Starting A New Business

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Starting A New Business

  1. 1. Starting a New Business ECS Candidates April 22, 2010
  2. 2. Overview <ul><li>Introduction </li></ul><ul><li>General </li></ul><ul><ul><li>Why? </li></ul></ul><ul><ul><li>Getting Started </li></ul></ul><ul><ul><li>Legal Options </li></ul></ul><ul><ul><li>Location Options </li></ul></ul><ul><li>Retail Consumer </li></ul><ul><li>Solo Consulting Practice </li></ul><ul><ul><li>Legal Issues </li></ul></ul><ul><ul><li>Accounting and Taxes </li></ul></ul><ul><ul><li>Finding Clients </li></ul></ul><ul><li>Shooting for the Moon </li></ul><ul><ul><li>Incubators </li></ul></ul><ul><ul><li>Resources </li></ul></ul><ul><ul><li>Investors </li></ul></ul><ul><li>Other Resources </li></ul>
  3. 3. Introduction – What do I know? <ul><li>Consulted for about 10 years, 5 as a solo practice </li></ul><ul><li>Employee of 5 different startups </li></ul><ul><ul><li>Eventual IPO: TCSI, Meta-Software, GetThere (Internet Travel Network) </li></ul></ul><ul><ul><li>On the runway: LeisureLink </li></ul></ul><ul><ul><li>Failures: TRW spinout </li></ul></ul><ul><li>But don’t take my word for it – talk to as many people as you can </li></ul><ul><li>Disclaimer: Use this free advice at your own risk! </li></ul>
  4. 4. Why Start Your Own Business? <ul><li>You’re the ultimate free agent </li></ul><ul><ul><li>Working for yourself instead of making money for some company </li></ul></ul><ul><ul><li>Perception of independence </li></ul></ul><ul><li>Freedom to commercialize an idea no one else believes is viable </li></ul><ul><li>Beware of the owner vs. practitioner trap </li></ul>
  5. 5. The Downsides of Your Own Company <ul><li>Long, long hours </li></ul><ul><li>Responsibility for personal income, employees </li></ul><ul><li>Poor Stability and High Risk </li></ul><ul><ul><li>Terrible odds of success </li></ul></ul><ul><li>All your weaknesses affect the whole company. The company culture is almost always a reflection of the person in charge </li></ul><ul><li>Owners must have a broad range of skills: product, sales, marketing, management, people, accounting, … </li></ul>
  6. 6. Getting Started – First Steps <ul><li>Formulate a plan and goals </li></ul><ul><ul><li>Research as much as possible </li></ul></ul><ul><ul><li>Plan financials – Business Plan, cash flow </li></ul></ul><ul><li>Identify (preferably land) first customer </li></ul><ul><li>Choose a name and legal structure </li></ul><ul><li>Print business cards </li></ul><ul><li>Sell yourself (or at least your product/service) </li></ul><ul><li>Go to work </li></ul>
  7. 7. Legal Stuff <ul><li>If you used your previous employer’s resources or paid time to develop your idea, your employer owns the idea </li></ul><ul><li>Company Structure </li></ul><ul><li>Licenses, zoning ordinances, etc. </li></ul><ul><li>IRS Employer Identification Number </li></ul><ul><li>Liability Insurance </li></ul><ul><li>The Legal Guide for Starting & Running a Small Business – Nolo Press (nolo.com) </li></ul>
  8. 8. Company Legal Structure <ul><li>Sole Proprietor – simplest but riskiest </li></ul><ul><ul><li>Some protection of personal assets </li></ul></ul><ul><li>S Corporation </li></ul><ul><ul><li>Annual profit “flows” to owners tax return </li></ul></ul><ul><ul><li>Not for those planning venture capital raising or IPOs – maximum number of partners </li></ul></ul><ul><li>Limited Liability Company or Partnership </li></ul><ul><ul><li>Most popular today </li></ul></ul><ul><li>C Corporation </li></ul>
  9. 9. Locations <ul><li>Your garage/loft </li></ul><ul><ul><li>Home office deduction </li></ul></ul><ul><li>Client sites </li></ul><ul><li>Rent an office </li></ul><ul><li>Rent a retail storefront </li></ul><ul><li>Incubators (less of an option for consultants) </li></ul>
  10. 10. Accounting <ul><li>Track your financials </li></ul><ul><ul><li>Know all your expenses for deductions </li></ul></ul><ul><ul><li>Create invoices for customers </li></ul></ul><ul><ul><li>Record keeping for the IRS </li></ul></ul><ul><li>Accounting software: </li></ul><ul><ul><li>Paper ledger </li></ul></ul><ul><ul><li>Excel or other spreadsheet </li></ul></ul><ul><ul><li>Quickbooks </li></ul></ul><ul><ul><li>Peachtree </li></ul></ul><ul><ul><li>Niche accounting for your specialty </li></ul></ul>
  11. 11. Taxes <ul><li>You are both employer and employee </li></ul><ul><ul><li>Pay employer’s Social Security, SDI, etc. </li></ul></ul><ul><ul><li>Get Employer Identification Number from IRS </li></ul></ul><ul><li>Consultants: 1099 vs. W-2 (Contractor vs. Employee) </li></ul><ul><ul><li>Affects and affected by your legal structure </li></ul></ul><ul><ul><li>IRS’ 10 Questions </li></ul></ul><ul><ul><li>1099 Pros: </li></ul></ul><ul><ul><ul><li>Generally more profitable </li></ul></ul></ul><ul><ul><ul><li>Tax deductions </li></ul></ul></ul><ul><ul><li>W-2 Pros: </li></ul></ul><ul><ul><ul><li>Less IRS paperwork, </li></ul></ul></ul><ul><ul><ul><li>Less likely to trigger an audit </li></ul></ul></ul><ul><ul><ul><li>Some clients insist you are ultimately paid by W-2 </li></ul></ul></ul>
  12. 12. 1099 Options <ul><li>True, direct outside consultant with 1099 filed </li></ul><ul><li>Intermediary agencies (pass-throughs) </li></ul><ul><ul><li>Pay you as a W-2 employee while maintaining a 1099 relationship with your client and numerous other firms </li></ul></ul><ul><ul><li>Keep a percentage of their services </li></ul></ul><ul><ul><li>Varying level of services and benefits </li></ul></ul><ul><ul><ul><li>Some even offer some benefits, but the second you are without a contract, you are unemployed </li></ul></ul></ul><ul><ul><ul><li>The more benefits, the bigger their cut </li></ul></ul></ul><ul><li>Part-time employee on W-2 </li></ul>
  13. 13. Consulting Contracts <ul><li>Get it in Writing!! </li></ul><ul><ul><li>Detail work and requirements as much as practical </li></ul></ul><ul><ul><li>Rate and Payments </li></ul></ul><ul><ul><li>Disclaimers, waivers, etc. </li></ul></ul><ul><li>Sources for examples </li></ul><ul><ul><li>Canned consulting contracts </li></ul></ul><ul><ul><li>The web </li></ul></ul><ul><ul><li>Borrow an existing contract </li></ul></ul>
  14. 14. Finding Clients <ul><li>Network, Network , Network </li></ul><ul><li>Old colleagues, friends, partners, competitors </li></ul><ul><li>If (when) you’re desperate, troll job boards </li></ul><ul><ul><li>Do not plan to land your first customer this way </li></ul></ul><ul><li>Agencies, head hunters, pass-throughs </li></ul>
  15. 15. Pricing <ul><li>Consider value of the service you are offering when determining your price </li></ul><ul><li>Ask colleagues and fellow consultants </li></ul><ul><li>In IT, a $100K salaried employee might make $100/hour as a consultant, but there’s a big range. </li></ul>
  16. 16. Changing gears to Launching a Tech Startup <ul><li>So… </li></ul><ul><ul><li>you’ve got an idea… </li></ul></ul><ul><ul><li>And you’ve always wanted to own your own company… </li></ul></ul><ul><ul><li>And maybe you even dream of making it big… </li></ul></ul><ul><li>But, be prepared to… </li></ul><ul><ul><li>Work really long hours, </li></ul></ul><ul><ul><li>Make the coffee, clean the office, buy pencils, </li></ul></ul><ul><ul><li>Lie awake at night worrying about deadlines, sales, employees, investors, legal stuff, and whether you are getting enough sleep </li></ul></ul>
  17. 17. The Business Plan <ul><li>Explain your idea(s), but more importantly, explaine how you will make money with your idea(s) </li></ul><ul><ul><li>What is your idea, and why will people pay for it? </li></ul></ul><ul><ul><li>What do you need to do to build or your product(s)? </li></ul></ul><ul><ul><ul><li>How much money do you need for R&D? </li></ul></ul></ul><ul><ul><li>Who are your customers, how many are there potentially, and how will you reach them? </li></ul></ul><ul><ul><ul><li>How much money do you need for Sales and Marketing? </li></ul></ul></ul><ul><ul><li>Who are your competitors and what are your roadblocks? </li></ul></ul><ul><ul><li>How much will you make per sale, per year? </li></ul></ul><ul><ul><li>Five year plan </li></ul></ul><ul><li>Tool to recruit employees and most especially, investors </li></ul><ul><ul><li>How much investment will you need, and how will you spend it, and how long will it last? </li></ul></ul><ul><li>What is your “exit”? </li></ul><ul><li>Many books and web sites on writing a business plan </li></ul>
  18. 18. Incubators <ul><li>Typically not for consultants </li></ul><ul><li>Share resources </li></ul><ul><ul><li>Lobby, reception, copier, phone system, network, kitchen, conference rooms </li></ul></ul><ul><li>Close contact with fellow entrepreneurs </li></ul><ul><ul><li>Camaraderie, mentoring </li></ul></ul><ul><ul><li>Share ideas, even partner with fellow tenants </li></ul></ul><ul><ul><li>Advice from others who have done exactly what you are doing </li></ul></ul><ul><ul><li>Referrals for lawyers, accountants, consultants, etc. </li></ul></ul><ul><li>Source of introductions to investors </li></ul>
  19. 19. Incubator Facilities <ul><li>LA CDC Business Technology Center </li></ul><ul><ul><li>Altadena </li></ul></ul><ul><ul><li>County run </li></ul></ul><ul><ul><li>Economically distressed zone </li></ul></ul><ul><li>Orange County Digital Media Center </li></ul><ul><ul><li>Santa Ana </li></ul></ul><ul><ul><li>Rancho Santiago Community College affiliated </li></ul></ul><ul><ul><li>Digital music and video oriented </li></ul></ul><ul><li>Idealab </li></ul><ul><ul><li>Pasadena </li></ul></ul><ul><ul><li>Private, for profit </li></ul></ul><ul><ul><li>Overture, eToys, CitySearch, … </li></ul></ul><ul><ul><li>Founded by Bill Gross (not the PIMCO Bill Gross) </li></ul></ul>
  20. 20. Entrepreneurial Resources <ul><li>Incubators </li></ul><ul><li>Professional Organizations </li></ul><ul><ul><li>OCTANe </li></ul></ul><ul><ul><li>Tech Coast Venture Network </li></ul></ul><ul><ul><li>SCORE (SBA affiliated, formerly Service Corp of Retired Executives) </li></ul></ul><ul><ul><li>Orange County Business Incubation Network (UCI affiliated, creates various incubators) </li></ul></ul><ul><ul><li>IEEE Orange County Entrepreneurs' Network </li></ul></ul><ul><ul><li>Others: Emyth, Entrepreneur’s Source </li></ul></ul><ul><li>Networking groups – industry, chambers of commerce </li></ul>
  21. 21. Angel Investors <ul><li>You, your relatives, friends, and mentors </li></ul><ul><li>Wealthy individuals interested in investing in small companies </li></ul><ul><ul><li>Usually opportunities too early or small for VCs </li></ul></ul><ul><ul><li>Less capital than VCs </li></ul></ul><ul><li>Professional angel investors </li></ul><ul><ul><li>Tech Coast Angels </li></ul></ul><ul><ul><li>Pasadena Angels </li></ul></ul>
  22. 22. Funding Sources <ul><li>Angel Investors: less than $1MM </li></ul><ul><li>Venture Capitalists: more than $2MM </li></ul><ul><li>Bank loans: Generally need business history </li></ul><ul><li>Investment bankers, private equity, etc. </li></ul><ul><li>Factoring receivables (CIT Group?) </li></ul>
  23. 23. Venture Capitalists <ul><li>Professional money managers </li></ul><ul><li>Primary goal is their Return on Investment, not necessarily your success </li></ul><ul><ul><li>Not even 1 in 10 investments succeeds </li></ul></ul><ul><ul><li>10:1 or even 20:1 ROI prospects </li></ul></ul><ul><ul><li>Structure your pitch and business plan accordingly </li></ul></ul><ul><li>HIGHLY recommend “High Tech Startup” – John Nesheim </li></ul>
  24. 24. Finding Angel Investors and Venture Capitalists <ul><li>Investors scout entrepreneurial groups </li></ul><ul><ul><li>Incubators </li></ul></ul><ul><ul><li>Executive networks </li></ul></ul><ul><ul><li>Entrepreneur Organizations </li></ul></ul><ul><li>Friends and colleagues </li></ul><ul><li>Fellow entrepreneurs and business owners </li></ul><ul><li>Always have your elevator pitch ready </li></ul>
  25. 25. Making the Pitch <ul><li>Present your business plan – 30 minute presentation </li></ul><ul><ul><li>Review it and practice it in advance </li></ul></ul><ul><li>The VC wants… </li></ul><ul><ul><li>A reasonable plan to make him 10:1 on his investment, or 25% annually </li></ul></ul><ul><ul><li>Smart and passionate management </li></ul></ul><ul><ul><li>Experienced management – people who have “seen the movie.” </li></ul></ul><ul><ul><li>Barriers to competition – “the moat,” an “unfair” advantage </li></ul></ul><ul><ul><li>Exit options </li></ul></ul><ul><li>10 in 1 get to pitch, 1 in 10 who pitch get funded </li></ul><ul><li>Pitch to as many VC as will listen </li></ul><ul><ul><li>Don’t count on just one investor </li></ul></ul><ul><ul><li>You can negotiate among multiple deals </li></ul></ul><ul><li>Typically takes a year from start of process to close </li></ul>
  26. 26. The Term Sheet <ul><li>The investors’ financial and legal terms, including: </li></ul><ul><ul><li>How much money they will provide, on what schedule, for how much ownership of the firm </li></ul></ul><ul><ul><li>How many people will represent the investors on your Board of Directors </li></ul></ul><ul><ul><li>What positions in your firm will be filled by the investors </li></ul></ul><ul><li>Typically has an expiration date </li></ul><ul><li>Typically has a “no shop” clause </li></ul><ul><li>Review with an attorney familiar with term sheets </li></ul><ul><li>The money isn’t yours until you deposit the check!! </li></ul><ul><ul><li>VC have been known to cancel signed deals </li></ul></ul><ul><li>Expect to own much, much less than 50% in the end </li></ul><ul><ul><li>Less than 4% at IPO is typical </li></ul></ul><ul><ul><li>Valuation and size of investment dictate ownership </li></ul></ul>
  27. 27. Other Funding Sources <ul><li>Banks generally want 5 years of successful financial history </li></ul><ul><ul><li>Exception: Silicon Valley Bank </li></ul></ul><ul><li>Equipment leasing with payment in some stock in lieu of cash </li></ul><ul><ul><li>Vencore, EMC? </li></ul></ul><ul><li>You credit cards, savings, and mortgage </li></ul>
  28. 28. Life in a Start-Up <ul><li>Draw a reasonable salary for yourself once you’re funded </li></ul><ul><li>Expect tremendous personal reward as you realize your ideas and grow the firm </li></ul><ul><li>Expect tremendous stress from running the business, from investors, from employees </li></ul><ul><li>Your personal life will suffer </li></ul><ul><li>Always seeking to reach/maintain hockey stick growth </li></ul><ul><li>Beware “Founder’s Syndrome” </li></ul><ul><ul><li>Investors will take some control </li></ul></ul><ul><ul><li>Professional managers generally do their specific jobs better than you </li></ul></ul><ul><li>Find a mentor </li></ul>
  29. 29. The Finish Line <ul><li>Initial Public Offering (IPO) </li></ul><ul><ul><li>Hire a CFO who has done it </li></ul></ul><ul><ul><li>Relatively tough regulatory climate in the US </li></ul></ul><ul><li>Acquisition by a industry conglomerate or competitor </li></ul><ul><li>A “lifestyle business” </li></ul>
  30. 30. The End <ul><li>George Wu, Startup Expert and Entrepreneur </li></ul><ul><li>[email_address] </li></ul><ul><li>http://www.linkedin.com/in/georgewu </li></ul>

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