In broad terms this blog is intended to discuss all things Business related. Primarily online businesses. There is a broad range of topics under the business umbrella; however, when narrowing each topic and relating each to be relevant to online businesses it becomes less daunting. As a kid I loved to program computers and eventually received a computer science degree, always programming of course. Next I had a desire to learn all I could about the creation of companies and businesses. I obtained a law degree (as opposed to an MBA) and while focused on intellectual property and computer law I learned all I could about the creation and legal issues around companies (creation, stock, etc.). I have created this site with the focus of online business and hope you find it helpful. Here are some of the broad topics and recent relevant posts.
Starting a Business
Let’s assume you have a business idea. Now you need to determine what type of entity you would like. You could just start a business without doing anything. In other words provide a product or service, take a cash or check and put the money in your checking account. However there are many reasons why that is not a good idea, first and foremost the issue of liability. If you do not create a wall, so to speak, between your own personal finances and your buisness than you are open to legal issues. You are also leaving yourself open to personal financial losses if you pledge personal property as collateral for loans. Whether legal issues or collateral issues, if problems arise your own personal assets could be tapped. You do not want that. Therefore you create an entity, known as your business.
Think of it this way, start with two sheets of paper. On one sheet write your name and list your assets, such as a checking account, car, home, and anything else you may have. On a second sheet write your new companies name, and a checking account and anything else it may have. Keep those two sheets of paper separate and as you create your business make sure you put all the assets, such as a domain name, website, checking account and other items, on the business piece of paper.
To learn more about what type of entity to choose read the incorporation tutorial.
Business plans vary in type and while businesses can change over time it is a good exercise to write down a basic plan. If for no other reason than to help you think through your new business. I would suggest you search for sample business plans to get an idea of their organization.
You may want to create a financial business model for yourself or to be used as you look for potential investment. A good financial business model serves many purposes. Here are the basics of what I like to put in a financial business model shown with multiple spreadsheets linked to one another.
- A three year plan with projections, with monthly detail
- A quarterly summary of the projections
- A yearly summary of the projections
- Actuals – A column for each month which is blank and used for your ‘Actuals’ as time progresses, in other words fill in each months expenses, revenue, growth etc. with the actual results you obtained as the month passes
- Expenses (expenses include everything such as employees, rent, travel, legal costs, accounting costs, marketing etc.)
- Revenue (how are you going to make money, and when)
- Growth Estimates of Key Variables – to adequately model the business everything will be tied together. As an example you may have a website and you project a monthly number of visitors based on how much you spend each month in marketing. You then show that a percentage of those visitors will purchase products from you at an average order amount. Next month you have additional visitors again and possibly a percentage of repeat visitors from the prior month. Based on the visitor and sales amounts you may need to hire certain positions such as fulfillment or customer service. All of this items need to be modeled showing your growth over time.
- Assumption Variables – having one spreadsheet that allows you to change the value of your various assumptions is extremely helpful. For example you may have a potential investor say “I see you spend $20,000 a month on marketing, what if you double it to $40,000”. By changing the monthly marketing variable your model should update and change the website traffic, number of purchasers, repeat purchasers, related expenses and show when you reach profitability or other milestones.
- Milestones – you can extract milestones from the model, for example you may decide after a certain amount of web traffic that you need to obtain your own rack within a hosting facility and that would entail a large monthly expense. Or my favorite milestone, which is the month you hit profitability 😉
From this exercise you will know what are the key metrics your business needs to watch, and your milestones. If your sales are lower or higher, or website traffic lower or higher, than you may need to increase/decrease customer service, IT staff, number of servers, you get the idea. If you report to a board this is an excellent tool to keep them updated by showing what was expected, what was achieved, and the business decisions you are making based on that information.
An online business needs an online presence. Start with a domain name, then create your website, consider your e-commerce needs, how you will accept payments, how to provide customer service, etc.
The first concern is a domain name. There are multiple extensions when you register a domain, such as .com, .net, .org and many others. Most individuals choose the .com as it is the most common. However it depends on how visitors will find your site. Regardless of what extension you choose, it is a good idea to also obtain the other extensions so you have as many as you can get. This will keep competitors from using your name with a different extension and stealing potential customers. At the same time you are looking for a domain name you should also check to assure someone is not using it as a trademark. You can search the U.S. PTO trademark database. I suggest you consult an attorney before deciding on a company name, website name, domain, and the potential trademark implications.
Most domain registration and website hosting services will also provide the ability to secure your site (SSL Certificates), provide e-commerce (shopping carts) and other business related services. There are payment tools out there such as the ever popular PayPal which make it easy for your customers to pay you and easy for you to accept multiple forms of payment with ease. There is a fee of course but you can be up and running very quickly.
When it comes to marketing there is a lot to cover. There are many articles on this site relating to online marketing. There is of course online advertising, whether it be to purchase display advertising (banners), contextual (search engine ads), interstitials, video ads, and more. Many ways exist to pay for advertising, then hope individuals view the ads and act on them. There are multiple ways to pay for the advertising, whether it be per click, per display, upon conversion, or other methods.
Do you need to raise capital? That is the first thing to determine, maybe you can start your business and never have a need for investment. Or possibly you can run the business for a while without the need for capital and raise money in the future. By growing your business before you raise capital may make the process of obtaining investment easier as you have hit milestones and proved your model. Also the investor would have less risk and potentially ask for less ownership of your business.
Loans vs. Venture Capital
If you decide you must raise capital, in other words you need money, there are basically two choices. You can obtain a loan however a new business can typically not obtain a loan if it does not have a credit history. Also be careful with signing the loan personally, if the business fails you and your assets are on the hook. Occasionally you can obtain a loan with terms such as allowing the individual or bank to convert the loan to stock, or favorable terms that allow you to wait a year or so before beginning to pay back, or interest only for a certain period of time, terms can be very creative.
When it comes to raising venture capital the main benefit is the fact that the investor is obtaining stock or another type of ownership. If the company fails you have not risked your personal assets, of course always consult an attorney (my disclaimer). Why would an investor want to risk their money, why not just loan it to you and make a guaranteed return? With stock the investor owns a piece of the company and when sold that piece may be worth more than when they first invested, or they may be able to sell their piece for more, either way they make money. So the risk of losing it all may be greater however the return could also be much greater.
Sell it, Keep it Private, Make it Public?
You do not need to make this decision when you first start your company. However you should think about it as you may make different decisions based on the answer. If you decide to keep it private you may not want to raise capital or have any owners other than yourself. If you are going to potentially take it public you must learn about all the compliance issues and be sure you start early on preparing your company for a potential public debut. If you believe you may sell it then you need to determine how to value it and at what point does your company become attractive to potential buyers. By thinking ahead you can make better decisions now and guide your company to the outcome you desire. If you want to eventually sell your company you need to understand valuations.
Valuations can depend on multiple factors which are usually determined by the type of business. If the business has revenue than there can be a multiple of revenue, either gross or net. In other words someone may pay 5x Revenue or 10x Revenue. The multiple will depend on other businesses in the same industry, your current growth trajectory and other factors. Some businesses may be valued on the number of customers they have, or registered users, players of games etc. Online business is big business. In August 2011, Network Solutions sold for $560 Million, and a year before that Register.com sold for $135 Million, while another company in the same industry named GoDaddy sold for $2.25 Billion. Obviously the valuations can depend on the company itself as those three are in the same industry with very different sale prices. LinkedIn is another online company, which is public, and valued at $10 Billion (in August 2011). Public companies are easier to value as you simply multiply total shares by the share price.