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What Type of Business Do You Want to Start?

I have a few rules:

  1. No Debt -- If you're exploring a capital intensive business and need to raise debt to fund it, my question is why?  Why would you take the financial risk of the business not working out?  Examples include large inventory expenses for retail or manufacturing operations (unless you can pre-fund it using Kickstarter), and even franchise businesses.  If you need to raise capital, do it through equity, not debt.
  2. Cash Flow Positive -- If there's a mis-match between accounts receivable, accounts payable and cash on hand, you're dead in the water.  One operational tactic to make sure you never get in a cash flow negative situation is to collect cash before delivering any products or services (ideally 100%, but even 50% is better than 0%).
  3. Enormous Market -- If everything goes perfectly, and it won't, how large is the total market size?  $100,000?  Run screaming. $1 million?  That's better.  Every company or consumer on the planet?  Now we're talking.  See:  Facebook, not Foursquare.
  4. Built-in Marketing -- This is a tricky one to explain so I'll try to use an example.  One previous marketing strategy we used for Evolyte was to sell the hottest Christmas gift during the largest shopping week of the year and build in social incentive so purchasers would have to recruit other purchasers. The result was nearly $30,000 in reserved sales from 1 day of marketing. Can you build something like that into your business?
  5. Scalability -- Last, and maybe most importantly, if your business grows does it cost more or less to get the same amount of sales?  If less, then you've got efficient scaling.  That's why all the VC and Angel funding is poured into technology and internet companies, not restaurants or bars, because opening a new physical location costs exponentially more buying another server to handle more traffic.

My advice? Stick with the internet.

 

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