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The following is a guest post by Darrow Kirkpatrick, a software engineer, author, and investor who achieved financial independence and retired early at age 50. Darrow now writes regularly on saving, investing, and retiring sooner at Can I Retire Yet?
7 Business Startup Lessons
Starting your own new business, or getting in on the ground floor of one, is a proven path to building wealth. Why? Because owning a business eliminates the middlemen between you and profits, gives you numerous tax deductions and credits, and allows you to leverage other people's time and money.
But, owning a business, though a proven and potentially fast track to wealth, is far from risk free. According to the U.S. Small Business Administration, over 50% of small businesses will fail in their first five years! But, what if you could learn from somebody else's mistakes to substantially reduce your own startup risk? Well, you can begin right now….
I started or participated in 5 different small businesses over my 25-year career in software engineering, and I learned from a lot of mistakes! But, ultimately, I was successful: I became financially independent and retired early. Now, I do whatever I want each day, without worrying about a paycheck.
I'd like to share with you here some of my business startup lessons learned, so you can fast-track your own success. I hope you can learn from my mistakes, so you don't have to repeat them:
1. Make sure there's a market. Do everything possible at the start of your business to ensure there is a market for what you are selling, whether it be information, services, or widgets. This is why competition is generally a good thing. It assures you that customers exist. If your concept is totally new, or substantially different from the competition, then put some effort into quick, cheap tests to prove your idea has appeal. One of the best ways to test is to offer a small, streamlined, or prototype version for cheap or free. Sites like eBay, Craigslist, and Fiverr.com make this easy. Keep testing different ideas until you find the one that people will spend a few dollars on, or at least trade for their email address.
2. Focus on customers, not technology. It's fun and exciting to learn the latest tools, and be a part of the latest technology buzz. But, trust me, that's a backwards way to build a business. (Unless your business involves selling to other technologists!) Your customers don't care much about technology. They have real-world problems to solve and want practical solutions. Whether those solutions are built with the latest bleeding edge, something tried and true, or even aging legacy technology, is largely unimportant to them, as long as it works and the price is right! Technology might be important to you. It might impact your job satisfaction, your ability to attract employees, and your profits in the long run. But, at startup, it's mostly your customers and their problems that matter.
3. Avoid infrastructure and build only the core of your business. The most critical question is this: Can I deliver something compelling to customers who will pay more for it than it costs me? Do whatever it takes to answer that question as quickly as you can, and you will find a viable business. Avoid at all costs any overhead or infrastructure that gets in the way of answering that question. And, yes, I mean you should skip, at the start, everything from writing a formal business plan, to incorporating, to printing business cards, to buying office equipment, setting up bank accounts, designing logos, and joining professional organizations. All that stuff that business "experts" say you need. Most of it, in most situations, will simply cost you time and money without bringing you any closer to the goal of getting customers and making money!
4. Be realistic about your skills. Starting a business is hard. Many fail. Before jumping into a new venture, and especially before quitting your day job, ask yourself what gives you an edge? Why will you succeed? Just wanting to set your own hours or be wealthy someday is great. It's good to be motivated. But you need more fuel than that. Focus on two areas: (1) your business domain skills, and (2) your networking and marketing skills. Do you know an in-demand business product or service so well that you can produce it very competitively with just a fraction of your available time (say 25%)? Good, because you'll need to do that. You won't have the luxury of spending most of your time actually doing the work. Instead you'll be running and marketing your business. Next ask yourself, what gives you an edge in marketing? How will you get the word out, cheaply, so enough people take notice? Do you have a record of doing this well, or can you partner with somebody who has? This is essential if paying customers are to find out about your business.
5. Know when to do it yourself, and when to get help. This is the next step after realistically assessing your business idea, and yourself. Ask, "what is lacking?" Strongly prefer businesses where you already have all the necessary skills for the initial launch. Because you, yourself, can do everything that's required, cheaply, and on time. But, if you don't have all the skills, network with friends and colleagues to complement your available skill set. Barter for tasks if possible. If necessary, pay for small freelance tasks through sources like 99designs.com or odesk.com. Partner, or hire employees, only as a last resort, because then you are starting to add infrastructure, before you even know if you have a viable business. It's much better to commit to such lasting relationships only as part of scaling out an already proven idea.
6. Do something so good that it can't be ignored. The last time you encountered a mediocre, boring, or overpriced new product or service, did you buy it? Exactly. We're not talking about commodities here, but something new and compelling. Don't expect to get sales, or even much interest, without that 'wow' factor. At least one dimension -- quality, novelty, or price -- and preferably more than one -- should impress your customers. Otherwise they just won't notice you in today's sea of competing ideas. How do you get that 'wow' factor? Sometimes new technology, or stunning presentation, or breakthrough pricing can deliver the knockout punch. But behind those elements is always a more traditional factor: hard work. That's right, at least at the start, you've got to sweat the details, go the extra mile, and pour additional value into your offering -- so your customers don't have to.
7. Diversify your revenue sources. Ok, so you've followed all the steps up to this point. Do you have a viable business yet? Possibly. One last element to consider, before you take it to the bank, is this: how diverse is your customer base? Are you a consultant with just a couple customers? A retail operation with spotty traffic? A web site that appeals only to frugal students? Even if it looks like a business, even if it is currently making a profit, it may not be viable in the long run. Some lost customers, a shift in fashion or demographics, could snuff you out. Don't rest until you have a diverse revenue stream -- only then do you have a truly viable business.
So that's it, 7 mistakes and 7 lessons I learned the hard way, that you don't have to! This is by no means everything needed to start a successful business, but it is essential knowledge that will give you an edge in the early stages. Ensure there is a market, focus on customers, avoid infrastructure, be realistic, do as much as you can yourself, do it all well, then diversify your revenue. And you'll be well on the way to a successful business that can take you to financial independence!
Share your experiences by commenting below!