10 cautions to consider before launching a start-up

Only a blink of an eye ago we were all drowning in a global pandemic as financial markets buckled under the strain of debt. Now the dotcom space is simmering to the boil and serving up yet another tantalising distraction from reality.

Bankers are predictable creatures. Speculative valuations on Facebook for $50 billion, Groupon $25 billion and Twitter $7.7 billion and hey presto the space is abuzz again. It seems we have short memories.

I’m circumspect of any business, whether online or traditional, in idea or practice, that is built on hyperbole, inflated expectations and nil profit.
The fundamentals of a business must be right for it to succeed long-term, even so, there are inherent risks and challenges that inhibit growth and profitability.

Before investing your hard-earned cash or taking a second mortgage on your house to launch the next potential dotcom darling, take a moment to consider a few cautions:

(1) What’s the back-story of the people driving the business and relevant experience? Being able to talk it up and arouse emotions from investors is one thing, but what’s the substance driving real commercial value?

(2) Is the business recording any profits? Even a tiny profit demonstrates promise. Throwing more money into a “red hole” often begets a deeper and more inflamed hole.

(3) Is this a hobby or a real business? Often people start a business they are passionate about, which is commendable, but passion isn’t enough, make sure there’s market demand first. Research, test and get a proof-of-concept and then float it to potential customers for feedback. Genuine passion and genuine demand should march together.

(4) Is the business scalable? This is a critical advantage. Conversely, if it relies heavily on too few people, it’s nothing more than owning a job with an expiry date.

(5) Have the key people failed previously? If not, this can be a smoke-signal they’re due. And it may suggest they’re hiding behind mistakes and haven’t learnt from them.

(6) How much money have the key people behind the vision invested? If they aren’t liquid, what other sacrifices are they making to demonstrate commitment and accountability? Be wary of a start-up entrepreneur who demands a top end of town salary.

(7) What level of detail is in the plan? Granted plans do change on the ground, however detailed preparation shows a pledge to the cause and ability to think before acting.

(8) What are the risks to all parties? There are plenty. Avoid selling the farm too early if you’re the brains behind the vision. Similarly, as an investor, don’t strangle the business with pressures by being too leveraged and anxious to get an ROI. Both are proven paths to frustration.

(9) Forget a public exit. Often a downstream float is dangled like a carrot to seduce investors. While this approach can be lucrative, it’s the exception not rule. I can name no less than three people I know directly who have taken this path, in doing so failing and harming their wellbeing and reputation. Each should have stayed private in hindsight.

(10) Be prepared to walk away from an opportunity if your gut doesn’t feel right, this applies for both investor and entrepreneur. There will be others.

If a business is potentially that special, you shouldn’t need to raise much (if any) money for it to prosper. Be patient, inject sweat equity and grow the business from solid foundations. In future, should you need to scale the business with funds you will raise considerably more cash with real profits and commercial substance as the basis of value.

As you can see start-ups fail for a myriad of reasons. Some are just bad ideas that should never have jumped from the nest.

The companies that I see survive and then prosper have a low cost base that allows key people to work in other roles while foundations are being formed. They know how to establish credibility quickly. Importantly, understand how to sell and market their ideas and the business is built on genuine value not shareholder return. That comes later.

My start-up forecast isn’t all boom and bust. It’s an exciting time to be an entrepreneur, barriers to entry are low and we have more tools and opportunities at our disposal than every before.

In haste, make sure you’re not overlooking the fundamentals before investing, or leaving a paid salary to fulfil an entrepreneurial call, for the wrong reasons.

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Trent Leyshan is the founder and CEO of BOOM Sales! a leading sales training and sales development specialist. He is also the creator of The NAKED Salesman, BOOMOLOGY! RetroService, and the Empathy Selling Process.