This article about How to Start a Startup first appeared on March 2nd, 2020 on Medium. Some of the links and resources may be outdated. See an updated version of this resource in my article Starting Your Startup Smarter – V 2.0
Keeping momentum in the startup world is damn hard. Getting started, and getting started right, can be even harder.
Finding resources on how to get started is an overwhelming and messy endeavor with endless suggestions and lots of gaps. There are plenty of great books, blogs, and podcasts, but even with the endless amount of info out there, I still find myself talking to first-time founders and veteran founders alike who still haven’t heard of some key resources.
This knowledge gap is understandable considering the internet is incomprehensibly massive with over 6 billion indexed web pages, and the first page of Google search containing only ten results, of which at least one is sponsored. Additionally, most tools that do get listed on places like Product Hunt and resource roundups are targeted for folks a little further down the line, when they already have a business that needs tools. We’re talking B2B (business to business) products for operational activities like HR, email marketing, accounting, and managing customer experience.
But what about the tools you need before you even have a business to run, or resources to actually help build it and get it running?!
I argue that these tools and guides are even more critical than any widget or magical SaaS product. Business operations tools all help amplify and scale up the foundation of your business, and if that isn’t solid, even the most super-powered software or fancy plug-in won’t save you.
What do I mean by “foundation”? I mean the core assumptions, plans, and expectations you have about your business, it’s market, and yourself.
Let’s start with the business part. Say you want to create a widget or a new service. Great, that’s an idea. What powers and propels that idea into a company is the structure you build around this idea. Just like building a physical building, to do it well, you need to have a blueprint.
For a business, that blueprint is called a business plan. There are several formats of business plans, from a multi-page traditional model that includes things like an Executive Summary, Organizational and Management Structure, and comprehensive Market Analysis, to the half-page back of the napkin type schemes. And of course, in the startup world, there is an endless stream of slide presentations (aka “decks”) claiming to be business plans.
Let’s take a moment to clear up a common misconception: a deck is not a business plan.
And a deck should not try to be one either. A deck is a summary of your business and opportunity for investors. A truly effective deck will summarize your business while telling an evocative story about why it needs to exist and why the opportunity to invest is limited, urgent, and timely. It is a sales tool to aid your pitch (more on that in later posts).
Which format works for you will depend a bit on your business, but there are few non-negotiables you should have down in some form. Listed in approximate order of need.
- A purpose and reason for existing — this is the heart and soul of the business. At the most basic, it’s the whos, whats, where, whys, and why now? of your idea.
- • Who is your customer?
- • What is your customers’ problem?
- • What solution to your stated problem are you providing them?
- • Why is your product/service useful? Why does this problem need solving?
- • Why do your customers need your business?
- • Why not some other alternative?
- • Why now? Why is your business timely?
- • Why are you (and your team) most uniquely qualified to execute your business more than anyone else?
- A business model — this is commonly used interchangeably with “business plan,” however, where a business plan is an overarching document for the business that includes all of the things listed here, and more (such as brand positioning, target market, strategies), a business model, is more simply that, its a model. A model demonstrates something, and in this case, it demonstrates your business, and (not for profits aside) a business’s purpose is to be profitable. In other words, a business model explains how your business makes money, and most importantly, how it makes more money than it spends. Determining some realistic projections about how your model will perform will also require you to do some market analysis and estimation of who your audience is, how big that audience is, and making the best guess at product-market-fit, what the demand for your business will be (and ideally, how that demand will grow).
- Budget — A BUDGET!? Oh please 🙏, please 🙏, please 🙏: Have👏A👏Budget👏.
If you’re selling a physical product, you may have some of your expenses captured in your business model as COGS (Cost of Goods Sold), but what about your marketing costs? Your salary? Payroll and benefits for the designer and 3 developers you eventually need to hire? And that office lease or coworking space fee? It starts to add up. A budget is important in the early stages of your idea because it helps inform you how much money you’ll likely spend to build and run your business. If you’re raising capital, similar to your business model, a budget will help you figure out compatible financing methods. (And some financers might require that you have a budget before giving you money.) The more specific you get on your spending categories and line items, the more accurate and useful the budget is likely to be. Advanced budgets will likely be integrated or “talk” to your business model and/or show how your expenses change over time. There are excellent tools and references below that will help you get started, see the “Budgeting” section.
Now that you have some insight from the first few documents, it’s time to make the next big decision… - Financing method — This means, how are you going to pay for starting this business? How are you going to “fund” it? Nowadays, it seems like the only way is through raising money from venture capital. But there are other options from bootstrapping (funding yourself), bank loans, and friends and family, including “angel” money. There are other means as well, but to keep it simple, we will focus on these. The reason it’s important to do your business model and budget before choosing your financing method is that you need to understand the potential size and cost of the business to appropriately match it to the best-suited financing method.
For example, say you have this great idea, so great that your model shows you’ll be profitable and make $300k revenue in your first year, $1MM in your second, and be stabilizing around $20MM by the end of year 7 at which point the business will reach market saturation and truck along at about $20MM for a while. To simplify further, let’s imagine your predictions are realistic and accurate.
Let me be the first to say: THAT IS AN AMAZING BUSINESS. However, that is almost definitely not a business that should raise venture capital. Generally speaking, a business with numbers like that might be more appropriate for a business loan, friends and family funding, or if your model allows, bootstrapping.
Wait, but why!?
Without going too deep (more to come in later posts), venture capital firms (VCs) rely on what might be described as a “lottery ticket model,” or at best “educated guess gambling.” Because most new businesses fail, VC’s bet that most will and invest in companies that have the potential to pay back their entire fund (at a multiple between 3x to 10x). On top of that, although a traditional business might take years of steady growth to achieve success at scale, VCs operate on a much more condensed “success” timeline of around 10 years.
That means if you are looking at taking an investment from a small/medium $50MM fund, your business needs the potential to return $150MM to $500MM in less than 10 years. (Your business also needs to have a realistic and relatively short-term exit strategy, a way to extract that potential value.)So, in our example, if a VC took a 20% stake in your company, for them to hit their minimum 3x return number of $150MM, you would need to sell your company for $750 Million or a 37.5x revenue multiple, which is fairly unrealistic. (You can read some more on “VC Math” here, here, and here.)
Finally! You have all of this business plan stuff done, so now it’s time to get going, rock’n’roll, right!?
Allllmost… If you aren’t seeking venture funding, the next steps are a bit more straight forward. You’ll want to incorporate your business entity, register with the IRS to get an EIN number, open a business bank account, possibly register your business name and logo with the USPTO, and then get going!
If you are choosing to seek venture funding and/or apply to an accelerator, you’ll want to do all of the above (making sure to incorporate as an Inc. and not an LLC or S-Corp) and then get familiar with a few other key processes and related documents. Namely, pitching, raising money, and recruiting advisors. In several upcoming posts, I’ll go into depth on each one of those activities, in the meantime, see some key resource documents and tools under the Venture Track Tools section.
So that’s it for now, I will revisit this post every few months with updates and edits. See a collection of “getting started” resources below. If you know any that I haven’t listed, please drop me a line and tell me! I’m always on the lookout for new and useful tools and would be happy to add them!
Tools and Resources For Intelligently Planning and Starting Your Business
Business Plan Tools
Writing a Business Plan by Sequoia Capital
https://www.sequoiacap.com/article/writing-a-business-plan/
This is a very brief and straightforward starting outline to get your initial thoughts down about your business. If you can’t concretely answer these basic questions, keep working until you do before moving forward.
Y Combinator Startup Application
Even if you don’t plan on raising VC or applying to Y Combinator (YC) or an accelerator, I suggest completing (but not submitting) this application. The application is a beast and will make you think. I have used the questions on this application numerous times as a guide on thinking about potential businesses and forcing myself to answer some very hard questions.
If you are wary about creating an account or want a different format, I stumbled on a great round-up of business plan questions with references! (including ones from the YC app) by @sparkhm via Hacker News.
I Paul Graham.
https://jamescun.github.io/iPG/
Prepare for a lighting-fast onslaught of tough questions with almost no time to answer!
Built by a YC alumn to help YC applicants prepare for the notoriously difficult 10 minute in-person YC interview, this poses a serious challenge. Consider this your benchmark test and trainer for how well you know your business and how clearly, simply, and concisely you can explain it. Even if you don’t plan on pitching and raising money, knowing your business front and back and how to quickly and understandably communicate your business to others is an important skill and critical to efficiently guiding your everyday activities and decisions.
Budgeting Tools
Anatomy of a Business Budget
https://www.inc.com/encyclopedia/businessbudget.html
Inc Magazine has a decent overview and breakdown of what a business budget is, what are the parts, and how to put one together. The article also includes some more resource links at the bottom.
Runway
This tool was created by the LTSE team (Founder Eric Reis is the author of The Lean Startup (affiliate link)). It’s a great tool for building basic financial projections for your company without starting from scratch in Excel or getting lost in a downloadable template (that may or may not be set up properly). You can also use this to work backward in order to determine how much initial funding you’ll need to start and run your business before you hit profitability.
Hiring Plan
There are simplified features of this tool baked inside Runway. Hiring Plan expounds more on surfacing specifics around projected headcount (which can help when projecting office and benefit costs), salaries, specific roles and teams, bonuses, and for VC companies calculating the effects of options package offerings on your overall cap-table.
Venture Track Tools
Pitching
Nancy Duarte Story Telling
As I alluded to earlier, pitching, especially early-stage, is not as much about your numbers as it is selling the dream, telling an emotionally compelling narrative that answers the key questions about your business (as presented in the Sequoia outline) at the same time. Nancy Duarte’s TED talk is a go-to starting point for getting a handle on effective and engaging storytelling. I recommend it to all of my clients.
Startup Decks
As you get into the weeds around decks, you’ll start to surface endless resources and dos and don’ts. This resource is more of a novelty, showcasing early-stage decks from now-massive companies. Don’t get too lost in it, use lightly as inspiration.
LinkedIn Series B Deck with Commentary
Speaking of getting into the weeds. Opposite of StartupDecks.co, which is more a bucket of startup nostalgia and eye-candy, this is a comprehensive deep dive on a single deck by Reid Hoffman. Hoffman breaks down every single slide from his LinkedIn Series B pitch deck providing, both context from his point of view as a founder at the time of the pitch itself (2004) and commentary advice from his current perspective as a VC.
Amazon Press Release Format
A good overview of creating concise and clear communication materials.
I Paul Graham.
https://jamescun.github.io/iPG/
Mentioned again here, before you step into any VC meeting, spend some dedicated time with your cofounders (or whoever is going to be in the boardroom pitching with you) drilling yourself with this tool in earnest. Keep drilling until you can nail a 10 minute round.
Fundraising
YC SAFE, financing documents
https://www.ycombinator.com/documents/
Invented in 2013, and updated a few times since, YC created the SAFE (Simple Agreement for Future Equity) as a more manageable, less resource-intensive, and more predictable alternative to convertible notes and a formal priced funding rounds. SAFEs are often the go-to funding document used for securing investment in pre-seed, angel, and early-stage companies. Make sure to read the comprehensive SAFE User Guide so you understand why you might use it, what to expect, and how to use it correctly.
Captable
When raising venture capital, you will always be giving up company equity and diluting your own (and others) equity in the process. Captable allows you to build models of what potential equity structures and raises might look like. Once you’re ready to go, you can also use the platform to manage your real captable with investors and then plug-in future scenarios to model things based on actual numbers. This is a free alternative to Carta.
SAFE Note Genie
If you don’t want to go through all the steps of setting up your company in Captable and just care about SAFEs, Note Genie is a quick and dirty except piece from Captable that lets you model SAFEs only.
Advisors
FAST Agreement
The FAST Agreement, or Founder / Advisor Standard Template, is similar to the SAFE in general motivation as it where it aims to standardize, streamline, and simplify a typically complicated and lawyer laden (re: expensive) process that all startup founders typically encounter. The FAST goes a step further by also purposing suggested equity offerings to advisors and outlines explicit time commitment and participation requirements based on the advisor’s expertise level and stage of the prospective company.
Other Resources
PG essays
http://www.paulgraham.com/articles.html
Paul Graham is one of the founding partners of YC. He publishes his well-thought and edited essays on his website, and they are a great source of inspiration, guidance, and a reality check for startup founders and curious minds alike.
Hacker News
Resource (or time suck) for a startup, business, silicon valley, tech, and other related news and insights.
YC Startup School
https://www.startupschool.org/
A virtual boot-camp style program for interested company founders. Even if you don’t register, you can still browse and read some of the resources and lessons. Worth a look!
Thanks for reading! I hope you found this helpful. Feel free to drop me a line and let me know what you liked (and what you didn’t).
Thanks for reading! My name is Adam Dexter. I’m based in Hayes Valley, San Francisco. I’m a seasoned operator, and former founder turned professional coach! I offer 1:1 founder coaching/mentorship.
Learn more and schedule a Discovery Call at TheStartUpFounderCoach.com
This article about How to Start a Startup first appeared on March 2nd, 2020 on Medium.