Stages of the Startup Journey - #3: Go (Or No-Go) Time!

Stage 3: Make a Go-No-Go decision
By this point, you should have a wealth of information about your target audience, the problem you’re solving, and how your solution resonates with your target audience. Now is when all of that information comes together to help you determine whether your idea has the right stuff to make it a successful business.

Time-to-market
In the first two stages, you identified your MVP, or minimum viable product. You should be very clear about what your customers need and want to get value on launch day from all of your customer and product validation interviews. Now is the time to put together a plan for how long it will take to build your product or service and get it into the marketplace to start generating revenue.

Your timeline needs to include some reasonable contingency periods so that if something comes up that you didn’t anticipate (and it WILL), you can absorb the changes or snags into the timeframe you’ve already laid out. The time-to-market will also be important in determining how long it will take to become profitable and how much money you’ll need to sustain your business to profitability.

Remember to include time for things like development, QA, bug fixing, deployments and environment work, and potentially even some alpha- and/or beta-testing phases. If you’re building a physical product, like a piece of hardware, you’ll need to consult with hardware and manufacturing experts to figure out how long the production of your product will take in the size batches you need to order for your first production launch. You also need to take into account your planned launch date and work backwards from there for your marketing and advertising plan execution.

Pro Forma
You should also have determined by this point what you can charge for your product(s) and/or service(s), and you should now be able to put together a pro forma. The pro forma outlines all of your expenses and compares that to your expected income based on acquisition of customers and market share over time. When all of this data is put together, you should be able to see exactly how much money it will take you to get to profitability, and you should be able to see how much money you’ll need along the way and when you’ll need it.

You should get as detailed as you possibly can in building your pro forma. When we put together a pro forma, we do it month-by-month for 3-5 years at a time. We put the income lines at the top, and break them down by source. For example, do you have customers paying you a monthly fee? Do you have advertising income? Are there other sources of income that you are predicting in your valuation? All of these should go at the top.

Below that are the expenses. You should think about all expenses across all categories when doing this exercise. Will you need office space? If you do, remember to account for rent, utilities, Internet and phone service, furniture, and supply costs. What resources do you need to hire? Do you need to provide computers and equipment for everyone? And what about contractors for one-time or limited-time needs, like graphic design, UX and support? Also remember to include your hosting costs, software licenses, subscriptions, tools, or anything else your product or your people will need to complete their jobs.

Remember to also include legal and accounting expenses, credit card fees or other collection or bank charges, travel, and your business insurance (like Errors & Omissions, Directors & Operators, General Liability, Cyberliability, etc).

Marketing spend
This expense gets a category all on its own because you MUST spend money on marketing and advertising. You cannot rely on the “build it and they will come” strategy for getting customers to buy your product or service. If you did your work correctly in Stage 2, then you should be able to nail down exactly who your ideal customers are, and any good marketing firm will know how to find and get in front of those people.

Marketing expenses include things like advertising (AdWords, social media ads, TV, radio, etc), earned media and public relations (getting spots on local news, TV, radio or other publications for free), social media management and content strategy and creation, SEO, and any events or networking opportunities designed to bring new customers into your product or service offering.

YOU CANNOT SKIMP HERE. If you aren’t spending enough money, you won’t hit your goals for customer acquisition and you’ll run out of money. It’s as simple as that. So don’t skip the research about the market size and reasonable acquisition targets in your pro forma, and don’t skimp on your marketing and advertising budget.

Investment capital
Once your pro forma is done (including your marketing spend!), you will be able to see very clearly how much money it’s going to take to get to profitability. If it takes much more than 3-5 years of working on your idea to get profitable, you need to seriously consider whether your idea is really viable as a business. Investors don’t like their money to be out there for more than 5-7 years, and it’s difficult to find a buyer for a business where the model doesn’t show a good profit.

Also consider whether the amount of money you’ll need to get to profitability can legitimately be recouped. If you’re building a SaaS-based business that forecasts $5M in annual revenue by year 4, and it takes less than $1M to get to that, that’s a very attractive investment. But if you’re spending $5M to get to a business that can’t easily or realistically generate more than $500k in annual revenue, no matter how long it’s in business, that’s a MUCH harder sell, and you'll end up giving away most (if not all) of your company to get that money.

ROI (Return on Investment)
ROI tells an investor how long it will take them to see a return on the money they give you to build your business. If you get to profitability by year 4, and you’re planning on selling in year 7, then your investors will know they need to hang tight for up to 7 years before they see a return. The type of investment vehicle(s) you engage with will determine what your investors level of expectations for return should be.

Risk
Which brings us to risk. Ultimately any go-no-go decision is made by looking at all of the items listed above and deciding whether the risk is worth the reward. If everything about the idea is really awesome, but the business model and revenue potential suck, there’s likely no business to be had here.

Throughout this analysis process, you should ask yourself the hard questions and be as honest as you possibly can about your personality as it relates to how you execute on your idea. Are you prepared to spend the time and money to get this idea to market? Are you prepared to spend time and money on customer acquisition once you are in the market? Do you have the patience and tenacity to keep going, no matter what? Can you, and are you willing to, put all of your time and energy (and possibly a fair bit of your own money) into bringing your idea into the world?

There are a few exceptions, but in general every company that’s done well in the world has done so because there was someone being the champion and never giving up on the idea. If that’s you, and if everything else lines up and makes sense, then you just might have a winner!