I started my first business when I was 15. Since we weren’t able to drink yet, myself and a few friends decided to rent out lofts – and throw parties – without an age restriction. We had our first meeting on a friend’s roof, his mom made cookies, and we each put our life savings on the table; $1,000 in total, a big amount for a group of 15-year-olds. On the first night, we used the money to set up everything and waited, terrified. What if we planned this all wrong? What if no one will show up? After two nerve-wracking hours, the first guest arrived, and by the end of the night, we had sold 300 tickets. We continued this operation for almost a year, and during our peak, we were selling 600 tickets a night. Since the good ole days I’ve continued in my business endeavors, taking part in several business formations. Some made a profit, others were complete failures. However, those anxious hours, days, weeks and months were always there.
Setting up a business always involves rolling the dice; and in order to win anything you always have to be willing to risk something. But statistics also play a huge role in the success. There is only a certain number of times you can play, and the higher that number is, the higher the odds are of winning. This number is what people usually call your personal runway. Every time you launch a business, the runway shortens as you waste more money. Can you launch a business without seriously damaging your personal runway? A wise man once told me that money and time are equal contenders, and if you don’t have one, you can simply have more of the other. If I’m trying to set up a business without going bankrupt, my tactic simple; minimize my risk to the opportunity cost (aka the money I could have earned doing something else), and I do so using three rules.
So you have a great idea. It’s amazing. But is it amazing? Are you really sure? Or are you the only person that thinks the first iPad racing wheel is cool? (Seriously: Check out Kolos). One of the worst gambles you can make is committing a large sum of money or time to a project before getting the customer base is there. “If you build it – they will come”? Why don’t we try that the other way around?
Today, there are a lot of simple ways for people to test their ideas and gain prospective clients before investing a single shekel. Crowdfunding is a great example, but even those can be pretty labor intensive. An even easier way to test out an idea is to launch a simple website and set up a simple campaign on Facebook to market it. Is there a real interest? Does it gain traction? Do people really want this product or service? If they do, great! Once you have a critical mass of people signed up (based on your business model), it’s time to employ Steve Blank’s philosophy and see how many pre-launch orders you can get. How do you get those orders? Through one of the crowdfunding platforms we talked about, such as Kickstarter or Indiegogo, or even an email campaign. Once you get the orders lined up, it’s time to build your product.
My easy recipe for testing:
Use Tailor Brands to create a logo and business identity that will make your new venture look legit.
Use LaunchRock to create a landing page with a simple call to action, such as “Sign Up”.
Set up a simple Facebook campaign to market the Landing Page to your designated target audience.
Use MailChimp to design a nice looking email with a preorder button.
Let’s say we have incredible demand, over 500 preorders! It’s clear that people really want this product. Let’s get investors, raise a lot of money, get a shiny office, and start tons of ads to blanket the internet! Wait…what? You definitely have some interest, but do you actually know the potential? More often than not, projections and business plans turn out to be very inaccurate, for both small companies just starting out, as well as the big established companies. More often than not we get ourselves entangled in the startup mentality of overspending, all while forgetting the simple rule of every small business: sustainability.
For most traditional businesses, if you spend more than you make, you’re in trouble. A successful test does not guarantee a market fit for your product, so you should really focus on getting your business to a place where it is “Ramen Profitable”. It’s exactly as it sounds, getting a business that makes enough to pay the bills and pay for your dinner. Once you’re there, you can have any additional profit reinvested for growth. Now obviously “Ramen Profitable” is slower, but it’s better than bankruptcy.
My final rule is simple – profit is not as important as growth. Do you have revenue? Wow! Are you making a profit? Fantastic! However, don’t use those dimes to pad your pockets. Re-invest them in your business to facilitate additional growth. Use your profits to increase your variable costs; like buying more ads, or even getting a PR agency. Your business will grow, revenue will increase, and when you decide to stop growth and get rid of those variable costs, you’ll find yourself earning a lot more money than you initially intended.
In summary, starting a business is always a risk – but money is not the only currency we can put on the table. The more time you’ll be willing to invest in testing your ideas and hopefully gaining a market foothold means less money you’ll be putting at risk. This might not be the best tactic for everyone – but the bottom line remains the same: You won’t always win. You may be the best gambler in town, but everything you do involves some element of chance, and you should always bet on the currency that will cause the least amount of damage to your runway.