6 steps to creating a super startup

Thinking about starting a business? Follow these crucial tips and your company might just become the next big thing.

By Anne Field

(Fortune Small Business) -- If you want to be an entrepreneur, you're in good company. An average of 464,000 adults a month create new businesses, according to the most recent statistics available from the Kauffman Foundation (kauffman.org), which tracks and promotes entrepreneurship.

But starting a business is a complicated, risky, all-consuming effort. Indeed, just two-thirds of new small businesses survive at least two years, and only 44 percent survive at least four years, according to a study by the U.S. Small Business Association.


Taking the six steps below will help put you on the road to success.

1. Determine if you're an entrepreneur or just a wannabe. Starting a successful business requires a unique set of characteristics. You have to be willing to take calculated risks. In addition, a mix of optimism, high energy, and an ability to live with ambiguity are also crucial.

According to a recent study of 1,600 Columbia Business School alumni who started businesses, the desire most related to success was the inclination to build something.

"They took a long-term view," says Murray Low, director of the Eugene M. Lang Center for Entrepreneurship at Columbia.

Make sure you're prepared to wear many hats, at least in the beginning. "You need to be willing to meet with the chairman of the board, then go back to the office and fix the toilet," says Low.

2. Pinpoint an opportunity. There are lots of ways to find the right business idea. But for most people, it's wise to begin with your interests, say small-business experts.

"You should start with what you know best and are most passionate about," says Sarah Chiles, director of Programs at NYU Stern's Berkley Center for Entrepreneurial Studies.

Back in 1999, Julie Dix started sewing satin tags onto her baby's blankets, after she discovered the infant liked playing with soft edges. Soon, other mothers began telling her what a great idea it was. That's when she teamed with friend Danielle Ayotte and formed Spencer, Mass.-based Taggies. Today, the company sells the blankets, and dozens of other products in six countries.

The bottom line: "You have to find an underlying need that's not being fully met," says Timothy Faley, managing director of the Samuel Zell & Robert H. Lurie Institute for Entrepreneurial Studies at the University of Michigan's Ross School of Business.

3. Make sure there's a market for your idea. Get out there and talk to as many potential customers, suppliers and distributors as you can. Trade-show attendees are a particularly good source of information. And remember: You're not trying to sell anything yet; you're just exploring the opportunity.

"Everyone will be more willing to talk if they think you're just looking for information," says Faley.

It's also a good idea to make a prototype of your product, so customers can test it out. That goes even for low-tech wares. Early on, Dix and Ayotte made samples and brought them to crafts fairs, as well a local store. When it sold out in just a few days, they knew they were onto something.

As you get feedback, good or bad, fine-tune your concept accordingly.

4. Write a business plan. Any plan needs to answer a few key questions: What is your product or service? Who is your customer? What need does it address? And, how are you going to turn your idea into a money-making venture?

The plan "should lay the foundation on which you build your business," says Faley.

Divide the document into a few sections. First, and perhaps most important, is the executive summary, detailing in no more than two pages the key information in your plan.

Next should be a market analysis that describes the needs you're addressing and any potential competitors; a discussion of your marketing plans and the management team; and a financial analysis of the first five years in business, with a sample income statement and balance sheet.

Be prepared to revisit the plan many times. "It should grow and change along with your company," says Faley.

5. Determine your business structure. You have four basic choices -- sole proprietorship, partnership, LLC, or corporation. Each offers different legal protections, tax savings, and ownership requirements. They also vary in how complicated they are to set up.

For example, sole proprietorships and partnerships require little paperwork to establish, but also don't provide the tax breaks and liability protections of other structures.

With limited liability companies (LLCs), you are personally protected from creditors and lawsuits and can have as many owners as you'd like.

Corporations also shield your personal assets from creditors and provide various tax breaks. If you incorporate as a C corporation, owners are not responsible for liabilities, because the corporation is considered to be a separate legal entity. But there's also a double taxation, on both earned dividends and profits. An S corporation avoids that problem by having shareholders report earnings on their personal tax forms. But there are limitations on who and how many people can be shareholders.

6. Look for funding. Most entrepreneurs start their businesses by dipping into their savings, and hitting up friends and family. Perhaps half of all startups, in fact, are funded initially by the founder's credit cards, according to Faley.

Getting a bank loan is tough unless you have assets - and that often means using your home as collateral.

Other likely sources include potential suppliers and even prospective customers, who might be willing to help out in return for steep discounts.

What about venture capital? Fact is, VCs rarely invest in startups.

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