The pandemic did for the economy what a decade of uninterrupted growth could not: it spurred a surge in American entrepreneurship. The pre-pandemic economy was characterized by a mysterious, decades-long decline in business formation. Although the media has been full of inspiring stories about start-ups in Silicon Valley, the reality is that the rate at which Americans have been starting companies has been in decline for a long time. That changed with the pandemic. According to the Peterson institute for International Economics, Americans started 4.4 million businesses in 2020, up 24% from the previous year. This is the biggest surge in business formation on record. The question for many entrepreneurs is, how do you start a business the right way with the right startup business structure?
Find Your Passion
Running a new business is hard. There are innumerable challenges, your business may struggle for profitability for many years, and competition means that you are always at risk of shutting down. Wading through these challenges without passion is almost impossible. You need passion to sustain you in the difficult moments. You also need passion to spark the creativity needed to find novel solutions to problems faced by consumers.
Find People Who Share Your Passion
Some thinkers have begun to talk about the “passion economy”, suggesting that you can build a business that caters on a shared passion with 1000 or even 100 “true fans”. Finding these true fans will enable your business to exist. Without them, you cannot earn any revenue. What better business can there be than one that monetizes your passion?
This idea extends to the people you work with. Find those people who share your passion and want to turn that passion into a business. Many great companies have been built through shared passions. For instance, Berkshire Hathaway is not just the story of Warren Buffett’s investment acumen, it is the story of his shared passion with Charlie Munger for value investing.
Develop a Business Model
The great managerial guru, Peter Drucker, liked to say that the purpose of a business is to keep and create a customer. Achieving that in profitable ways is the purpose of your business model. You have to have a clear and powerful value proposition in order to attract and keep customers and your startup business structure needs to reflect that. Growth without profits destroys shareholder value. Your business model has to figure out not only how to get customers to buy your product or service, but how to earn a profit while doing so.
Your value proposition has to be such that it is difficult or costly, or both, for your customers to shift to another company. For instance, in many parts of the world, WhatsApp is the default messaging service. Not using WhatsApp punishes you because that is the default way in which people communicate. With that kind of competitive advantage, profitability is guaranteed. Apple can charge massive premiums on its products because it has a powerful value proposition that makes it difficult for its users to shift to rival products.
Test. Test. Test.
You can’t improve what you do not test and measure. This is the basis of progress. The best place to test a product or service is among a small group of customers, using a minimum viable beta version. These customers can test the product for you, giving feedback on their experiences, difficulties they have, things they like, and things they wish weren’t there. This is a process of stress testing in which your product or service is subjected to real-world conditions. Once the product or service has withstood this period of stress testing, your business can put more resources into making it work and distributing it to the broader market.
For example, if you are thinking of opening a restaurant, you could make at home the dishes you plan to make for your restaurant, and have friends, family and neighbours test them and then work your way out, looking for people in your target market to taste them. It’s important to be open to criticism. It’s the criticism that will make your product better.
Build Your Team
Unless your business is necessarily individualistic, for instance, if you are writing a newsletter on Substack, you will need to build a team. A common mistake made by entrepreneurs as they assess their startup business structure is to try and do everything themselves. You cannot be a hero for all seasons, you need others to reduce the load off your shoulders. It’s not just about reducing your workload. Nobody is perfect and your team has to compliment your skill set. For instance, Steve Jobs had no engineering skill, but he had clear design ideas and knew how to build a great brand. He built a team that had the skills he lacked and turned Apple into one of the greatest businesses of all time. You have to be honest about what you can and cannot do. If you let ego get in the way and overestimate your skill and talent level, you will kill your own dreams.
You can search for co-founders who will contribute with capital, or skills, and share profits and equity with them. New businesses often do not have the capital to attract top talent. If your vision is powerful enough, you can make up for this by offering recruits stock options. Then, even if their salary is low, your employees would have the option of selling these options at a later date, if the company succeeds. Many startups recruit employees in this way. You must take care to ensure that everyone’s compensation is aligned to the need to grow the company’s long-term shareholder value. Tying pay to metrics like return on invested capital, is a good way of aligning compensation to the goals of the owner’s to grow shareholder value.
Have the Right Business Structure
As we have said on this website, your startup business structure has profound tax and legal implications for your business. The most common business structures are corporation, S corporation, sole proprietorship and partnership. The Limited Liability Company (LLC) is a business structure permitted under state statute. You have to pick among these business structures and ensure that your startup business structure meets your needs.
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