to categorise them. That's a whole topic in itself, and I'll write about that next week. Capitalisation is also an important concept for larger equipment expenses.
The process we've outlined will put you in a good position to ensure that you always file your VAT returns correctly and without fuss. VAT is a whole topic in itself, so it will also be covered in a later article.
If you make expenses by cash or on a card that doesn't belong to the company, you can still enter those. Every person who can make such expenses should have an account in FreeAgent, and they can then create the expense manually in the system, or with MobileAgent. FreeAgent will automatically track who is owed how much for expenses, and how much of those expenses has been paid back to the user, which is a really nice time-saving feature. These types of expenses should be done just as promptly as normal expenses, by the way, for the same reasons.
The key take-away from this article should not be that you need to follow my system to the letter (or even at all). This is just an example of a system that works. Tailor it to your own business, adapt and evolve it as you gain your own experience and opinions on the topic. The key objectives of the system are that every invoice or receipt is explained promptly and correctly, and with a minimal amount of time wasted running around trying to remember what happened 3 months ago. Whatever works for you to achieve that is probably the right system for you.
The series so far:
1. How to register a company in the UK
2. How to: deal with your Corporation Tax (UK)
3. How to: track your expenses (UK)
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