Business planning

Four questions to ask before launching your startup

StartupSmart /

 

The first thing to do when launching a business is to speak to everyone that could possibly help get it to market.  Usually an open approach to launching is best, where your ideas are socialised and co-developed.

 

If your idea can be stolen and secrecy is your only advantage, it won’t last long.

 

There are four questions to answer to lead you to the most important people to speak with before launching your business.

 

1. Who has the most to lose and the most to gain by your product being successful?

 

The people who will lose or gain something from your product being successful will be keen to learn more about how they could play ball with you. Some incumbents will want to maintain the status quo as they see change as risk not an opportunity. Some will even mislead you in an attempt to send you down the wrong track.

 

These reactions are the opposite of what they should be doing to ensure their survival. They should listen and ensure they are adapting to the changing world and consider how they could extend their own business or earning power through partnership, investment or even acquisition.

 

2. Who already has your target customers that could distribute on your behalf?

 

You can learn more about your target customers from people already distributing to them and increase your chances of success.  You may even be able to develop a risk-shared, commission-style, pathway to your customers.

 

Be careful not to be duped into paying for a dead database – there’s a big difference between someone that has a database of names and email addresses and someone that convenes an engaged constituency.

 

Look up and down the value chain for adjacent bundling partners. Is there someone who adds value to what you’re doing down the chain, such as a consultant or integration company? Is there someone upstream that doesn’t compete with you that could get you into the market, such as an existing supplier to your target customers?

 

3. Which thought leaders influence your target customers?

 

What does your customer read, where do they hang out and who do they hang out with?

 

Identifying the influencers that everyone follows and getting their feedback, involvement or assistance will be helpful in refining your product and go-to-market strategy. They may even give you some of their brand halo through Twitter or Instagram.

 

4. How do you make the unit economics work?

 

Once you’ve got a handle on the path to market and potential costs through the information and opportunities you gained from these conversations, it’s time to look at unit economics.

 

Unless you’re going for a crazy valuation because you think your business is a unicorn, you need the lifetime value of your customer to be greater than both the cost of customer acquisition plus the cost of customer retention.

 

If a customer spends $100 per year with $20 of margin, including the cost of retention – sending them a birthday card annually for example, and the customer is retained for an average of three years, there will be $60 of margin to share with potential partners who lead to a customer acquisition.

 

This may not be enough to get your partners excited, so you might choose to supplement this cost-per-acquisition (CPA) with some venture capital fuel if you believe that in the long-term, the CPA will become sustainable.

 

Venture capital funds are generally happy to fund a burst of users initially if they can see that once you get some brand awareness, media coverage, and industry credibility that the CPA will reduce to a sustainable number.

 

You could consider cutting some deals with potential partners where you pay $200 for each customer they give you, up to a cap. Push some risk onto them by paying the commission upfront. Maybe 30% upfront and then 70% after six months to be sure they are real customers. They are likely to be excited by the possibility of receiving $200 for each customer in their ecology, so they’ll do a deal.

 

For this deal you would want $2 million in venture capital or enough to supplement your first 10,000 customers. Show the venture capital fund a spreadsheet that demonstrates that it makes sense in the long-term and you’ll be ready to launch.

 

 

Phillip Kingston is the founder of venture capital and investment firm Trimantium Capital, and a technology entrepreneur and investor. You can follow him on Twitter here.

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