The dream of starting a business can be a real motivator. The keys to success go far beyond motivation though. Once you’ve got the dream in place, it’s time for a reality check. What are the critical success factors for a startup?
The truth is, every startup is different. The formula that works for one may or may not work for another. However, there are some common foundational business factors that every entrepreneur in every single startup should know. Here is a look at seven of them.
Know Startup and Operating Costs
First, by the time you are ready to really put your business plan into action, you should know your startup and operating costs for the next five years. While five years may seem like a long time, this is the average time it takes many businesses to fail.
Why do they fail? Most of the time it relates to cashflow. Annual or one-time expenses are not accounted for or predicted in their original business and financial plan, even though they can be. Because of this, startups run out of money at critical junctures.
How do you project costs five years out? We’ll talk a bit about a few different planning methods, but at this point the costs should be known entities. Things like your rent or mortgage, utility and internet payments, salaries if applicable, and other known material and service expenses.
This also gives you the knowledge you need to choose the right approach to financing your business.
Choose Your Approach
Regardless of what kind of business you are starting, you will need capital to make things happen. Critical to the success of any startup is the need to choose an approach to money and finances.
This largely depends on your goals. What do you want to do with your business? Raise capital, grow rapidly, and then sell? Work the business for the rest of your working life (essentially until you retire)? Pass your business on to family or to your employees?
Why is making the decision of how to exit your business so important to choosing your approach? Because every approach comes with some pros and cons, and some come with strings attached based on your exit strategy. Let’s look at a few examples:
- You can find angel investors and raise capital that way. These investors usually have a stake in your company, and they want a timed exit. They want a certain return on that investment, and they want it quickly. If you can’t reach those goals, they can technically take control of your company from you.
- You can borrow money to run your business initially, like an SBA loan. You need to figure these payments into your cashflow calculations, and understand how they affect your operating costs, but you do remain independent from investors.
- You can bootstrap your business, using your own capital and assets, crowdfunding, or an early adopter strategy, where early participants help fund your venture, but get some perks in return.
There are also other approaches to getting the money you need to start and operate your business for a while.
The point, at least for this article, is not to decide which approach to use, but to understand that every successful startup determines their approach from the beginning. Can you change your approach later if your goals change? Sure. Just be sure you make that change part of your written business plan.
For a frank discussion of financing options and startups, check out Lost and Founder, by Rand Fishkin of Moz. It offers some great insight from a founder’s perspective.
Attract Investors or Attract Early Adopters
Know your costs and have an approach in mind? Great. Now you need to attract that money. You can do so in the form of attracting investors, if that is your model. Your business plan is critical to this. Including key elements that indicate how you will become profitable and when helps these individuals make good decisions.
This applies whether you are seeking financing through a loan or if you are looking for angel investors. Outline the how and why of your business, and even before you approach anyone for a loan or even standard investment, think about what assets you can put forward that will guarantee repayment in the case of failure.
A bank wants to see this type of thing to help secure a loan. An angel investor wants to see that you, too, are invested. They know you as a business owner will try harder the more you have on the line.
If you are offering a service or certain products, it may be worthwhile to release an MVP (Minimally Viable Product) to some early adopters at a discount. It gives you a chance to make some money in the short term to keep your business going, and it also gives you a chance to run tests in the real world rather than a lab.
Your MVP must have at least some value to add to the lives of your early adopters. These are the people who can become your ambassadors later on. If you have a legitimately good product, they will share that information with their network, people you can sell your tool to at the non-discounted price.
An MVP is one approach that can attract early adopters, keep your business growing, and even build in future growth.
Ask “What If?”
You have your plan and your approach. You’ve attracted the right investors, and you are poised for growth. But your business plan still needs to ask an important question: “What if?”
We are living this example now. Every single person in 2015 who was asked “Where to do you see yourself in five years?” got the answer wrong. Even our New Year’s resolutions have a void clause in 2020. The reason? No one asked the question: “What if there was a global pandemic in March of 2020?”
As a result though, some businesses have fared really well. Others are struggling to survived, and entire industries have changed forever. So what do we plan for? There are three scenarios:
- Most Likely: Barring a global pandemic or other unforeseen issues, this is the most likely outcome for your business. Don’t confuse this with the next scenario: this is not the best case scenario; this is the realist outlook.
- Optimistic: This is your “pie in the sky” best-case scenario. For some companies, like Amazon, FedEx and Zoom, the global pandemic fit right into this scenario. Everyone started working from home, needed new home office equipment, had nearly everything delivered, and needed a solid and simple video connection program.
- Pessimistic: Most bar owners on the night of December 31, 2019 had no idea the nightmare they would experience in March. However, those who planned for a potential downturn have survived, although not in great numbers. Adaptation has been the key.
Your business plan should at least account for some of these potential outcomes. Remember, even a sudden burst of growth can come with issues: look at Zoom and the security scrutiny they came under.
Once you ask, “What if?” there are adjustments you need to make.
Adjust Strategy to Match Reality
Ideal strategy and the dream are one thing, and reality is another. You need to adjust your strategy as you learn more about the reality of your industry. As your business plan and goals progress, you may need to revisit your strategy, your financial approach, and more.
Why do many businesses fail? Why do they not track cashflow and other important metrics? Because reality often interferes with “dream thinking.” But a harsh dose of reality is a crucial factor in startup success.
Know the Landscape
You have heard the old adage know thy enemy. While your competition may not be your enemy per se, they are a part of your industry you need to know. The best and most competitive startups know who their competition is. Whenever and entrepreneur says they have no competition, it is clear they are unclear on their industry.
It is worth carefully considering though: your competition has been where you are, maybe not exactly, but they have learned to survive in your industry, whatever that might be. So by following them, you get to know the landscape and what works and what doesn’t.
Knowing your industry is key to the success of any startup.
Keep the Drive Alive
When we talk about crucial factors for success, we often talk in terms of facts and figures. Cashflow projections, profit and loss, competitor analysis, and many other things are not the fun part of being and entrepreneur.
That’s why it is essential that despite all of the administrative things that can weigh you down, the most important thing is to keep your drive alive and keep your dream in front of you. Remember these things:
- What drove you to start your business in the first place?
- What do you love about what you do?
- What are your favorite things about your customers or clients?
- What do you want your business to do for you in the long run?
- What is your passion, and how does your business relate?
For most people, fact sheets, profit and loss statements, and cashflow calculations are not what gets them up and moving each day. A crucial element of startup success is simply remembering and embracing your drive.
Entrepreneurship and staring a business are no small tasks. And many businesses fail because they lack crucial success factors. Keep these things in mind as you plan for your future and that of your business. Your future self, your clients, and those around you will thank you for it.