Platt Perspective on Business and Technology

Building a startup for what you want it to become 15: moving past the initial startup phase 1

Posted in startups by Timothy Platt on May 24, 2016

This is my 15th installment to a series on building a business that can become an effective and even a leading participant in its industry and its business sector, and for its targeted marketplaces (see Startups and Early Stage Businesses and its continuation Page 2, postings 186 and loosely following for Parts 1-14.)

I have been discussing innovative products and services, and portfolios of them through the course of the last nine installments of this series, leading up to here. And I have been systematically discussing the flow of new innovations into an active product portfolio under production, in the last several of those installments. And then I added in Part 14, as a key element to that ongoing narrative, a progression of due diligence questions that would have to be addressed in the new business context, in determining where and how to develop and offer innovative products, and on what to focus on first in that. The goal there was to simultaneously meet prudent fiscal management and cash flow requirements, while at the same time building a startup from its beginning to become a recognized – and appreciated source of innovative value. There are a lot of trade-off considerations there, as only briefly noted in Part 14, that have to be addressed. And I add here, that I only touched upon some of the more generic questions in that series installment, that would have to be asked in conjunction with more business, and business model-specific questions too. My goal for Part 14 was to get startup founders thinking, and in specific ways about a set of critically important issues.

At the end of that installment, I said that I would look past the initial startup phase to carry this overall discussion forward and into next business development stages. I will at least start that here, continuing my focus on what the new business offers and brings to market, and on what it seeks to develop as a source of marketable value. But in keeping with my overall shift in focus to next business development stages, I shift the posting title tagline used here accordingly, to “moving past the initial startup phase.” And as this posting starts a next overall step in this series as a whole and in its ongoing narrative, I will begin with some fundamentals:

• When a new business is initially coming together as a still embryonic source of value creating potential (when it first formally enters its initial startup phase), the entire focus at least at first, is on initial planning, and on building and refining a business model, and on determining in progressively more refined detail, precisely what initial products and/or services to build this new enterprise towards producing and selling. This, I add, applies as a matter of basic principle, regardless of how carefully and fully the initial founders of a proposed business have thought out what they would specifically produce and bring to market prior to actually taking their first true startup building step; actually starting to plan out and build a business to do this always raises new, practical-level questions that a founder, no matter how experienced would not be entirely able to anticipate in advance, let alone entirely answer in advance. This is a planning and decision making period but it is also essentially always going to be just as much a learning curve period too.
• And the first steps are taken in turning a dream and an idea into what will hopefully become a viable, profitable business too, with first development and building steps taken even as initial planning continues. And a startup is born. And a startup stage business, essentially by definition is a pre-revenue business.
• Cash reserves that have been brought in to make founding this new venture possible, are being spent down and hopefully very carefully and prudently, and strategically so. But the first income from effort exerted here, has yet to arrive. Startups are pre-revenue received, early stage businesses. (Note: I did not say pre-revenue due there, as a business cannot pay its bills from fees and payments due but not yet paid in yet.)
• I focused in Part 14 and in the installments leading up to it, primarily on this first basic development phase. I turn here to consider the next phase: the early business development stage. And revenue is starting to flow in now. This is now an early revenue generation business. The challenge is that incoming revenue at this step in development does not entirely cover expenses going out yet, let alone generate profits.
• That requires some clarification. The key word that I did not state in the immediately preceding bullet point was “consistently.” An early business development stage enterprise can have a particularly good month and actually meet and exceed all outgoing cash flow requirements for that period. But if that success is not stably reliable yet, this is still just an early business development stage company.
• The very good news here is that while a new venture at this stage still has to rely in having some non-revenue funding support, it is bringing in income now from sales made, lessening the need for that. The bad news is that while it is bringing in those sales earnings now, it is not at least yet bringing them in at a fast enough rate to be able to keep the doors open long-term from them alone – at least yet.
• I said “non-revenue funding” there for a reason, instead of only using “sales income” or similar terms. That is because this still-needed financial resource base can include what is left of initial seed money, but it can also include cash reserve supplements that are raised by the founders from outside of this business or by early members of their new business team. It can include loans from family members or friends, and at this stage it can also include influx of funds from outside investors, and particularly angel investors here.
• I have to add that outside investors can and sometimes do move in and offer development funds during the true startup phase too, and particularly if the investor in question knows and has confidence in the startup founder, or if they see particular meaning in their business mission or vision. But for here, I assume the commoner pattern of true startup stage businesses having to prove themselves on their own, at least as far as truly outside investors are concerned, and with the early development stage, the development step where their type of funding support might become a possibility.
• But either way, that is essentially always one-time money that is not going to be replicated on an ongoing basis and strictly as a result of the performance of this new enterprise.
• Financial constraints of the type that I address in my series: Understanding and Navigating Burn Rate: a startup primer (at Startups and Early Stage Businesses, postings 67-78) begin to relax a bit here but they are still going to be critically important here too.
• When a business reaches a point in its development where it is in fact reliably, consistently bringing in both sales revenue per se and enough of it so as to be profitable from that – then it has transitioned out of its early development business stage and into an early growth stage. Now any initial funding left from its earlier, pre-profitability stages become its reserves, or at least a component of them, and resources for capital expansion and business reserve, as well as a source of fiscal balance and security. The dynamics of cash and other liquid asset allocation and use, and the decision making processes that shape them are important and merit further discussion which I will include in this series, and in this section of it in upcoming installments.

My goal for this installment has been to at least briefly sketch out what the earliest post-initial startup phases are and how they relate to that beginning business development step. And I will be referring to this conceptual developmental model in postings to come. I will simply add as a final thought here, that this is only one possible way to organize this developmental process and to characterize specific businesses that are going through it. Other business analysts divide up this developmental progression at least somewhat differently. The only absolute requirement that I would suggest that a reader adhere to, and no matter what organizing approach you use here, is that you identify the stages of development faced, in terms of stage-specific functional requirements that prudent due diligence would indicate have to be carried out and then in particular. And that you set the boundaries from one step to a next there, in a way that matches when founders and owners, and the managers on their team and others, have to make fundamental changes in what they do and what they have to prepare for. Set the developmental end points for each stage in terms of what amount to phase changes in what has to be done, how it can and most prudently should be done, and with what priorities. To highlight what should be an obvious example of that, simply consider the implications of bringing in revenue per se for a new business, and certainly if the founders of this have considered taking out a new business loan for capital development. Incoming revenue can suddenly make that a viable possibility, and whether or not this type of outside funding support is an intended development option in any given new business.

I am going to continue this discussion in a next series installment where I will focus on early development stage businesses, and on their products, and on the issues of beginning to build a true product portfolio, and from the startup stage planning that has already been carried out and from ongoing experience in this new venture. Meanwhile, you can find this and related material at my Startups and Early Stage Businesses directory and at its Page 2 continuation.

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