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3 Critical Lessons No One Will Tell You About What to Start For Your First Business

I’m often asked by people about what business to get in to.  “I want to start a business but I don’t know what business to start”.  It’s worth taking a lesson from Richard Branson’s book here, businesses are disposable you’ll let them go when they no longer serve you the focus is about the people and in this case investing in yourself.

See if you go into business not concerned so much about that particular business but taking a long term view of learning to make business successful then you’ll buy yourself the freedom to go into all the businesses you want in the future.

It’s not glamourous, it’s not get rich quick, but it’s real taking a long term view will give you a better life than you ever imagined, you’ll be far less likely to be disappointed when you struggle, and you’ll be able to dramatically reduce the risk of starting something of your own.

“Who’s going to pay for the learning curve” – very wealthy businessman and investor to his ex-girlfriend when she announced she wanted to start a juice bar business.

To her the statement came across as cold but the cold hard fact is we all have a learning curve when we get into something new and there’s a cost, usually a very major one to that learning curve.  If you think college, university, or some paid training are expensive try making mistakes in real life and measure what they cost.

With that in mind I’ve learned some very critical lessons I wish I’d followed when I was getting into business that would have saved me tens or hundreds of thousands of dollars and accelerated my success DRAMATICALLY!

 

Lesson #1 – Business consists of two parts you need to learn both to succeed

What is business all about?  It’s about selling something and then delivering on it.

Most people who are getting started in business think of the business in terms of what you are delivering.  For example, it’s a yoga business, a book business, a shoe company, a supplement company, an engineering firm, etc.  Because that’s the part we mostly see and care most about as customers we tend to think of business as being the product or service being sold and this is a great detriment to the success of a new small business owner.

Pop quiz in most cases is it harder to sell something or deliver on what you sell?  For most small businesses the answer is selling.  Don’t believe me?  Go ask virtually any small business owner what do they have a shortage of?  Customers or ability to deliver to those customers?  Most of the time you’ll find their struggle is to get more customers if they had more they could provide for them.

There are exceptions of course, those who have figured out the sales and marketing equation and those are the businesses that are successful.

Statistically, something like 80% of small businesses fail mostly because they go into it thinking only about the delivery and not about the selling.

By contrast you could start a business that is identical to another in terms of what it delivers but different in terms of how it sells it and have that business thrive.

Richucation Hint – When looking to start a business pay attention to how you’re going to sell the product/service

 

 

Lesson #2 – Starting a business is going to be a learning experience your first goal should be to decrease the cost of that learning experience.

Here’s another stat the typical small business doesn’t make money for the first 3 years.  Crazy right?  That’s mostly because they haven’t figured out the sales and marketing equation.

But let’s take that information and backtrack for a minute.

Let’s assume it will take you 3 years to learn enough to actually make money in the small business…or let’s say it takes a year to build momentum regardless so it will take 2 years to learn what you need to know.  This is fairly reasonable.

What does this mean?

It means you’re paying whatever your expenses are each money for 2 years!  This is the cost of your learning curve.  Your monthly expenses multiplied by 24 months.  Possibly longer.

So if that’s the case do you want to start a business where you’ve got expensive retail space and a lease costing you $20,000/mo.?  Or do you want to start a business based from home where you’ve got no lease?  Do you want 10 staff on payroll from day 1 costing you $30,000/mo.?  Or do you want to be a sole operator maybe with one other person?  Do you want to be paying interest on a $250,000 loan or do you want to start debt free?

Consider that cost of your education.  If your monthly expenses are $50,000 vs $5000 then the cost of your education (how much you lose before you start to make money and consequently how much of a hole you have to dig yourself out of is $1.2 million vs $120,000).

In other words, when you’re starting your first business you want to minimize your monthly expenses or what are called your “burn rate” as much as possible.  Later, once you’ve learned what you’re doing you’ll probably end up with a high burn rate and a fair amount of staff in order to scale and make a lot more money but at this stage you want to keep lean…you don’t want 5 or 10 people sitting around while you’re learning…you and your mentors or coaches are the only people you want sitting during that stage.

What’s worse and partially takes people out in business is as we mentioned 80% of businesses fail.  So imagine you put in that time with that expensive learning curve only to have the business fail and then what was all that expense for?

It goes further do you think a business losing $50,000/mo. is more or less likely than a business losing $5000/mo. to fail?

Richucation Hint – consider your first business your education for your second and stay lean while learning

 

Lesson #3 – You can get away without learning delivery but not without learning sales and marketing

Remember how I said earlier that you needed to learn both sides?  That’s not entirely true, to go to the highest level it’s true but when getting started you can get by without knowing much about the delivery side.

Remember how I said most businesses are starved for customers but have no problems delivering to those customers?  Well if you got to virtually any company and offer to send them customers they will pay you for this.  You should make sure you negotiate a good deal for each customer but the point is they’ll pay you.  Literally, businesses will line up for you to send them customers.

By contrast if you’ve got some product or service you can deliver are there people lining up to sell it for you?  No!  Not a chance.  Why?  Because people who know how to sell are mostly selling their own stuff or selling the premiere providers on the market, which is why if you focus on delivery you’ve still got to learn sales and marketing but if you learn sales and marketing you don’t necessarily have to learn delivery.

Now let’s put this in the context of lesson #2 about minimizing the learning cost.

How long will the learning curve be if you have to learn 2 things vs 1 thing?  Theoretically twice as long.  So let’s say of that 2 year learning curve 1 year is spent learning delivery and another is spent learning sales and marketing…now imagine you only had to learn sales and marketing…your learning curve (the amount of time you spend losing money) just dropped from 2-3 years to 1 year.

If you’re spending $5000/mo. that means your cost of learning (the hole you need to dig yourself out of once you start making money) just went from $120k-$180k down to $60k maybe less.  Is that a good thing?  You bet it is!

In other words, yes at some point you’d like to start all your dream businesses maybe you imagine one in gardening and one in architecture and one in fashion and one in media but none of those will succeed without good sales and marketing whereas virtually any of them can succeed with really good sales and marketing.  So learning sales and marketing first is your ticket to freedom.

So how do you do this?

Think of a product or service you already use and already love…ideally one that isn’t already incredibly well marketed.  Now, approach the company that provides they product or service to sell on their behalf.  Almost any company will take you that’s the great part.

Think of how wonderful this is.  You get to promote something you already know is good because you use it, vs having to worry about mastering creating and delivering the product, hiring and managing staff, providing customer service, dealing with warrantees and returns, inventory, theft, etc.  All of those problems are out of your mind and you’re free just to learn to promote something you love and the moment you make your first sale you’ll make money.  It might not be enough initially to cover your costs but you’re already ahead of the game whereas if you were delivering your own product or service you’d still be busy figuring out what to call it, how to design the logo, hiring the customer service staff, figuring out how to train them, getting the phone lines and website set up, etc.

I’m not a huge fan of MLM or network marketing but this is the advantage of those business models.  You don’t have to worry about product development, manufacturing, quality control, inventory, shipping, returns, customer service, invoicing, etc.  All of that is taken care of for you and you just focus on selling, building a team, and training to replicate.  What we’re suggesting you do here is similar but with much higher margins, which makes making money faster much easier.  In other words, instead of getting $5 for every $100 sale you get $30 for every $100 sale.

Be sure you don’t just accept the first offer of what they want to give you to sell their product they’ll be inclined to throw out a number like 10% or something like that.  Generally, you want much higher and you ideally want a residual on the value of the customer as well or some way to get the customer’s repeat orders to come through you but that isn’t always possible.  If you can get it you’ll start to build a residual income that will buy you long term freedom of your time even without needing a team because the company with the product or the service is your team and they’ve got a vested interest in your success.

Richucation Hint – find a product or service you love and sell it as your first business

 

Can you do otherwise?  Certainly, you can start something from scratch inventing a product, you can build your own store, try to do it all from the beginning, etc.  But that’s a short sited approach and will give you a lot more risk and cost you a lot more money.  If you take this approach then once you’re selling one thing successfully you can expand to sell another, then another and so on and eventually add your own products or sell it all under your own brand.  Think about a company like Amazon.  They make very few of their own products mostly they are just a great brand selling the products of others.

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What Would Make Me Invest With YOU?

I was approached the other day by someone looking for investors in a new business asking “what do you consider?”  Essentially, they were asking “what do I have to do, say, etc. to get you or someone else to invest?”  You’ll hear lots of different opinions about “what investors are looking for”, and mostly those generalizations aren’t worthwhile because investors come in all shapes and sizes, about the only completely predictable group of investors are banks, who are really lenders not investors, but that’s another matter.  The lending criteria of banks isn’t the subject of this conversation though.

The point is any business idea can get funded regardless of what rules it may appear to break or not, simply because of the range of investors.  For example, it’s common to get friends and family to invest in a new company (please note I’m referring to a new business here as somewhat different from what I’d define as a start-up, which is more the game of silicon valley and angel investors) and family will invest in some cases based on helping family members not based on a solid investment criteria.  This being said, it isn’t a reliable way mindset to take when seeking investment and there are definitely things to do to increase the investment potential.

Let’s start with the basics; investors are looking for a return.  In other words the basic law is “capital wants to grow”.  Your job in seeking investment then is ultimately to persuade the potential investors that their capital will grow by investing in your business.  The corollary of this is they don’t want to lose money; preservation is a necessary part of production.  Yes, you can convince them what you’re doing is cool, or visionary, or any number of other things, but from an investment standpoint there are the core elements of mitigating the risk of loss while offering a reasonable, ideally great, rate of return.

Essentially, you need to demonstrate how you’ll generate sufficient profits and growth in shareholder value relative to the capital invested.  What does this mean?  If you’re losing money most likely so will the investors so the investors are going to want to know how you’ll make money, the more of it the better.  There are rare occasions where you can lose money and make it up when selling the company but that’s a different game and we won’t discuss it here, so let’s focus on profit, which is the heartbeat of sustainability and growth.

The obvious piece that follows is your costs will be lower than your revenues, which means you’ll need to be able to show both how your costs will be manageable and your revenues will be strong.  This is where a potential investor had told the particular individual who was asking for advice “if I invested in your business I’d have to know where every penny was going”.  This was much to the ire of the person looking for the investment and all investors are different but it belies an important point.  You should know where every penny is going in order to better manage the use of someone else’s money.

The most important thing is proving sales.  This is why it’s so much easier to raise money after you’ve gotten started than before and one of the best ways to raise money when possible is to go get some sales (pre-orders) and then take them to investors saying “look, I’ve already got these pre-sales, I need financing to deliver”.  If the numbers work that can be a slam dunk investment.  This is also where if the investor is a potential customer you’ve got an advantage.

There’s something more important than all of this though, which was the message I delivered to this individual and it might sound harsh but it’s worth noting.  I often meet people struggling to raise money, they often think it’s because they don’t know the right investors or don’t have the right pitch etc. and those things make a difference but not nearly as much a difference as this thing.  Money is attracted to growth, the moment you’ve proven you can provide consistent returns you’ll have little trouble raising money.  Think about it, it doesn’t matter what it’s for, Warren Buffett would have no trouble raising money, purely because he’s Warren Buffett.  This is why the United States has a virtually unlimited borrowing capacity because the United States is very credit worthy.  In other words you are the biggest factor in whether you can raise money.  What I told this person is I probably wouldn’t invest in them no matter what because it was them doing it.

This isn’t to be mean; it’s simply that the person had absolutely zero business experience.  They don’t understand costs, or marketing, or management, or leadership, or team building, or operations, or assets, etc.  In other words I know they are going to go through a huge learning curve in growing that company and I’m going to have to pay for that learning curve as an investor.  You have to learn before you earn and I’m not earning on someone else’s learning.

Does this mean they can’t make money?  No, certainly not, they might well succeed and I hope they do, but it’s very high risk because of their lack of skills.  Does this mean no one who has never run a business is worth investing in?  Certainly not, the question isn’t whether you’ve run a business the question is what are your skills, often the best people to invest in are people who have worked for someone else within the same field and are striking out on their own because they know most of what they need to know and just need some capital to get started creating an opportunity to prove that expertise.  In other words you develop the expertise before you show the results of the expertise and as an investor you get a much better deal investing before there’s a track record because there’s less competition from the market (you wouldn’t get very favorable terms investing with Warren Buffett).

So, what do you do if you don’t have the expertise?

You could go try raising the money anyway and there are people out there who will invest in you if you look long enough and work at it hard enough.  But I’d recommend two other strategies the first is find a way to develop the expertise.  The best options here tend to be go work with someone whose got a business helping to grow theirs or take some training (note training not information learning, reading books doesn’t give you the skills nor does listening to talks to seminars) such as the Richucation training.  The second is to find someone with expertise to join you in an operational capacity.  What this person who approached me would need in order to get me to invest would be to come with a partner who had expertise who was going to help them run and grow the company.  They’d still have to show me a solid business model, etc. but having someone with expertise could be the make or break factor.

If you’d like training on growing a business as well as learning how to raise money please check out our Richucation training programs where we walk you step by step through the skills development and process of becoming rich.