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3 Major Considerations for Every Startup

By: Joey Reeve

 

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Everybody has a great idea, but as Award-Winning Entrepreneur and author of The Execution Factor, Kim Perell famously said “vision without execution is talk.” The reality is that about 90% of startups fail, while 10% of startups fail in the first year. So, before you quit your job and launch your brilliant parking garage mobile app, know for sure that this is what you truly want to pursue. We have outlined a few of the critical boxes that an entrepreneur must check before “taking the plunge”.

Once you have confirmed that pursuing a startup venture is truly your calling, you must research the market. At a minimum, you should have a familiarity with the following factors:

  1. The market demand
  2. The competitive landscape
  3. How to fund your Startup

The Market Demand

One of the main factors that compelled me to quit my accounting job and pursue a CPA exam test prep company was because I experienced the traumas of pursuing the CPA license. With CPA Exam pass rates hovering around 50%, and knowing that one cannot get promoted beyond senior associate until they pass all four sections of the exams, I knew that the market (i.e., CPA exam candidates) were desperate to pass.

There might not be transparent data out there that accurately reflects the market demand for the vertical that you are dreaming of, but there are almost always qualitative factors that can give you a better idea. Personally, I was fortunate enough to simply know how hard the CPA exam was, from taking it myself. For example, if you work in the hospitality industry, you might know what product could make lodging and food services a better experience. If you are in the medical industry, you will have a superior understanding of problems in the medical field that are desperate for a solution. So instead of thinking of “what would be cool” instead, think about what you know people need.

The Competitive Landscape

Knowing existing and potential competitors in your arena is a little easier to read. In today’s digital age, there are plenty of websites, affiliates, keyword research tools to learn who is selling and creating content about the industry that you are hoping to enter. Before starting my company, one of the first thing I did was create an excel that broke out every single competitor. I then made a free trial for each program to learn what it is that they are doing, and how I could do it better.

Having a competitive advantage is crucial when trying to disrupt any market. I knew that our competitors marketed themselves on having “adaptive learning” technology. Having been a student myself, and having tutored hundreds of CPA exam candidates, I knew that students passed the CPA exams because of the CPA exam study material, not fancy technology. This is why we initially allocated every dime to superior, and more visually appealing content. So, after listing out the possibilities for differentiation, and determining the viability for implementing those differentiating factors, you are set to outline your core competencies.

How to Fund Your Startup

There are generally two ways to fund a startup, by financing your project (e.g., borrowing money or selling equity to investors) or by using your own money, which is often referred to as bootstrapping. Let’s talk about the tradeoffs for the different startup funding options.

Let’s start with the possibility of borrowing money (i.e., debt financing). This will obviously require that you are the one assuming the risk. In other words, if your project fails, you are on the hook for paying back the debt. Before getting excited that this is your solution for not selling a bunch of equity, know that 1) it certainly isn’t easy to convince a lender to give you capital for a startup venture and 2) for the amount that you might need for technology advancements, you might not qualify for a loan.

This brings me to the second possibility – selling equity. Selling equity is the more common approach as many investors are keen on investing in potential upside of a startup. Think about how ecstatic Bill Gurley was when he received his investment from the Uber IPO. The tradeoff to selling equity is that you are losing some ownership interest in your own company. So, if and when your idea is a homerun and it comes time to sell, you will miss out on some of the economic benefits.

Finally, let’s talk about the option of “bootstrapping”. Bootstrapping is simply a word that describes using your own money. This is a good option for those of you who have enough money saved up to invest. This will give you a good runway for getting your minimum project off the ground, allowing you to later learn more about your market from getting your feet wet, as well as having a more accurate understanding of your company’s deficiencies and how raising more money in the future could be beneficial.

If you’re not sure about the best approach for financing your startup, there is nothing wrong with pursuing a little bit of each option. Many investors want to see that founders invest their own cash and have a little “skin in the game”.  At the end of the day, if you believe in your idea, and you think you have a shot at disrupting your market, go for it. Afterall, isn’t that the whole idea of risk?

Published: September 12, 2022
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Joey Reeve

Joey Reeve, CPA is cofounder and lead instructor of Universal CPA Review. This post is designed for those interested in learning more about the CPA exams or currently studying for them. As a disclosure, Universal CPA Review is a CPA exam study resource that is particularly designed for visual learners.

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