In a stroke of brilliance, you’ve conceived a tech application that you’re sure will take the world by storm. The logical next step is to create a business around your concept. All successful tech businesses were born in startups, small companies funded by external investors and designed for rapid growth in the marketplace.
Statistics on startup success may be discouraging. The U.S. Bureau of Labor Statistics states that 38% of tech startups are in business after four years, and some sources say the failure rate is even higher. This guide is designed to get you thinking about a solid business plan, the market, and funding that could transform your idea into the latest and greatest tech innovation.
Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011:
84% now are closely held and operating independently,
11% were acquired or made initial public offerings of stock,
4% went out of business
Less than 1% are currently in IPO registration.
Data via The Wall Street Journal and the Dow Jones VentureSource.
Get Your Idea Market-Ready
Creating a new application or concept is only one small step in the process of getting it to market. Most innovators in tech began with an idea supported by a business plan and a thorough understanding of the marketplace. Without hard data on projected sales, market viability, and competitors’ performance, it will be difficult to attract the big money that venture capitalists and banks can provide for your new business.
Before you begin searching for funding, prepare data supporting the claim that your product will strike a chord with customers. Develop a comprehensive, clear presentation of the facts, including development costs, timelines and marketing strategy. Approaching any potential investor without this information makes you appear unprepared and is not likely to convince people to fund your company.
Most initial funding in tech comes from the business owner. A passionate belief in a product naturally leads tech developers to tap into their own financial resources, especially early in the process. Some developers sell assets; luxury items like boats or second properties, for example, can generate a lot of cash in a hurry. It is also worth noting investors want to see you’ve invested a personal stake in your business; if you believe in it enough to access a home equity line, 401(k) fund, or insurance policy, then you may inspire confidence in investors.
Friends and family are a typical source of capital in new business ventures. It’s not unusual to have a relative or acquaintance who owns a successful business and understands your need for seed capital. Approach these investors with caution, however. It may be best to take these funds as loans; once you’ve repaid them, the business transaction is removed from a personal relationship. If you must offer a business stake in exchange for funding, keep ownership shares as small as possible and clearly state in writing what rights the investor is granted.
Loan and Credit Options
While the U.S. banking industry is less optimistic about credit now than before the recession, many credit unions and local community banks believe in supporting local businesses. If you can prove that your product will significantly impact your local area, then your odds of receiving a small business loan are somewhat high. Evidence that you’ve tapped into your own assets is also viewed favorably by bankers.
If you have good credit, a viable product and a solid business plan, you may still have difficulty borrowing from banks. For this reason, the federal government has created programs designed to help small business owners. The U.S. Small Business Association (SBA) loan program partners with financial institutions to provide government-backed business loans.
If you have excellent credit, then you may be able to qualify for a business credit card. As with any credit card, you assume personal risk to your credit rating if the account is handled poorly. Many institutions offer business credit accounts, some with added features like frequent-flyer miles or cashback programs. Carefully consider whether your business could benefit from perks like this; many business owners find that a no-frills card that has a low interest rate best serves the company. These credit cards can be especially useful in the early stages of business development, when you’re likely to be spending more than you’re earning.
Attracting Venture Capital
The gold standard ultimately sought by business owners is venture capital. Individuals or groups of investors seek out new businesses to develop; in exchange, they typically receive ownership shares or a percentage of profits. If your company is ever publicly traded, these investors can earn significant returns. Generally, these are the most significant sources of funding in a developing business. There are a few ways to find and collaborate with venture capitalists, often known as simply VCs.
VCs who are particularly interested in funding early-stage businesses are commonly known as angel investors. While the term may bring to mind an image of a generous business philanthropist, the opposite is true; angel investors are in business to make money. You won’t find angel investors in the yellow pages, because these individuals often prefer relative privacy from constant requests for seed money.
A recent trend is for angels to form organized groups, often intending to serve specific locales. It’s likely that there is an venture capital group near you; creative researching will turn up resources for finding one. Organized groups of angels usually have a defined strategy for reviewing pitches, and hire a front-of-the-house staff that sifts through the business plans of hopeful company owners. The Angel Capital Association, formed in 2004, is home to over 100 of these angel groups. If you fit the profile of an angel group’s interests, you may be asked to present before potential investors.
Other angels prefer to work independently, or sometimes form an informal group that reviews investment opportunities together. If you are lucky enough to receive capital from an angel, expect to pay a cost. It is common for angels to retain up to 50% of a business’s equity; the younger or less developed a company is, the higher the return cost to an angel. Angels or their representatives may also charge monthly retainer fees.
Nationwide VC Funding is Falling
U.S. Companies raised 20.8% less in venture capital in the first quarter of this year than they did in the first quarter of 2011.
2013 Q1: $6.4 billion
2012 Q1: $7.2 billion
2011 Q1: $8.1 billion
Participate in an Incubator
Some young companies in their earliest stages purchase membership in business incubators. Often found on university campuses, business incubators offer services to its member companies. Joining a business incubator may provide you with access to low-rent office space, shared services in the form of accounting or administrative professionals, professional mentoring, financing options and assistance with federal loan programs. Angel investors often associate themselves with business incubators.
Consider any universities in your area that have strong entrepreneurship programs. Even if a business incubator is not in the offing, many times professors in these programs have contacts with angels. Arrange to meet with a high-ranking faculty member in one of these programs and explore any leads to angels. By design, angels are difficult — but not impossible — to find.
Finally, you may want to consider taking advantage of a platform service that is designed to help entrepreneurs raise funds. These websites help you present your ideas, break down your financials and offer presentation options such as short videos. VC funding groups may be searched, and member investors may browse the site for new opportunities. Using one of these services to get your company into the public eye can attract investors you may not have found otherwise.
Next Steps in Business Development
Founding a company requires more than product development and capital acquisition. All entrepreneurs must follow certain legal and administrative steps to properly set up a company. While it may seem like a daunting task, resources are available to help you meet these obligations.
Choosing a company name may not seem like an important matter in the early idea stages, but your company name could be more important than you think. When your product goes to market, your brand strategy will drive the promotion to the public. This brand strategy should reflect what your product is and how it will be perceived by end users. Your company name is ideally suited for a logo and easily remembered.
If you have a name in mind, take the time to do some research before you commit. Is the web domain available for your future website? Research potential URLs before you brand your company. Is your company name already in use? The U.S. Patent and Trademark Office offers a trademark search tool; use this to avoid copyright infringement issues. Check the business names of competitors in your industry to ensure that your company name stands out.
When you choose a company name, it must be registered for you to conduct business. Legally, the name of a business defaults to the owner’s name, unless a “Doing Business As,” or DBA name is registered. Most states require that any sole proprietorship, partnerships or corporations file a DBA name. Depending where your business is located, you must register this name with your county and/or your state. You may register a DBA at a county clerk’s office or at your state’s government office.
After your company name is registered, you must apply for an Employer Identification Number (EIN) from the IRS. This ultimately allows you to set up payroll and meet your tax obligations as a business owner. You may apply online for an EIN, or by fax, phone, or snail mail. Some states have tax-specific implications for new business owners.
Lastly, you must obtain all required permits or business licenses. The federal government does not legislate tech businesses, but many state governments do. Fortunately, the SBA makes it easy to research and comply with your local mandates.
Tech Business Best Practices
You’ve obtained funding, registered your company and secured all the required licenses and permits. Congratulations, you’re in business! To keep your company operating smoothly during the next phase of growth, keep some industry best practices in mind.
Define your company’s vision. Knowing where you want to go and what you want your company to become will prevent unscheduled diversions that could derail your progress. Particularly in early-stage tech startups where resources are likely scarce, focus every effort on maintaining a clear vision.
Choose the right partners. Consider your own depth of expertise and honestly assess where your best role is in the company. While most company founders are CEOs, it is not a requirement; CEO positions may not be the best fit for everyone. Consider your weaknesses, and hire or partner with experienced people who can fill those gaps. For example, you may prefer to focus your energies strictly on developing your product; if so, hire a management professional to handle your business, or an accountant to manage your financials.
Practice active public relations. Early marketing budgets are often skimpy or nonexistent. You may have generated buzz via word-of-mouth or social media; however, PR contacts can provide you with vast amounts of publicity from their audiences. A glowing product review from a well-read tech professional can do more for your product’s publicity than a $100,000 ad campaign.
Don’t forget about the competition. Remember that your business doesn’t operate in a vacuum; there are other aspiring startups out there who would like to put you out of business, perhaps even with a clone product. Ensure that your management staff includes professionals who can analyze the industry and the state of the market, and review this information regularly.
Keep your company working together. In tech, it is common for product developers to be somewhat isolated from business partners who are speaking to customers. Keep your production team in the loop with marketing and sales, and use feedback from the field to inform new development.
Be adaptable. One of the main reasons startups fail is the inability to react quickly to changing company needs. The tech industry is dynamic and fluid, and an effective tech owner should be able to react quickly to changing needs in all aspects of the business, whether in the industry marketplace or internally.
Starting your own company may be thrilling, terrifying or the culmination of a life’s dream. Early planning is everything to your company’s success; clearly define where your product fits into the marketplace and exactly how much it will cost to develop it. When you acquire funding, adhere to tedious but necessary steps in legally establishing your company. Taking these steps and practicing proactive, informed management may put your company into the ranks of successful tech startups.
Success Stories
There is no question that tech entrepreneurs have competition; the opportunities for success and dynamic nature of the industry lead to very talented people competing on a volatile playing field. Don’t be discouraged by widely publicized “failure rates.” Many individuals have beaten the odds and are currently enjoying the fruits of their startup labors.
Amazon
One of the first and most successful pioneers in tech marketing is Jeff Bezos, founder of Amazon.com. Bezos began as an academic superstar, serving as valedictorian of his high school class and graduating summa cum laude from Princeton University in 1986. Leaving behind early success (and a lucrative career) on Wall Street, Bezos is arguably an e-commerce pioneer.
Amazon.com began in a garage in Seattle, where a handful of employees developed the first e-commerce software platform. By 1994 the business had moved into a two-bedroom house and 300 friends had beta-tested the product. Amazon was launched as an online bookstore and in its first month averaged $20,000 per week in sales and penetrated 46 countries.
Today, Amazon is publicly traded and remains the premier source for online purchasing in all market segments, not just books. Amazon successfully introduced the Kindle in 2007, a popular mid-market answer to Apple’s costly iPad. Amazon has continued to post record sales throughout the recent recession in the U.S.
Mint
Aaron Patzer, founder of financial management tool Mint.com, started from slightly less auspicious beginnings than Bezos. Patzer, an electrical engineer by training, was frustrated with the market’s poor offerings of web-based financial management. So he developed a product that was user-friendly, pleasing to the eye and easy to use. In short order, Mint had 400,000 users with zero advertising promotion.
Industry software giant Intuit challenged Patzer’s reported earnings, demanding proof of his claims. When Intuit recognized that Mint was a much better product than its commercial rival Quicken, it offered to buy out Mint and move Patzer into senior management. Patzer was astounded, having never had plans to sell his company. After receiving a $170 million purchase price, Patzer is happily serving in senior management at Intuit today.
Kickstarter
Kickstarter, the crowdfunding website that has raised capital for new business ventures in every sector of the economy, was once a startup itself. Launched in 2009 by three friends, the NYC-based company was primarily backed by angel investors. Yancey Strickler, Perry Chen, and Charles Adler all felt passionately that a resource was needed to crowdfund creative endeavors.
The company’s first investor was David Cross, an actor in TV’s Arrested Development, in a (successful) bid to bring the popular show back to life. Though Kickstarter originated strictly to assist artists with funding needs, today it has grown to annual pledging of over $375 million for projects in every sector.
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