The question, “What does it take to make a successful company?” runs through every entrepreneur’s mind before he or she dives into the task. After all, anyone familiar with the sport of start-ups and finding investors knows that not all good ideas win. Some fall away despite their potential, just as not every great athlete makes it to the pros. What leads a company to the playoffs of investment is varied, and the path is crowded with risk.
But let’s start with the basics. A successful entrepreneur needs to start a company, true, but that isn’t the first step.
The first step to success is finding an idea.
If you’re an aspiring entrepreneur, you’ve probably had dozens, even hundreds, of ideas so far. You go to the grocery store and see brands like Stacy’s Pita Chips, which started in a cart and are now sold nation-wide. You log on to Facebook or watch The Social Network and see how encompassing a single, well-executed idea can be. The world is an endless stream of inspiration and ideas but you need one that’s better than all the others. You need the best idea, something special, something you can live and breathe for the next few years of your life, no matter how much of a struggle it may be. Once you find that idea, run with it. Actually, don’t just run—sprint. Take it as far as you can by yourself, and along the way you will realize that you need to move to the second stage.
In the second stage you’ll be creating a team, or finding a co-founder.
As your company grows stronger, the need for another person will become increasingly apparent. You can’t do all of this yourself, even though you might want to. So search for someone you trust, someone you believe will be able to take your company to a level you could never accomplish on your own. And here’s the hard part: give them fifty percent of the company.
True, now you own half as much of your idea as you did when you started. But your half is worth more than the former whole when you find someone who can elevate your company. Fifty percent is necessary because it’s a sign of fairness. This person needs to be invested in the idea, and having an equal stake as its creator will motivate them to achieve just as much as you. It should be noted that this isn’t the last time you’re going to be cutting your share of the company down. You’ll do it with each new investor, the number varying based on how much they give you. But never fear—each time you do minimize your portion, your company will increase in value and your share’s value will increase with it.
Third step: funding.
You’re building a field now, a place for your company to grow. Maybe you need an office, business cards, software… Rent and food, too, so you can live while you use all of these things. Because you’re a private company you do have limited options for finding all this money, but it’s not impossible. You can either A) get money from an “accredited investor” you know, who either has $1 million in the bank or makes $200,000 annually or B) ask friends and family. Most entrepreneurs have no choice but to take the second option, and that’s alright. Every penny counts and just asking relatives can give you and your company enough to survive.
And now for the big question: if you build it, will they come?
Having a field, or startup cash, doesn’t make a company. The money won’t last forever. Now you need angels, or in this case angel investors (though I assume actual angels could be helpful too).
Angel investors are wealthy individuals who look to invest in startup companies. They’re a great alternative to incubators—places that provide cash, space, and advisors to new businesses—because they’ll often invest more money. While incubators usually give you around $20,000, angel investors give an average of $600,000 if they value your company as sound. How these investors value your company will make or break you in this round—the average valuation for a company with an angel investment is $2.5 million. Not every company is worth that much. Perhaps if yours’ isn’t, an incubator will be a better option for you. But if you’re confident, or even unsure of how much your company is worth, here are a few things that will bring those angels to your field:
- Competition or Demand: If word gets out about your company and you start attracting investors, your value grows on the basis of demand. Investors love the game, and they’ll be more than willing to pay extra if it means beating out their competitors.
- Exponential Growth: If your company is already growing, it’s worth more than a company with a plan to grow (which is often what startups present).
- Low competition: If you’ve created something no one has thought of before, or that was formerly thought of as impossible, your company will be nearly invaluable to investors. Of course, “invaluable” doesn’t exist in this world, so the value will just be very large.
- Pre-existing Revenue: If you’re already making money, it’s pretty apparent that you’ll keep with the trend.
- Great History: If you or your new company’s other co-founders have worked on successful ventures before, thus already illustrating an ability to execute, you’ll gain the faith of investors.
- Team Chemistry: If everyone involved with your company works together and gets along well, the energy is palpable. For some investors this means a lot—they’ve often seen both sides of the workplace and know that good energy can mean better work.
- Locality: This is often something that varies based on the investor, but since new business can expand to boost the local economy, some investors value local start-ups over others. Their knowledge of the community will also give them a good idea of your initial consumer base and whether they’ll take to your product. If you live in a city with a good start-up scene, it’s definitely a good idea to start pitching to local investors.
If all works out for you, you’ll make it to the next stage to start attracting venture capitalists. In essence, you’ll be playing in the big leagues. Stay tuned to see how that story will pan out in our next blog post, “Sink or Swim… Or Float.”