10 Questions Every Start-up Founder Needs to Ask
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Mr. Biz Radio: 10 Questions Every Start-up Founder Needs to Ask
Unedited transcription of the show is included below:
Welcome to Mr. Biz Radio Biz Talk for biz owners during the next half hour, Mr. Biz, Ken Wentworth, a leading business advisor, and two-time bestselling author. We'll cover topics. That'll help business owners run their companies more profitably and more efficiently. If you're ready to stop faking the funk and take your business onward and upward, this show is for you. And now here's Mr. Biz, Ken Wentworth.
All right. Welcome to another episode of Mr. Biz Radio with me, Mr. Biz, Ken Wentworth. And this week, you guys are stuck with me. That's the bad news. The good news is I think you're going to enjoy the topic. So I was recently doing a speaking engagement and was taking some Q and a afterwards and was asked a question, what are the critical questions that a startup founders should be asking? And I had you know just a brain dump as I was speaking, you know, off the cuff of all these things to consider. And afterwards I had several people come up to me and say, Hey, you know, have you done a video about this? Is this in one of your books? Is you know, is it, have you done a radio show about this? And I haven't. And so I thought, you know what? This is probably a good, good topic to talk about.
So we're going to talk about so I've narrowed it down to 10. We've only got 30 minutes for the show here. So I wanted to narrow it down to 10, even with that, I'm going to have to kind of buzz through them, but I want to give you what I would consider the top most critical top 10 questions that every startup founder needs to be asking. And I'm going to give you a little bit of background on each one of those. And so with that said, let's get rolling here so we can get through all 10 of these within our our 30 minutes together. So the number one, and these are basically like in a, not basically they are in a chronological order. So these are, you know, from one to 10, you should follow them in that order. The way I have them arranged.
And you'll, you'll probably see why as we go through these. So the first one is, you know, you need to ask yourself as a startup founder, do I have what it takes that is massively important. You've got to start with that. If you don't have what it takes, you're not going to be successful, right? The first thing that you need to consider folks have heard me talk about this before to be a successful startup founder. You have to have what I call consistent, perseverance. I don't care how smart you are. You are going to make mistakes. You are going to get curve balls, thrown your way. You're going to have problems. So you have to be able to have that consistent perseverance to continually get up after you've been knocked down, think back a few other things to consider, you know, do you have a big picture vision?
Do your judgements typically turn out, well, do you have high energy? You're going to need that as a startup founder. You're definitely gonna need that. Not only for yourself, but for your team. Again, going back to that consistent perseverance, you have the ability to brush off those losses. Don't take them personally, you'll be able to move on. And then the last thing I would say in regards to do you have what it takes is sacrifice it's way different than sacrifice, quote unquote, in a corporate job or working for someone. The sacrifices are real. Not that the other ones aren't real, but they are, they can be, you know, have a significant impact on your family life, your personal life, a lot other things. So you have to make sure that you are willing to do that. And, and that will help you determine the answer to that question if you have what it takes.
All right. The second one to get past that. Yep. I got what it takes. The next thing that you need to consider is what type of entity should you use and what I mean by that? There's several different options. The LLC, which is a limited liability, limited liability corporation, you have a general partnership, a sole proprietorship, a C corporation or an S corporation. So again, we've got limited time here, but I'll just real quickly run through these. And S-corp, there are some advantages to that. It avoids double taxation and it goes straight to your personal tax return as a, as a, you know, as a founder, as an owner that's an advantage now there's other things that you have to do as an S-corp. You have to have quarterly meetings, et cetera, et cetera. So there's a whole bunch of stuff that goes around that a C Corp that is tax separate from its owners.
There's no limitation on shareholders, which there is for an S-corp. There, you can have different classes of stock, et cetera. One thing to consider if you are, will ever consider having venture capital investment, anything like that, any type of investors, you're probably gonna need a C Corp. That's typically what they want to invest in. They get preferred stock of that C Corp, an LLC that is limited liability as it's called for the owners. It flows through the taxation as a flow through taxation to the owners. And so again, very briefly considering time here, but so what should you choose? So here's, here's my advice. You, you did you notice that I gave you the options upfront and I gave you five, but I only talked about three of them. There's a reason, never choose a general partnership or a sole proprietorship.
Shouldn't say never too strong, but almost never. It's a huge disadvantage to an owner because of potential owner liability. Something goes wrong with the company. You could personally be liable for a lot of that stuff. So that's why I absolutely steer people away from those very few instances where I would suggest to you to use a general partnership or sole proprietorship entity type. The LLC protects the owners. If you properly structure it. Again, if you want outside investors, you probably need the C Corp. Generally, I would say an LLC is where you can start. And then as you grow and you need to be bigger, it's easy to convert from an LLC to an S Corp. And then if you need to, and you, you know, you're gonna take on investors or anything you can graduate, so to speak to a C Corp.
So that's, that's what I would say on that that particular question.
The number three, number three, the third question that every startup founder needs to be asking, what should be your first hires. And so a lot of people either do this wrong one or two ways. They either hire a bunch of people were out of the gate, bad mistake there in most situations, or they hire no one and try to DIY everything to their detriment. So not good there either. So what I do is go through an exercise here. I want to try to buzz through this one before we run out of time on the segment here. So determine the top six or eight competencies that are needed for success for your particular business, then do a real honest assessment of which, which ones you and or if you have a co-founder are short on, be very honest about those.
Maybe you guys are really good at five of the eight. The first hire should be the three that you're short in, or one of the first hires should be that. And here's another couple key metrics to consider with all this. You should expect an absolute minimum of about $150,000 of revenue for every full-time resource that you hire. So think about how that is, how much revenue you're doing right now. How many employees do you have? You need to be doing about one 50 or more, if you can, per head. And if you can't get there quickly, it's not time to hire someone. You can not afford to hire someone. When I see businesses that have less than a hundred thousand dollars per of revenue per resource, those businesses are typically not profitable. So it's a, it's a good metric. Again, it's somewhat generic.
Every business is different, but that is a decent rule of thumb to follow, try to get at least 150 K of revenue per full-time resource. Again, this requires a super honest founder assessment. What are you good at? What are you not good at? And by the way, it's good to really the things that you're gonna hire for even as best you can perfect those things as you're really in startup in bootstrap mode, and then hire you know, use a rule of thumb of an employee can cost, can cost, cannot exceed about 25 to 30% of the revenue per resource. So again, if you're bringing in 200 K of revenue per head, you know, you could say that's a $60,000 a month. So 30% of the 200 K as an example. And the last one, the thing I'll say on that one, it's really important as you hire is make sure every person that comes in the door, they've got it objectives.
They've got competencies and they've got metrics. The metrics will measure their performance against the objectives. You got to have those things, not only for you and your sanity, but also for your employees. They know exactly how they're being measured. It takes a lot of ambiguity out of things. And again, those things as, especially as a startup, they'll change over time, but at least start with something. You can always change them. Progress, not perfection as, as my good friend Jason Case always says, so those are the first three questions that every startup founder needs to be asking.
We're going to come back after the break and we're going to knock out, hopefully numbers 4, 5, 6, and seven, and get through four of them during the second segment here on Mr. Biz Radio
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All right, welcome back to the show. And I failed to mention before the break it's time for Mr. Biz tip of the week, as you guys know it to be in the second segment, we always go through that and ironically enough, as it seemed to happen so frequently the tip this week is actually something I'm going to talk about. And one of these questions that startup founders should be asking, but the tip this week is one of my favorites, hire on character, hire fecal people on character loyalty and work ethic, everything else, almost everything else can be learned. You can teach someone if they have those tangibles an intended intangible attributes to their, their, their person. You can teach them and they will learn that almost anything. Again, if you're going to hire a brain surgeon, of course, you need to have some experience with that, right?
I mean, I'm not being silly here, but for the most part, that's where you should hire and people make that mistake. And we'll talk more about that with one of these questions later. And as we get into the show here a little further, that is the Mr. Biz tip of the week.
Let's jump right back into the top most critical 10 questions that every startup founder needs to be asking. And we are on number four and number four. And again, these are in order. So now that we have determined, we have what it takes, we've determined the type of entity we want to have, and we've determined what should be our first hires and when should we hire them and what should we expect from them? The next step is Mr. Biz, you know, what's coming next, right. How to determine startup costs and other expenses.
So again, as you guys can imagine, I could speak about this for days. So again, trying to be an interesting time and trying to knock out all 10 of these within the 30 minutes of the show. So find a P and L of a successful competitor. And when I say successful, if you're going to sell stuff online, go pull off the Amazon pin. No, I'm not kidding. Find a successful competitor. There's is obviously public. You can pull their P and L. And if you can go back, as far as you can look at the early days of when they were starting up, that's going to give you an idea of what to expect. And of course, hopefully you have a little bit of expectation. You've spoken with some people you've done plenty of research. You can start to put together some things, but the other thing to consider as you're putting together these numbers, and this is a very important part to this.
You need to make sure that you were being very conservative. One of the things that happens with founders and startups, you get a really cool idea and you get rose colored glasses and you go, okay, gosh, we're, we'll, we'll bring in a hundred thousand dollars of revenue in the first month. And then you got crickets for three weeks. So what I would suggest is be very conservative with that because you might not find traction as fast as you can. It's better to be pleasantly surprised than to be, have a disaster on your hands, because you've sort of, you know, thought of things didn't think of going all the way through all the way through. I would add at least 20% to every expense. That's not a hundred percent, no, there's anything out there that you're estimating. You're like, eh, I think it will be about this, whatever you come up with, go through after you go through that exercise and add at least 20% additional expense to it, because you're probably short-changing it.
And then when you project revenues, look at it, everything projected revenue, again, keeping in mind, you know, probably have some rose colored glasses on, and then depending on the person and how much, how rosy colored their glasses are. I tell them to cut it by 50% and cut it by 50% again, make it a worst case disaster scenario, and especially calendarize that out. How long is it gonna take thank you to make that first a hundred K you know, going to make 5k the first month, seven K nine K 11, K. Does it, you know, does it take off after month three because of different actions you're taking, et cetera, but that is a critical piece. You need to know that, of course, to know how much runway you have with the startup capital you have. So now question number five, that every startup founder needs to be asking, why is competition important now, of course, kind of a silly question, you know, that's important, but here's the thing to consider a lot of startup founders that I've found is some of them, I shouldn't say a lot think that they don't have competition.
They think that they we've created some brand new thing that, oh my gosh, no one else does this. I have no, no competition. I'm here to tell you that everyone has competition. Whether it's direct or indirect, everyone has competition. Here's what I would suggest. And again, in the interest of time this is the best secret shop your competitors. When you do that, make particular no notations on the costs, things, what they charge for things, the experience that you get while you, when you shop with them, whether that's, whether that's, you know, brick and mortar, the quality, the number of products they offer the placement, one of those products, what type of marketing and advertising they're doing? You know, what mediums of marketing advertising they're using if you can, well, you can, I'm sure. Go online, look at their customer ratings, especially look at things that if there are any things that are assistant, where they're falling short, that's an opportunity for you to step in and be able to differentiate yourself in a positive way versus that particular competitor.
And then based on number for it, we just talked about the costs. You know, when you look at your costs, this is why they're in these order, this order, right. You could determine yeah. Costs. Now you've got some, some data on your competition. Can you compete with them right? Based on the cost that you came up with, can you compete? What do you have to charge now that it'd be at the appropriate margins you need to be at. And is that going to make you non-competitive them? If it is, that might still be okay if it is though, you need to be able to demonstrate the value yeah. That you bring versus their product, right? So someone's gonna pay 20%, but more for you. You need to be able to easily demonstrate, like slam dunk, you know, easy layup on how, why are you better create that differentiating factors again, think of it.
Yeah. If a customer said, Hey, I was just down the street at Bob's boggling charges, $5 from this, and you want eight, why should I buy it from you? And not him. You need to be able to answer that question very easily and succinctly and something that the buyer would go, oh geez. Okay. Got it. Okay. Where do I sign? Where, how do I buy this? So very important there.
All right, I'm gonna move along to speed it up a little bit here. Number six. W you got to interview several successful people, startup owners that have been there, done that when you're choosing them people. Here's another mistake that people make. They, they find someone who claims this and claims that when you're considering people to interview for this, to get your incentive, [inaudible] ask these questions. What is the most money you've made in a year?
Kind of a personal question, but you'll see why, what is the biggest business that you have built? And what was your biggest payday? Right? If they sold a business, exited a business, you asked them questions to see if that person's faking the funk. Are they a fake guru? Are they saying they know all these things, but they've not really actually experienced it. They've not actually done it. If so, they're not going to give you the feedback that you need. So super important, optimally, you would find people with varied backgrounds and you want truth tellers. You don't want the attaboys. You need reality. You want someone to be able to give you and keep you in check and tell you that the real real deal, if you can find someone that's out of your market and maybe not a direct competitor, but in your field, that you can get some of their time and pick their brain a little bit, ask about some of the challenges.
First of all, run your idea by them and seek some feedback. Then you can ask them about some challenges to avoid if they may have run into and then ask them, what are some things that they did that were accelerators, right? Those two questions alone can save you so much time and could be a reason for your success or your downfall and or the speed at which you are successful, or you're not. So that one is a really, really, really important one. And I am actually a bit behind here. So we're only on number six, we've got four more to cover, and we're running out of time here. So I'll start this one and we'll, we'll continue it afterwards. And so the, the seventh one is what name should I choose? And I've got a lot of specific things about this, personally, that I think, first of all, I need to keep it short.
I suggest usually less than four syllables. If you think of the biggest brands in the world, Coke now, again, they're Coca-Cola, but they go by Coke, Amazon, Apple, Tesla, Pepsi, Nike, Disney, Walmart, how many syllables are in all of those all less than four, all less than four. There's a reason for that. That's not a coincidence. So keep that in mind, keep the name short. And I will stop there and we'll pick this topic up this question up after the break. So come back after the break. I'm Mr. Ms. Ray, and we'll continue going through the 10 most critical questions that every startup founder needs to ask.
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All right, welcome back. And I need to get on my horse here and make sure we get through all 10 of these questions that every startup founder needs to be asking. So I started talking about how to choose a name and I mentioned, you know, keep it short. I suggest less than four syllables. In most situations, you can find some brands out there, large brands in the world that are more than four syllables. You won't find too many again. I named off a whole list of some of the biggest brands in the entire world that are, and they're all less than four syllables. Most of them are two, as a matter of fact. The other thing I personally think is in most situations, try to make it. So someone has a reasonable idea of what your business is or you do from the name.
Now again, you got names like Google that, you know, that that worked pretty well, who the heck knows what a Google is, right? That worked for them, but I'll tell you, I had an experience with my own. My, my first business, Wentworth Financial Partners. I created that name. First of all, it's entirely too long way too many syllables. It's too long character-wise as well. And people would think because I, I, my idea was I may partner with you. I may financial partner with you in that I will help you with your financials and what people got out of it. They thought I was a financial advisor. I would help you with your retirement, things like that. So I learned from that, another thing when choosing a name, I personally think check to see if you can get the domain name and the.com version of the domain name.
If it's already being used, if there's already a business with that name, I think it's very important to have the.com unless you're a tech company and you have, you know, dot IO or something like that. But for most, most cases you want the.com version that's considered, you know, the primary address you want to make sure you have that, of course check any intellectual property, go out to the www.uspto.com check any intellectual property stuff that are around there. And I would also suggest once you get the dotcom by other, other alternative domain. So if you get you know www.MrBiz.com by www.MrBiz.org , www.MrBiz.net , you know, buy some of those, you know, the next couple of ones, just so you, you had them. So no one else has those. They can't, they can't park on them. So that is that one.
So number eight, what do I need to know about financial statements? Again, I could talk about this one for days. Of course, I won't. I'll just really briefly tell you that the main three financial statements, balance sheet, your income statement and your cash flow statement. So balance sheet, it basically gives you a financial snapshot at a point in time. What you want to look for. Generally speaking, as you go through time is you want your assets going up, your liability is going down your debt and you want your equity going up. So you want to see that as those directions, as you compare to other periods your income statement, again, everyone knows kind of what that is. Are you making a profit? Are you going to have some tax liability because of that, et cetera, I won't belabor that one. In the interest of time, your cash flow statement, this one, a lot of people think of it as kind of accounting.
Mumbo-Jumbo, it's a little confusing. It's not really, really, if you look at it, it breaks out into three sections. It shows you where your cash is coming in, and it shows you where your cash is going out. So if you're bleeding cash, you can look on your cash flow statement and see why and where, and compare it to prior periods. And that's what I should mention is what on all three of these, these statements, your, your balance sheet, your income statement, your cash flow, compare them back to a prior period. Once you're in business for a while. So the same period a year ago the prior year, I'm sorry, the prior period. So say, let's say you're in second quarter. You compare to first quarter prior year. So second quarter of this year versus second quarter of last year. So it gives you a year of your comparison.
Are you growing? Are you not growing, et cetera? And of course, everyone has a budget, right? Yes, they do. And you want to compare to your budget. So that's what I'll say about financial statements. All right, we got two questions left. I think we're going to make it guys all right. How to hire the best people please. That's one of the things you've got to ask, because no one, no one grows large businesses on their own. And as I mentioned with the tip this week about hiring on character loyalty and work ethic, one of the biggest mistakes I see people make is they focus only on prior experience or skills. If that person is really skilled at doing filling in, you know, fill in the blank, whatever it is, but they're a Butt-Head and you don't want to be around him and they irritate their coworkers, or they irritate customers.
They're going to be a crappy employee. They're probably gonna irritate you too. And by in turn, you're going to irritate them. And they're going to believing you're gonna have attention issues, et cetera. So fine. Yeah. Someone character loyalty work ethic. You've got to find that super, super important. I'm promise you if you hire based on those three tenants, you will have a very high success rate on hiring the good people for that fits your culture. That will be good workers. That will be loyal employees, of course, a really, really important there and how to measure that. So I'll give a really quick example. I only got four and a half minutes, and I still had another one to bust through, but I've given this before. You know, someone says, well, how do I measure character loyalty and work ethic? One way to do this I've done in the past is if you're interviewing someone you're in, let's say an office put a piece of trash on the floor, that's in the walkway.
As they walk into the door with a trash can within, you know, within eyesight of them, very close eyesight, the person who, so there's no way they wouldn't see that piece of trash, the person who walks in and steps over that piece of trash. And doesn't do anything about it generally is the person that when you ask them to do something two months from then, they're going to say that that's not my job. The person who picks up that piece of trash is the person that thinks along the lines of there is a person I know there's trash, not supposed to be on the floor, right there as a trash can. I'm going to pick it up. I'm going to fix it. That's not in their job description to come in, to interview with you to pick up trash. That person is showing you a lot about their character, loyalty and work ethic with that simple, well, little thing.
And I wouldn't make your decision solely based on that, but I'll tell you it, man. Think about that. It's, it's powerful, very, very powerful and an easy thing to do to test that. All right, right. We're on the last question that every startup founder needs to be asking, and again, chronological order here, how can I obtain cash to maintain and grow? So I'm gonna, I'll tell you a couple of things and I'm going to tell you something, it might shock you. So, first of all, you need to develop a relationship with multiple different bankers at multiple lenders, consider all of your different options. The other thing you need to do when you see and con create those relationships is determined upfront. What they will do require from you, what are they looking for in order to extend a loan to you, or a, you know, a line of credit or any, any sort of credit they're going to give to you?
What are the things they're going to look for? Because then you could manage those within your business to ensure if at some point you think you may need that, that you can get into that and be available for that. So you don't run your business for six months, run out of cash and go, they go, oh, well, we're looking for these three things and you haven't set yourself up to be successful for that. However, here's the shocking part beyond your initial funding. So you're going to start up, you know, you're gonna have your startup funding that you're using to start the business that we talked about earlier. This might sound a little crazy, but I would recommend not having a plan B in regards to cash. I know it sounds crazy. Here's why, if you don't have a plan B, so if you say I'm, let's say you're starting a business with $50,000 and you have a plan to make it work with $50,000 and you start burning through your 50 K if there's no plan B, your plan B becomes, make plan a work.
And that's what it should be. If you know that if I burned through this 50 K I can just go to the bank and get another, another a hundred K you won't have the same urgency to make sure that it works on the startup funds. You could end up wasting a lot of money. You won't have the same diligence around it because you won't have the urgency. Plus, the other thing that it can do is in that scenario where you already have plan B lined up and you burn through your 50 K and you throw another a hundred K at it, as you could, it could cause you to keep putting money towards a losing effort, a losing business. I am giving myself these startup funds, and if I can't make it work with them, then I need to move on to the next project.
That's the type of attitude you should have. And I know that sounds a little crazy, but I'm telling you, you got to create that urgency. If you know, know that, you know, my uncle, Bob's gonna lend me a hundred K. If I run out of money, you will not work to make that 50 K work initially, because you know, you have the a hundred K to back you up. So those are the 10 most critical questions that every startup founder needs to be asking right now, again, I'm going to run through them real quick. Number one, do I have what it takes? Number two, what type of entity should I establish? What should be your first hires, how to determine your startup costs and other expenses. Why is competition important? The fact that you need to interview several successful startup owners, how to choose a name, what do I need to know about financial statements, how to hire the best employees and how can I obtain cash to many maintain and grow? So those are in Mr. Business opinion, at least the top 10 questions that every startup thunder needs to ask. Very, very important there. So I will tell her that we need to make sure you're asking those questions, and you're gonna hear biz barky official employee here. He's he's telling us his acceptance of those. So thanks for listening guys. This week as always cash flow is king.
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