Aspiring entrepreneurs often ask me what to do first when starting a business. Let me assure you, there is no absolute right or wrong, but there is real value in doing things in a sequence that minimizes the risks, optimizes your efforts and generates the best “first impression” on potential investors. Just don’t try to sell your business to investors before it is well established.
A popular approach these days is for founders to regale investors early with a pitch touting the newest “million-dollar idea.” In fact, ideas are a commodity and by themselves won’t generate any funding interest, outside the context of a leader who can execute. Instead, entrepreneurs need to focus first on execution disciplines and timing. Here are my recommendations for establishing the right sequence:
- Nail down a specific problem and solution before incorporating. You shouldn’t try to create a business that hasn’t yet been defined. The name and the type have to fit, or expensive rework will be required later. The date of incorporation is the official start date for your business, so investors will scrutinize progress from this point. On the other end of the spectrum, a solution without a company will be seen as a hobby.
- Start with the simplest legal entity to minimize liability and taxes. In the United States, this is a limited liability corporation, or LLC. A C-corporation is more complex and expensive, and is recommended only if you expect to pitch to professional investors who demand preferred stock, or you pitch to more than 100 potential shareholders. Don’t put your family assets at risk by assuming that a sole proprietorship or partnership will cover your business needs.
- Build your timeline and momentum quickly after your business’ start. Your credibility as an entrepreneur is at stake. Even new entrepreneurs should be able to move from an idea to a legal entity within a couple of months, finalize their business plan in the new few months after that and have a prototype solution built within six more months. Efforts that take years, or have many starts and stops will not generate investor confidence.
- Find a partner and core team early to supplement your expertise. Very few individuals have the skills and energy to build a startup alone. If your strength is technology, find a cofounder who has a comparable strength in business, finance or marketing. A strong team has more credibility with investors than does a great idea by itself.
- Register some intellectual property to provide a barrier to entry. A large portion of your competitive advantage and your potential value to investors is the size of your intellectual property portfolio. Entrepreneurs who have no patents, trade secrets or trademarks are usually deemed non-fundable and noncompetitive.
- Demonstrate a concentrated focus on customers early on. Investors look for entrepreneurs who are customer-centric, rather than technology-centric. Even before you build a product, you should be interacting with potential customers in person, and through social media. Accumulate customer advocates, testimonials and “letters of intent.”
- Ship a minimum viable product quickly, test the market and iterate. Startups that operate in stealth mode until their solution is perfect usually acquire customers and investors very slowly. You should assume that your first offering likely will need tuning, so nurture a culture and process for improvement and iteration from the very beginning.
- Prepare for investor attention once you are ready to scale the business. Seeking investors before you have a business plan, or a product or even a few customers, is premature unless you have built previous successful businesses. Fundable entrepreneurs have a proven business model and are ready to scale up the business.
Of course, your milestones and timing may vary due to personal constraints or technology requirements. The key is to communicate variances clearly while highlighting momentum. Do things in the right sequence, and show the results that you have achieved. For investors, it’s all about confidence in the entrepreneur. Confidence lost early can never be regained.
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