Starting a Tech Business

Again this morning I awoke feeling frustrated. I finally have the time to work on my project, but I’m struggling to get the wheels in motion. At first figured my best course of action would be to start building a website that showcases some of my feature ideas, but I’m reminded now that the tools I need to do this don’t exist yet and I must venture to invent them!

I am trying to build a social network. This is no simple feat. If I’m going to take on a project of such stature, I have to get serious and start treating it like the huge endeavour that it is.

First steps first, I need to read up on how to start a tech business. I spent the day at the library on Tuesday, reading up on the topic. The book I found, E-Business Start-Up: The Complete Guide to Launch your Internet and Digital Enterprise by Philip Treleavan and Charles Birch, was a bit dated (published in 2000, long before the advent of social media and social networking) but it still provided valuable information on getting things started.

I felt like I was on the right path as soon as I read the Foreword. It stated that this book catered to young people with big ideas, strong ambition and dedication to get them off the ground within 2-3 years.

Now, don’t get me wrong, I’m completely aware of the amount of work and patience this entails. I realize that there are very specific personal attributes and skills that people must have to pull this sort of thing together… I like to think I have what it takes!

If anyone has ANY insight, please do comment so we can discuss. Lots of work ahead, I’d love any and all help I can get!

According to the book, here are the some of the personal strengths required:

- Vision: As an entrepreneur, do you have the vision of the future trends? Most high-tech entrepreneurs are strong on futurology, and how technology and the marketplace will develop. Absolutely. One of the main reasons I am pining to create my project is because I have a vision for how social media will affect and change the world. I think it’s important that we think forward and create structures/tools that will allow us to use social media in positive ways that promote our lifestyles.
- Discipline: Whether you are driven to make your fortune or to change the world, do you have the motivation and discipline to make it happen? I am without a doubt well disciplined and I haven’t let anything get in the way of my dream to bring this project to life and make a living out of it.
- Focus: Can you focus on the essentials of the business, especially, in the start-up phase. I can! It’s all I want to do!
- Evangelism: Do you have the ability to sell your idea to others – to investors, customers, staff and the media? I’ve pitched my project to people before and have had great response. I’ve been told many a time that I am the perfect spokesperson for my project.

Can you get it together?

- Leadership: Can you build a team, and get them to turn your dream into a reality?
- Finance: Can you persuade investors to risk their money to finance your dream?
- Sales: Can you persuade large numbers of people to sign up?
- Publicity: Can you persuade the media to promote you and your company?

Here’s what I learned from the book, along with personal commentary…

Classic High-Tech Start-Up Scenario

- Launch: Use the low-risk start-up model to demonstrate your business idea. Start small, raise launch funding from friends and family, and develop your product.
- Focus: Focus on an entry-level product that is 100% complete offering.
- Silicon Valley: If you are an up-start start-up wanting to make a fortune fast, you need visibility, you need to dominate the US market, you need American VC money and the associated kudos, etc. Arguably the easiest place to do this is the US.
- Share options: Give everyone in the company, from the receptionist up, share options, to motivate them. Typically 10-25 percent of the company is allocated for share options.
- Venture capital: As soon as your idea is proven, use venture capital to accelerate growth to a $100 million company.
- Promotion: Promote yourself and your business as a superstar. The ultimate accolade is to get on the cover of Time.
- Initial public offering: Aim for an IPO that will value your company at over $1 billion, or aim to sell the company to a trade buyer for $100 million to $200 million.

Valuation versus revenue: Market capitalization or valuation is often considered more important than profits.

Venture Capital’s Role

- Venture Capital model: You identify an opportunity in a large and growing market, hire a complete team of experienced and successful managers, raise millions of dollars of venture capital, and spend it to accelerate your business development.

• However, reputable VCs in general do not provide money to brand new companies. VCs need a high rate of return on investment and therefore they will want a high percentage of your business. With young entrepreneurs, they often want to hire someone to run the business for you.

- Low-risk model: You raise a small amount of money from friends, family and other entrepreneurs, develop your product and slowly expand your business.

• You learn to control your finances, hire people as the business grows. You deliver a better product to a few customers instead of trying to capture a slice of the world market.

- Optimum approach: Use the low-risk model to start up and then once your business is established, use venture capital to accelerate your growth.

Share Options - ‘Stock options are the oil that lubricates high-tech start-ups’

- Incentive Stock Options (ISO): If certain rules are met, the employee does not have to pay tax on the ‘spread’ between the grant and exercise price until the shares are sold. Capital gains would then be due.
- Non-qualified Stock Options: The employee pays tax on the spread just as if it were wages, and the company can take a corresponding tax deduction.

Realising your Investment

- Trade sell: Sell your business to another company.
- Going public: Obtain a share quote on one of the major stock exchanges.

Identify a Profitable Market

- Your customers: You need to be sure that people want to buy the proposed service, and that they will in fact buy from you.
- Market Buoyancy: You need to estimate how long your market will remain profitable, or the life cycle of your service.
- Realistic prices: You need to charge realistically high prices both to make a profit and to demonstrate to customers that you are a serious, professional business.

Good Management

- Controlling your business: You need to plan how your business will develop. This covers not only technical and financial aspects, but also the life cycle of your product or service, and future technical developments. You also need profits for funding longer term growth. Many businesses never move beyond their first product, and many do not generate sufficient profits to expand.
- Cash management: In the short-term, you need to manage your cash flow to ensure you have enough cash to pay your bills. A surprising number of businesses fail simply because they run out of cash to pay their day-to-day bills.
- Costs management: Most successful managing directors are good at maximising sales and minimizing costs.
- Type of business: Choose the correct legal form for your company. For most this is the Limited Company.
- Seeking advice: Look at how other companies operate – their business structures, marketing strategies, the look and feel of their products, even the design of their brochures.

Your Product or Service

This part I find difficult to pinpoint. Because my business is an online service with an advertising profit scheme, I’m not sure how to size up the profitability. Also, because my idea is unlike anything that exists, it’s hard to size up the market. Nonetheless, research will prevail.

Is it sound?

- What exactly is the service you are offering?
- Why should customers buy your offering, rather than an existing service?
- Will established competitors respond aggressively?

Is there a market?

- Market size: How many people are likely to buy the service in Australia and principal overseas markets? How many potential customers are likely to buy from you?
- Profitability: How many customers do you need to make a good profit and is it realistic for you to expect to capture this percentage of the market?
- Market share: For your target market, what market share do established competitors already have and what share are they likely to have in the future?
- Overseas competitors: Will overseas competitors move into your marketplace and marginalise your offering?

Can it be built?

- Resources: Do the technical resources, such as equipment, exist to build and support the product?
- People: Are there reliable staff, contractors and suppliers who can do the work?
- Money: Do the financial resources exist to fund the development? Investors are usually reluctant to fund the building of prototypes.
- Management team: Do you have a management team experienced in handling rapid growth, advertising, sales and global marketing? Great management is far more important than a great idea.