SMF Chirag Shah, a successful serial entrepreneur, contributes his second blog in a series of six.

My co-blogger George Fowkes’ Guide to Entrepreneurship – Getting Started posted last October about the key steps of how to get started and a priority list of the key things to think about in the early stages.  So I thought I would complement his post with some practical tips that you won’t find in the textbooks.

At this stage you have a great idea that you are pretty sure can withstand the blows of competitors and make you some money. If you are going to take your idea forward into a business, the next thing you must do is set up a company. At this stage, it doesn’t matter too much what the company is called; you can always change it or set up a subsidiary with a more suitable company name later.  The UK is, in my experience, the easiest country in the world to setup a company. You can actually do it online in about 5 minutes and it only costs a few pounds! (Get the details from Companies House website.)

So why the urgency? Because it’s a quirky fact of life – especially in this day and age of heightened transparency – that most of your stakeholders (future employees, banks and clients) will assess your credibility first and foremost by the period of time that you have been in business – i.e. since your company was born! For example, most banks won’t extend credit to companies that have been in business for less than 6 months old – regardless of how much sales revenue they generate, so you might as well start the clock ticking. Completely meaningless and outdated, but that’s how it is. Now here’s the clever bit: get your newco set up now and hey presto in less than 365 days time your “Founded in 2013” cachet will make you one year old in the eyes of most stakeholders!

Tip 2: Know your numbers
By this I do not mean do a business plan. I’ll get to that in my next post entitled “Getting Funding”. I mean figure out what is the minimum you need to achieve to ensure you don’t go bust. The former Cabinet Minister and über successful publishing mogul, Michael Heseltine, is famously attributed with doing the numbers for his publishing business on the back of an envelope.

In my view you should be doing precisely that too. In any business only a few key numbers drive the whole profit equation and its imperative that you know what they are and understand them simply enough to do the calculation “on the back of an envelope”. Now, I appreciate that as a business grows it can get more complicated, but at the very least, you should be able to do the calculation to the point where you understand the “break-even” – in other words, working backwards to understand how much you need to sell to cover your operating costs.

Here’s an example that I use with prospective franchisees of my écurie25 Supercar Club concept:

KEY COSTS per month:

Staff – £10,000
Cars – £15,000 (5 cars @ average £3,000 per car per month)
Rent – £4,000
Marketing – £2,000
Other -£5,000 (round number factoring in insurance, service costs, professional fees, admin, etc)
TOTAL £36,000

On the REVENUE side
Average Membership (customer) Income per member per month (net of vat) – £1,200

Hence, the number of members required to hit break-even = 36000/1200 = 30

[Sanity check: Number of members that a club with 5 cars can support 40]

So, that’s it. If you wanted to start a Supercar Club, you’d need to ask yourself whether you could recruit 30 customers, at least.

Of course, you can go on from there to calculate how much money you would make with 40 customers, 60, etc and certainly you might have to add in more costs (supercars, in this case) to support the expansion; and of course there may well be start-up costs such as license fees, and fit-out costs and also other sources of income such as delivery charges and venue hire and so on.  Of course, there are many other revenue and cost items you can (and will) include in your business plan, but you now have your key metric that will shape your entire business thinking…I need 30 customers to break-even, let’s call it 35 to be on the safe side!  So now your focus can start to address key questions such as: can the market support that number? Where would I get them from? How many customers can I count on from my current network?

Tip 3: Ignore your customers
Well, at least for the time being. I know I’m flying in the face of convention on this one but here goes… I don’t advocate customer market research for start-ups! Henry Ford reputedly once said, “If I asked my customers what kind of car they wanted, they would say a faster horse”. When working in established markets, customers are very good at knowing what they want. But in the land of entrepreneurs, where hopefully you are bringing something to market that is a bit ground-breaking/innovative/disruptive, your potential customers are not the best source of feedback. By all means do canvas their opinions, but be prepared to take what they say with a pinch of salt. In reality most people are not that innovative; they are reluctant to accept change and slow to absorb great ideas even when they see them.

I find a much more beneficial route for entrepreneurial ventures is to undertake market research through talking with competitors (or “close-competitors” if there’s nobody doing exactly what you do), potential partners and key suppliers in the sector. Certainly, if what you are doing has been tried before, they will know, and more importantly they will have a good idea why your idea won’t work or didn’t work (in the past) which will help you refine your proposition to maximise the chances of success.

Of course you’re probably now wondering how you do that without giving away your top secret plans. Well, you need to be smart – talk to them in roundabout ways or share only a part of your secret sauce to ascertain whether it’s an area that they have considered before, or are considering right now. In my experience, most people like to meet and discuss – in this era people understand that today’s competitor is tomorrow’s partner and an open information exchange with a current or potential player has value to them too. Just be careful and understand your boundaries about what you are willing to share well. Prepare beforehand and don’t allow yourself to overstep the mark.

If you don’t feel you can talk to competitors, vendors and partners then mystery shop them – either yourself or through an agent as the case may be.

Tip 4: Defend your IP
If there is an element of internet or web identity in your proposition (and there should be), then do spend a bit of money now making sure you have conducted some legal searches to ensure you are not treading on anyone’s toes, and simultaneously taking the necessary step to protect your IP (intellectual property). It may be a painful expenditure at this stage in the start-up cycle, but the harsh truth is that the later you leave it the less “protectable” it becomes. A few well-spent pounds now could save you a fortune in legal fees or lost business later.

Tip 5: Focus on “frustomers”
In early stage business, sales can be divided into two groups: personal sales and “others”.

Personal sales relate to customers that know you from before (friendly customers or frustomers).  Either they bought from you in a past life, or know (of) you from your previous achievements.  The key is that these people are buying you and your reputation, not the product/service that you are going to create.  Therefore, you can sell to these people before you have even made the product – perhaps a concept or prototype is sufficient for them.  Of course, I don’t mean literally that you can get a cheque from them, but you can explain what you are planning to do and should be able to gain a significant degree of commitment – emotional, letter of intent, handshake, heartfelt promise – from at least some of them that helps you increase your confidence about your early-stage sales trajectory.

Note: If you are struggling to get sales commitments from this group, or don’t know anybody in this group, think very carefully about whether and how you wish to proceed. You’re probably doing something seriously wrong.

The “others” group don’t know you and it’s not worth trying to pitch to them too soon; if anything, you will lose credibility and make selling to them even harder later on.

In summary, most of this post has been dedicated to eliminating downside risk before you go off and start spending major chunks of money creating your product and bringing it to market. If you address these steps effectively, you should have moved from having a great idea to a new business and you should also be feeling pretty good about your future prospects for this business – without actually having spent more than a few thousand pounds in getting there.