What should entrepreneurs think in a startup?

Freelancer & Founder

I recently received another concept for a startup. The sender asked me for feedback and my assessment.

The quintessence of his "concept":

  1. I'm building the best app in the world

  2. Anyone can use it

  3. It will revolutionize the world

"Great. And who cares?", I wondered.

  1. IT professionals and founders need CFO skills for projects
    IT professionals also have to be a bit of a CFO or controller. At least basic knowledge in business administration (BWL) should be part of the tools of every CIO or IT project manager when negotiating the benefits of a project and the budget with CFO and controlling. The same applies to founders and startups who need money from a bank to finance a business idea. Here we explain the most important terms in finance.
  2. ABC analysis
    Procedure for analyzing operational processes and arranging their importance.
  3. Balanced Scorecard
    A concept that, based on a corporate vision, condenses goals, indicators and measures. In addition to the financial perspective (such as sales, profit, return on equity), customers, processes and employees are recorded in the balanced scorecard approach. Connections are established and described with goals and key figures. The approach promises a better implementation of the strategy in operational practice.
  4. Break even
    An analysis that tries to determine the breakeven point. In doing so, the sales volume is determined which, if exceeded, earns money.
  5. Cash flow
    The cash flow represents the financial surplus of a period. It is usually calculated as follows: Annual surplus + depreciation + changes in long-term provisions = cash flow.
  6. contribution margin
    Also known as gross profit, the contribution margin is the difference between the revenues generated and the variable costs. The contribution margin determines the extent to which a product contributes to covering fixed costs, i.e. to operating profit.
  7. EBIT
    EBIT means adjusted profit. Abbreviation for "Earnings before Interest and Taxes". One-time expenses as well as interest and taxes are ignored because none of these items were created by the actual business activity.
  8. financial plan
    As a dynamic calculation, the finance plan takes into account all future payments in and out, usually over a period of the next twelve months. Instrument to control and manage the means of payment.
  9. Forecast
    The forecast is an extrapolation of earnings items in the current financial year. This is based on the results of the previous months, which - compared with current information - are updated for the remainder of the financial year.
  10. Annual financial statements
    The annual financial statements are a legally prescribed instrument for providing information to external persons and institutions. It must be drawn up in accordance with the German Commercial Code and the principles of proper accounting (GoB) at the end of each financial year. The annual financial statements consist of the balance sheet and the income statement.
  11. Return on investment
    The RoI describes the return on the capital employed. A key figure that sets the (operating) result achieved in relation to the capital (investment) used for it. The RoI can also be calculated by multiplying the two key figures return on sales (EBIT / sales) and capital turnover (sales / total capital).
  12. Variable costs
    Variable costs are only incurred when there is production. So you need apples in the production of apple compote. When production is idle, no apples are needed. The apples represent variable costs. The machines generate costs (for example depreciation, financing) regardless of whether or not apple compote is produced. This is known as fixed costs.

This founder fell into a widespread psychological weakness:

Many people consider their own ideas to be the best and most beautiful. Just like we believe our children are always the best and brightest.

But they are not.

Sure, some ideas are good.

However, most ideas are only good as long as they are in our head.

As soon as they are released into the real world, it turns out that they do not work. At least not like in our head. If the would-be entrepreneur is confronted with this reality, he either gives up immediately or thinks everyone else is stupid and continues blindly. One in probably a hundred thousand is really on the right track and becomes one of the rare mega success stories. The others go for a swim with the idea.

But there is also a second, exactly opposite, psychological hurdle for entrepreneurs in Spe.

This is expressed in the fact that these potential founders have their own ideasnever feel good. They may have sensational, ingenious, meaningful ideas, but they feel they are worthless. Months or years later you will see that others with a rudimentary copy of the idea will have huge success. They are annoyed about not having taken action themselves, but then continue in the same way and continue to doubt their ideas.

Let's leave the two psychological factors out of the way for now.

How do we actually come up with good ideas that have the potential to become a startup?

How can you develop startup ideas?

The most common sources of startup ideas are:

  • Personal frustration about a situation that you no longer want to accept (this can be, for example, a lack of or poor service that you need, or a deficiency in existing products that you no longer want to accept)

  • Enthusiasm and passion for a topic

  • Personal lifelong dream

  • A night of drinking

  • A spontaneous idea, the trigger of which one can no longer understand

  • A completely crazy idea, where you answer the question "Yes, why not?" can't give an answer

  • A (coincidental) meeting of people who combine ideas from different areas in a completely new way

  • An emotional driver in the sense of "You think I can't do it? I'll show you", in which one takes a rejection that one has suffered as an opportunity to prove the opposite to the person (to people, a group or even to one Companies)

  • Services or products that become possible due to the availability of new technologies (currently: FinTech, LawTech, etc.)

  • A "waste product" in the search for a solution to a completely different problem (such as the discovery of graphene or penicillin)

There is always a trigger for a startup idea. And in most cases it has nothing to do with how much money you can make with it. A pure focus on "get rich in 6 months" almost never works.

Often the idea lacks a business model

On the other hand, a great idea is worthless if it cannot be "monetized", i.e. converted into a business model.

Many founders fail here as soon as they make a proper calculation. Many founders shy away from such calculations or are overly optimistic because they do not want to see the real risks. Or why do new restaurants open every week, only to be broke 6 months later?

Let's take a look at what questions we should ask ourselves as soon as we have a "brilliant" new idea.

The most important leading questions about the business model

When the first idea is born, you have to think about the implementation and the reality. This includes questions like:

  • How big is the market? The answer: "Everyone" is not an answer. It always has to start with a clearly defined target group. Facebook also started with students at a single university.

  • What are the potential customers doing so far? If potential customers do not even know that they are missing something or are able to cope with their previous approach, I have to be able to offer considerable added value. Many founders underestimate the ease and aversion of people to change entrenched procedures - even if they annoy themselves daily about the shortcomings of the procedure.

  • How can you make money with it? "About advertising revenue" used to be an accepted answer, today it is (almost) no longer possible.

  • What competition is there? "None" is not an answer here either. There is always at least one "competition" - namely the convenience of potential customers to leave everything as it is now.

  • What are the regulatory requirements? Some business ideas cannot be directly implemented because there are regulatory requirements that make either the idea itself or marketing the idea impossible or even illegal. That doesn't mean the business idea doesn't make sense. It just means that a lot more effort and / or creativity has to be invested in order not to violate the regulations.

The path from the idea to founding a company takes place while walking. And if you find that there is already a motorway there, there is hardly anything left to get - because the market is probably saturated.

Unless you do something fundamentally different.

The Advantage in saturated markets is that the Market participants are also fed up. They are comfortable, sluggish, and usually quite arrogant too. This is a weakness that clever founders can exploit. Or why did a startup like N26 Bank get over 100 million euros in financing from Allianz and the Chinese (!) Tencent Holding in March 2018?

The customers do not provide you with a ready-made solution!

Founders and established entrepreneurs who are looking for new ideas keep thinking "Let's ask the customers what they need and want, and then we'll do it".

The problem:

  • Most customers don't know what they want! Most of them are already overwhelmed when they have to order their lunch in a restaurant. Then how are they supposed to know what functions the latest mobile phone should have? The iPhone would never have been "invented" by customers.

  • The following sentence is attributed to Henry Ford, even if it has never been proven whether he said it. But he seems to describe his attitude pretty well and I am convinced that he is still true today: "If I had asked people what they wanted, they would have said 'faster horses'."

  • Yes, of course there are really clever customers who have really good ideas. But that's the minority. When you find such people and partner with them, you can become incredibly successful. But it's just the minority. The majority have other concerns than worrying about your company's new products.

When we look around in the industrial environment, very close cooperation between corporations with partner companies and customer groups is becoming more and more part of everyday life. "Open Innovation" is one of these concepts for developing new products. For this article, however, I am assuming that you are not looking for new product ideas for a corporation, but are playing with the idea of ​​founding your own company.

Why do you want to found a startup?

I have already mentioned that "getting rich" is not the best basis for founding a startup.

Of course, this can work, but that motivation will also result in breaking laws, disregarding moral rules, exploiting employees, and doing many other unethical things. We can find examples everywhere, from Enron to the Libor manipulation of the most respected banks to the diesel scandal.

The idea that you have should really excite you completely. Your eyes should light up when you talk about it. Because your startup and life as an entrepreneur will demand a lot from you.

Do you have the psychological and character traits?

The following question may sound strange, but it's important: How well do you sleep these days when you have worries or problems? Do you roll around in bed for days or weeks until there is a solution? Or could the world collapse around you and still have an excellent night's sleep?

Hopefully you will experience many moments of happiness in your founding life. But there will also be a lot of setbacks, things will go wrong, people or companies will disappoint or even betray you, customers and business partners will not keep to agreements, financing will not work out, and much more.

  • You will have to lead people, give them direction and support.

  • You will make many mistakes yourself that you must be able to admit openly.

  • You will recognize and have to accept that there are many things that you have no idea about and that you are confronted with demands that are completely overwhelming - and yet an answer or a decision is expected from you.

  • How will you treat other people when you are under enormous stress yourself?

Confidence, humility and honesty

To be successful in the long term, you need a healthy level of self-confidence and the humility to face your weaknesses.

Above all, you should work right from the start to find employees, consultants and partners who are considerably better at their respective areas of expertise than you are - and then give them the opportunity to give their best. As inspiration for this, I can recommend the book "Creativity, Inc." recommend to the development history of Pixar!

This is also true of Steve Jobs' statement:

"There's no point in hiring intelligent people and telling them what to do. We employ intelligent people to tell us what to do."

Probably the problem with Steve Jobs' (I didn't get to know him myself) was that he was so incredibly intelligent that most of them couldn't tell him what to do.

The 15 steps to building a successful startup

  1. Live and think in the future. How should / will / can this look like?

  2. What is missing today so that the future can be like this?

  3. Write down your ideas and choose one that you want to pursue. A! The best in your eyes. You keep the others on your list, but you have an idea first! Concentration is the key to success.

  4. Build a prototype (or a so-called MVP = "Minimum Viable Product"). This can be something electronic, something tangible, or - for services - the clearly defined process including benefits, advantages and disadvantages.

  5. Show the prototype to at least 50, but better 100 people. Not just 2. Not just 5. You need as much feedback as possible. The more critical, the better. The goal is to get you out of your dreams and face reality.

  6. Use all feedback and revise the prototype until it makes sense for you and the people you are talking to.

  7. Find a partner or create an environment that supports you as an individual founder.

  8. Start a company. It doesn't cost EUR 100,000, but it is also the first step in turning an idea into reality. If you don't think so, then you don't believe in your idea either. So back to step 3!

  9. Get funding for an initial version of your offering. In the best case, without any external investment!

  10. Sell ​​your product. You will never forget the moment when you receive money for your idea for the first time! Only give away your product / service in absolute exceptional cases or if you pursue a "freemium" model. Make sure you get money. Discounts are ok at first. But only at the beginning.

  11. Stay tuned to the customer. Do they use the product, do they buy again, do they tell others about it? Or is it unused in the (virtual) closet? In case customers DO NOT use it or DO NOT come back: Find out exactly why. Bury your pride and personal feelings and listen. Exactly. Only then will you find out whether you just need to optimize your idea or whether it was just an idea that didn't work. The relationship that you build with your customers will be very valuable for the future of your company!

  12. If the customers come back, take advantage of the offer, even talk about it, then you work on gaining a critical mass of customers. That can be 10, 100 or 1,000. When it comes to digital services, maybe 500,000 or even 5 million.

  13. Keep selling your product like a man possessed. You have to grow continuously and acquire new customers. For digital products, your weekly growth rate is one of the key metrics.