Q: I am from Pakistan, where venture capital funding is not yet readily available. How can entrepreneurs here ensure cash flow in a startup’s early days and pay salaries to employees? What are the top three building blocks needed for entrepreneurs to transform a startup into a sustainable organisation?
- Ibraheem Ahmad
A: After seeing so many tech startups rocket to billion-dollar buyouts so quickly in the past few years, some new entrepreneurs might mistakenly think that starting a business is an explosive sprint that ends quickly.
In reality, it is an endurance race that only a few survive: According to Bloomberg, eight out of 10 companies fail within 18 months of opening for business.
There is no hard and fast rule that distinguishes the two businesses in 10 that survive from those that fail: Business-threatening challenges can pop up at any moment, no matter what you do. However, one of the best ways to protect your enterprise is to make choices with the long-term in mind. Here are some tips on three areas where your decisions will make a difference for years to come.
1. Choose your clients carefully
When you are launching your startup, it may sometimes be tempting to take orders or make deals that you cannot afford to fulfill in hopes of gaining clients. This is almost always a mistake. If your business grows too fast, you will likely end up producing an inferior product or service and disappointing those customers - and if you are unlucky, the entire enterprise will then fall flat.
It may be difficult to take some time out in those first hectic days of launching your business, but before you sign any deal, you must consider the proposal carefully, keeping the bigger picture in mind. Sometimes, you may need to pass on an order for the good of a fledgling enterprise. You might lose a little business, but it is better to focus on building steady growth rather than on gaining quick wins; this is how we have been building the Virgin Group for more than 40 years.
The number one killer of startups is cash-flow problem. So as you review any new deals, be sure to think about how payments should work. A common issue smaller businesses face is late payments from big corporations.
So be sure that you are clear about payment terms before you sign any agreement.
Do not be afraid to ask for part of the payment up front, if that is what the health of your enterprise requires.
When you start delivering your product or service, send your invoices promptly as agreed and keep close watch on payments. If you run into problems, be honest with your own suppliers about the difficulties - they may be willing to wait until you are paid so that they can keep your business.
2. Choose your employees wisely
Rather than hiring staff you cannot afford, start small - I began one of my first businesses, Student magazine, from a telephone box with an idea and 300 pounds.
Doing all the work by yourself may be difficult, but it will also help you to explore your idea’s strengths and weaknesses more quickly.
When you do have funds to bring in employees, ensure that they understand and buy into the purpose of your business. This will motivate them to go the extra mile to make it a success. (I have written more about how to hire in other columns - for more, please take a look.)
3. Find a mentor
When we launched Virgin Atlantic, my mentor was the great Freddie Laker, the founder of Laker Airways. British Airways muscled his business out of the market long before we came along, and his advice was invaluable in helping me to establish a successful airline, to British Airways’ dismay.
He was the best sort of mentor: an entrepreneur whose business had been in the same sector, so he could warn me when I was about to make a mistake. And as he reminded me, if you do make a mistake, all is not lost; it is how you learn from such experiences that matters.
If you are having trouble finding a mentor, websites like Eventbrite can be useful. You are likely to meet potential mentors at entrepreneur meet-ups and other gatherings; it is often surprising how willing entrepreneurs can be to help each other. Whether you are based in Pakistan or Peckham, Portland or Peru, we are all part of the same community.
Ibraheem, good luck with your startup! Whichever industry you decide to enter, do not overlook the possibility of reaching potential customers online, since Pakistan has so many mobile customers. Now go for it!
Mr Branson is the founder of the Virgin Group. Email: RichardBranson@nytimes.com.