Self employment...Advice Please!

[Corporate666]

Agreed, anyone that talks about a three year plan is wasting your time. For example, I have no idea why investor types seem to value a three year plan, nobody really knows how successful, or otherwise, something is going to be.

If they want to see a return on their investment, then they'll want to be sure that getting a return isn't going to be contingent on extraordinary good fortune. They want to know that, given realistic assumptions about a business's likely income and outgoings, it can make a profit.

Nobody expects a new business to accurately follow the forecast, especially if it's in the early stages with no trading history and regular customers. It would be foolish, though, to invest in a company which can't possibly make a reasonable profit unless things happen to go exceptionally well for it. Drawing up a business plan is supposed to highlight whether or not this is the case.

While I understand what you're saying, my problem with it is that any figures would be complete conjecture, they're completely made up finger in the air, so what's the point? How can you possibly present realistic figures particularly as a start up?

What you could do is say that, if we sell 1k widgets it would look like this, if we sell 100k it would look like this, if we sell nothing we'll lose $x. But that's not how they work, they take a single set of figures based on a (typically optimistic) assumption with zero foundation.

If the figures in the business plan are complete conjecture, then the person writing it didn't do their job.

You can't necessarily predict sales with a high level of accuracy, but you can make reasonable predictions based on market research.  Research will also tell you reasonable growth rates for a new company and what the market is doing (growing, stagnant, shrinking, etc). 

A potential investor will also be doing their due diligence, so the numbers in the plan better be in line with the numbers an investor comes up with during DD, or they are going to know the plan writer is just talking out of their ass.

[Corporate666]

While I understand what you're saying, my problem with it is that any figures would be complete conjecture, they're completely made up finger in the air, so what's the point? How can you possibly present realistic figures particularly as a start up?

You can't. It's always pie-in-the-sky.
That's why investors these days, for hardware in particular, want to see you do a crowd funding campaign first. They use that as a real-world metric of how much demand there is for the idea.
Gone are the days of getting a business loan to start a business, you just start the business. Either boot strap your idea, or crowd fund your idea. Of course you can fund it yourself with debt by say mortgaging your house, but you'd be a fool to do so.
Smart players have always boot-strapped small manageable product ideas, because:
a) you can't get turned down by anyone
b) you can't lose any big sum of money, just your time
And with today's marketplace anyone can develop, build and market a product for a fraction of what it used to cost.

There is billions of dollars being put into small (or start up) companies in the USA every year - the vast majority of them didn't get started with crowdfunding.  It's a minuscule minority that go after crowdfunding and in most cases - it's a bad idea to start with crowdfunding, IMO.  The reason most of them crowdsource is because VC's wouldn't touch most of those hacks with a ten foot pole.  The way most of the run their businesses is laughable.  It's a tiny minority who know what they are doing.

[Corporate666]

Formal plans are a crap shoot, don't bother.
In terms of a product based business, just do some basic research which costs you nothing, make a product you like for as little as possible with enough margin built in, and then suck-it-and-see who wants to buy it.

For example, before the blog, I knew that if I got a project published in the magazines then I could easily sell say 100 kits, so it was fairly low risk in buying 100 blank boards (which you had to back then when 100 was almost the same price as getting 2 made). And it's now much much cheaper and lower risk to develop a product these days with crowd funding and low cost prototypes and manufacture.

An example I like to give of doing simple product design high risk was Mitch Altman's TV-B-GONE. IIRC he paid over $30K for tooling and kitting up before the first unit hit the market. Sure he got lucky that it was very popular, but it wasn't that popular because he spent $30K tooling up. It would have been just as popular if he spent $3K, or maybe even $300, and used an off the shelf remote case.

It depends what you're trying to do.

For someone trying to make a small business that will give them enough income to be "self employed", then starting small is fine.  But Tesla could never have started small, nor could any of the companies making mobile phones, etc. 

Business growth in a fast growing market can be exponential... which means starting out with a lot of money can put you years ahead of where you would be if you tried to bootstrap.  Not to mention, many businesses have a barrier to entry such that bootstrapping is not feasible.

Business plans are always a good idea - especially for small business owners.  It's too easy to get caught up in the little things and forget the big picture.  A well researched and realistic business plan keeps the founder in touch with the big picture, if done correctly.

[Corporate666]

That is exactly the way I started with my first product. I funded it myself, and although I did have offers of investment, I couldn't face not being my own man, having others both pushing direction and wanting a piece of the action.

It very much depends on each situation.

I'm working a deal right now in the automation business.  We've passed the seed phase and are looking for $1 million in startup capital.  The business plan (based on realistic market research) has us around $10 million in sales by year 5. 

We could bootstrap it but it's an emerging and fast moving market, and bootstrapping would put us years behind, and significantly compromise our potential.  If we hit $10MM in 5 years with fast growth, the hope would be to then sell the company for $20MM and all of the founders do pretty well in the deal.

Investors who are investing for the right reasons won't be 'pushing you around', they are investing because they believe the founders are the ones to make the business successful - not so they can tell them what to do.  And it's sometimes better to have a smaller piece of a bigger pie than a bigger piece of a smaller pie.

[IanB]

For example, before the blog, I knew that if I got a project published in the magazines then I could easily sell say 100 kits, so it was fairly low risk in buying 100 blank boards (which you had to back then when 100 was almost the same price as getting 2 made). And it's now much much cheaper and lower risk to develop a product these days with crowd funding and low cost prototypes and manufacture.

And that's your business plan! Your research showed that selling 100 units was probable, so there was a low risk in stocking 100 units in advance. On the other hand, if you had paid for 1,000,000 boards to be made, you would likely be out of pocket.

Business plans are nothing more than realistic market research and accounting. They help you to avoid basing your business projections on fantasy rather than reality.

Yes, selling 1,000,000 units will yield a huge profit, but failing to sell 1,000,000 units you have paid for in advance will yield a huge loss. Market research allows you to plan appropriately.

[EEVblog]

I'm working a deal right now in the automation business.  We've passed the seed phase and are looking for $1 million in startup capital.  The business plan (based on realistic market research) has us around $10 million in sales by year 5. 

And the percentage of business plans that are also based on "realistic market research" that fail in the first year or two is very high. Based on pure statistics, odds are probably against a startup making it to the 5 years as per the business plan.
Not saying it's right or wrong, just pointing out to others who may not know, that business plans, no matter how well thought out, often "come a-gutser" as we say here.

We could bootstrap it but it's an emerging and fast moving market, and bootstrapping would put us years behind, and significantly compromise our potential.

But bootstrapping also gets you runs on the board, and can in fact get you to market earlier.
Sitting around hoping for an investor can also put you behind. Not uncommon to take a year or even two to find funding for an idea, and then you have to hire hire and get up to speed before you can even think about hitting the market with something.
With the resources available today to the individual, the keen midnight engineer can easily out-start a formal startup.

[EEVblog]

And that's your business plan!

Correct, but the big difference is I never wrote anything down, nor thought about it as business plan, because it wasn't a formal business, it was just an extension of the hobby that turned out to do pretty well for itself.

Yes, selling 1,000,000 units will yield a huge profit, but failing to sell 1,000,000 units you have paid for in advance will yield a huge loss. Market research allows you to plan appropriately.

Don't ever believe any market research that tells you you'll sell a million widgets. Not if you are playing with your own money anyway.

[EEVblog]

It depends what you're trying to do.
For someone trying to make a small business that will give them enough income to be "self employed", then starting small is fine.

And that's exactly what the OP is trying to do here.
So writing business plans and all that formal stuff is the wrong way to go about it in the OP's case IMO.

Business plans are always a good idea - especially for small business owners.  It's too easy to get caught up in the little things and forget the big picture.  A well researched and realistic business plan keeps the founder in touch with the big picture, if done correctly.

And likewise it's also all too easy to get caught up following some ill-conceived or inflexible business plan into the ground.

[nctnico]

Don't think a business plan is something rigid. Plans always change but if you plan things in an orderly fashion you avoid going left and right instead of forward. I've seen that a couple of times too. When things get tough some people tend to jump from left to right trying to grasp straws. If they sit down, take a look at the big picture / analyse their situation and write down their options they will move forward and be much more succesful in the end.

[Howardlong]

Don't think a business plan is something rigid. Plans always change but if you plan things in an orderly fashion you avoid going left and right instead of forward. I've seen that a couple of times too. When things get tough some people tend to jump from left to right trying to grasp straws. If they sit down, take a look at the big picture / analyse their situation and write down their options they will move forward and be much more succesful in the end.

I can only go from my own experience of running my own business for the past 25 years, and while I understand that investors may think that three year plans have value, I can only say that they're almost always not worth the paper they're written on.

Now if they were to ask how the financials would look given a few scenarios based on different sales volumes, I would have more time for them, showing how many you need to burn through to break even, what the returns are if you sell x or y thousand. But to base it on a single finger in the air guess of volume makes no sense to me, you might as well build a house on sand.

One product I developed was based on a single proprietory chip that was fundamental to it. About 15 months after the product was released, it was still selling well, but then came the bombshell: that chip developer went belly up. Try as I might I could not get the liquidators/receivers/adminsitrators to release product despite offers of cash, and for them to name their price. Despite there being 250,000 chips sitting in a warehouse in Wales, it was going nowhwere. Where would that be in a three year plan?

I fear we're going to have to agree to disagree!

[nctnico]

A semiconductor manufacturer going belly-up or discontinuing a device would have been in the 'risk analysis' section of a business plan.

[Howardlong]

A semiconductor manufacturer going belly-up or discontinuing a device would have been in the 'risk analysis' section of a business plan.

For an investment of a few thousand, that's just not going to happen I'm afraid.

Maybe if you live in the merky M&A world where investments are seven or more figures, but not for a few K.

Just sayin'!

[ozwolf]

A semiconductor manufacturer going belly-up or discontinuing a device would have been in the 'risk analysis' section of a business plan.

+1
Ozwolf

[JGE_Engineer]

Thank you all for your advice so far, there is a lot to take in, I am sure I will spend a good while sifting through this post!

WRT the business plans etc, yes, I have a plan, no it is not up to date and it does seem to be virtually impossible to predict what will happen too far ahead from what others have said.

There has been a lot of talk about "niche" products, these also seem to be hard to think of!

However, say I have a new product which will change the world, or at least be of interest to someone, what is a good way of making people aware, I have read a number of articles on marketing but they seem to be geared towards running a restaurant or printing business, i.e. door to door, press adverts etc, it doesn't seem to be quite the right approach to finding out who in your area would be interested in such a service / product when it comes to EE / IT, I mean I can search on the net for companies within the vicinity of me and see what they do and if they would perhaps be interested, but there must be better ways of approaching people / businesses with potential product ideas.

I have found myself almost becoming a PI in what kind of businesses and potential competition around my area, not sure if this is borderline obsession but I find myself particularly in the last year or so, whilst thinking of if I actually wanted to do this or not, every 4-6 months driving around the business parks and industrial estates looking for potential customers / competition. 

I guess in terms of paperwork and plans etc, I would like to "fund" my first venture entirely, as I feel in years to come, if I am still going, it would be pretty good to look back and know I did it by myself with no help from others, but I am not afraid to approach banks etc for loans if I need to, and if I need to I would do what they require me to do.

I have asked a few potential suppliers with regard to credit terms etc, and they seem to say after the first few initial orders, I would be able to apply for credit terms if I required it, maybe it's vain of me, but I am thinking ahead for larger orders.

So so much to think about!

[dannyf]

I would like to "fund" my first venture entirely

Equity is expensive and you should try to use the least expensive form of capitalization - loans from a bank or from friends, etc. Don't raise equity unless you have to.

The key, as I stated earlier, is to 1) understand why you are in this business; and 2) know before hand when to let your baby go.

Both are incredibly difficult to do when you are emotionally involved with the project and very few people can make a rational decision in those scenarios.

[EEVblog]

I have asked a few potential suppliers with regard to credit terms etc, and they seem to say after the first few initial orders, I would be able to apply for credit terms if I required it, maybe it's vain of me, but I am thinking ahead for larger orders.

I've never used credit terms for any parts, always paid cash. And anyway, a credit card is credit.
A good business will always be cash flow positive and have plenty of cash on hand for those larger up-front orders.
i.e. if you are bootstrapping a product and you aren't bringing in enough cash to fund future buy orders, then you have priced your product wrong 

[Corporate666]

And the percentage of business plans that are also based on "realistic market research" that fail in the first year or two is very high. Based on pure statistics, odds are probably against a startup making it to the 5 years as per the business plan.
Not saying it's right or wrong, just pointing out to others who may not know, that business plans, no matter how well thought out, often "come a-gutser" as we say here.

If the business plan isn't done well or correctly, then the majority of those companies will fail inside of 5 years.  However, for plans that are done correctly, a majority of them will succeed - actually a pretty high majority.  Most professional angels or VC's are estimating that 20-30 of their investments will return nothing, a further 50-60% will return the original investment plus some profit, and 10-20% will return huge profits.  The idea that "most businesses fail" is true, but that's largely because they are undercapitalized or the execution was just wrong.  A correctly done business plan eliminates both those problems.

But bootstrapping also gets you runs on the board, and can in fact get you to market earlier.
Sitting around hoping for an investor can also put you behind. Not uncommon to take a year or even two to find funding for an idea, and then you have to hire hire and get up to speed before you can even think about hitting the market with something.
With the resources available today to the individual, the keen midnight engineer can easily out-start a formal startup.

Well, in this case you're assuming a binary choice between bootstrapping and doing nothing while waiting for money - but in this case we're not doing that, and most people looking for investment don't do it either.  Actually, sitting around doing nothing until you get the $$ is a pretty effective way to ensure you won't get any investment.  You still need to develop your product and have all your manufacturing ducks in a row - and if you're smart, you'll have contingency plans for what you do if the investment doesn't come.  But starting out small and taking advantage of first mover benefits only works if you're selling into the right market with the right product.  Having significant capital behind you allows you to approach that process in a different way and exponentially increase your results.  That's what the investor is betting on anyway... they want to know that you will be successful in any case, but with their money you will be really successful.

As far as funding timeline... if the idea is good and the business plan is done well, I'd say it's more like 60-90 days from when you are meeting investors until you have a deal closed.  But it goes back to the idea that someone sitting around waiting to get an investment isn't going to get very far.  The investment process happens concurrently with developing the business.  If the idea is solid, the team is good and the plan is reasonable, getting an investment is never an issue.  When people can't find $$, it's because one of those elements is missing.

[Corporate666]

Business plans are always a good idea - especially for small business owners.  It's too easy to get caught up in the little things and forget the big picture.  A well researched and realistic business plan keeps the founder in touch with the big picture, if done correctly.

And likewise it's also all too easy to get caught up following some ill-conceived or inflexible business plan into the ground.
[/quote]

Any business plan should be updated on at least a yearly basis, if not twice a year - that's par for the course.  It's sort of like making a shopping list - if you have one, you're more organized, and if you're expecting someone else to help you shop, having a list is almost a requirement.  It doesn't mean you can't buy something else while you're at the store or choose to skip something, but if you write a list and toss it in the trash on the way in - then the person who is helping you shop isn't going to think you're very organized and isn't likely to let you borrow their credit card next time you go

[Corporate666]

Don't think a business plan is something rigid. Plans always change but if you plan things in an orderly fashion you avoid going left and right instead of forward. I've seen that a couple of times too. When things get tough some people tend to jump from left to right trying to grasp straws. If they sit down, take a look at the big picture / analyse their situation and write down their options they will move forward and be much more succesful in the end.

I can only go from my own experience of running my own business for the past 25 years, and while I understand that investors may think that three year plans have value, I can only say that they're almost always not worth the paper they're written on.

Now if they were to ask how the financials would look given a few scenarios based on different sales volumes, I would have more time for them, showing how many you need to burn through to break even, what the returns are if you sell x or y thousand. But to base it on a single finger in the air guess of volume makes no sense to me, you might as well build a house on sand.

One product I developed was based on a single proprietory chip that was fundamental to it. About 15 months after the product was released, it was still selling well, but then came the bombshell: that chip developer went belly up. Try as I might I could not get the liquidators/receivers/adminsitrators to release product despite offers of cash, and for them to name their price. Despite there being 250,000 chips sitting in a warehouse in Wales, it was going nowhwere. Where would that be in a three year plan?

I fear we're going to have to agree to disagree!

Of course a business plan should include multiple scenarios for "low, medium and high" sales levels.  Catastrophic potential issues aren't included (unless they are foreseeable), because that kind of stuff can happen to anyone - you don't put "and hopefully our warehouse doesn't burn down or our CEO gets hit by a meteor" because such risks are understood and inherent in small business investing.

I think the big thing a lot of folks are missing is that a business plan is an exercise in doing research, fact-checking, and making sure you have enough data to "prove" your claims (about what your business will accomplish).  If I was writing a business plan about building space ships with $1 billion in VC money, I wouldn't have the first clue what things would cost, what timelines would be like, what the regulatory stuff would look like, etc.  And so no investor would take me or my investment seriously because I would be the wrong guy to be investing in for that project.

But in a business I know a lot about, and in your business you know a lot about, and in Dave's business - we could all should be able to come up with realistic projections and numbers for what we would be doing.  If Dave was starting a new YouTube channel, he'd know that projecting 1 billion views in 3 months is wildly unrealistic, as would 100 views in 1 year be.  Same with my business - if I predicted something wildly inaccurate, it would be a red flag and I'd never see any investment.

The business plan is a sales tool in many cases, and you're making your case to an investor.  There are industry standard investment formulas that they will run on your financials which will quantize the risk and potential return and give them an equity range they need to be in for their investment to produce suitable ROI.  Then they will do some due diligence on your projections, market research and financials and management team - if it all looks good, and they are interested, things move forward.

That's why professional VC's only lose money on 20-30% of their investments whereas something like 90% of businesses fail.  It's not just art, but a lot of science as well - and it's mostly based on the business plan.

[KJDS]

That's why professional VC's only lose money on 20-30% of their investments whereas something like 90% of businesses fail.  It's not just art, but a lot of science as well - and it's mostly based on the business plan.

Whilst that's part of it, if you have the right access to VCs, and a track record of starting businesses it is far easier to get funding. You'll still need a business plan, and the ability to present in a creditable manner to them.

A few years back I was buying some computers. The company that I'd asked to quote phoned me whilst I was driving and as I didn't have a hands free kit in the car my passenger answered the phone for me. The passenger was a good mate of the salesman's boss, so I was offered excellent credit terms, otherwise I'd have had to pay up front. People are people and they will help those they trust.

[nctnico]

I have asked a few potential suppliers with regard to credit terms etc, and they seem to say after the first few initial orders, I would be able to apply for credit terms if I required it, maybe it's vain of me, but I am thinking ahead for larger orders.

I've never used credit terms for any parts, always paid cash. And anyway, a credit card is credit.

That depends on where you are located. Over here it is normal to get goods delivered and pay within 30 days. As a principle I don't do business with suppliers who demand payment upfront.

[Howardlong]

I have asked a few potential suppliers with regard to credit terms etc, and they seem to say after the first few initial orders, I would be able to apply for credit terms if I required it, maybe it's vain of me, but I am thinking ahead for larger orders.

I've never used credit terms for any parts, always paid cash. And anyway, a credit card is credit.
A good business will always be cash flow positive and have plenty of cash on hand for those larger up-front orders.
i.e. if you are bootstrapping a product and you aren't bringing in enough cash to fund future buy orders, then you have priced your product wrong 

There is another reason to use credit or charge cards to pay bills, and that is for the air miles. Even my usually stalwart accountant understands that, even he has jumped on that band wagon now, having seen the jollies the wife and I get for free. With several longhaul trips at the pointy end per annum it makes a lot of sense.