A friend of mine has recently been thinking of quitting his job at a bank and starting a business. He asked me for advice both on starting a business and I gave him a few points that I thought would be interesting to share here. So if you’re thinking of becoming an entrepreneur and starting a business, here’s what you gotta keep in mind.
1) Is there a big company that would want to buy your company?
Everyone talks about exit strategies today. About how you could exit the business whether via an IPO or a trade sale to a bigger company. An IPO is a much bigger task and that’s a whole new issue for another article later on. But when it comes to trade sale, in order for you to sell your company someone else must not only see the value in buying your company, but that someone else must have the money to buy it.
So many internet startups neglect this one point and start apps or websites because it sounds like a good idea, without thinking about who would buy it. And we gotta be really honest with ourselves on whether these companies really will buy it. Have they bought companies like that in this space before?
There is a caveat to this though, and that is if you’re in a business not to exit or sell but to simply make money. Many businesses are like that. They’re not likely to get acquired because they probably draw low earnings multiples in terms of valuation but they make good money. I know many entrepreneurs with businesses like this. Whether it’s a restaurant chain or advertising agency. They don’t sell for a high price but they make good money and if that’s what you’re aiming for then great.
2) Are there much bigger companies overseas that do the same thing?
When looking at what your company is worth one important point is what are your comparables? What other companies in the same industry are trading at in terms of earnings or revenue multiples. These things help paint a picture and a story to future investors and give them a better idea on how to value your company.
For example, if you own a car classifieds website like iCar Asia does, you can go to investors in Australia and say “We’re like Carsales.com.au (which is a $2.32bn listed company in Australia trading at a 24.34 PE) but for SouthEast Asia which is a bigger market population wise.”
That helps paint a story of where your company will be drawing from a company that is already successful doing the exact same thing somewhere else. Chances are you’ll get a better valuation if your comparable is trading at a high valuation.
3) Can you find a seed investor?
One thing I used to think when I first started out is that it’s better to fund your startup yourself and gain traction first so that you can fetch a higher valuation when it does. That is true… a startup with traction fetches a much better valuation than just a business plan or an idea of doing a startup.
However what is less exciting than a business plan or an idea of a startup is a startup that has launched but is NOT gaining traction. And that is MOST startups. So it’s about risk and about how confident you are about your own startup. If you want to risk manage a little, then take in some seed funding just before you start. If your startup gains traction then good… it’s a happy problem to have. If your startup doesn’t gain traction then you’re gonna be glad you took in some money at the business plan stage.
Besides the one thing about taking in an early investor is that it’s some form of validation. That you’re not necessarily just building castles in the clouds but someone else believes in your startup and is wiling to put his money behind it.
4) Are there government grants you can get in this area?
I was surprised at the number of government grants the Malaysian government provides its businesses and I’m not just speaking about in the tech space like Cradle. I’ve seen grants from various industries. It’s a lot more work to get grants but hey if it’s out there for companies like yours, go get it.
5) Are you filling in a gap in the market or creating a market?
There are two types of businesses.
One that sees a need and fills it like logistic companies that see a need for logistics or a coffee place in an untapped suburb.
One that creates a desire and a market for itself. Like Apple did with the iPad. Nobody knew they needed an iPad until they had one.
Both type of businesses come with their pros and cons. The ones that just fill a need tend to be easier to get some form of traction because a market already exists there but chances are it’s a lot more competitive.
Those that create a market for itself tend to find it harder to get traction but when they do, they can hold a monopoly-like position at least for a while longer (like the iPad still does with the tablet market).
So if you’re trying to create a desire or a market then don’t be fearful if you don’t immediately gain traction. Go in with the right expectations.
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And these are my two cents.
Timothy Tiah – Co-Founder of Colony, Kuala Lumpur Co-Working Space