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How to Start a BusinessTaught at Wharton about how to start a business
 
 
The book is 130 pages packed full of battle-tested strategies that have been accumulated over 10 years of combined business and entrepreneurial experience. Understanding your customers, building a product, building financial forecasts – everything you need to start the business of your dreams, be your own boss and achieve financial independence is right here.

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Table of Contents        Back to Top

Take the First Step

What You’ll Get from This Book

What This Book is NOT About

Who We Are

Understand Your Customers

Target Market

How many customers are there?

How much money do these customers have?

How well do you understand these customers?

How accessible are these customers?

How often will these customers need your product?

How willing are these customers to try new products?

Market Research

3rd Party Research

Demographic Analysis

Surveys

Interviews

Informal Focus Groups

Ethnographic Research

Scope the Competition

SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

Putting It All Together

Competitive Research

Job Boards

3rd Party Research

Expert Opinion

Online Metrics

Be a Customer

Just Ask

James Bond

Degrees of Competition

Direct Competition

Indirect Competition

The Potential for Disruption

Competitive Advantage

First Mover Advantage

Distribution Channels

Brand

People

Innovation

Common Pitfalls

Design with Users in Mind

Value Proposition

Be Tangible

Be Specific

Be Concise

The Value Scale

Switching Costs

Learning Costs

Risks

Customer Service

Auxiliary Products

Ease of Access

Experience Trees

What is an experience tree?

How do I build an experience tree?

Why bother using experience trees?

Everything but the Kitchen Sink

Knowing Right from Left

Road Map

Upgrade

Modify & Expand

Get Your Product Built

Employees vs. Outsourcers

Competence

Location

Recurrence

Specifications

Use Cases

Details on Cause and Effect

Wireframes

Non Goals

Why Bother with Specifications?

Outsourcing Marketplaces

The Benefits of Using Outsourcing Marketplaces

Risks

Keys to Success

Put Your Name Out There

Online Advertising

Dimensions of Online Advertising

Search Engine Ads

Pricing Options

Ad Networks

Ad Media

Specific Sites

Mobile & Location-Specific Ads

Retargeting

Keywords from Previous Search Queries

Measuring Effectiveness of Online Advertising

Scaling Up Online Advertising

Other Online Promotional Tactics

Newsletters

Streaming vs. Broadcasting Newsletters

Social Media Marketing

Using Facebook and LinkedIn for Marketing

Organic Search Traffic & Search Engine Optimization (SEO)

Affiliates

Traditional Advertising

Direct Mail

Flyers

Radio

Resellers

Repeat Sales

Promotional Offers & Price Discounts

Free Trials

Money-Back Guarantees and Refund Policies

Sales

Volume Discounts

Loss Leaders

Public Relations (PR)

Get Coverage on Other Third Party Blogs

Viral marketing

Newspapers & Magazines

PR Agents

Other PR Opportunities

Article Marketing

Promotional Tactics for Corporate Customers

Cold Calls

Trade Shows, Fairs & Conventions

Find the Right Price

Basic Pricing Strategies

Cost-Based Pricing

Value-Based Pricing

Competitive Benchmarks

Advanced Pricing Strategies

Price Discrimination

Tiered Pricing

Corporate Buyers

Finding the Price that Maximizes Revenue

Website with Rotating Prices

eBay Auction

Analyzing Test Results

Lifetime Value of a Customer

Repeat Purchases

Referral Rate

Distribution

Place

Channel Conflict

eBay

Independent Reps

Fulfillment

Drop Shipping

Designing For Scale

Understanding Factors Limiting Growth

Creating Efficiencies

Potential Bottlenecks

Financial Plan

What Is It & Why Bother?

The Structure of a Financial Model

Keeping Things Simple & Clear

Fixed and Variable Costs

Income Statement

Calculating COGS

Operating Expenses

Cash Flow Statement & Cash Balance

Inventory Schedule

Figuring Out How Much Cash You Need

Sensitivity Analysis

Forecasting Sales

Ball-Parking PPC Sales

Ball-Parking Organic Search Sales

Ball-Parking Sales from PR and Other Marketing Methods

Growing Sales Over Time

Useful Financial Metrics

Lifetime Value of a Customer, Customer Acquisition Costs & Ad Allowable

Customer Acquisition Costs for PPC Advertising

Gross Margin

Raising Money

Equity vs. Debt Capital

Finding Investors

Risks & Mitigation

Intellectual Property

International IP

Corporate Structure

Sole Proprietorship

General Partnership

Limited Partnership

Limited Liability Partnership

Corporation

S Corporation

Limited Liability Corporation

Founding Team

Required Roles

Baggage

Traits to Look For

Next Steps

Beyond the Book

Teach & Learn

Appendix

Statistical Significance

For Click-Through Rates & Conversion Rates

For Website Optimization Test Results

Stock Valuation
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Introduction - Take the First Step

“Everyone has a plan - until they get punched in the face.” – Mike Tyson

 

What You’ll Get from This Book

We’ve encountered many people who believe they have a unique idea for a business venture.  Yet rare are the individuals who act on those ideas.  Often, the root of startup paralysis is the aspiring entrepreneur’s belief that he or she lacks the business acumen needed to properly execute on the idea.  This book addresses that problem. It’s meant for any educated individual who’s interested in starting a business, but needs a pointer in the right direction. 

 

Fundamentals for Founders will equip you with the high-level concepts and practical tactics needed to thoroughly evaluate your idea and start building a successful business.  You will learn how to gain an understanding of the market you’re entering and use that knowledge to make informed decisions. Each section is accompanied with detailed examples and anecdotes drawn from real world experiences of successful entrepreneurs and includes topics such as:

 

  • Designing user-centric products using tools like experience trees
  • Making smart pricing decisions using tests and experiments
  • How to use outsourcing marketplaces to rapidly execute
  • Building a financial model to estimate how much money you’ll need to start. This includes several example spreadsheets that you can adapt to use in your own business and videos explaining how to use them.
  • Understanding your competition using online and phone research techniques
  • Overviews of a broad range of marketing tools like online and radio advertising, efficient cold calling and landing media coverage
  • Determining which corporate structure best suits your needs

 

After reading Fundamentals for Founders, you will have all the tools you need to complete a feasibility assessment of your idea, and more importantly, take the critical first steps towards building your business.

 

One of the recurring themes of this book is leveraging online tools and sources of data to rapidly understand, execute and grow your business. In the past decade, the Internet has made business services like outsourced product development and customer service much more available and affordable to just about anyone, no longer just large corporations. This has drastically reduced the initial capital needed to start a business and also changed some of the execution tactics.  There are now much faster and more cost-efficient ways to start a business compared to a few years ago, and we’ll show you to make the most of them.

 

The second theme you’ll see is that building a business is an iterative process.  Whether it’s designing products, setting prices or building an advertising campaign, very few people get it right the first time around.  In many sections of this book, we’ll advocate starting with well-researched assumptions and then rigorously testing those assumptions.  For example, you may try several vastly different approaches to marketing, competitive strategy, and your product value proposition. Set a direction, validate it, then rinse and repeat until you find a profitable and scalable combination. We like to think of this process in terms of the following stages:

 

 

The word start-up might invoke images of a new technology product, but Fundamentals for Founders has much to offer for even the least technical business idea. Every new business, ranging from pretzel franchises to niche consultancies, will need to apply the concepts and practices we cover here. Even if you’re not planning to develop any products, you’ll still benefit from our product design and development chapters because you’ll probably still need a strong web presence and will need to work with engineers to have that built.  Regardless of the specifics of your idea, the core concepts and techniques we discuss here will be relevant to you.

 

What This Book is NOT About

Fundamentals for Founders is not a guide to writing a business plan document.  While the ideas and practices discussed in this book will lay the foundation for a great business plan, we don’t focus on how to write the document itself.  As many entrepreneurs can attest, successful businesses are a result of action! We want to accelerate your startup by providing just enough preparatory material to ensure you’re taking the right actions, rather than hampering development with unnecessarily complex business plans. Once the need for a formal plan arises, such as if you’re looking to raise money from professional investors, this book will have helped you put all the pieces in place already to write them up into a document.

 

Who We Are

We are serial entrepreneurs, combining a love for building things with a passion for travel and writing. We started doing projects together back in 1999 as classmates in the elite Management of Technology program at Wharton, the top undergraduate business school in the country. Between the two of us, we started a file-sharing network company, wrote an award-winning business plan for a wireless networking product, and both graduated with degrees in Business as well as Computer Science.

 

Next stop were stints in marketing and engineering at Microsoft and Motorola, both in Seattle and then in China, helping build and market Windows Mobile, MSN Music, and Motorola smart phones. Armed with combined ten years of experience in bringing products from idea to market, we each separately decided to scratch our entrepreneurial itch and break free from corporate jobs.

 

We now run several small businesses, some online, some offline, ranging from selling educational games for children to trading Chinese custom-made artwork. We’ve also investigated and tested various other start-up ideas, some of which we decided not to pursue once we had tested the ideas and got hard numbers to validate our assumptions. In this book we’re sharing our combined knowledge and experience, as well as insights from our friends and alumni network of other entrepreneurs and investors.

 
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Cold-Calling

This is loosely defined as calling potential customers on the phone who weren’t expecting to hear from you. If the targets are consumers getting disturbed during dinner by someone trying to sell them a better phone plan, that’s called telemarketing and deservedly has a bad reputation. However, cold calling is much more accepted for business-to-business sales and may be worth a try for you as well. We like to think of it in terms of these steps:

 

  1. Build a list of potential customers to call. There are many methods available, some specific to your industry, but also these general options:
    1. Web searches (consider outsourcing to an assistant on elance)
    2. Yellow pages (for less than $50 you can hire someone on elance to programmatically scour the yellowpages online and deliver you an Excel sheet with tens of thousands of addresses/phones in the categories/ZIP-codes you specified)
  2. Call them yourself and figure out which sales approaches work best. Which opening lines, which arguments, which questions? Which selection criteria yield the most receptive customers? For example, given a list of potential customers from the yellow pages, you may soon develop a sense that certain words in the company names, certain locations, etc. can indicate much higher chances of the person you’re calling being interested in your offering. Write down your findings to then make them into a repeatable and outsource-able process.
    1. Keep the call brief of course, and have materials ready to send as follow-ups to anyone who’s interested, and make sure those materials have super-clear calls to action. Instead of sending files as attachments, consider pointing people to an URL so that you can measure click-through rates and offer a more interactive user experience.
    2. Also specify what information you’d like recorded as part of each call.
    3. Get yourself a Skype account, a headset, an Excel sheet to track your work, and then power through. Of course cold calling isn’t very fun for most people. Don’t get discouraged by a few folks who hang up on you. Call 30 numbers per hour, keep going, it’s a game of numbers. Call a few hundred people and you’ll make some sales. Key here is to find the right formula that has a positive ROI. Once you’ve found and documented it, you can delegate and won’t need to keep doing the calls yourself.
  3. Outsource #2, scale it up.

 

The same steps apply if your method of cold calling involves actually stopping by in person. Try it out yourself first, write down what works, and then hire people in other locations to repeat the steps for you.

 

Note: especially if you’re considering calling consumer households, be sure to check up on local legislation regulating under which circumstances you’re allowed to call, and refer to do-not-call lists.

 

 […] Buy Now to continue reading

 
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Customer Acquisition Costs for PPC Advertising

Consider running some numbers to check under what conditions PPC advertising can be profitable for you. List assumptions into an Excel sheet and then see how your profitability varies as you change the values. Let’s take a look at the example financial model in the file "<sample financial model - product inventory business>". To see under which conditions PPC advertising would make sense for this example, let’s set our assumptions for organic and other sales to zero so we can isolate just PPC sales.  Then we’ll try out a couple of different combinations of average cost per click and conversion rate (% of people who clicked on the ad and then purchased) and see how that affects our profitability. For example:

 

Various Combinations of PPC Assumptions and their Effect on Profitability

1

2

3

4

5

6

7, etc.

Average Cost per Click

$ 0.30

$ 0.50

$ 0.70

$ 0.90

$ 1.10

$ 0.30

$ 0.50

Conversion Rate

0.5%

0.5%

0.5%

0.5%

0.5%

1.0%

1.0%

Clicks per day

150

150

150

150

150

150

150

PPC Customer Acquisition Cost

$60

$100

$140

$180

$220

$30

$50

Unit Sales from PPC ads

27

27

27

27

27

54

54

Gross Income (Loss)

$(1113)

$(2013)

$(2913)

$(3813)

$(4713)

$(307)

$(1207)

 

Note: “Gross Income/Loss” is the result of various calculations in the spreadsheet. Open the file to see the details for yourself.

 

We expanded the above list with more combinations, and then summarized the results in a table showing profitability for different combinations of values for cost-per-click (CPC) and the conversion rate:

 

Conversion Rate

Cost per Click

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

 $ 0.30

 $ (1,113)

 $     (307)

 $       500

 $   1,307

 $   2,113

 $  2,920

 $ 0.50

 $ (2,013)

 $ (1,207)

 $     (400)

 $       407

 $   1,213

 $  2,020

 $ 0.70

 $ (2,913)

 $ (2,107)

 $ (1,300)

 $     (493)

 $       313

 $  1,120

 $ 0.90

 $ (3,813)

 $ (3,007)

 $ (2,200)

 $ (1,393)

 $     (587)

 $     220

 $ 1.10

 $ (4,713)

 $ (3,907)

 $ (3,100)

 $ (2,293)

 $ (1,487)

 $   (680)

 

The same data plotted:

 

 

We see here the combinations at which PPC advertising starts to become profitable for this business, and clearly there are many scenarios for which PPC advertising would not be profitable for this business. We can use research or experiments to check the feasibility of achieving a CPC/conversion-rate combination above this break-even line.  Refer to the Excel file to see details of this analysis and adjust the numbers to your own business.   […] Buy Now to continue reading

 
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Direct Mail

Fun-Fact: Ad spending on direct mail in the US for 2007 was $58 billion.

 

Direct Mail means sending printed marketing material to potential customers or partners via snail-mail. You probably receive a lot of this yourself and toss most of it in the trash, but clearly this model works for some businesses. It’s worth a try to determine if it works for you.  For $1000, you can design a brochure and send it out to several hundred addresses, enough to get statistically significant results on the effectiveness of the campaign.  If it works, this advertising approach is straightforward to scale up. 

 

Say your company offers educational travel tours to China. Your customers are high schools and their students may take a trip during summer vacation. You want to reach all the high schools that teach Chinese and convince the teachers to organize a group of their students to take a trip with your company. You could try something like the following:

 

  • Build your list of addresses. Some options:
    • Hire someone on elance for less than $5/hour to build you a list of US high schools with Chinese language programs. Anyone around the world who can read basic English and browse the web is qualified to do this work.
    • Use the Yellow Pages, filtering by category and keywords. Folks on elance can provide an Excel file with all the Yellow Page entries meeting your criteria for about $50.
  • Design your materials. $100 on elance will get you a professionally designed two-sided color brochure.
  • Print and mail. Most online printing companies will also offer direct mail services.  You provide a list of addresses and they’ll print, fold, stuff envelopes, and do the mailing – all for less than $1 per envelope.  Search for “online printing and mailing,” and you’ll find lots of options.

 

A variation of this model that’s more time consuming but would provide higher returns for your dollar investment involves cold calling your prospects first to pre-qualify the opportunity.  You only spend the $1 direct mail cost on those that seem somewhat interested in what you have to offer. 

 

In order to measure response rates for a direct mail campaign, include something uniquely identifiable in the offer, such as:

 

  • Unique URLs
  • Coupon/offer codes
  • Unique Phone Numbers or extensions
  • Requests to “ask for Joe” on the phone
  • Requests to “mention this ad when you call”

 […] Buy Now to continue reading
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Experience Trees

You know who your future customers will be.  You know what your product is and why your target market will be interested in it.  Now you need to understand how your product will address the needs of your customer.

 

The devil is in the details.  In order to get those details right, we recommend using a framework called experience trees.

 

About Experience Trees

What is It?

A graphical mapping of the different scenarios in which a customer will use your product. It shows the relationships between scenarios and features.

How is it Useful?

It lets you build better products. Specifically, it helps:

Design with a better understanding of the situations in which customers will use your products.

When making scheduling decisions, avoid creating ‘orphan features’ that don’t get used because complementary features needed to complete a scenario are missing.

 

How to Build One?

Brainstorm and group scenarios. Break scenarios down into sets of tasks.  Link tasks to the features needed to complete them.

 

What is an experience tree?

An experience tree is a graphical planning tool that distills a core user experience into a cohesive set of enabling features by systematically considering the range of situations in which the product will be used.  Experience trees have been used to design many world-class products from Motorola and Microsoft to small startups.  The complexity of the tree can vary dramatically and will largely be dictated by your specific needs.

 

How do I build an experience tree?

At this stage in the product design cycle, you should already have a good understanding of your target market as well as a clear vision for your product.  You know the particular needs of your users and the core experiences your product will provide to address those needs.  Each of those core experiences should be expanded into its own experience tree.

 

For example, consider the challenge of building a phone that’s focused on entertainment. Your target market consists of television and film enthusiasts, yet your competitors have yet to deliver a compelling mobile video experience.  Let’s walk through how to create a tree for this example, keeping in mind the following structure:

 

Anatomy of an Experience Tree

Experience

The core objective that user is trying to accomplish.

Scenario

The high level ways in which user could fulfill the experience, applied to contextual filters and resulting in user interactions that occur in specific situations. 

Task

Set of steps user must take in order to accomplish a scenario.

Feature

A product capability which exists to enable user to accomplish a task.

 

This exercise is often made easier by keeping a hypothetical user in mind.  Assume you’re designing this mobile experience for an avid video fan named Luke.  What are the high-level ways in which Luke might enjoy or otherwise interact with video on his mobile phone?  […] Buy Now to continue reading
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Financial Model: What Is It & Why Bother?

It’s an Excel file that you build to model your company’s financial future.  You will use your financial plan to estimate revenues and costs and forecast profitability.  Why bother trying to determine specific numbers for something difficult to estimate, like your future revenues?  Even if your assumptions are wildly off the mark, the model will be show you which variables have the largest impact on your profitability, and what minimum values you will need to achieve your goals.  We like to think of it in terms of three main questions:

 

  1. How much money will you need? Knowing the answer is obviously essential to making sure you don’t run out of cash.  In addition to initial product development and start-up costs, you may need to invest or buy inventory before receiving cash from customers.  If you get a lot of orders, you need to have the necessary cash to fulfill them (this is called working capital). Most entrepreneurs tend to underestimate the amount of working capital needed to operate a business until it turns cash-flow positive. It’s tough to calculate this number by gut feeling – better to sit down and do the math. Also, there may be a period at the beginning where your cash inflows from sales don’t quite cover your company’s monthly expenses yet. You’ll need to start with enough cash to make it through this beginning phase successfully.
  2. How much money do you expect to make? This helps you decide if the business is financially attractive enough to make it worth your time and estimate the value of your company.  This valuation is necessary if you’re looking for outside investment, as you’ll know what percentage of your company is a fair exchange for the amount being invested. 
  3. How can I increase profits?  The model will help you make better operating decisions by illustrating which aspects of your business play the largest role in profitability. For example:
    1. Which has a bigger impact on your bottom line: reducing customer service costs by giving your staff better tools to increase efficiency by 20%, or increasing the conversation rate on your website by 10%? The answer depends on a lot of factors, and having a financial model will make it easy to see. Plug in different values in your assumptions and see how they affect profitability.
    2. Can you afford to invest in a new project? For example, you want to take a risk and invest in some new equipment that’s expensive at first, but that you expect to result in much increased sales later. How much of an investment can you make without running out of cash?

 

No matter how simple the business, it’s usually worth your while to put down the numbers in a spreadsheet. Even a simple financial model can help you run your business more effectively and avoid many mistakes. Also, if you’re looking to raise money from professional investors or banks, they’ll demand to see a financial model. It’ll be a key part to demonstrating the extent to which you’ve thought through the business.

 

Note the distinction between a “financial model”, which looks to the future, and simply your “accounting books”, which are records of your past transactions. You can outsource the latter to an accounting firm; pass them your receipts and bank statements and they’ll take care of keeping your books accurate without needing to understand much about your business. However, to build a financial model you’ll need someone with in-depth knowledge of your business, so the first version will usually be built by one of the founders.  […] Buy Now to continue reading

 
 
 
 
* Excerpts from this book are used as part of the Penn Engineering Executive Masters in Technology Program, co-sponsored by the Wharton School, which has consistently been ranked the world’s top business school by the Financial Times. Privacy Policy | Contact
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