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Can you create a successful formula to creating startups?

Over the last two years we have tried our hand at incubating new businesses within our current space. Although we already have a successful multi-million dollar web design business we are always coming up with new ideas for new businesses. The first attempt was a mess because we tried to do it as a part time thing without finding a full time person to run it. That taught us our first lesson: always have a full time founder or CEO that can give the business daily attention. Since then we’ve been far more successful. Even the worst of the attempts still returned a profit to us when we sold the assets to our partners.

The question we’ve been asking ourselves is whether there is a scientific process to creating new successful businesses? We think there is and here’s a broad outline of the process and the components.

Funding – 
How much funding is needed? To get an idea out of somebody’s head and in front of prospective customers you don’t need much. Unless you are building a massive telecom business or starting a biotech firm you don’t need that much. In general, when starting a web business, a simple prototype will often be all you need as a first proof point. We have typically invested about $20K in our startups. That’s in line with the $18K offered by TechStars and the $20K or less offered by the Y Combinator. There really is no magic number but $20K is an easier pill to swallow if it doesn’t work out. Our first company cost us $16K and returned no customer revenues. However, we did sell the assets for $50K. Our most recent company has cost us about $20K and already has received deposits over $100K. We’re selling approximately $100K in new business each month. Projected revenue for 2010 will be over $1million. You’ll notice we are cautious about counting sales as revenues as we prefer to look at deposits as a way of keeping score.

We believe that because we have started and run several successful businesses, the money we invest comes with all the benefits of having a full time adviser on your staff. Dumb money, or money without the experience, is far less meaningful.
Bottom line: you don’t need much money but the source of the money matters a lot more than you think.

Founding team
 – Who will run this business day to day? As mentioned before the worst mistake you can make is thinking you can run a business on the side. You need a full time manager or CEO. It’s only possible to get the momentum you need to break startup inertia if you have someone with 100% focus on the business. We look for CEO’s with startup experience and at least 2 or more successes behind them. Startup CEO’s are very different to the CEO’s that end up running the business after 2 – 3 years. These startup CEO’s are ready to roll up their sleeves and do anything necessary to get the first customer signed up or getting the product out the door. We do not think this role is for entrepreneurs that have just graduated or are starting their very first business. We may team the idea guy with the startup CEO but we advise against letting the smart computer science grad run the business.

Bottom line: Who you choose to work with and their level of commitment is without doubt the biggest determinate of startup success.

Operational involvement and control
 – How much time and energy do you have to put in to your companies every day? The horrible truth is that you need to give your incubating companies attention almost every day. Our business is somewhat unique in that Fresh Tilled Soil actually builds and supports many of our investment companies websites and applications so we are intimately connected to the daily operations of the business. This unique involvement is far more active than if you are just a financial investor or a board member. We also physically house some of our companies which gives us unparalleled access to the founding teams. From an operational point of view we insist on weekly management meetings with our partners and founding CEO’s. These meetings are designed to review the key metrics of the business (sales, revenues, expenses, COGS, deposits, AR, AP and process). We have a dashboard which shows all these key metrics and compares them against the previous weeks and months. In each meeting we’re looking for patterns and opportunities to improve.

Bottom line: Starting a business is like having a child. It’s a daily commitment where the level of involvement is in direct proportion to the outcome of success.

Mentorship and partnership – 
How will the founder or founding team get the experiential and emotional support they need? Make no mistake, this is one of the big keys to a successful business. Nobody starts a great business by themselves without lots of support. Forget about the mythologies of individuals like Jeff Bezos and Bill Gates. Even the greatest billionaire CEO’s started with a partner or an advisory board. Both Bezos and Gates have repeated said that without the right mentors along the way they would never have created the businesses we know today. We provide lots of advice to our founding teams whether they solicit it or not. We also offer them lots of emotional support because we know it will get tough. One of our company CEO’s was in for a design meeting but we sensed they were distracted by other issues. As we probed the conversation quickly turned from design to sales. We ended up hearing about some unforeseen sales challenges that were getting in the way of achieving our revenue targets. By discussing the stresses and concerns of our CEO we were able to get to a solution. These conversations can feel like therapy sometimes but they are necessary for a leader to find the daily focus they need. These sugar-free meetings can be a little abrasive and direct but they are served up on a plate of compassion and a desire to get to the truth quickly.

Bottom line: No one is an island. Get advisers, mentors and partners that support you with honest direct advice.

Infrastructure – 
Where should we put the team and how can we reduce the infrastructure cost of starting up? Earlier incubation models insisted on sharing physical space so they could amortize the costs of rent, printing, etc. I’m not yet sure it’s necessary to be in the same office but it really helps. We have enough space to house at least 2 or 3 small startups and still have ample space for our core business, Fresh Tilled Soil. We share in the cost of rent, connectivity, utilities, some legal fees and sundries but that’s not the real benefit to being together. We love being able to solve problems in an ad hoc real-time way. If there is a question our startup teams can get up and walk over to get answers. That speed of decision making is critical to maintaining momentum.

Bottom line: Even in a virtual world, physical space still matters. We are social beings and the closeness to others has a meaningful impact on the startup process.

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