Being your own boss, calling all the shots, hustling to hit your goals -- for many people, entrepreneurship is the ultimate career goal.
But as awesome as running your own business sounds, it's also incredibly difficult.
How difficult? 90% of startups fail.
Entrepreneurs are also more anxious than other people and experience more day-to-day stress. After all, when you're responsible for the bottom line, every setback falls on you personally.
Here's the good news: Starting a company can be one of the most rewarding, exhilarating, and interesting opportunities you'll ever get. If you're aware of the risks and you're still dead-set on being an entrepreneur, use the strategies and advice in this guide.
In this post, we cover:
How to Become an Entrepreneur
- Identify profitable startup ideas.
- Identify and focus on a growing category (or categories).
- Fill an underserved demand.
- Make something better (or cheaper) than what's out there.
- Validate your startup idea with buyer persona research.
- Start with a minimum viable product (MVP).
- Create a business plan.
- Continue to iterate based on feedback.
- Find a co-founder.
1. Identify profitable startup ideas.
A successful startup begins with an idea. You can't build a business without one. Here are some creative techniques for thinking of a product or service:
Ask your friends what frustrates them.
What makes a product or service profitable? It provides a solution for a problem or frustration that people are willing to pay to have alleviated.
With that in mind, start by asking your friends what frustrates them.
Founders get inspiration from their frustrations all the time. For instance:
- Travis Kalanick and Garret Camp started Uber after they had trouble getting a cab.
- Andrew Kortina and Iqram Magdon-Ismail founded Venmo (acquired by PayPal) after they had trouble paying each other back by check.
- Chris Riccobono launched UNTUCKit -- a line of shirts that look good untucked -- after getting frustrated with how wrinkly and ill-fitting his regular button-down shirts were when he didn't tuck them in.
As you brainstorm, ask your friends to keep track of the day-to-day things that annoy them. Then go through their lists and look for problems you might be able to solve.
Get inspired by other emerging startups.
Checking out what other people have come up with can be a great way to kick your own thought process into gear. Go to Product Hunt, a constantly updated curation of the newest apps, websites, and games, for digital inspiration. Meanwhile, Kickstarter is great for physical products.
Identify trends to future-proof your idea.
As the world changes, people need different products. As an example, the rise of Uber, Lyft, and other ride-sharing apps created a demand for a third-party app that will tell you the cheapest fares at that exact moment.
You want to get ahead of the curve. Read trend predictions for your industry or market, or check out universal trend forecasting publications like Trend Hunter and Springwise. Then ask yourself, "If these predictions come true, which tools will be necessary?"
2. Identify and focus on a growing category (or categories).
Licensing expert and intellectual property strategist Stephen Key recommends picking a category that fascinates you but isn't overly competitive.
"I avoid industries that are notoriously challenging, like the toy industry. There are so many people creating in that space," he explains. "You will have an easier time licensing your ideas if you focus on categories of products that are growing as well as receptive to open innovation."
After you've picked a category, Key says you should study all the products in that category.
- What are each product's benefits, and how do they vary?
- What's their packaging and marketing strategy?
- What do reviewers say?
- What are the potential improvements?
Once you've picked a product, consider questions like:
- What can be done to improve it?
- Can I add a new feature?
- What about a different material?
- Can I personalize it somehow?
3. Fill an underserved demand.
You don't need to reinvent the wheel if there aren't enough wheels. Many people start successful businesses after noticing a gap in the market. For example, perhaps you learn there's a shortage of high-quality sales outsourcing. Since you have experience in sales development and account management at early-stage sales companies, you might decide to offer this service to tech startups.
4. Make something better (or cheaper) than what's out there.
You don't always need to develop something brand-new. If you can offer an existing product at a lower price point, better quality, or ideally, both, you'll have plenty of customers. Better yet, there's clearly an existing demand.
As you go about your day, make a list of everything you use. Then review the list for something you could improve.
- Network with other entrepreneurs: Use Meetup or Eventbrite to find events in the local startup community. Not only will networking with other entrepreneurs help you build valuable relationships, but it'll also give you lots of ideas.
- Research patent applications: Patent applications are typically made public 18 months after they were filed. Although we don't recommend outright copying any inventions, browsing through these documents can give you a good sense of where a particular space is headed.
- Have a brainstorming session: If you need to get your creative juices flowing, invite three to five other entrepreneurial-minded people to a brainstorming session. Ask everyone to come prepared to discuss a certain product category or question, such as, "What's your favorite type of X and why?" or "Do you use anything to accomplish Y? Why or why not?" The answers may lead to some great ideas.
5. Validate your startup idea with buyer persona research.
Great, you've got an idea. But don't quit your day job yet. Before you go all in, you need to know other people will actually want your product. (No, your friends and family don't count.)
In order to safely gauge the viability of your product in the market, start by understanding your buyer persona, i.e. the real people you plan to sell to. If your product doesn't serve a need, they won't be interested, no matter how innovative or cool it is. That's why buyer persona and market research are so important.
Once you've identified your ideal client, interviewing people who fit the bill should be an important component of your research. Show them a working demo of your product, ask what they like and what they don't, how much they'd pay for it, how often they'd use it, and so on.
Envato blogger Chris Bank also recommends "listing the problems you assume your product will solve and then asking for opinions and a ranking of each problem."
If you want to test the market's interest before building anything, build a landing page that describes your product or service. Ask people to submit their email addresses in exchange for early access; a free subscription, membership, or product; a discount, product updates, or some other compelling offer. Then promote the video on social, paid search, etc., and see how many visitors convert to sign-ups.
6. Start with a minimum viable product (MVP).
An MVP is the simplest, most basic version of your tool or service possible. It's functional enough to satisfy early customers and get a sense of what you should improve.
Let's say you want to build an app that will connect college students with virtual tutors. You might create a bare-bones version, manually invite 150 tutors you found online to join, and then post the link to the app on the local university's Facebook page. If you get a decent number of sign-ups, that's a sign you should move forward. If you get barely any, you should either rethink the idea or start fresh.
Starting small with an MVP keeps your costs low to start but allows room for growth as the product continues to be validated.
7. Create a business plan.
A business plan is a formalized document that details your business goals and the steps you'll take to achieve them. This may include marketing strategy, budget, and financial projections and milestones.
As an entrepreneur, your job is to set your company's mission, vision, and long-term and short-term goals. As you do this kind of strategic planning for your venture, the business plan is an output of your work and helps to guide the growth of your startup.
You can download a free business plan template here.
8. Continue to iterate based on feedback.
Keep in mind that your MVP will not likely be enough to stay competitive in the market categories you choose, especially if you have big dreams for your startup.
Now comes the cycle: Generating interest and demand (marketing the product), securing customers (selling the product), gauging satisfaction, improving the product based on feedback... and repeat.
Optimizing all parts of this flywheel generates the revenue needed to invest in product, and investing in product generates additional interest from:
- Satisfied customers creating word of mouth referrals
- More competitive offerings that attract new customers
9. Find a co-founder
Conventional wisdom says you should look for a co-founder when starting a new business. There are three main advantages to having a co-founder.
1. It's easier to get funding. Whether or not multiple founders actually contributes to a company's success, many venture capitalist investors believe it does. They're reluctant to back solo founders.
As an example, "single founder" is the first thing on Y Combinator co-founder Paul Graham's list of causes of failure. He writes, "Have you ever noticed how few successful startups were founded by just one person? It seems unlikely this is a coincidence."
2. You have emotional support. Running a company is a stressful, exciting, and unique experience. If you're riding the emotional roller coaster by yourself, you won't have anyone to celebrate with during the ups -- or survive the downs. A co-founder understands exactly what you're going through and makes you feel less alone.
3. They can provide different skills, knowledge, and connections. Maybe you're great at selling, while your co-founder is more technical. You've got lots of connections, and they've actually started a business before. Picking a co-founder with a complimentary resume is an excellent way to boost your odds of success.
But there are also drawbacks to having a co-founder.
1. There can be conflict. You and your partner will inevitably disagree. A little healthy disagreement is productive, but if you don't find a solution relatively quickly, you'll waste valuable time and energy. Plus, you might hurt your team's morale.
2. You'll have to split the equity. If you're the sole owner of your company, you start with 100% equity. As time goes on and you hire more people and/or receive funding, you'll distribute that equity -- but you'll likely be giving 0.005% to 35% to a single entity, depending on who they are. If you have a co-founder, you're automatically giving up 40-60% of your company in a single swoop.
3. Finding one can be difficult. It can be really hard to find someone with the same business ethics, work habits, and complementary personality. In addition, they need to believe in your vision, contribute the right skills, and have a desire to be your co-founder in the first place. That's a tall order.
It's worth noting that an analysis of thousands of successful startups showed that more than 46% had only one founder. Make a decision based on your situation, not traditional advice.
Where to Find a co-founder
If you decide you want a co-founder, the next step is finding one. Look within your own network first. Choosing someone you already know, or whom your connections can vouch for, is much less risky than a stranger.
This concept works in reverse as well: You've also got a better shot of convincing them to join you if they're a first or second-degree connection.
But if you've tapped your network without success, there are a few "co-founder matching" services you can turn to.
You can also attend local entrepreneurship events to meet potential partners.
How to Get Funding to Start a Business
- Ask your family and friends to invest in your business.
- Apply for a small business grant.
- Use a crowdfunding platform.
- Pitch to angel investors.
- Solicit venture capital.
- Use a credit card for a short-term cash option.
- Get a microloan.
- Bootstrap it.
You have to spend money to make money. To fund your startup, consider the following options:
1. Ask your family and friends to invest in your business.
Many entrepreneurs rely on their friends and family for an initial investment, typically called a "seed round." You can exchange funding for a stake in your startup (i.e., your cousin receives 4% of the company after giving you $12,000), request personal loans (with or without interest), or even donations.
2. Apply for a small business grant.
Federal, state, and local governments have programs to help small businesses, including low-interest loans, venture capital, and grants. To find programs your company qualifies for, check out Grants.gov.
Most businesses aren't eligible, so you might not be able to find anything. But it's worth looking into, because hey -- free money!
3. Use a crowdfunding platform.
This method doesn't just generate capital, it can also help you get early product feedback, brand awareness, and sometimes, if you have an interesting story or especially cool product, press.
4. Pitch to angel investors.
Angels look for early-stage companies that can 10X or more their investment. Typically, they put in $25,000 to $100,000. If you do the math, angels are looking for businesses worth $2.5 to $10 million in the future.
They will be extremely diligent in making sure you understand your target customers, the product space, how you'll make money, and how you'll scale. Make sure you're prepared with a solid business plan and early signs of traction (such as "the average user refers two additional users in their first week" or "we doubled our revenue from January to March.")
Along with an angel's funding, you'll get access to their expertise and connections. They'll receive equity in exchange.
5. Solicit venture capital.
Venture capital firms look for young, private companies. Like angel investors, VC firms are looking for high-risk, high-return investments. The returns they expect depend on just how mature your startup is. If they invest right before your company goes public or gets acquired, a 3X return is good.
But if a VC firm invests very early, they're probably looking for a 7X to 10X return.
Venture capitalist Fred Wilson's blog post about venture returns is a good introduction to these concepts.
6. Use a credit card for a short-term cash option.
It's typically not a good idea to use your credit card to pay for business expenses -- unless, of course, you can pay the balance. Sometimes, you have no choice: You need money, and fast. But sacrificing your credit score and racking up credit card debt will hurt your business in the long run (not to mention, your personal financial health).
7. Get a microloan.
You can't apply for a loan in your company's first year, as lenders are unwilling to make such a high-risk investment. However, you can take advantage of the Small Business Administration's microloan program. Small businesses can receive up to $50,000; the average SBA loan is $13,000.
This is a list of SBA partner microloan providers by state.
Microlenders and nonprofit lenders are other options. These lenders often seek out minority or disadvantaged entrepreneurs. Their terms are usually very fair.
NerdWallet's guide to the top nonprofit lenders in the US is a great resource.
8. Bootstrap it.
You don't need to accept money from anyone else if you don't want to. Some companies never raise funding at all -- their founders pay for initial costs by themselves, and then, when the company becomes profitable, its revenue covers all expenses.
This option allows you (and your co-founder, if you have one) to hold on to a much bigger percentage of your company. But you may grow less quickly without big infusions of cash. If you do decide to bootstrap, keep your budget as lean as possible to extend your company's lifetime.
How to Incorporate Your Business
At a certain point, you need to decide whether you want to incorporate your business. As a sole proprietor, you and your company are considered to be the same entity.
Once you incorporate, your business becomes separate from you. From a legal standpoint, it can buy and sell property, incur taxes, sue and be sued, set up contracts, and commit crimes.
The advantages of incorporating
First, and most importantly, a corporation protects you from businesses debts and obligations. Creditors can typically only seek repayment from the corporation's assets, not your personal assets (like your house, car, bank account, and so on).
You're also not legally liable for the corporation's actions. In contrast, as a sole proprietor, anyone who sues your business is suing you.
Having a corporation lets you transfer shares. You can sell some of your ownership in a company, transfer it, or give it away. If you want to accept external investments or bring a partner on board, you need the ability to divest.
Corporation status also gives you more credibility, which helps you attract investment capital.
Lastly, corporations can deduct normal business expenses before they allocate income.
The disadvantages of incorporating
It creates an additional tax burden: You need to periodically file with the state and pay yearly fees. The process can be relatively time-consuming, and hiring a lawyer can cost anywhere from a few hundred to a few thousand dollars.
You don't need to incorporate -- there are a variety of business structures to choose from. But if you have a co-founder, need external funding, and would like legal protection, it's a good idea.
Once you've decided to incorporate, you must choose between becoming a limited liability company (LLC) or S corporation. The SBA has a handy guide on choosing the right entity structure.
The journey to entrepreneurship is a long one, but it can be so rewarding.
Editor's note: This post was originally published in August 2019 and has been updated for comprehensiveness.
Originally published Nov 12, 2020 2:30:00 PM, updated November 13 2020