Shelley Klingerman | Managing Entrepreneur for NEXT Studios and CEO & Founder of Stiletto Agency
Building a company with partners is a whole different experience than building a company by yourself. Ask me how I know. Both are rewarding and challenging, but they are different journeys. When you build a company yourself, you are 100% in control of the decisions that, for the most part, only affect you. It’s your success or your failure and you know that. It could be a great payoff for you, but you could also lose it all if it doesn’t work. And when it’s just you, you can control the level of risk you’re willing and comfortable in taking. Most likely that level of risk will come with a lot of questions; such as, “Do you have another source of income to get you by? Do you have a spouse that can support you while you test the waters? Are you going to jump in with both feet and burn the boat?” It doesn’t matter what you do, because you only have to “worry” about yourself. You can’t be silent because you’re talking to yourself and making independent decisions that you will immediately know about.
In a partnership it’s different. You are bringing various experiences and perspective to the table to build a company. No single partner’s thoughts, opinions or experience trumps another, UNLESS YOU LET IT. If you don’t speak up, it’s on you. Most partnerships come together because everyone is bringing an important perspective to the table and you are stronger together than you are independently. Always keep that in mind, you are there for a reason. There might be times when you feel your perspective doesn’t align with the majority so, “I must be wrong” or you trust the others. That’s common, however, your purpose for being at the table is to disrupt the group think and provide a DIFFERENT perspective. One that might be completely opposite of what’s being discussed, but it’s your responsibility to make sure it’s considered. It might not be the way things go, but at least it was considered. I’m here to tell you, it can be intimidating and misinterpreted (by you) that, “I don’t see it that way, so I must be wrong”. Yet, it is so important that you don’t silence yourself. You need to be heard for the benefit of the company that you’re equally responsible for building and its success. If you are a female, this whole experience has the potential to be exacerbated.
As someone who is passionate about this challenge, I spend a lot of time empowering women on how to seize control of their safety through my work in Stiletto Agency, as well as empowering visionaries (entrepreneurs) to seize control of their future through my work as a Managing Entrepreneur with NEXT Studios. And to be completely honest, I spend a lot of time managing this for myself. Ladies, if we’re going to come to the table, we have to check any insecurities, passiveness, and 100% trust at the door. Acknowledge feelings when they surface and know they were given to you as tools to guide you through life in both personal and professional situations. There is NO feeling that should be dismissed. Every feeling/emotion has a very important role. Some are meant to pause you; others are meant to make you act. They are YOUR feelings. You own them. No one can tell you they’re wrong.
You may allow others to provide you information that you can take into account to work through your feelings, but they can’t change them, only you can. My point is, when something doesn’t FEEL right to you, it’s real. It might not be the way someone else feels, but that doesn’t mean your feelings aren’t valid. When you’re building a company or making your way through a corporate environment, don’t not address something that doesn’t feel right to you. Unchecked, these feelings will manifest into things like resentment or panic, which become a much larger distraction and can unnecessarily derail your success.
Women get concerned about being labeled, so we don’t speak up. We need to. For our own good and for the good of our business. Do not silence yourself. I often go back to this quote by Eleanor Roosevelt: “No one can make you feel inferior without your consent.”
Innovation is an increasingly imperative part of any successful enterprise, but it takes savvy executives to develop a workplace culture built around innovation. Innovation gives companies an edge over their competitors, but lack of innovation in business can cause failure. Research indicates that in the past 21 years, 52% of Fortune 500 companies have gone bankrupt, been acquired, or ceased to exist due to digital disruption. While companies fail for many reasons, a lack of innovation is certainly a primary factor.
Let’s look closer at the causes of innovation failure and what happens when companies fail to innovate.
Why Do Companies Fail to Innovate?
If innovation is such an imperative business function, why are not all firms innovative? A lack of innovation often comes down to culture. And while leaders increasingly recognize the need for a culture of innovation in the workforce, there are significant gaps in understanding. According to a recent study by Ernst & Young LLP, 79% of C-Suite executives say their organization is tolerant of failure. Yet only 25% of entry-level employees agree. Here are ten barriers to building an innovative workplace.
Fear of failure
Innovation stems from failure. Harvard Business School professor Clayton Christensen famously estimated that 95% of new products fail. Others have put the innovation failure rate of new products around 70 to 80%. While these seem like astronomically high numbers, companies should celebrate smart failure—and learn everything they can from it. Failure is an opportunity for growth, not a death sentence.
Lack of leadership
Lack of innovation in the workplace often comes from the top. If a company’s leadership doesn’t provide a safe place for innovation to occur, how can employees be expected to take risks? Innovative companies—and the leaders who run them—embrace change. For companies hoping to adopt this approach, understand that it takes time. Building a culture of innovation won’t happen overnight, but the outcome is crucial.
There is a saying that says “short-term solutions lead to long-term problems.” While solving short-term problems is, of course, a necessity, organizations should consider each solution through a long-term lens by beginning with the end in mind. Challenge decisions that are made exclusively out of short-term thinking.
Lack of resources
With an estimated 69% of American workers reporting they would leave their current position for a role at a company considered an innovation leader, developing a culture of innovation could be the difference between losing or retaining top talent. Focus on your employee’s individual talents and be open to ideas that seem initially “impossible.”
Lack of collaboration
Collaboration leads directly to innovation and change. Creating a learning environment where teams can learn from one another will lead to different viewpoints and angles, encouraging employees to continuously offer ideas for improvement. Create a space for employees to be personally invested and share what they do with one another.
Almost everyone, from business executives to entry-level employees, regularly faces time crunches, so it can be easy to lose track of time that should be dedicated to innovating. Leaders and employees need to be intentional with their time and rank their to-do lists, with innovation practices landing high on the list.
Lack of focus
Setting goals and tracking key performance indicators are common business practices. But how often are these goals aligned with long-term solutions and innovation? Create SMART goals around innovation—that’s Specific, Measurable, Attainable, Relevant, and Timely. That’s not to say innovation targets should be easy or obvious, but this provides a target or measure to aim for.
No delivery to market
So often, businesses fail to align their external market with their internal thinking. The market you’re serving now may well be different from the market you served five year ago. Know what problem your company solves now, and look ahead to what problem you may be solving in the future. View change as an opportunity, not something to fear. After all, according to Nielsen, the majority of consumers like when manufacturers offer new products.
No clear process
Using the same, age-old processes likely won’t lead to innovation. And yet, having no process is a problem, too. Businesses must find better ways to externalize their ideas to find new approaches to problems. A useful process likely includes allowing for internal and external collaboration, with a clear path to present new ideas.
Lack of urgency
According to Nolan Bush, the American businessman who established Atari, “The true entrepreneur is a doer, not a dreamer.” A company who lacks urgency will likely get left behind by their competitors. Innovative companies are lean and fast-moving, but they also recognize the need to act in proportion to the level of urgency. There’s no need to raise alarm bells every day.
How Does Lack of Innovation Affect Business?
To be blunt, a complete lack of innovation in business will likely kill a company. It won’t happen overnight, but companies that fail to adopt innovative practices and adapt to new consumer demands will get left behind. In 2015, an estimated 84% of consumers reported that it is somewhat or very important that the company they buy from is innovative. Savvy executives will consider this growing consumer need for innovation in their business model.
Recent lack of innovation examples are all around us. Companies like Blockbuster fell by the wayside to streaming services like Netflix. Toys R Us failed to compete with the growing emergence of internet sales and marketplaces like Amazon. Other companies, like Coca-Cola, are regularly releasing new, innovative products, even though many eventually fail. The ones that do stand the test of time have the potential to drive major revenue increases, so innovation is always worth the risk.
Craft Innovation with NEXT Studios
NEXT Studios is a venture studio of experienced entrepreneurs who are dedicated to helping other leaders and thinkers shape and grow their ideas through innovative practices. With programs for intrapreneurs and entrepreneurs, NEXT Studios offers a suite of services for corporations and lean services to optimize their chances of success. If you’re ready to learn more about how NEXT Studios can help you innovate, connect with us today.
As entrepreneurs, business owners, and innovators, we are connected to our customers now more than ever before. Since we live in a fast-paced world that is in constant flux, businesses have to adapt their innovations to remain flexible and relevant. Customers consume, demand, and interact with products—they want to be co-creators and they want value delivered to them continuously. This shift is happening in every industry, and it fundamentally changes how products need to be built and presented. So, how can we harness this connection to our customers and use it to constantly be innovative? The key is in Continuous Innovation—a process businesses need to adapt in order to stay relevant and current in their industry. Let’s dive deeper into the topic of continuous innovation to learn what it is and how to adapt to the mindset.
What is continuous innovation?
Continuous innovation is defined as the momentum of innovation that can continuously push a company forward. It’s the constant flow of innovative ideas, both large and small ones, that keep a company experimenting and adjusting their product to meet their customers’ needs. Coined by Leanstack, continuous innovation is the modern way successful companies grow and stay relevant.
The old way of building products used to work at a time when there were huge barriers to entry and few competitors. Even if you got the product completely wrong, you had time to course correct and get back on track. But fast forward to today, with the Internet, open source, and cloud computing, it has become cheaper and faster than ever to introduce new products which means there is a lot more competition than before—both from incumbents and new companies starting up all over the world.
According to the 2019 Global Entrepreneur Monitor (GEM) report, more than 100 million startups are launched every year all over the world, which is about three startups per second. It used to be that failing to deliver what customers wanted led to failed projects. But now, failing to deliver what customers want leads to total business failure.
What is the continuous innovation process?
The process of continuous innovation in business can be seen in these rules: outlearn your competitors, fall in love with problems instead of the product, tackle the risks first, build a fluid business model, run multiple tests, and finally, use customer transactions as a measure for progress. Let’s dive into each of these topics a bit deeper.
Outlearn Your Competition
The speed of learning is the new unfair advantage. When you outlearn your competition, you get to uncover what customers want first and then build products that matter, winning the innovation race. The important part is to be continuously learning. Winning the competition once gets you a great product launch, but keeping the innovation process ongoing is what keeps your business model growing.
Focus on a Business Model, not a Business Plan
Heavyweight, static business plans rarely work. They involve so much uncertainty and are projecting so far out into the future. But in the modern world where customer’s needs are in motion, it’s hard to actually know what’s true today, let alone what will stay true. When a startup is moving fast, there’s a lot that is unknown, which requires a more fluid, dynamic mode so entrepreneurs can pivot and change instead of sticking to a static plan.
A business model is a one-page version of the business plan that is a lighter way of getting an idea across. This allows you to launch without having to forecast numbers or ideas that become outdated as times move on. A business model is a snapshot of an idea of what a customer might want, or what might be a solution to a problem you’re solving.
The power in this kind of modeling at Next Studios is that we can quickly communicate an idea and then we can start the process of testing that idea.
Love the Problem, Not the Solution
Start with the customer problem before you develop the solution. The challenge isn’t building more products, it’s finding out exactly what to build. If you start with the solution, it’s like building a key without a door. Instead, flip the approach around and start with the problem. Not only does the process of innovation become easier, but you also build keys to doors that you can actually open.
Tackle the Riskiest Assumptions First
It’s generally a myth that entrepreneurs love taking risks. When building a complex technical product, the best-practice is first tackling the risks associated with the product, then working out the kinks of it quickly to protect the downside. Based on our work with entrepreneurs, most of the biggests risks today are not product risks, but the customer and market risks.
Test, Test, Test
The perfect plan is a myth. Since the early stages of an idea are often filled with unknowns and uncertainties. In the business world today, successful startups use a new approach—Model, Prioritize, Test. In this approach, we work with entrepreneurs and their dynamic model versus a static plan, then work to prioritize your riskiest assumptions, and then use a series of multiple, fast tests to refine your idea and business model.
Use Customer Transactions as the Measure for Progress
Progress used to be measured on outputs like meeting budgets, build velocity, and plan execution. But is executing a flawed plan that results in a product no one wants on time and on budget considered successful? Of course not.
Instead of focusing on outputs as a measurement of progress, focus on outcomes. Use customer traction as the measure of a successful business model. Customer traction is a much more reliable metric for progress than even revenue and profit. This is because revenue and profit are nearly non-existent during the early stages of an idea. Later, revenue and profit are trailing indicators that tell you something worked—but they don’t tell you why. When you use traction as the measure of progress, you can tie business model outcomes to specific causal activities that then allow you to repeat and scale the next great ideal.
Innovate continuously with NEXT Studios
NEXT Studios is a venture studio of experienced entrepreneurs who are dedicated to helping other leaders and thinkers shape and grow their ideas through innovative practices. With programs for intrapreneurs and entrepreneurs, we offer a suite of Lean services for corporations and entrepreneurs to optimize chances of continual success. If you’re ready to learn more about how NEXT Studios can help you innovate, connect with us today.
Building a successful business innovation lab balances creative freedom with quality management processes and analytics to generate ideas that improve a business’ future prospects. McKinsey reports that 84% of executives consider innovation an essential part of their future success. 80% believe their business model is at risk without it. And only 6% are satisfied with their current innovation performance.
Why do we need innovation labs to make innovation happen? Because there are many barriers to innovation within established organizations. In the 2015 BCG Innovation Survey, 32% of companies said selecting the right ideas to follow through on was a challenge. 25% said a lack of coordination was holding them back, and 22% said there simply weren’t enough good ideas.
With the right processes in place to succeed, an innovation lab can address all these challenges and improve the bottom line. Here are some strategies and insights to consider as you approach building an innovation lab.
What is an Innovation Lab?
A simple innovation lab definition is a unit or department at a business that is responsible for coming up with ideas that compliment or improve the parent company. As distinct entities within a company, innovation labs are a place where novel ideas can be expressed and grow. Innovation lab ideas should be rigorously examined and we recommend a lean startup framework to determine if the concepts are viable, desirable, and feasible. In this way, ideas for everything from new product or service lines to spin-out companies can be vetted and improved to ensure the best-quality innovations are the ones that earn time and investment from the business. Innovation lab types could be a digital innovation lab, product innovation lab, a disruptive service lab, or even a culture innovation lab.
How Do You Structure an Innovation Lab?
Innovation labs could be structured according to Lean Six Sigma processes. This collaborative approach has been honed over the last 50 years to help teams reduce process defects and waste while also providing a framework for continuous improvement to existing products. However, this approach can also be limited, because it does not address the notion of disruptive innovation. Sometimes, it isn’t existing products and services that need to be streamlined and improved, but the entire business model itself. When the old model won’t serve, old processes won’t either.
Many companies might think the innovation lab should be a creative free-for-all where all ideas are given equal weight and examination. But a flexible process is just as important to innovation as curiosity. The Lean Canvas and other lightweight tools are designed to reinvent business models themselves quickly and effectively.
Innovation labs aren’t just a place to come up with new ideas. They’re a place to learn how those ideas will gain traction with consumers and help you win out against the competition.
Why Do Innovation Labs Fail?
Innovation labs fail due to lack of metrics to measure success, lack of alignment with the parent business, and a lack of balance on the team within the innovation lab. Let’s examine each of these reasons in depth.
Lack of Success Metrics: When the success of the innovation lab isn’t measured, it’s being set up to fail from the start. The executives investing in the innovation lab expect to see improvements in the bottom line of the business. However, revenue is often a trailing indicator of success in new products and services. By the time profits are manifesting, the innovation is getting stale. Traction with customers must also be measured in real-time. Plus, how is learning from failure going to be supported and encouraged, or even measured as success in its own right? These are some of the questions that should be answered in advance, and the resulting metrics tracked over time to ensure the lab is succeeding.
Lack of Alignment with the Business: Defining success metrics is part of the process of aligning the innovation lab with the larger business, but the process doesn’t end there. It must also be determined how the best ideas will leave the lab and become part of the larger business. Is the goal to create innovations that are integrated with the existing business, or become their own spin-outs or departments? Additionally, the alignment with individual employees working in the lab must be considered. How will intrapreneurs be supported by colleagues outside the lab, if at all? How will they form and sustain relationships with prospective end-users and customers? These considerations will minimize friction between the business and the innovation lab as time goes on and ideas grow.
Lack of Balance on the Team: Lastly, an innovation lab requires a diverse team to succeed. This means a mix of industry experts, business experts, and innovators from inside and outside your organization. Internal stakeholders like long-term employees know the corporate structure and company values, while external innovators bring the fresh perspective and eagerness that ignite the spark. Working together, a well-balanced team will fan the flames. Without a balance of diverse perspectives, they will go down in flames instead.
NEXT Studios’ Innovation Lab Business Model Can Help You Succeed
NEXT Studios is seasoned at helping intrapreneurs leverage the advantages at their company to disrupt their respective industries. We can help you not only recognize the game-changing ideas that are already on the table, but also implement processes that help serially deliver incredible innovations. Whatever the goals of your innovation lab, we are here to support you in creating lasting competitive advantages. Contact us to ask questions and discuss what’s NEXT.
In the world of startups, there’s a common bias among investors towards teams of founders. While we can’t speak for every investor out there, it seems the common reason for this perspective comes down to skills; two founders bring twice as much experience and perspective to the table. This is such a pervasive bias that Inc.com was surprised when a study published by NYU and the Wharton School found that, in reality, a single founder has a much better chance of making it than a team. The study looked at over 3,500 businesses and found that, initial challenges in getting funding notwithstanding, the solopreneur is statistically more likely to build a business with staying power.
So, can a single person start a startup? Absolutely. The data puts solo founders in excellent company. To understand why, let’s take a look at the role founders play in establishing thriving businesses.
What is the job of a founder?
A founder’s primary role is to establish the vision for the startup, then put the pieces in place to make that vision a reality. In early days, that can mean wearing many hats. Many founders are de-facto CEOs, but that job isn’t always the same one; HubSpot acknowledges that the title of “founder” can eventually become passive; what makes a founder a CEO is the active work they do in building the business.
In a startup, then, where a solo founder is the CEO, they’re really a lot more than that. Building a profitable business around an idea requires some working knowledge of finance, management, marketing, sales, and operations… It can be a lot. And while many think of tech when they hear the word “startup,” the same is essentially true for founders in any industry; no matter what skills an entrepreneur brings to the table, there are going to be gaps. A team of founders might have one member focused on code and product development with another focused on financials and the business side of things, but that still leaves a lot of expertise that needs to be found somewhere else.
What is a solo founder, then? It’s someone who knows that they don’t want to be the smartest person in the room on every subject. That’s a strength that can make the difference between a successful business and one that goes nowhere.
What business can I do alone?
The short answer is you can do any business alone, if by “do” you mean start. But the long answer is no thriving business can truly be disruptive as a solo act. Tech startup founders become business leaders in a lot of different ways, but what unites them is the desire to change the way something is done for the better. Apps and other tech tools can do that with explosive results when the stars align, but sustainable growth requires a lot of work around understanding the market, adapting to customer needs, developing workable pricing models, and bringing a tech product to market in a way that gets attention.
To summarize the article, written by Gene Marks, no business is a one-person business. On one level, there just aren’t enough hours in the day for a solopreneur to make good money doing everything themselves. On another, it’s critical for a startup founder to embrace the notion that they’re going to be hiring help in some form or another, whether it’s through internal hires, vendors, or even SaaS solutions.
In other words: To unlock a startup’s potential, solo founders need the right team in every case.
Solo founders: Get ready for what comes NEXT
If you’re an individual with an idea for a tech startup and you are feeling overwhelmed at this point, you aren’t alone. The prospect of building that winning team of experts around your vision can be daunting if you’re approaching it from zero, but starting a solo business doesn’t mean going it alone.
NEXT Studios is a venture studio dedicated to supporting solo entrepreneurs and teams of founders alike with a proven process to take an idea and turn it into a business. It starts with helping entrepreneurs evaluate their vision—Does it solve a real need? Will people buy it? Can it generate enough revenue to sustain a business?—then gives them the resources they need to grow.
As Indiana’s first Benefits (B) Corporation venture studio, we’re dedicated to fostering the economic development of our state and its visionaries. That means helping solo founders get access to capital, but also to put that capital to work with the right team of experts to wear the many hats a startup needs. We believe in the power of individuals who are serious about changing the world, and it’s our job to help them prepare for whatever comes next.
You’re a curious entrepreneur with an idea. How can you start a business from scratch and turn your invention into an innovation? Innovation is about examining what others have left unexamined. It’s challenging the status quo, noticing trends that others are missing, and uncovering hidden customer desires.
There are many reasons for starting a new business from scratch. Freedom, learning new skills, and following your passion are just a few. To successfully build a startup from scratch, entrepreneurs need to have hustle, grit, and dedication to problems worth solving. At NEXT Studios, we follow a strategic process that can help entrepreneurs form compelling ideas, create a competitive advantage, and set them on a path to serial innovation with high returns. But first, let’s start with the basics.
Here are five steps to start a small business.
Step 1: Finding an idea
“How do I get an idea for a startup?” might be the first question entrepreneurs ask themselves. Here is the key: fall in love with the problem, not the solution. As an entrepreneur, you have to be passionate about the problem you are trying to solve.
Some of the greatest startups come from problems people didn’t even know they had. To invent an idea, consider what is possible. Before Microsoft and Apple, people were just fine with the analog way of working. The status quo was comfortable. When Steve Jobs and Bill Gates were crazy enough to conceive an image where every desk in every office would have a working computer, they stumbled across an idea that changed the world.
On a cold winter’s night in Paris in 2008, Gerrett Camp and Travis Kalanick couldn’t get a ride. That’s when they had the simple idea of requesting a ride from their phone. What began as just a thought turned into the global brand, UBER, focused on helping people move towards opportunities in the world.
Step 2: Make your new business official
Once a business model is set and initial funding is secure, there are a few legalities that need tending for your startup to be official. Here are a few requirements to start a business legally:
Select a business entity – The business entity is sometimes referred to as a business structure or legal entity, which refers to how a business is legally organized. There are four primary business entities: sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). There are also other business models to consider, such as a certified B corporation.
Register your business with your state – This gives you legal grounds to move forward using your brand’s name.
Pick up the right licenses and permits – Depending on your business, this can include food, liquor, health, or business licenses.
Get an EIN – This allows the IRS to track your transactions
Open a business bank account – Keeping your business and personal finances in separate bank and credit card accounts make it easier to track the business’s expenses.
Step 3: Write a business plan
One of the next steps to start a small business is to write a business plan. A good business plan acts as a roadmap for how you’ll structure, run, and grow your startup. Most business plans fall into one of two common categories: traditional or lean startup.
Lean Startup plan – Lean Canvas – This plan uses a standard structure and It focuses on summarizing only the most important points of the key elements of your plan. They can take as little as one hour to make and are typically only one page. They are ideal for founders to identify assumptions and risks. The plans are living documents. A great resource for Lean Canvas is leanstack.com. With these plans, some lenders and investors may ask for more information.
Traditional business plan – This plan is more common, uses a standard structure, and encourages you to go into detail in each section. It tends to require more work upfront and can be dozens of pages long. The challenge with this process is that the risks and assumptions are harder to spot and often the plans do not change over time. Lenders and investors commonly request this plan.
Step 4: Securing funding
Now that you have your business plan, you’re going to want to secure funding. Or you might ask yourself, “How do I start a startup with no money?”
Depending on the type of business, you don’t always need a lot of capital to get up and running. It’s true that to scale business you’re going to need some cash flow. Start by asking yourself what do you need to learn about the customers, the market and work to learn as much as you can for as little expense as possible. Find what is essential to your business and scour the internet for free resources. Whether it’s starting with a Facebook business page, designing your own marketing material on Canva, or trading your skills or resources with someone else in lieu of payment, there are limitless options.
When it’s time to look for more capital, there are many options open depending on what kind of business you are looking to build. Look into applying for a small business loan, small business grants, or local funding opportunities. Another option is to search for – and woo – potential investors. When approaching investors, keep in mind that the more you can do to begin building a vision of your business and demonstrate traction, the more seriously investors will consider investing. There are a myriad of ways to get that cash flow going. External investment can be the fuel to accelerate the growth of your business but is not the only way to grow, you may aspire to be a Unicorn, Camel or perhaps a Gazelle?
Step 5: Build Your Business
There is never a stopping point for entrepreneurs. When your startup has a foundation, you have to continue to grow and lay down the bricks. More next steps include obtaining business insurance, setting up an accounting system, developing a marketing plan, hiring employees, and building a customer base.
Here is an important element of entrepreneurship: if you love the problem you are solving,plan to pivot on your early idea of a solution. As you grow a fully formed corporation, challenges and obstacles will arise. See them as opportunities to learn, grow, and pivot to continue leading your business innovation to new heights.
Entrepreneurship is hard and lots of people get it wrong by repeating mistakes. NEXT Studios provides best practices, lessons learned, models, and direction to reduce the risk that your startup will fail and generate higher returns. We are the studio of entrepreneurs, for entrepreneurs, with entrepreneurs. Are you ready to get started? Find what’s NEXT and drop us a note here.
You have a great idea for an app or digital product. You are confident it will transform your target industry and improve the lives of end users. But what will it cost to get it off the ground?
Calculating tech startup costs is a process dependent on your assumptions. Unexamined assumptions can put your business on pause before it even gets a chance to launch. We often talk to entrepreneurs that have not engaged with potential customers to confirm that what they are planning on building is something that the customers even want. Assuming that you have validated your assumptions, you should have a pretty good idea of the Minimum Viable Product (MVP) you need to build and the specific functions it should provide. For non-technical founders, the number of functions in the MVP and the choice of the service provider will inform the total capital required to start a business. For technical founders we recommend sticking with a very small MVP—after all, your time has value!
We have supported many companies through the early stages of ideation all the way to successful investor pitches and fundraising. Now we want to share with you the insights we’ve learned about how to calculate realistic startup costs.
How Much Does It Cost to Start a Small Business?
On the surface, the cost to start a small business can be as little as a few thousand dollars. Before spending money on the subscription or purchase costs of app development platforms, web hosting, and marketing management platforms, we recommend spending resources learning from your customers. Plan on drinking a lot of coffee! Once you choose to develop the MVP based on customer feedback, the sticker price of these necessary tech tools isn’t representative of the full cost to use them. There is always a learning curve, and as the founder, you may have technical skills to bootstrap the MVP into existence all on your own. But what about the value of your time? It’s a lot of work to do alone, and you should plan to pay yourself at least some salary to keep a sufficient supply of ramen noodles and coffee flowing.
Generally, the practice is for founders to only take on expenses when they are absolutely necessary. But since that definition will be different for every startup, the costs of professional support in areas like sales, marketing, or quality assurance may also be part of your early expenses.
What Are Some Startup Costs for a Business In Tech?
Subscriptions to cloud services such as email, website, CRM, collaboration tools, rapid prototyping tools, AWS or Azure
Equipment like computers, software, smartphones, servers, and more.
Utilities like Internet and electricity
Office or Coworking Space including expenses to establish a home office.
Insurance like errors and omissions policies, cyber liability, and employment practices liability.
Market Research at multiple phases of development where you need to connect with and get feedback from your target audiences about your concept or product.
Advertising and Marketing including a website, digital content creation, pay-per-click advertising, print ads, professional organization memberships, and more.
Salaries for yourself and any vendors, independent contractors, or employees.
Accurately calculating the startup costs for your business allows you to request funding, attract investors, and get your product on the market. The US Small Business Association also provides a startup cost calculator worksheet you can use to estimate which expenses apply to you and which ones don’t. Silicon Valley Bank recommends estimating 18 months of expenses to get perspective on the total cost of your runway to launch.
How to Record Startup Expenses
Online bookkeeping platform Bench reports that two-thirds of founders use personal money to launch a startup. Whether you’re funding the venture yourself or have closed a pre-seed round with early investors, it’s to your benefit to record startup expenses. The IRS recognizes two categories of expenses:
Investigation Costs include everything from wages and salaries to rent to advertising and market research. This category generally includes all the expenses associated with investigating the market fit of your business and launching the enterprise.
Organizational Costs include the expenses to formally organize the business like incorporation fees, partnership filing fees, and legal or accounting fees.
Both these categories of costs are deductible, meaning you should record the expenses in a spreadsheet or tool like QuickBooks and keep track of the associated documentation for filing itemized deductions on your business taxes. Depending on the amount you spend, you may be able to deduct a portion of these expenses from your first year of business taxes or spread out the deductions over the next 15 years in a practice known as amortization.
There are also certain startup expenses that do not qualify to be deducted from business taxes. These include research or experimentation conducted before the business is legally formed, real estate taxes, costs of issuing stock, and the costs of transferring assets to the organization.
Get Support with Tech Startup Financials from NEXT Studios
NEXT Studios is a new type of venture studio established to help today’s entrepreneurs bring their ideas to market. This includes supporting founders at every step of the process from design thinking and prototyping to MVP development to releasing the product and pitching to investors. We want to help you take the next steps toward profitably launching your product or service—even if the next step is just the first step. Contact NEXT Studios to work with fellow entrepreneurs, launch your product, and move forward with confidence. We’re here for you.
Venture studio helps launch ideas into companies with accelerated NEXT UP program
INDIANAPOLIS, April 21, 2021 –NEXT Studios, a Midwest venture studio designed by entrepreneurs, for entrepreneurs, with entrepreneurs, announced today the launch of the NEXT UP program. The program is launching its inaugural cohort starting Monday, May 3, 2021 with women-led startups from around the Midwest chosen to take part.
Each month, a different community of underserved entrepreneurs will be invited to hone their ideas during a five-day “Discovery Week.” Those with a unique concept and clear identity will be invited to pitch for a potential investment from an affiliated local impact fund. Once accepted into the second phase of the program, an intense and focused six-month journey will accelerate the typical 12 to 18 month startup process. Pursuing their entrepreneurial dreams will become a full-time job as entrepreneurs work directly with mentors, experts and sponsoring institutions to refine and productize their businesses. A tailored group of services such as management, hiring, branding, finance, operations rapid prototyping and development expertise will help get products to market and generate that first dollar of revenue.
In collaboration with and support from the Central Indiana Community Foundation (CICF) who supports creating a community where everyone has an opportunity to thrive, the third and final phase of the NEXT UP program will provide entrepreneurs an opportunity to pitch for additional funding to officially launch their company.
“It’s an exciting time to be helping create an ecosystem of inclusive entrepreneurship,” said Joe Cudby, managing entrepreneur of NEXT Studios. “Entrepreneurship is hard, messy, complicated and NEXT Studios looks forward to using the cohort model to help actively think about the team element for driving company success and accelerating the lifecycle of startups from big ideas to get them to market faster.”
Four founding teams will be selected to take part in the inaugural “Discovery Week.” Founders seeking to apply for this or later cohorts can visit nextstudios.org/nextup/or email firstname.lastname@example.org. To learn more about NEXT Studios, please visit next-studios.org.
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About NEXT Studios
Founded in 2020, NEXT Studios is a venture studio that is a partnership of experienced entrepreneurs who help visionaries share their ideas, craft them through a repeatable process, and move them forward with capital and talent. The studio works with entrepreneurs across the state to move their ideas into products and their products into companies. The studio uses a proven process to reduce the risk for investors and encourage more local investors to get involved in our local innovation economy.
It is estimated by Enhance Ventures that there are now over 550 studios in operation around the world, having grown by 625% since 2013.
This growth may come from several factors:
Due to the rapid growth of large cloud-based platforms like Google, Amazon and Microsoft, there has been a reduction in the availability of venture capital for early-stage startups. Investors are increasingly wary of funding a startup which could be seen as a competitor to one of the platform companies. To the degree that VCs make earlier stage investments, the risk reduction provided by venture studios makes those startups more attractive.
Many of the bigger opportunities for startups come from machine learning, deep computing, and other technologies that are beyond the capabilities of first-time entrepreneurs. Solving these issues usually requires the deep experience that few startups can afford. Studios offer this expertise in a teamed approach with the startup founders, which allows the company to be more ambitious in its goals, which could drive larger returns.
The typical ten-year cycle for a startup that focused on the largest sale price of the company is not the ideal training ground to develop new entrepreneurs and seasoned teams. It also tends to result in a lack of diversity in investors and founders, because the only objective is the best return on the investment, so anything outside of the “tried and true” is perceived to add risk. Studios can be tailored to cater to different geographies, diversity in founders and objectives beyond the biggest “exit.”
What is the difference between venture studios and startup accelerators?
Venture studios are not the same as startup accelerators such as Y Combinator or Techstars. A typical accelerator may offer a 10-to-12-week program focused on ideation or productization in exchange for $10,000 to $100,000 in funding and an equity stake. The objective is to help the founder move their business along to the point where investors might be interested in funding the next stage. It is expected that most of the startups will fail, and so an accelerator becomes an effective way to “play the field” and invest a relatively small amount of money in many different startups at the same time, such that if just a handful are winners, they offset the losses for the majority that don’t succeed.
While it’s possible to succeed as a startup founder without the support of a venture studio, partnering with one reduces the risk of failure and can accelerate your ability to access venture capital and the resources you need to succeed.
The new engine of intentionality in the world of startups and innovation
Sometimes called “startup studios,” venture studios are organizations designed to create new startup companies. They do this either by generating new ideas for startups or by recruiting founders with ideas, and then they apply significant amounts of time and capital to the process of growing the startup successfully. At the heart of every venture studio lies a process, which generally has four steps (though each studio may give them slightly different names):
Ideation – the process of coming up with a new idea and “pressure testing” it with potential buyers through conversation and the sharing of prototypes
Productization – the process of developing the “minimum viable product,” or MVP, which is not the final version but is enough to share it with customers for feedback and continued development
Launch – the process of creating and initiating a go-to-market strategy, including sales, marketing and customer support
Scale – the process of building an organization around initial market success that will help it grow
Venture studios are often outgrowths of venture capital funds, as each stage of the process requires capital funding to pay for each activity. Depending on the depth of the involvement, the equity stake taken in the company can be quite high, as startups are risky and most fail. The involvement of a studio in the startup tends to reduce the risk for investors, as the process and the experience of the team can help to avoid common mistakes that would cause others to not succeed.
There are several different models for venture studios, but most of the differences center around how much of the company is owned by the studio as compared to the founders.
1st Co-founder studios are designed for founders with an idea but little to no expertise in how to start a company. Generally, the studio will take half of the equity in your company, leaving you with the other half, and then they will do practically everything else from validating the idea through development of the product through the launch of the product into the marketplace. Usually, the founder will move into the role of CEO at the launch stage, and the company then operates like other new startups.
2nd Co-founder studios are designed for startups that are further along in the process. Often, they have a minimum viable product and some degree of customer interest but are struggling with a go-to-market strategy and the funding required to launch the product and scale a team. This is frequently seen with engineering-oriented founders who are experienced with a technology and have created the basic product but lack the business skill and experience to create a company around it. More of the equity is held by the founder in this model – typically 65% with 35% to the studio, and the role of the studio is to supplement the founder’s team with additional resources working in concert to move the company forward.
3rd Co-founder studios are designed for startups that have a solid team but have certain “holes” they need filled. A very typical need is for someone to manage the product or technology, or perhaps to setup and manage a sales team or a marketing team. In this model the studio operates like mercenaries brought in for specific purposes to complete the leadership picture. Here the smallest amount of equity goes to the studio – somewhere between 10% and 25% depending on how many needs must be met.
Of course, all of these are guidelines: there is an infinite range of models for studios across the spectrum.
Why do founders choose to partner with venture studios?
The core value proposition of a venture studio is to access skills, expertise and a network beyond the founding team. These resources reduce risk and enhance outcomes by equipping a startup with resources they usually cannot afford early on:
Skilled teams employed by the venture studio or through their partner network amplify the ability of the startup to execute and reduce the time and expense of rework based on mistakes and inexperience.
Methods and tools created and offered by the studio to portfolio companies help obtain results more quickly as they are the result of distilling experience and failures into process.
The willingness of venture studios to “roll up their sleeves” and provide hands-on guidance both reduces risk and provides accelerated mentorship and training to founders.
Essentially venture studios absolve you as founder from having to figure out how to attract or get investors to fund your business or how to convince someone to invest in your product. You get to focus fully on leveraging the skills, expertise and network of the studio to build your startup.
Can you generate more than a financial return? All successful things require both selfish and altruistic motivations. If you’re only altruistic, you won’t have the stamina to succeed, but if you’re only selfish, no one will want to work with you. Successful companies must generate financial returns, but they will not be sustainable over the long term unless they also generate returns that impact their community in positive ways.
As part of our series about “5 Things I Need To See Before Making A VC Investment” I had the pleasure of interviewing John McDonald. He has over twenty years of experience as an entrepreneur, most recently as the founder and CEO of ClearObject, a leading Internet of Things company which successfully exited to private equity in 2019, and at IBM, where he led technical sales for their software development tools brand in New York.
He is a founder and board member of the Indiana Technology & Innovation Association, chairman of the Technology & Innovation Committee of the Indiana Chamber of Commerce, a board member of TechPoint, of the Indianapolis Chamber of Commerce and of the Indiana India Business Council. He is also a member of the Social Enterprise Alliance, the advisory council for Hamilton Southeastern Schools, the Workforce Alignment council of Ivy Tech Community College, and the Dean’s Council for the Purdue Polytechnic and President’s Club at Purdue University.
He graduated from Lawrence North High School in Indianapolis, and studied business management, computer science, and meteorology before receiving degrees in Software Development and Computer Information Technology from Purdue University at West Lafayette, where he was also the Student Body Vice President and Treasurer. He was named Purdue’s Distinguished Technology Alumnus in 2007 and Lawrence North’s Distinguished Alumnus in 2017.
Thank you so much for joining us in this interview series! Before we dig in, our readers would like to get to know you a bit. Can you please share with us the “backstory” behind what brought you to this specific career path?
While I was the CEO of my previous company, I never turned down a meeting request from a startup entrepreneur, because it’s a really hard job, and if there was any mistake I made that I could help you avoid I would be all too happy to tell you about it. But there was a distinct pattern to these conversations. Most of the time they had thought up some idea, dreamed up 20 markets they could sell it into instead of focusing on just one, and then leaned on some friends to build some sort of prototype. They then showed it to some potential buyers who told them all the things that needed to change before they’d buy, but they had no money to make those changes, and their wives were telling them to drop it all and get real jobs. What they were looking for was an investor to write them a check so they could keep working on the project and were frustrated that no one was writing them that check. That’s because no investor will ever write them that check, because they really have nothing to invest in except an idea and some degree of determination. I got to thinking about how useful it would be if there was an “agency” to help these startups succeed, and when I started sharing that idea with some friends, we all agreed that we should just go create it.
Is there a particular book that made a significant impact on you? Can you share a story or explain why it resonated with you so much?
“Atlas Shrugged” by Ayn Rand. If you’ve read it then you know why, and if not, do a web search on it and you’ll find out why you should. Atlas is the Greek god who mythologically holds up the world — but what if Atlas shrugged off his duties? In the novel, Ayn asserts there is a small group of “prime movers” who drive the world forward, and her stated goal for writing the novel was “to show how desperately the world needs prime movers and how viciously it treats them” and to portray “what happens to the world without them.” I believe that entrepreneurs are prime movers, as our role is to create things where there is nothing, putting people and resources to work and creating prosperity in the process, and I believe that together with fellow entrepreneurs, we have created a venture studio to be a force multiplier for entrepreneurship. I also admire that Ayn is a strong female writing about strong female characters in a time where that was very, very rare.
Do you have a favorite “Life Lesson Quote”? Do you have a story about how that was relevant in your life or your work?
“When all was said and done, more was said than done.” Ideas are free — everyone has them. What differentiates an idea from a product or company is the intentionality to act on that idea right now. Actions, not words, make companies.
How do you define “Leadership”? Can you explain what you mean or give an example?
My definition of leadership is encapsulated in the question, “Is anyone following you?” If not, you’re just a guy out for a walk. People frequently mistake management for leadership, but if you look at the root words “manage” and “lead,” you’ll find that they are practically opposites. “Manage” implies corralling and controlling, while “lead” implies bold new directions and striking out of the safe into the unknown. Some of the best leaders I’ve known are terrible managers — they can barely manage their own calendar let alone other people — but they have a way of inspiring people to work with them in spite of the fact that those people don’t report to them.
How have you used your success to bring goodness to the world?
I am no judge of that. I have certainly tried.
Ok, thank you for that. Let’s now jump to the main part of our discussion. The United States is currently facing a very important self-reckoning about race, diversity, equality and inclusion. This is of course a huge topic. But briefly, can you share a few things that need to be done on a broader societal level to expand VC opportunities for women, minorities, and people of color?
First we have to study where that problem comes from. Venture capital is essentially legal, organized gambling. You are making a bet on a team and their ability to execute on an idea. As such, the industry has developed ever-increasingly sophisticated ways of analysis aimed at reducing the risk of the bet in order to get that small edge. Dreadfully this has resulted in a tendency to place bets on known winners — serial entrepreneurs who have “done it before” and can hopefully “do it again.” As such, the vast majority of venture capital is plowed back into the same ecosystems of people who are predominantly white males, because those ecosystems have been made up of white males from the start, all with the intention (and excuse) of reducing risk and getting better returns for investors. But this inbreeding is starting to have a predictable and now numerically demonstrable result: overfunded teams that lack diversity and perform worse than capital efficient diverse teams. Smart venture capital knows this, but it’s hard to see past Sand Hill Road in Silicon Valley when it’s all you’ve ever known. The best thing we can do is elevate the great diverse founders and teams above the noise so they are visible to the investors who understand that they are better bets, and celebrate those who overcome bias and cut the check.
Can you share a story with us about your most successful Angel or VC investment? What was its lesson?
So, there were these two kids who went to school at Indiana State and started a business selling all kinds of French fries out of a food truck they outfitted, mostly at football games and the like. High turnover for labor, and they found themselves consuming too much time doing screening interviews, so they turned to technology to solve the problem. They wired up a cloud-based service where they could post up screening interview questions, and have the cloud call any candidates based on scanning for their phone numbers on submitted resumes and read them the questions. The recorded questions were then transcribed and sent back to them in an email. Brilliant. Also removed all the bias from the job interview process. Did I mention that they are Black, and that Indiana State is in one of the poorest counties in the State? Great ideas and great entrepreneurs come from everywhere, and if you’re only looking at white male founders in big cities on the coasts, you are going to miss some great opportunities.
Can you share a story of an Angel or VC funding failure of yours? What was its lesson?
A friend of mine was sick with cancer and was in the hospital over the new year’s holiday. As we were talking, a woman in brown scrubs came into the room and used a hand-held device to scan a bar code on a machine, and then walked out. I asked him what that was all about, and he said, “I don’t know, but the brown scrubs care about that machine, and someone in yellow scrubs seems to care about that one.” We realized that what they were doing was manual asset tracking — trying to keep tabs on where these machines were. Can you imagine a more expensive way to do that? So one of our founders had a similar experience and laid out a bold vision for how he could use things already in the room, like the television or the lights, as asset trackers so that no one would need to go around with handheld devices anymore. Really great idea, very much needed. But, on the way to solving that problem, he kept seeing other problems and other things he could solve. The result has been many months of no progress, because there was no clear, distinct focus around a single problem that could be solved with a tech startup. Focus is truly the most important thing to have.
Can you share a story with us about a problem that one of your portfolio companies encountered and how you helped to correct the problem? We’d love to hear the details and what its lesson was.
We met a founder who spent his whole career as a technician who monitors systems in the operating room for life support, mainly for procedures like open-heart surgery. He had spent many years and hundreds of thousands of dollars on a very sophisticated system to track all of the data from these systems, partially to have one single control panel for all of them, but mostly to record a “ticker tape” of data for the purposes of proving that all of the systems worked well during the procedure and that he didn’t make any mistakes that caused any damage to occur. We asked him how many of these systems he had sold over the years. Answer? Not one. Incredulous, we inquired as to what the reaction was to his product when he shared it with the people in his industry doing the same work. He enthusiastically relayed their interest in having such a system, but also that they had no intention of buying one, because they expected their hospitals to buy the equipment for them. After a very long pause, I said, “You have spent a fortune in time and money developing features for your user, but not your buyer.” After another long pause, we asked him if there was anyone else in the hospital who might be interested in that data, which elicited another enthusiastic explanation of who and why might want to have the information for insurance, for liability, for patient outcomes, for Medicare — all sorts of reasons. We then explained that it’s a common mistake for startups to build features for users, but if the user isn’t the buyer, it’s almost always a waste of time and money. If it’s a B2B play, the buyer is almost never the user. Only in B2C is the buyer more likely to be the user, but then again, not always.
Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?
Honestly, we’ve never turned down a company yet that we’ve regretted, because we’re grown in our discipline regarding the things we need to see. Yes, some have gone on to succeed without our help, but that’s OK: we look at our relationships as partnerships, and that means we have to bring something to the table that the other party doesn’t have. We need to make each other better. Otherwise you end up with what I like to call “Barney” relationships (after the annoying purple dinosaur kid’s show), who’s title song goes, “I love you! You love me! We’re a happy family!” But then nothing ever happens of consequence.
Super. Here is the main question of this interview. What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.
1) Do you have ears? Entrepreneurs need to build up walls high enough to keep out the naysayers, but not so high that you lock out all criticism, because some of them might be right. If there is a feedback loop from your own mouth to your own ear, you’re destined to only learn from your own mistakes. One guy we turned away because he built a technology that failed to launch because he didn’t research the market to understand what they needed. He then launched the same technology again in a different product form (which also failed, for the same reason). Then he came back to the table with the same technology in yet another product form. He was failing repeatedly as he repeatedly failed to listen to his own potential customers.
2) What is your protectable market? You can ask this question many ways, like “what is your secret sauce” or “what is your moat” or “what do you uniquely do differently,” but it all is really about understanding the things you could do to slow down a potential competitor and give you more time to execute. Our base assumption is that other people have the same idea you have, maybe lots of people, but what helps you stand out from them? We talked with one company who was really having trouble with this until we helped them see that their protectable market was locked inside of their own heads: they had so much insider knowledge in the industry they were in that no competitor could ever touch them in their ability to read the market and execute faster.
3) How are you going to use our money? We all know you’re going to need more. What we want to see is how you are going to use this money to get you to a place where you can successfully compete for more. It’s something like a landing on a staircase: you’re not to the top yet, but you can take a breath and prepare for the next climb. Use of funds is one of the simplest things to get right, and yet it’s usually too simple. For example, we had one company assert they needed $1M for sales and marketing until we pointed out that nothing rolls up to exactly $1M and that they didn’t even have a product developed, so there was nothing to sell or market yet.
4) Who is on your team? And by team, we don’t just mean the leadership and employees. What we really want to see is all the people who have advised you formally or informally, because we’re trying to understand who is implicitly vouching for your ability to execute. It’s unlikely that we know you or of your abilities, but your advisors do, and if we know any of them, you’re essentially borrowing their credibility to bolster your own. We looked at a company that had the typical 2–3 pictures of employees on their team chart in their presentation, and only through dialog did we learn that they were being advised by several military experts who had helped them land a company-making lucrative contract with the Department of Defense. That’s a game changer!
5) Can you generate more than a financial return? All successful things require both selfish and altruistic motivations. If you’re only altruistic, you won’t have the stamina to succeed, but if you’re only selfish, no one will want to work with you. Successful companies must generate financial returns, but they will not be sustainable over the long term unless they also generate returns that impact their community in positive ways.
You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. 🙂
All gifts come from God. When you understand that, your only natural reaction is to want to give back in some way. But we are so, so, poor in society at helping people unlock and give of their gifts. Our world is crawling with people to help manage your money or manage your health or manage your time — why is it not crawling with people to help you manage your God-given gifts? What would happen if everyone on the planet knew what their gifts were and had access to the most efficient vehicle for applying them in service of others? The free market economy has come closest to this, but it still has challenges in regard to gifts that aren’t easily monetized or in places in the world where the free market doesn’t exist.
We are very blessed that some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this. 🙂
Any of the wealthy business people focused now on giving away their fortunes for good. Impact investing is the best idea ever in philanthropy and for good reason: instead of giving away the money (which is a one-way street), they are venture funds that use philanthropic dollars to invest in companies and founders that are making an impact in their community and in our world. Any returns are reinvested over and over again as an evergreen donation, which means they can be used again and again for good. I want to understand why they wouldn’t immediately allocate their resources using this method, which could be a game changer both in creating new approaches to old problems, but also in seeing that those resources live on beyond them.
This was really meaningful! Thank you so much for your time.