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Thursday, December 13, 2007

Playing the start up game well

Finding your Milestone Leverage Points
A little bit of magic happens every time your startup company hits another growth milestone. Sometimes it's hard to put your finger on it, but you can tell when it happens.
It's that moment when your Web site launches and your product becomes real for the first time. It's the moment when your first customer actually writes a check for your product. It's that moment when that big idea you kept talking about begins to turn into an actual company that you walk into every day.

Those milestones aren't just reasons to celebrate and have a beer (although that's always a good idea!) They are also key points at which you can create some leverage in your business.
For example, you may not have much leverage with an investor when you're sitting with nothing more than a business plan in your hands begging for capital. Yet the second after a key customer confirms a massive purchase order for your new product, your leverage increases significantly with investors and they begin begging you to invest.
A smart startup pays close attention to key milestones in their business so they know when their stock is trading at its highest, and when to hold out until times look better.
Understanding the Leverage Points
While every business is a little bit different, it's safe to say that most businesses share the same basic milestones that serve as leverage points. These milestones range from the initial incorporation of your company to the closing of a substantial round of financing.
In the earlier example I pointed out how an investors' interest in your company may change significantly when you've proven that customers really will buy your product. That's because the value of your company is directly tied to your ability to prove that customers will write big checks for the product.
What you may find is that before you signed that deal, an investor would be willing to value your company at $1 million and no more. But the moment after you sign that deal, the investor will value the same exact company at $10 million. You've just hit a leverage point.
Timing your Leverage Points
By understanding your leverage points, you can start to do a better job of determining when it's best to make big decisions. A company becomes worth progressively more as you pass each successive milestone. In many ways, the longer you wait the more leverage you have.
The first significant milestone you'll likely hit is just getting incorporated. That milestone helps you take the company from just an idea to an actual enterprise. The incorporation alone can be a leverage point when determining who is really involved in the business and who just likes your idea. This is a key leverage point because you will start to determine who will own not only the upside but the liabilities as well.
Up until that point anyone could claim that they were a part of the idea. But when you start determining who owns the assets and the liabilities of a company, you quickly shake out who's on board and who's not.
Looking for the Key Points
Beyond milestones like incorporating your company, there are key points that can actually drive major decisions down the road.
For example, landing your first paying customer is a very key point รข€“ maybe the most important one. A paying customer is the ultimate validation tool of your business and therefore creates a tremendous amount of real value for your idea almost instantly.
Knowing that a paying customer can increase the value of your company so quickly, you may hold off on quite a few decisions until you can hit this milestone. You may forgo investor funding, hold off on approaching a bigger customer, or stall a partnership that would require you to give up too much control.
There are other key points, like hiring the right person, getting the right press, or bringing on the right board member. When those milestones are surpassed, real value is added, and your ability to make more substantive decisions becomes more obvious.
You probably already know the basic objectives of your business like finding capital, creating partnerships and hiring staff. Now you need to align those decision timelines with the key milestones that will give you the best leverage to make those decisions.
Holding Out
Before you make a big decision, it's important to ask yourself ,What leverage will I have in the near future when I surpass my next big milestone? What's the benefit to waiting until that point before making a move? What does it cost me to make the decision now?The better you understand your key leverage points the better you'll understand when to make big decisions. Sometimes growing a business isn't just about what you do. Sometimes growing a business is about when you do it.

(abridged from the Go big network blog)



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