The pandemic brought one positive and unexpected result. Over the last few decades, a trend had established itself, which, in the last decade, had seemed set in stone: new business formation had seemed to be in permanent decline. Despite numerous new policies and incentives, nothing that had been attempted had managed to reverse this decline. Yet, with the pandemic came a surge in new business formation. It’s no surprise then that entrepreneurs like you are thinking about forming new businesses. The pandemic presented entrepreneurs with enormous market opportunities and underlined the fact that over the next decade, the world will undergo a massive transformation as the shift to digital, the emergence of artificial intelligence, the switch to electric vehicles, the rise of robotics, the genomic revolution, among other trends, sweeps across the world. In this article, we will discuss how you can start a small business this year.
Pick the Right Business idea
The great managerial thinker, Peter Drucker, used to say that “the purpose of a business is to create and keep a customer”. What he meant was that a business needs a powerful value proposition to attract customers and keep them, if it is to earn revenue and have a chance to earn material economic profits. Without a powerful value proposition, there can be no business.
One realization that many entrepreneurs never seem to grasp is that a business can earn revenue, indeed, it can grow revenues at earth-shattering rates, and still not make a cent in profits. In order to earn profits, at least past the early growth-stage of a business, a business needs to be capable of sustainable value creation. This has two dimensions: the size of the spread between a company’s returns on invested capital and its cost of capital, what is known as the economic earnings margin; and how long that company can continue to earn this margin, a period known as the growth appreciation period. What this essentially means is that a business needs to earn returns above what it costs to raise capital and it needs to be able to earn these returns for a long time. In many industries, the competition is such that few and sometimes no businesses are able to earn economic earnings. The competition is so severe that competitors do not have any pricing power and returns are kept near or below the cost of capital. To escape this, your business has to defy competition, you have to have something that nobody else can offer, and which your customers cannot live without. You have to make your customers feel as if they are robbing you blind every time they walk away from your store. They have to feel as if regardless of what you charge, the value they get is so much they are willing to tolerate you raising prices. The first hint of this is if your product has product-market fit. The second hint is if you have pricing power. Without the ability to sustainably create value, regardless of how fast revenue grows, your business will never earn material profits and will ultimately fail. This is the biggest test of all. If your business idea can’t pass this test, you’re toast.
Develop a Business Plan
The next stage is the planning stage. The Prussian general, von Moltke, used to say that no plan survives first contact with the enemy. In business, this is true, no plan survives first contact with the market. So why do we plan? We plan in order to arrive on the battlefield in the best condition, to understand market forces, the competitive landscape, the best sources of funding, the regulations governing the industry, the best business structures to operate under, the optimal pricing, among other factors. Your business plan is not and cannot be a rigid thing. From the day you start operating, unexpected forces and events will force you to deviate from your plan. Your business plan will remain useful because it is an exercise in thinking about how you will navigate through the industry. The solutions you develop may not be implemented as you envisaged, indeed, you may go in directions you never intended, but your business plan will prepare you to answer these challenges.
In terms of financing, it is virtually impossible to raise external funding without using a business plan.
Your business plan, if it is done right and the results are promising, will open the door to external funding. Although many businesses are entirely funded by their owners, or at least with funding from friends and family, you may find that you need more sources of external funding to fulfil your business model.
A traditional bank loan is the more orthodox way of raising external funding. Small business grants are also very popular and in many ways more accessible than traditional bank loans. Another route is to get equity financing from businesses or individuals you feel would be a great fit for your business. Many times, traditional loans are inaccessible to entrepreneurs, especially if they do not have significant assets the bank can accept as collateral. In that case, you can raise funds from crowdfunding platforms, angel investors and venture capitalists. Where you go exactly is a function of the type of business you have, the resources you need and the kind of partners you need.
Decide on a Business Structure
Every business is organized around some business structure. The most common kinds are the corporation, S corporation, partnership and sole proprietorship. The limited liability company (LLC) is a business structure permitted under state statute. The decision you make has tax and legal implications. It is not a decision that should be taken lightly. Get additional information before making your decision.
Register Your Business
The next step is to register your business. This will make it a distinct legal entity. You will have to register with federal, state and local agencies, not only to establish your business, but to obtain a federal tax ID, any business licences you may need, and secure protection for your trademarks, patents and brands.