12 Things Aspiring Startup Founders Need to Know
Before Starting a Startup
At the core, a tech startup is a business. It is a service, a product, a brand or a company that is meant to generate revenue.
Since profit is the main goal of any business, it is necessary that the founders of a tech startup know the fundamental business tenets in order to have a successful startup.
1. Understand the basic financials of your product
The importance of financials cannot be stressed enough. When the business is based on a product or a service, it is important to understand its financials.
Building a product is a process that takes money and time. So, understanding the costs and the revenue associated with building the product is important.
The basic financials of a product include:
Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) is the cost of the inventory sold by a company. It is the cost of the production, which excludes the cost of direct labour.
For example, if a web development company builds a website for a client, the cost of goods sold will be the cost of the design, development, hosting and other technical expenses involved in building the website.
Cost of Goods Sold is further broken down into two types:
Direct costs — direct expenses incurred on the product or service
Indirect costs — expenses incurred on running the business like rent, utilities, sales and marketing, administrative etc.
Gross profit
Gross profit is the difference between revenue and cost of goods sold. It is the profit earned before the deduction of operating expenses.
Operating expenses
Operating expenses are the costs required to keep the business running. They are expenses that cannot be avoided, and are essential for a business to function.
For example, salaries of the employees, rent, and other expenses incurred in the day to day operations of a business.
Net profit
Net profit is the gross profit less the operating expenses. The net profit is also known as the bottom line, and is the amount of profit that the business makes.
Net profit is the final amount that a business is going to pay to its owners as an income.
Gross profit margin
Gross profit margin is the gross profit as a percentage of the revenue. It is the profit made on every unit sold.
Operating profit margin is the operating profit as a percentage of the revenue. It is the profit made on every unit sold, after deducting the operating expenses.
2. Understand the sales funnel
Understanding the sales funnel of your product is very important. It is a measure of how many units of a product or service a company is selling and at what price.
The sales funnel is a graphical representation of the sales process. It states how many people visit a product or service, and the percentage of those who buy the product or service. It also indicates how many people bought the product at a certain price and the gross profit earned on them.
It is a very useful tool in understanding the financials of a product or service, and in deciding on the pricing of the product.
3. Understand the basic marketing principles
Marketing is the process of promotion of a product or service to increase sales and profits.
While a startup’s founders may not be able to hire a marketing professional in the initial stages, they should know the basics of marketing. They should know the fundamentals of promoting a product or service.
Marketing is a broad subject, and there is no way to cover it in a short article. However, the following are the basic marketing principles every startup founder needs to know:
Differentiate your product or service
Identify the problem your product or service is solving
Determine the target market
Decide on the marketing strategy
Choose the proper marketing channels
4. Understand the basics of human psychology
Marketing involves understanding the human mind. It involves understanding the reactions of a target audience to a marketing campaign.
Marketing and advertising are not the same. Marketing is a process of identifying the needs of your target audience and communicating the benefits of your product or service to them, while advertising is selling the product or service by communicating its advantages.
Marketing is not just about knowing the product or service, but also about knowing the target audience and their expectations.
The key to successful marketing is understanding the human psychology. For example, people buy things that they want, not things they need.
Psychologically, people buy things that they want, not things that they need. Therefore, it is important for a startup founder to understand the psychology of their target audience and promote their product accordingly.
5. Understand your competitors
Understanding the competition is important in any business. In a startup, the founders should know the competition, and how their product or service is different from the competition.
For example, if your product is a web development company, you need to know the competition. You need to know the competitors in the market, and why the customers should choose your product over the others.
While the competitors are the main concern, it is also important to understand the industry and the market that you are entering.
6. Understand the basics of accounting
Accounting is a fundamental business skill. Every startup founder should learn the basics of accounting.
They should at least understand how to read the financial statements of a company.
The following are the basic accounting principles every founder of a tech startup should know:
Know the difference between cash and accrual accounting
Understand the balance sheet
Know the basics of the income statement
7. Understand the basics of legal
Every tech startup has legal concerns. Whether it is intellectual property or company formation, a tech startup founder should know the basics of legal.
Understanding legal is not just knowing the basics of company formation or intellectual property. It is also about understanding how the company is structured, and how to maintain it.
For example, a tech startup is usually a limited liability company. A limited liability company is a company where the shareholders’ liability is limited to the amount they invested in the company.
The founders of a limited liability company should have knowledge of the following:
What is a limited liability company?
What is the purpose of a limited liability company?
What is the difference between a limited liability company and a partnership?
What are the advantages of a limited liability company?
What are the disadvantages of a limited liability company?
How to form a limited liability company?
What are the responsibilities of a limited liability company?
8. Understand the basics of intellectual property
Intellectual property is the ownership of a product, service or idea. It is the ownership of a company’s intellectual property, which includes the company’s name, logo, patents, copyrights, trademarks etc.
Since a tech startup is a product or service based business, it is necessary that the founder of the startup know the basics of intellectual property.
9. Understand the basics of work culture
Understanding the work culture is important for a startup founder. It is important to understand how to hire, how to manage and how to motivate employees.
For example, a startup founder needs to know how to hire the right people for the right job, how to manage them, and how to motivate them.
A lot of startups fail because they don’t know how to manage their employees. It is important to understand the basics of work culture before starting a startup.
10. Understand the basics of organizational behavior
Understanding the organizational behavior of your employees is important. It is important to understand the motivation of your employees, and to know how to deal with them.
For example, if an employee is not performing well, it is important to understand the reason, and to deal with it accordingly. A startup founder should know how to deal with underperforming employees.
11. Understand the basics of human resource management
Human resource management is the process of managing the employees of a company. It is the process of hiring, developing and motivating employees.
Human resource management is the backbone of a company. It is the process by which the company is structured.
Understanding human resource management is important for a startup founder. It is important to understand the basics of HR, and how to apply them to the company.
For example, the founders of a tech startup should know how to hire employees, how to hire the right people, how to interview them and how to motivate them.
12. Understand the basics of project management
Project management is the process of planning and organizing resources, so that a project can be completed successfully. It is about time management, and resource management.
Project management is essential in any company, whether it is a tech company or not.
It is important for a founder to understand the basic concepts of project management, and how to apply them to the company. It is important to understand how to plan and organize resources, so that the project can be completed successfully.
For example, a founder should know how to prioritize the tasks, and how to deal with underperforming employees, so that the project can be completed successfully.
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.
