By this point, you should have a wealth of information about your target audience, the problem you’re solving, and how your solution resonates with your target audience. Now is when all of that information comes together to help you determine whether the ingredients are there to turn your idea into a successful business.
In the first two stages, you identified your MVP, or minimum viable product. You should be very clear about what your customers need and want to get value on launch day from all of your customers and product validation interviews. Now is the time to put together a plan for how long it will take to build your product or service and get it into the marketplace to start generating revenue.
A good timeline for tech startup entrepreneurs will include some reasonable contingency periods so that if something comes up you didn’t anticipate (and it WILL), you can absorb the changes or snags into the timeframe you’ve already laid out. The time-to-market will also be important in determining how long it will take to start making money and to become profitable, and how much money you’ll need to sustain your business to profitability.
Remember to include time for things like:
- Software/app development
- Quality testing
- Bug fixing
- Deployments and environment work
- Alpha- and beta-testing with users
- Hardware manufacturing timelines and supply chain
- Advertising, SEO and marketing strategy timelines
- Earned media and PR lags
If you’re building a physical product, like a piece of hardware or IoT (Internet of Things) device, you’ll need to consult with hardware and manufacturing experts to figure out how long the production of your product will take in the size batches you need to order for your first production launch.
Every tech startup also needs to take into account the planned launch date and work backwards from there for your marketing and advertising plan execution. Remember, building domain authority for SEO and building up a body of content to instill trust and show your expertise to potential customers doesn’t happen overnight. It takes time, so plan for that time.
Build a pro forma
You should also have determined by this point what you can charge for your product(s) and/or service(s), and you should now be able to put together a pro forma. The pro forma outlines all of your expenses and compares that to your expected income based on acquisition of customers and market share over time. When all of this data is put together, you should be able to see exactly how much money it will take to get to profitability, and you should be able to see how much money you’ll need along the way and when you’ll need it.
You should get as detailed as you possibly can in building your pro forma. When we put together a pro forma, we do it month-by-month for 3-5 years at a time. We put the income lines at the top, and break them down by source. For example, do you have customers paying you a monthly fee? Do you have advertising income? Are there other sources of income that you are predicting in your valuation? All of these should go at the top.
Below that are the expenses. You should think about all expenses across all categories when doing this exercise. Expense items to consider include:
- Office space: rent, utilities, Internet and phones (equipment and service)
- Furniture and office, bathroom, and breakroom supplies
- Staffing: salaries, health insurance, and the employer portion of taxes you need to cover
- Computers and other hardware or equipment for your people
- Functional knowledge areas: UX/graphic design, development, product management, office management and administration, finance and procurement, HR
- Will you use contractors for anything?
- Operational costs, including hosting, software licenses, subscriptions, tools, or other products/services people will need to do their jobs
- Legal and account fees, business insurance (like Errors & Omissions, Directors & Operators, General Liability, Cyberliabilty, etc)
- Collection, bank, and credit card processing fees
- Travel expenses
Pro tip: You don’t have to be a finance geek, but if you’re not then consider hiring (or bribing) one to help you. A sensitivity analysis is an easy thing to put together, as well as customer acquisition costs and lifetime value of your customers, but to get them right you need enough knowledge to be able to plug the right algorithms into your spreadsheet. Do this piece right, and it’ll pay off in spades later.
Marketing and advertising spend
This expense gets a category all on its own because you MUST spend money on marketing and advertising. You cannot rely on the “build it and they will come” strategy for getting customers to buy your product or service. If you did your work correctly in Stage 2 (link to previous post), then you should be able to nail down exactly who your ideal customers are, and any good marketing firm will know how to find and get in front of those people.
Marketing expenses include things like advertising (AdWords, social media ads, TV, radio, etc), earned media and public relations (getting spots on local news, TV, radio or other publications for free), social media management and contract strategy and creation, SEO, and any events or networking opportunities designed to bring new customers into your product or service offering.
YOU CANNOT SKIMP HERE. If you aren’t spending enough money, you won’t hit your goals for customer acquisition and you’ll run out of money. It’s as simple as that. So don’t skip the research about the market size and reasonable acquisition targets in your pro forma, and don’t skimp on your marketing and advertising budget.
Once your pro forma is done (including your marketing spend!), you will be able to see very clearly how much money it is going to take to get to profitability. If it takes much more than 3-5 years of working on your idea to get profitable, you need to seriously consider whether your idea is really viable as a business. Investors don’t like their money to be out there for more than 5-7 years, and it’s difficult to find a buyer for a business where the model doesn’t show a good profit.
Also consider whether the amount of money you’ll need to get to profitability can legitimately be recouped. If you’re building a SaaS-based business that forecasts $5M in annual revenue by year 4, and it takes less than $1M to get to that, that’s a very attractive investment. But if you’re spending $5M to get to a business that can’t easily or realistically generate more than $500k in annual revenue, no matter how long it’s in business, that’s a MUCH harder sell, and you’ll end up giving away most (if not all) of your company to get that money. And actually there’s no investor who’d even take that deal, as far as I’m aware.
ROI (Return on Investment)
ROI tells an investor how long it will take them to see a return on the money they give you to build your business. If you get to profitability by year 4, and you’re planning on selling in year 7, then your investors will know they need to hang tight for up to 7 years before they see a return. The type of investment vehicle(s) you engage with will determine what your investors’ level of expectations for return should be.
Which brings us to risk. Ultimately any go-no-go decision is made by looking at all of the items listed above and deciding whether the risk is worth the reward. If everything about the idea is really awesome, but the business model and revenue potential suck, there’s likely no business to be had here.
Throughout this analysis process, you should ask yourself the hard questions and be as honest as you possibly can about your personality as it relates to how you execute on your idea. Are you prepared to spend the time and money to get this idea to market? Are you prepared to spend time and money on customer acquisition once you are in the market? Do you have the patience and tenacity to keep going, no matter what? Can you, and are you willing to, put all of your time and energy (and possibly a fair bit of your own money) into bringing your idea into the world?
There are a few exceptions, but in general every company that’s done well in the world has done so because there was someone being the champion and never giving up on the idea. If that’s you, and if everything else lines up and makes sense, then you just might have a winner!
Get more support with the Precursa platform
You don’t have to wonder or worry anymore when you want to turn your tech idea into a viable business. The Precursa platform helps you navigate the challenges and shows you the entrepreneurial roadmap to success as you move from idea to MVP launch. With our unique AI and ML-driven Precursa score, you can track your progress, compare your ideas to other startups, and have confidence that your idea has been tested and is ready for the next steps on the journey.