Making the leap from employee to entrepreneur is no small feat. Starting a small business means leaving behind a steady paycheck and benefits. And considering that half of businesses fail within their first five years, according to Gallup, it won’t be easy.
Nonetheless, more than 550,000 people take the plunge in the U.S. each month, the 2016 Kauffman Index of Startup Activity found. It makes sense. A 2014 study by the University of Phoenix School of Business found nearly 40 percent of working Americans who don’t currently own a business want to.
Failure isn’t inevitable. Here's how to start a small business.
TEST YOUR IDEA
Does your idea have legs? In other words, will people actually pay for your product or service? You can start by gathering market data from industry associations, government agencies and trade publications to assess demand. Another way to test the market is to crowdsource your idea online using a website like UserTesting, UsabilityHub or AYTM, which let you solicit feedback from real consumers.
You’ll also want to assess competitors by looking at their market share, customer satisfaction ratings, and sales figures (if available). Your business idea should be unique or offer a product or service at a significantly cheaper price than what’s currently on the market.
WRITE A DETAILED BUSINESS PLAN
You need a roadmap that outlines what route your company will take as you start it, grow revenue and thrive in the long term. Translation: Write a business plan that projects what lies ahead for the next three to five years.
A traditional business plan includes eight sections: an executive summary, business description, market analysis, organization and management structure, service or product line, marketing and sales, funding strategy and financial projections. This document will serve as your main marketing tool when pitching your idea to investors. The U.S. Small Business Administration offers step-by-step instructions.
Don’t have a bunch of cash sitting around to fund your business? You’re not alone: Two-thirds of prospective entrepreneurs (68 percent) say they don’t have enough personal savings to start a small business, a recent Gallup poll found. Fortunately, there are other ways to raise money.
Crowdfunding sites such as Kickstarter, Indiegogo and Crowdfunder allow members to sign on as backers. In return, these “investors” usually receive tangible rewards like a sample of the product. Thus, the main advantage to this financing method is that you don’t have to give up equity, or ownership stake, in your company. However, there’s stiff competition; for example, only 36 percent of campaigns reach their goals on Kickstarter.
If you’re willing to give up part of your ownership, you could pitch the idea to angel investors or venture capital firms. However, these firms set a high bar for what they want to see before investing in your business, so you’ll need an ace presentation in order to get funding.
Another option is to join a startup incubator or accelerator, like Y Combinator. These programs — which are often associated with major universities — provide entrepreneurs with education, mentorship, financing and often the opportunity to pitch ideas to affiliated investors. Since 2005, 172 U.S.-based accelerators have helped more than 5,000 companies refine their business model and raise a total of $19.5 billion in funding, or $3.7 million per company on average, reports the Brookings Institution. The caveat is that many incubators and accelerators are extremely competitive (all the more reason why you need a great business plan).
SET ASIDE CASH RESERVES
Reality check: It’s going to take time for your business to turn a profit — quite possibly up to a year or more depending on how fast you gain traction. Therefore, it’s wise to talk to industry experts to get an idea of when you can expect the company to reach profitability. Then, use that number to determine what you need to have in cash reserves to ensure you can run the business and keep your household income stable while you’re getting started.
MAKE IT LEGAL
Figure out how you want to structure your business for legal and tax purposes. Most businesses are sole proprietorships, which basically means you and the business are the same. It’s easy to set up and run, but if someone sues the business, they’re suing you and could come after personal assets. If you want to shield yourself from that kind of liability, you’ll need to set up an LLC or S corporation. Because they have different tax implications, consult with a tax advisor to determine what’s best for you. Once you have the proper structure in place, you’re ready to hit the ground running.
Your business idea should be unique or offer a product or service at a significantly cheaper price than what’s currently on the market.