I’ve been asked to write about starting up a technology company. I should preface this by disclosing that I am, to some extent, learning as I go. Much of what I’ve done right has been thanks to helpful advisers, both professional and otherwise. I should also note that a lot of my mistakes key learnings have been through trial and error. Very often, there’s no better way to learn what works than by trying. That’s one benefit of a technology company: you don’t have to build a whole factory to see what works. But much of it applies to businesses in any field, so if your dream is more old-economy than new, this still may help.
But I’m getting ahead of myself. Let’s back up for a moment.
My brother-in-law once told me that, if you’re thinking of opening your own restaurant, start by slipping the maître d $50 every time you eat there. You’ll get treated like an owner and it will cost far less. If you still want to do it, then at least you’ll know that you’re doing it for the right reasons. I’m not sure that advice is perfectly applicable to someone who’s thinking of starting a technology company, but some circumspection in the face of such daunting odds is certainly appropriate. If you really want to start your own technology company, it’s important to confront some hard questions. Are you tired of steady hours, reasonable pay, predictable schedules and frills like health insurance and retirement plans? Do you enjoy having to make decisions that determine the success or failure of a company several times a day? If so, then it just might be for you.
Let’s assume you have a great idea in a new space that you can execute before someone else (Google, Hooli, that sort) throws thousands of developer-hours at it and replicates it. Or even improves on it. For the purposes of this piece, we’ll focus on tech start-ups. If your plan is to open a factory that makes actual things, please write in and let us know. I’d be happy to research it for you. I’m told that such things were actually common in our area many years ago.
To begin with, let’s understand just what we’re talking about. A tech start-up is what professional asset managers call a very high-beta undertaking. Beta comes from academic finance and the capital asset pricing model. It is an investing term used as shorthand for a particular asset’s relative risk compared to the broader market (let’s use the S&P 500, whose beta is, by definition, one). An older, more stable company might have a beta of 0.8, suggesting that it effectively blunts some of the market’s volatility: if the market is up 10% in a given year, that stock may only be up 8% or so (and it will minimize some of the loss in a down year). But there’s a corollary to that: a high-beta company will tend to amplify the swings of the market in either direction. Amazon.com used to have a beta of 3, which means that in a plus-10% year for the market, you could see a gain of 30%, but in a down-10% year, you could be down 30%. When investment guru Peter Lynch warned investors decades ago that successful investing depends as much on a strong stomach as a strong mind, this is one example of what he meant.
Why is that, exactly? For one reason, the market for software is global. A pizzeria or clothing store might be able to ship worldwide, but they would still incur costs (investing in new capacity, for example) to be able to do that. Your costs to expand, let’s say, a software business are relatively low and the talent pool is everywhere. As a result, the stakes are also higher in almost every way. You will compete more aggressively for talented hires, you will work harder to secure – and protect – intellectual property like patents and trademarks, and you will need smart and experienced advisers to guide you. All these things cost money, so unless you’ve already retired (somewhere between comfortably and extravagantly) or come from a phenomenally talented family, you will most likely be looking for outside funding.
But before that, there needs to be a core team behind your idea. The next piece will discuss building a team and finding the right investors and advisors to help you navigate the shoals of forming and building and company, and avoiding the windswept crags upon which most tech start-ups have run aground. In the meantime, if you have any questions, please send them in by email to the editor and I’ll do my best to address them.
Yali Elkin spent 15 years perfecting his spreadsheetsmanship in corporate finance before starting LiveDial (www.livedial.com), to develop and market software for polling and surveying users via smartphone applications on issues ranging from President Obama’s foreign policy to the Kanye West/Kim Kardashian wedding. He has a BA in History from University of Pennsylvania and an MBA from NYU. He lives in Teaneck with his family and that somewhat overwrought “shoals/ windswept crags” metaphor is his own.
By Yali Elkin