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Startups


The Physics of Startups

By Mark Alford

The cumulative challenge facing startup businesses can be described in simple physics terms regarding energy in its two fundamental forms: kinetic (energy in motion/active) and potential (stored, built-up energy). Starting a business from scratch is one of the most demanding endeavors one can take on, requiring significantly more effort/energy to operate than businesses that have been around for at least a few years. This is because they haven’t yet built up a significant client base or revenue stream (potential energy) and have yet to solidify their daily and long-term operations guidelines. They’re forced to exert energy for each and every task they wish to accomplish, operating purely based on kinetic energy. However, as a startup business’ potential energy increases through the investment of time, money and effort, so too do the potential rewards.

Startup businesses should first determine whether they’ll be operating as a sole proprietorship, partnership, limited liability company (LLC), corporation, or as a nonprofit organization. While figuring out this critical part of starting a new company, business owners and operators would do well to set up their tax system right away. The longer you wait to set this up the harder it will be to record, organize, track and file all of your important tax information later. Taxes can actually represent a strong ally for small-business owners if taken care of promptly and properly (e.g. tax write-offs, rebates and credits).

Developing a business plan is essential to optimizing a startup business’ potential energy. Key to a new business’ success is careful investment and budget planning. Will you fund your operation based on personal finances, debt capital (funds that must be paid back; loans), equity capital (funds not required to be paid back; investments made by outside parties), venture capital (investments made in exchange for some type of ownership in your company; stocks or control over decision making), or even fundraising (nonprofit organizations)? Next, you’ll improve your money management by deciding how you’ll use your earnings. Will you take all profits and reinvest them to build your business through positive cash flow or will you use those earnings for immediate payouts? Establish what methods of funding and cash-usage you’ll incorporate and then do whatever it takes to stay within the parameters of your budget. (If you can’t afford it, either don’t buy it or find a way to get it for free or barter services/products for it).

Startups are also faced with the important element of establishing pricing and profit margins as well as revenue strategies. This will largely depend on the types of products and services they offer. Selling physical products requires an examination of materials, manufacturing, shipping, etc. Selling services necessitates consideration of the time required to deliver/execute such services as well as the level of training and qualifications their employees/service providers will require. And less tangible factors will also need to be valued by startup owners in order to solidify their profit margins. For example, where a majority of a business’ costs are front-end costs related to development, such as with informational products, the startup-business owner is responsible for researching and assessing the perceived value of their offer in addition to how much revenue is required to recover product-development costs.

Any small-business owner can tell you about the exhilaration of seeing their business reach the point where it starts using built-up energy. A prime example of this is branding and marketing. In the beginning, startup businesses are essentially faceless entities without a concrete identity. The goal of consistent branding and marketing is to generate enough recognition and awareness where one’s business essentially starts selling itself (using built-up potential energy) instead of having to constantly pitch your business to others (kinetic energy).

This leads us to a critical point often taken for granted by startup businesses, establishing a niche market. Pinpointing a niche market grants one of the most powerful means of achieving a competitive status. Otherwise, without a niche market a startup-business owner is essentially a single solider going up against an entire army. Drill down and establish a small section of your target market to slash your potential competition and go after those prospective clients with vastly improved clout.

Developing your unique selling proposition (USP) and your corresponding elevator pitch will help you accomplish that. Your USP is your business’ kernel of distinction; what makes it different from all the other businesses in your market. And your elevator pitch is what you’d say to someone to describe your business and what you offer if you had just 30 seconds to say it; as if you were in an elevator with a prospective client and needed to pitch your business before they exited the elevator. Develop your USP and elevator pitch and incorporate them throughout all of your branding and marketing.

All marketing and sales efforts should be made with a specific volume in mind. Although every business owner hopes for a wildly successful marketing plan, it’s essential to have sufficient product and service processing and support in place. Companies can get into just as much trouble taking on too much business as they can taking on too little. Employing volume control ensures that a business will be able to provide high-quality products and services backed by appropriate customer service measures for each and every client while generating optimal profits. Each business has its own threshold, requiring startups to carefully determine what their own particular numbers are for this important equation. This also highlights the importance of establishing the lifetime value of a client: how much revenue can be produced throughout the course of one client’s dealings with your company. This provides critical help in determining your target cost per acquisition.

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