1. Don’t get hung up on inventing something new
How many entrepreneurs have made money by inventing a brand new product or service? You need investment to build prototypes and to protect your invention through patents and copyright. Patenting is difficult, expensive and can take years. All of this assumes that you have invented something people need and will pay for. If they haven’t already realised they have a need, then you must convince them and this takes money.
The most successful entrepreneurs have taken an existing business need and found a way to serve it better or cheaper with a pre-existing technology or set of products and services.
For example, there are hundreds of millionaires in communications and IT, with companies that did not invent anything. Many of them don’t make products, own any infrastructure or even hold stock.
2. Don’t assume that all sectors are the same
People say ‘stick to what you know’ which is good advice. You need to be passionate about what you do, however if your knowledge or expertise is not specific to a particular industry, you should consider choosing a sector with a high intrinsic value.
If you look at the price/earning ratios for different sectors you will see that they vary. The p/e ratio of a company is simply the price per share divided by the earnings (profits) per share over a period of time. Stocks and sectors with high ratios tend to be those that the market thinks will grow in the future. As a general rule those sectors that have the potential to positively affect other sectors’ productivity (e.g. software and technology) will have higher p/e ratios.
This feeds through to the valuation of a company for raising money or disposal since a common method of valuing a business that is not publicly traded is on a multiple of the profit it generates.
Choose a sector that meets this criteria and you should find it easier to raise money. Also you should get more for your business when you decide to sell it. Think about how your business is positioned right now. For example, the telecom service sector (e.g. phone systems) has a p/e ratio of around 20 but the applications software sector (e.g. the cloud) is up around 60.
3. Don’t go native
There is a fine line between passion, determination, belief in your product and delusion. You may have a great business idea but for social, technological, environmental or regulatory reasons, it may not be the right time for it.
In the business world this is known as ‘going native’. When an entrepreneur is so heavily invested, both emotionally and financially, in plan A that they refuse to even consider a plan B. These companies are often involved in constant rounds of fund raising at increasingly lower valuations and rarely survive.
You can avoid this by realising that great ideas have their time and ensuring that if your vision takes longer to become reality you have a plan B and sufficient funds.
Think like your customer, try and be objective and cultivate relationships with experienced peers from your industry whose opinion you value. Understand that putting together a machine that can make, sell, bill and service products is often the hardest bit. It doesn’t matter if the product or service you end up selling is not what you originally intended.
To find out more contact Jola.
