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This is the sixth article in a series on how to start a company in 2020. See the previous article, Develop and Test Product Prototype.

“It’s not the plan that is important, it’s the planning.” – Dr Graeme Edwards

Developing a clear path to profitability — and being able to defend it with good metrics — is probably the single most important thing a startup founder needs to do before launching a company — and certainly before meeting with investors. Sure, there are examples of successful startups (like Google and Pinterest) that did not know how they were going to make money before building their products, but those examples are rare. It is a far better strategy to build your product around a revenue stream, than to try and figure out how you will make money later.

Most startups make the mistake of pursuing multiple markets and multiple revenue streams. Successful startups focus on one revenue stream and perfect it before attempting to bring on additional revenue streams. Cash flow plus growth equals value. A good startup will focus on getting a large share of one market before diluting its resources to pursue multiple markets. Once your revenue model is crystallized, the task is to articulate it in a plan and detail it with a realistic set of financial projections.

Things to Think About and Decide

First, think about your primary revenue model. How do you plan to make money? Decide on ONE revenue stream to start. Model the cash flow with a basic Pro forma.

Second, decide on the key assumptions and data points that support your financial projections. Think about what you need to show to defend your revenue model.

Third, think about the top-line assumptions, i.e., traffic, hits, conversion rates, price, churn, customer retention rates, etc. Think about your selling costs and the costs of running the business. Think about how these might change as you grow.

Fourth, decide how many customers you have to sell each month to cash flow the business.

Things to Do (or not)

  • Depending on the complexity of your product, write a detailed product specification.
  • Develop a realistic and defensible financial model, based on one revenue stream.
  • Describe in detail the steps that are required from the very beginning of the customer relationship to when a payment is received.
  • Detail your assumptions for expenses, such as fixed expenses and costs of goods sold, and how they will scale as the business grows.
  • Try to keep all costs variable. Do not take on fixed, long-term expenses unless your business absolutely requires it.
  • Set up your Chart of Accounts using Quick Books online or similar application.
  • Write an Executive Summary that includes how you will make money and how much money you need to reach break-even.
  • Don’t write a business plan that is more than 50 pages, including financials. No one is likely to read it, least of all your own team.
  • Don’t overly focus on product margins; focus on top-line revenues.
  • Prepare 3-5-year financial projections, with the first year showing revenues and expenses monthly, then quarterly for years 2-5.
  • Do NOT show “hockey stick” revenue projections, where the revenue is flat lined in year one, shows a modest increase in year two, then inexplicable soars in year three.
  • Have good answers (contingencies, fallback position) for what happens when things don’t go according to plan (because they won’t).

Recommended Readings & Resources

Model Executive Summary Template, by Mike O’Donnell, StartupBiz.com

Business Plan Template StartupBiz.com

Sample Business Plans and Business Planning Software, Palo Alto Software

Both Sides of the Table, by Marc Suster – A blog that covers financial and business topics.

Startup Business Models, by Dave Parker

eCommerce Business Models, by Shyna Jain

Business Model Examples, by Board of Innovation

Business Model Canvas and Value Proposition Canvas, Strategyzer

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Stay tuned for Step 7, Secure Intellectual Property

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Post Author: Michael ODonnell