how to start a company

How many times have we heard of businesses that have been started in the founder’s garage? The move to office space marks an important milestone in the growth of a company. That, as many probably suspect, can be daunting. From leasing office space to setting up a computer network and meeting payroll, there are many tasks that need to be done. Many have to be done regularly, day after day, and some on a 24/7 basis. These tasks require a level of experience that entrepreneurs rarely will have, or care to acquire.

For example, how many of you are likely to know the “nitty gritty” of leasing office space? Besides, these are distracting to the entrepreneurs’ larger goal of building one’s startup. Continuing with the previous example, after all most of you are not aiming to enter the real estate business. In the circumstances, what can an entrepreneur do to ease the burden of these essential tasks and move on with the larger goal of building an entrepreneurial enterprise?

Fortunately, there are good choices. Entrepreneurs can hire space in so-called business incubators, which take care of a startup’s every need. Or they can hire a project manager for a bunch of tasks such as setting up an office and computer systems, and outsource another set of tasks like payroll and accounting. Also, a lot of office equipment including computers and computer servers can be leased.

Entrepreneurs need to examine these choices in the light of what they seek in terms of costs, administrative control and perhaps the ability to scale before determining what is best for them. Let’s look at each of the three choices and consider the advantages and disadvantages.

Incubators

Just as medical incubators help a newborn survive, business incubators provide the tender care entrepreneurial companies require. Over the years, incubators have evolved into a lot more. They not only help entrepreneurial companies survive but serve as a launching pad for young and small businesses. Most offer promising startups everything it takes to succeed. The services range from simple front-office services to backroom processing, and hosting of computer networks to hosting of computer servers. Besides taking care of the routine business needs, some incubators provide strategic assistance to the entrepreneurial company. This can include financial planning, venture capital funding, specialized marketing and legal expertise, and management consulting, among others.

Many entrepreneurs benefit immensely by starting life in an incubator, especially because they can remain focused on their companies instead of worrying about everyday administration. Some startups will move out once they outgrow its utility, or when it becomes imperative to build their own facilities.

Entrepreneurs should favorably consider incubators especially because the early stages of setting up a business is truly challenging and can be time-consuming and frustrating to one inexperienced in these tasks. Statistics suggest a significantly higher rate of success for startups that begin at an incubator.

However, incubators come at a price. This is especially true of the good ones that provide strategic guidance. These incubators have a portfolio of companies that can leverage off one another. They link entrepreneurs with powerful investors and advisers, and can lead to sales and marketing contacts. So much so, some incubators provide a lot of “intangibles” than other investors do. For providing these services, most incubators seek a share of equity. Remember that most incubators examine the prospects of entrepreneurial companies before accepting them.

Some entrepreneurs may not wish to part with equity for a variety of reasons. For example, an equity deal with an incubator could complicate plans for venture capital at a later stage. For such entrepreneurs, this obviously is not a good option. But they still can consider business parks and barebones incubators that offer a wide range of essential services required for entrepreneurial companies.

For entrepreneurs willing to shed equity to an incubator, the decision should be examined carefully with the help of lawyers in order to avoid difficulties later. Also, entrepreneurs who seek to raise any capital through an incubator’s investment fund must carefully evaluate the advantages and disadvantages, and estimate its real cost to the company. Of the three options we listed at the top of this chapter—incubators, leasing and outsourcing—incubators are likely to be the least expensive but could well be the most cost-effective, depending on the traction the incubators provide to a young company.

Doing It Yourself

Many entrepreneurs choose to set up their own offices because it is clearly a cheaper alternative, when compared with the previous option—incubators. This they can do by using initial funds, or angel investments, or even venture capital. Most entrepreneurs who choose this option have better cash flow than others, or have pressing needs that are not typically met by the other alternative.

So entrepreneurs would lease office space, buy the furniture and even set up their own computer network, to start with. This happens at an early stage of the company, probably when the founders move out of their garages. But as they go along, entrepreneurs need to hire employees—a front office receptionist or office manager, for example—to set up and manage a number of things and set up a system of controls for most everyday functions.

Then there are the regulatory and other requirements that need to be met. So entrepreneurs need somebody to manage the finances and maintain records and a lawyer to take care of the legal processes such as incorporation. Fortunately, in the modern world, a lot of these tasks can be outsourced, allowing entrepreneurs to focus on building their company. Payroll, accounting, call centers, technology support, hosting of Web sites and computer servers, etc. all can be outsourced to third party providers. One only needs to oversee the outsourcing vendors.

Many entrepreneurs might need project managers, real estate advisers or brokers, and architects if they plan to build their own offices or labs, or expand these on a regular basis. Entrepreneurs who choose this option can independently decide whether to buy or lease computer and other office equipment, depending on such factors as cash flow and redundancy required. The key challenges in deciding to do your own, or build your own, are several. For example, a small entrepreneurial company needs to have the ability to quickly scale up its operations as it grows. It needs to add computers and servers, and create more space for more employees. It needs to balance costs with scalable infrastructure in order to arrive at optimal choices. The advantages to entrepreneurs are the ability to plan these better, when compared with simply using an incubator’s facilities, and potential gains from economies of scale.

Equipment Leasing

Entrepreneurs can lease equipment, instead of buying outright, to reduce the cash outflow. For startups with no revenues, “small ticket” leases of $100,000 or less are feasible on the personal credit of the founders or owners so long as they can make the monthly payments.

In fact, most small businesses use equipment leasing. Equipment leasing can be thought of as a loan in which the lender buys and owns equipment, and merely “rents” it to a company at a flat monthly rate for a specified number of months. At the end of the lease, the company may purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing or return it and lease new equipment. Besides saving precious cash, entrepreneurs can avoid obsolescence risk. Leasing also finances the “soft costs” associated with equipment purchases, such as installation and training services. Still, leasing is generally more expensive than bank financing, but other advantages including easy availability and simpler procedures make it very attractive to small businesses.