5 questions every startup needs to answer

Posted by Brad on June 10th, 2010

Before I start laying out my vital five questions, I have a couple of disclosures.
These questions although straight forward are not fully answered in many of the businesses that I am working with including BPG Motors where I am the CEO. So, if you have already nailed the answers to these questions in the early stage of your business, congratulations. If you are like the rest of us, and you still have work to do before you have a winning strategy for your business, keep working it. These are fundamental questions if you are trying to launch a successful business of any scale.
I try to use examples from companies I have engaged with. In order to not disparage the companies in a public forum, I do not reveal their names. The CEOs and founders of these companies should not take my comments personally; they are just one man’s opinion. Since these folks were crazy enough to launch a startup in this environment, I know they are pretty thick skinned anyway.
Why will someone buy it?
OK – this should be easy. If you are a startup selling a new toothbrush, you could answer- our customers will buy our new toothbrush because it’s $1.00 cheaper then the competition. We could have a healthy debate about is a $1.00 price advantage sustainable, but at least you have defined your market positioning. You are going to compete on price. Many a tech company struggles with this question. In our own case, we have an undeniably cool electric motorcycle that we are building.
Are people going to buy our cycles because they are cool? For sure. Is that a well enough defined value proposition (reason to buy)? We don’t think so. We have defined our consumer as the urban professional, living in a dense city who will likely travel no more then 5 miles on the vehicle at a time. This crisper definition then “its cool”, allowed us to focus the design, optimize our product development and get the entire team, investors and ultimately we hope many customers around a uniform vision.
How do we make money?
What should be the most fundamental question is often unclear or not known. In the case of the toothbrush, we make money by building a toothbrush for a dime and selling it for a dollar. For the motorcycles above, we intend to sell a tangible good at a premium price point relative to alternative gas and electric cycles. Selling a motorcycle is old school and it’s pretty easy to understand how a company makes money. Often with web2.0 businesses, the making money part is not clear at all. Some times, there is a we will build the user base and then figure it out model, sometimes it’s a freemium model (dropbox is one of personal favorites for this model) and finally sometimes it is “we will make money in a hundred ways”. I recently saw an example of this approach in a colleague’s business plan: we expect “revenue from: subscription, referral, and OEM licensing fees; and advertising and social media marketing consulting”. Based on the CEO’s tenacity and talent, I am sure this company will do well, but it is pretty clear they need to get some focus on their revenue model if they don’t want to swamp their cost of sales and marketing by having to sell in to five different channels.
How will we sell the product?
What is the channel? Are you selling toothbrushes online or to a retail store? Are the toothbrushes going to be sold through reps or distributors? Do you need a known partner to get you access to shelf space? If you are Web2.0 Company, do you need a sales force? Are you going to rely on AdWords, clever SEO, PR, to drive people to your site or service? These are not small questions and they drastically affect your margins, cost of sales, and staffing requirements. My observation has been that the savviest entrepreneurs have a well-formulated plan early on in the process on how they are going to sell and how they are going to minimize their cost of sales. And generally, the entrepreneurs that can crisply answer this question are not building their first business.
How much will it cost to sell the product?
You have a great idea for a simple Web 2.0 business. Your average revenue per customer is $20. If your conversion rate is 5% (1 out of 20) from everyone who lands on your site and it costs you $1 per click (to drive a customer to your website), your cost of acquiring a customer in this case is equal to the revenue you generate. You have a serious problem. Not too long ago, I met a young entrepreneur building an online coaching service. While he did great lining up coaches and building the website, he could not afford to drive customers to the site so he recast the business plan to try to market the service through partners websites and doing a revenue share. This was a clever change to his initial strategy. I do not know if his new strategy will yield, but he was forced to change because he did not understand his cost of sales from the start.
There are a thousand ways to sell something, but they are all going to cost money, even yes – a purely Internet no-sales-force business.
Successful startups understand their cost of sales going in or at the very least ensure that there is enough margin in the product so they can afford to sell the product.
Why do we win?
Saying you win because you are first to market, because you have patent protection or because no one else is doing what we are doing, are generally week arguments. Was Microsoft, Apple, Google, Oracle or Facebook the first to market? They won because they out executed and out marketed the competition. Make sure you can answer why your team is the team that will win in the space you are in or be explicit about what you need to make your team or product a winner.
Can you answer with authority these five questions about your own business? If yes, you are well on your way to a solid business, if not contact Harkador Partners and lets see if we can help.