How Can an IT Startup Become a Profitable Business?
One morning you can wake up with a brilliant business idea: to set up your own IT startup, develop an exceptionally useful application, which will help users in everyday life and will open up the door for you into the world of big business.
Do you think it can happen only to you? Unfortunately, no. Nowadays, launching a startup is a popular business activity and many people take it up. Some of them try to implement really practical entrepreneur ideas, while others choose this path only to follow modern trends. How to survive in this competition, prevent your small business from being lost in the shuffle and attract investors? I have discussed this with Alexander Mikhalchuk, COO at Anadea Inc. Here is the transcript of our talk.
How to start a tech startup and avoid pitfalls
According to statistics, out of 10 IT startups only 1 or 2 survive. What do you think is the reason for such a poor startup success rate? Where do young entrepreneurs make mistakes most often?
For one thing, startups differ from each other significantly and their success depends on various factors. Of course, if initially people came up with an idea for a new product and start bringing it into life, they see a startup as a commercial venture, the goal of which is to bring profit. In this case they should devote significant effort to selling products or services. If a startup is built as a commercial project, this is where the focus should be and you should never lose it.
Among the classical "traps", I recall situations when the main ideologists of a startup are programmers, who are interested in the technical aspects or they make something they miss in their work. They know how to develop software but absolutely neglect the sales part, thus, the project is doomed to fail.
Do you mean that they pay little attention to advertising, promotion and representation of the project?
Yes, if the matter concerns commercial success, this is exactly what you should concentrate on. Technical specialists who have always worked only with the technical side, tend to avoid complicated things that they have never done in the sales area – this is one more challenge. Marketing concepts, promotion, figuring out how to market a business, performing audience research, understanding who your customer and competitor is – if you are not going to do it yourself, hire a specialist.
Can you recall any examples of startup success stories?
As a positive example, I can give the one with Matthew Daimler and his project which was initially called Buyfolio and later became Agentfolio. Originally it was just live tables. Then it became a product which helped to connect apartment seekers in New York with sellers and landlords.
The story of this startup started when Matthew, being a New York resident himself, faced a problem – he was in need of such services but the existing ones didn't satisfy him. After investigating the problem, thinking through how he could help people in this area and being aware of all ins and outs of the problem, he built a model of a startup. He was deeply involved into the development but didn't do any technical supervision – Matthew focused on promoting the product. Articles and news pieces were appearing in press – both clients and agents started rolling in. As a result, the startup worked out, became profitable, a large company got interested and purchased it.
So, are you saying that a young entrepreneur should start with a good idea that offers value to people?
A startup is always an idea. What is a startup in general? A few people gather, they have an idea for a business (of various degree of "coolness") and they start putting it into life either themselves or by engaging someone else (at the initial stage through their own funds). Later, they start searching hard for investments. And it turns out that this is the market where there are people with IT business ideas and people with money – the so-called "angels" - who inspect new tech ventures at various startup workshops and business incubators where young startups are given office space and equipment for a nominal fee. Naturally, angels evaluate the idea. If it seems interesting and viable, they can invest money in this startup business. Angels understand that they take risks and that, as a result, it may all go down the drain. For them it is common practice to finance 10 startups, 9 of which will fail but the 10th will kick off and make back for all 10 of them.
What are the terms of getting funding for startups?
The biggest part of a startup's profit will go to the people who financed it. It is necessary to understand that business angels won't miss the chance to get their full share and when you are creating the next Facebook, it is silly to believe that you will become the second Zuckerberg.
How to attract business angels?
A business angel, when makes investments, wants to gain profit. That's why we come back to sales. If the revenue model of your startup isn't well worked through, if it's not viable, if it's simply missing, nobody will give you any money.
That's simple maths.
Exactly. If you want to make your startup successful, you have to think about sales. In the first place. The trap may be that technical people can dive into technical details and that's a waste of time. This is fatal for business as, during this time, new competitors continue to emerge and the ideas that appeared in your head may be implemented in someone else's products, before you know it. And your ideas are still only in your mind and on paper and there is not a single user yet.
And still, how to stand out from 10 startups?
Everything depends on what kind of a startup it is. The most important thing is the idea. Its novelty, relevance and the demand for it. The competition of two startups is the competition of ideas. But the startup idea is not the whole story. Let's say, two IT products provide the same function. But one is convenient and the other one isn't. In other words, this is already a question of implementation. Or it can be so that one product will be more convenient for business people while the other one, with a more trendy and pleasant interface, will suit young people's taste more. That's why the image of the target audience should be shaped at the stage of creating the idea. Of course, the concept can always be altered later on, but as I have already said before, it is a waste of time.
What difficulties can result in shutting down a startup?
Financial. If a person has no money to pay the team or even support a family – in this case even the most brilliant and potentially lucrative business idea will have to wait. An estimation of your own strengths, resources and business start up costs is very important. When you are talking about financial success you have to understand that you spend money, time and efforts today but you will start getting something in return only after a while. It's necessary to develop a startup business plan. Make sure, that you have an idea and people who can turn it into reality. You should estimate the time needed to make the work done as well as startup capital required to cover the operation of your team during a certain period of time. But if the plan is unrealistic, then, any startup is simply out of the question. For example, you will need a thousand dollars for half a year of work, whereas there is only one dollar in your pocket… you'll have to save up, buddy. You should look at things the way they are. You can go without the services of specialists and do everything yourself. If you can't, look for some supporters of your idea. Show it to those who can finance it (on Kickstarter, for example). Or save money!
Many thanks for the talk, Alexander.
You are always welcome.
The key tips for starting an IT business
So, if you want to turn your startup into a profitable business:
- First of all, you need a strong idea that suggests a solution to a specific problem. Along with that, it is necessary to clearly understand what audience the product is targeted at.
- A correct and realistic business plan that includes all deadlines and expenses.
- Introducing the idea to the society, promoting it with the help of industry specialists through the means of media and advertising. In addition, you should always keep the focus on sales.
- Attracting investors, business angels to provide startup funding.
As usual, you don't have to invent a bicycle – it has already been created by experienced people. If you stick to these simple rules, it's more than possible to turn the startup business idea into a deal of a lifetime. The most important is for the idea to be really worthwhile.