The Business Side of Start-ups

Back in March when Amos and I applied to the MassChallenge accelerator program, we had a cool idea, some initial feedback from potential customers, and a POE-level prototype showing that we could really build a usable bathroom scale for people in wheelchairs. However, when we were accepted into the program and started talking to people, it turned out that there was a lot more to learn about “the business side of things” than we thought. It’s not as simple as just building a product and selling it in an online store, and crowdfunding sites like Kickstarter are not as effective unless you’re selling to engineers (like Technical Machine) or the general population (like 3Doodler). Here are some of the major things we have internalized in the past four months of running a business:

1. If you’re selling a product, it probably makes sense to go through distributors. These exist in every industry, and they are often industry-specific (except for stores like Walmart, Costco, and Target). When you sell to distributors, your value proposition is inherently different. Instead of telling individual customers why your product would make their lives better, you are telling businesses why your product would fill a gap in their product line and generate profit for them. For us, this means selling our scale to stores that sell wheelchairs, ramps, bath seats, and other independence-enabling products.

2. Your total materials and production cost should not be the selling price of your product. If you are going to sell through distributors, your wholesale price (how much you charge the distributor per item) may have to be as little as half of the retail price (how much you charge the end user per item). Additionally, your cost of materials and manufacturing should probably be less than half of your wholesale price so that you can make a profit and continue to run your business. Thus, if it costs you $X to make your product, you might sell it to Target for $2X, who then sells it to customers for $4X. If customers are unwilling to buy your product for $4X then you may not have a viable business idea.

3. Fundraising is difficult and takes a lot of time, and winning investments is a lot like dating. You meet a potential investor informally, and either at some point in the conversation you pop the question “Would you be interested in investing?” or if you’re lucky your potential investor will tell you outright that she would be interested in investing.

If she asks the question, “Are you raising funds?” too early, you should answer “No” if possible, because investors love it when you don’t seem needy right away. Later you send her a slide deck about the company, the executive summary of your business plan, and a term sheet (so she knows how investing will benefit her). Maybe you set up a phone call or an in-person meeting to discuss what questions she might have (and at this point you still have no idea whether she plans on investing $5, $50,000, or $500,000). You do some back and forth, and in your head you set some time limit like 6 weeks for the negotiation process. If the end of that time window gets close, let the investor know you’re “closing,” so that she doesn’t just take up your time asking questions if she doesn’t intend to invest. Eventually she might say yes, and when that day comes, hopefully you have your forms ready, so you can get her to commit to it pretty immediately. Finally, the cash takes a painfully long time to actually get to your company bank account.

4. Patience, Patience, PATIENCE! Everything takes longer than you think (so try not to give time estimates for anything unless you are the only person that task depends on). You are a startup, operating on a similar time scale to a student in engineering school (checking your email constantly, thinking about problem-solving in the shower, and working more than 40 hours a week). Anyone else you interact with is not on that schedule. Receiving money takes even longer than receiving documents, which takes even longer than setting up a simple meeting. And doing these things with doctors, entrepreneurs, or CEOs of slightly larger companies takes even longer, because although they operate on your hectic time scale, your email may be missed until a month later when they are cleaning out their inboxes.

5. You are not your business. If you, as an agent of your business, royally screw up, people will not hate you. At worst, they will think less of your venture and may tell others not to purchase your product. Apologize early and often, and they will forgive you. From the other side, recognize that other people are not their businesses. Point out flaws in the business, not the person.

6. Free things are everywhere, especially in the Boston startup community. Many law firms offer up to $10,000 in deferred fees, meaning you don’t have to pay a dime until you raise $500,000 or more. Take advantage of these deals (so that maybe you can go out to dinner once in a while). Negotiate or find alternatives when the cost of doing things one way is too high for your budget, and do things to save cost like filing a provisional patent before you file a full patent. Patent pending means the same thing either way!

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