When launching a startup, what you are really doing is transforming inspiration for innovation into a profitable product or service. It takes more than just positive thinking. Ideas are a dime a dozen; the successful startup differentiates itself in execution, and this ultimately comes down to the numbers and profitability. I have learned that there are three key numbers that every would-be entrepreneur needs to to know before launching a start up.
I built my independent wealth management firm, LexION Capital, from the ground up. I was inspired to innovate in the realm of investment services by my experience helping my own mother. While I was in college, my father became very ill and fell into a coma. My mother suddenly and unexpectedly became responsible for the family’s finances. I searched for an investment professional who I felt confident would give my mother honest and ethical investment advice who would both respect her intelligence and meet her where she was to increase her understanding of the financial world. I could not find one. So, once I obtained my education and learned the investment industry from the inside, I built a wealth management firm that continually strives to be good enough for my mom.
As a financial advisor myself, I work with a number of clients who are business owners themselves. I have seen plenty of successful startups, and more than a few failed ones.
Your burn rate
No business is profitable from day one. Some will take months, or even years to become profitable. Yet, the right business is worth the long run-up to profitability. The burn rate is how much cash a new business will spend in its first months and years of operation. The expenses will include overhead, for example, office space, equipment, technology licenses, and utilities. They will also include salaries, which should include a salary for the founder herself.
With a proper business plan, an entrepreneur can have the security of knowing their startup capital should see the business through to profitability.
The length of your runway
Your initial business plan should always include a runway. A start-up’s runway consists of the number of months or years that it can operate at the calculated burn rate, which is dependent upon the amount of capital that can be raised. If your business hasn’t taken off by the time you reach the end of the runway, you don’t keep driving. When you calculate your burn rate and runway remember that this is not the time for unrealistically positive thinking. Your business plan should be realistic or it’s not worth the paper it’s printed on.
When I started LexION Capital, my runway was three years. If LexION had not been successful within that time frame, my plan had been to re-enter the corporate workforce. I knew it was the right time to quit my day job when I had a long enough runway that I could take off and not crash.
The number of clients in your best-case scenario
You have a projection and a target for your launch, your first quarter of business, your first year. As part of calculating your runway, you’ve also considered what will happen if you fall short of that goal and how long you would then have to get up to speed. But it is also important for an entrepreneur to have a best-case action plan.
When I opened my doors for business at LexION Capital, by the end of the first day I had more clients than I expected for the entire first quarter. This success became what I can only call a reverse curse, as there was no way that I could adequately serve any more clients at the extremely high standard I was committed to. So, LexION shut its doors temporarily to additional new clients while I expanded and staffed up. It was a whirlwind lesson in strategic growth planning, one that every entrepreneur would do well to prepare for in advance. Your business plan should address what you will do if business ramps up more quickly than you expect. In this section of the plan you don’t need to be afraid of overestimating your potential. Dream big, and then dream bigger. Will your company be ready for the best-case scenario given its current size? If not, what will you need to do so that you are equipped to handle that additional business?