Last night I caught a new episode of Shark Tank, which I believe to be the first episode I‘ve seen with an actual start-up company on the show. Well, they got massacred by four of the panelists. The basic comments were: Don’t come on the show telling us that you are worth this much with no product. Don’t ask us for that much while offering so little. Get your product sold before coming onto the show. I actually thought I saw hatred in their eyes. They felt totally disrespected by the fact that a start-up had the audacity to come on their show and ask for money. Fortunately, one of them stopped them all and spoke to the presenting duo.
Kevin Harrington came from the same background, and told all of them that the valuation methods that are normally used cannot apply to a start-up since this method is based on sales/revenue and not potential. He did not choose to invest, even though he came to their defense, because they lacked a suitable deployment strategy, not because they were a start-up. I am sure that after seeing this episode of the Shark Tank, many entrepreneurs starting looking for a job the next day!
The world that we live in today was built by start-ups. Gutenberg borrowed today’s equivalent of a million dollars from an Angel investor to get his press to produce the first copies of the bible. There is often no other way to get an idea off the ground, but some people forget this. There are however some ground rules; steps that have to be followed:
1) Put your idea on paper. Write it out and research it. Is there anything similar? What are those similarities? How are you different? Now sit back and read through it again. Still think it’s a good idea? Still think this is the one?
2) Start writing your business plan. I know, everyone always says start your business plan, but that is because the sections of a business plan will help in determining the value and the need for your product or service. Don’t worry about the financials just yet. You still need to establish the validity of the idea. Think about: marketing, competition, organizational structure, advisors and so on. Once you go through all of the steps, you will have a much clearer idea of the potential of your product/service or whether or not you need to re-think the idea.
3) Now, you need to figure out what you need in terms of equipment, software, programming, and people, and you need to calculate some of these costs. Do you need a prototype? Basically, you need some figures relating to the cost of getting the product to market. This is the seed money you will need. This seed money usually comes from friends, family and/or acquaintances. Not too many people will speak to you until you get this part done. Also, this would be a good time to speak to a securities lawyer who will advise you on the rules of selling shares in your company.
4) Now it’s time for forecasting your potential sales and expenses. Do a minimum of 3 years, but many potential investors will want to see 5. This section will complete the business plan, from which you will now be able to extrapolate what is known as the Executive Summary.