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Thursday, September 10, 2009

Keep it cheap. will you start Up

Whether you are starting a dog washing business or founding the next search engine empire, you will be more successful if you keep it cheap. Do not quit your day job so you'll have time to develop. Don't get those expensive offices. Don't invest in 5000 flyers or a telephone book advertisement. Make every possible effort to start your business on a shoestring, and to grow it only with the revenue of paying customers, because that is how you maximize its value.

A start-up, is by very definition, an untested business. It doesn't have the product, customers, delivery methods, management team or pricing strategy required to succeed. What it does have, is freedom.

If an entrepreneur keeps his nascent business cheap, he has the freedom to design a solution that combines customers, products, services, prices, delivery mechanisms and one or more hardworking professionals to create a ‘virtual machine’ that makes more money than it spends. He has the time required to come up with a business that has the capacity to grow. He can keep his prices low, his quality high, his company under control.

If an entrepreneur burdens his ‘baby business’ with high fixed costs, like his own salary, a big office, with big marketing expenditures, long before it is in a position to repay those costs, he makes it harder for his business to succeed. In a worst case scenario, entrepreneurs burn through their life savings, their credit, and burden their business with debt it will never repay. An entrepreneur in this position has lost the ability to define his business so it suits the market it must live in. In effect, he has cut it off from the people it must serve in order to survive.

Your business should be very solid before you accept outside investment for it. The more financial partners you have in a business that isn't up and running, the more difficult getting the company up and running will be. When you are playing with other people's money, they have expectations about how you will spend it. Since they have never run your business successfully, their ideas about where the money goes and what it does might be entirely wrong. If you want to have the freedom to make the right choices, let them keep their money until your business is ready to grow.

For example, the boys from Google created the earliest versions of their internet search engine while working in a dorm room. Their startup costs were very low and no one was taking a big pay check. Only when they had a proven technology that had demonstrable value, did they accept outside investment. They were looking for money to scale their business, not to develop its core technology. This is why Google's founders are some of the wealthiest young men in the world.

As an entrepreneur you may feel like you are doing it all wrong when your office is in the garage, and your idea of a business lunch is a pasty down at the pub. The truth is, what your business needs is your best efforts to create a cost effective, streamlined, easy to deliver, scalable product or service that meets the needs of its customers. It needs you to get it into the black as quickly as possible and to keep it there.

Doug Richard is the CEO of School for Startups and original BBC2 Dragon

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