Starting a profitable business: a comprehensive guide
A startup is defined as a new and innovative business venture, typically launched by one or more entrepreneurs with the goal of creating a unique product or service that meets an unmet need in the market. Startups typically have limited resources and a small team, and they often rely on outside funding to get off the ground and to fuel further growth. The success of a startup is typically measured by its ability to scale its business model and become profitable.
Many people dream of creating a thriving business, but understanding the steps on the journey to creating a profitable startup can be crucial to success:
Ideation & Discovery: This is the stage where the entrepreneur(s) come up with an idea for a new product or service. This stage may involve market research, identifying a target audience, speaking to potential customers and assessing the feasibility of the idea.
Create a business plan: this is crucial to gaining funding and should outline your products and services, finances, operations, market analysis and strategies.
Validation & Development: This is the stage where the product or service is developed. This may involve prototyping, testing, and refining the product or service to ensure that it meets the needs of the target audience.
Incorporate your business: choose what type of business you want to register as. There are many options so carefully consider which type of entity best fits your needs and model. There’s guidance available from gov.uk or you can seek support from legal organisations who can also help with employment law, copyright and patents and any other legal considerations for founders.
Fundraise: your first funding will be a pre-seed round. You may already have used your own funds to bootstrap the initial activities of your startup but will next look to pre-seed funding from angels, friends & family or bank loans. Take care to be realistic about what you need to borrow, and calculate your projected costs and cash flow carefully.
Build an MVP: this stands for minimum viable product and is the first iteration of your product or service you can go to market with.
Launch: Once the product or service is ready, the startup can launch it into the market. This may involve marketing, advertising, and PR efforts to build awareness and generate interest.
Growth: Once you are seeing good performance, strong traction and strong revenue, you can look to gain further seed funding, usually from VCs, refine your model and proposition, and look to scale up your operations, expand into new markets, and develop new products or services.
Maturity: Once the startup has established itself in the market and achieved sustainable growth, it enters the maturity stage. At this stage, the focus shifts to maintaining profitability and staying competitive in the market. You will take on further seed funding rounds to allow for vertical and horizontal growth and target additional market segments. Finally, you may choose to exit the business.
First-time founders are generally characterised by being innovative, driven and passionate, and while those qualities can be hugely beneficial, they’re not enough on their own to guarantee success. Not only are founders generally time-poor, they will by definition have gaps in their skills and knowledge that could be crucial to building a thriving business. No man (or woman!) is an island, and drawing on the expertise and experience of board advisors, NEDs and fractional executives can provide the strategic and operational heft necessary to scale a build and scale. Connectd has a huge network of experienced professionals who specialise in supporting founders and founding teams.
Once you have a balanced team in place - alongside a great idea, robust financial models and a strong pitch deck - you’ll be a much more attractive proposition to investors. At early-stage, the leadership team can be a huge factor in investors’ assessments.
Connected’s smart matching technology allows investors on our platform to search for startups that match their investment thesis, against criteria including founding team, financials, stage and funding plans. You can learn more about accessing our network of advisors and investors here
Coming up with profitable idea
Some people have a moment of divine inspiration, and are compelled to make their idea a reality, but many others decide they want to strike out into the brave new world of entrepreneurship without actually having a concrete business idea. So how do you come up with a profitable idea to create a solid starting point for your journey?
- Focus on your expertise and skills - by leveraging your own experience and areas of specialist knowledge you are much more likely to come up with an idea with which you can succeed.
- Park the perfectionism - taking the leap can often be the hardest part. Your idea may not yet be perfect but very few are! Refining, amending and pivoting your idea is a natural and necessary part of your early-stage journey.
- Identify problems and pain points - many of the best startup ideas address an existing problem and create a new or improved solution. Cast your net wide to discover what is causing people pain, especially within areas that you have expertise and experience.
- Look to overseas markets - there can often be products or services that are operating only in certain geographies, and can give you inspiration to roll out similar solutions in your country or region.
- Is it worth paying for? The fundamental and most important question is whether people will part with their cash for your product or service. This is where research can prove invaluable, even at the ideation stage - and can save you time and money.
- The proof is in the passion - above all, you, as the founder, need to be totally invested in and a champion of your product. You will be your company’s biggest cheerleader so you have to believe in your idea and its ability to succeed.
How to choose a working business model
Choosing the right business model for your startup is absolutely critical to its success. Here are some steps you can follow to help you choose the best business model for your startup:
- Identify the problem you are solving: Your startup should solve a problem or address a pain point.
- Identify your target audience: Start by understanding who your target audience is and what their needs are. This will help you determine which business model will work best for your startup.
- Research your competitors: Look at other companies in your industry and see what business models they are using.
- Define your value proposition: Determine what sets your startup apart from the competition and how you can create value for your customers.
- Consider your resources: Look at the resources you have available, such as capital, staff, and technology.
- Test your ideas: Before committing to a business model, test your ideas with potential customers and investors to get feedback and refine your approach.
- Consider the scalability of the model: Your business model should be scalable to ensure long-term growth. Identify the potential growth areas for your startup and choose a model that can support that growth.
- Be willing to pivot: As you gain more information and feedback, be willing to pivot and adjust your business model as needed.
Remember, there is no one-size-fits-all business model. What works for one startup may not work for another. Take the time to carefully consider your options and choose the model that is the best fit for your startup's unique needs and goals.point of your target audience. Identify the problem you are solving and ensure that your business model aligns with it.
Steps in market research for start-ups
Market research is an essential step for startups to gain insights into the market, competitors, and target audience and will allow you to build and adapt your product to satisfy customers and keep up with changing trends. Here are some key areas that startups should focus on when conducting market research:
- Industry analysis: Start by researching the overall industry that your startup will operate in. This includes understanding the market size, trends, and growth potential. This information will help you understand the competitive landscape and the potential for your startup.
- Competitor analysis: identify your competitors and analyse their business models, marketing strategies, pricing, and distribution channels. This will help you understand their strengths and weaknesses and identify opportunities to differentiate your startup.
- Target audience analysis: conduct research to understand your target audience's demographics, preferences, behaviour, and pain points. This information will help you create products and services that meet their needs and develop effective marketing strategies.
- Product research: gather feedback from potential customers about your product or service. This can include focus groups, surveys, and user testing. This will help you identify areas for improvement and ensure that your product or service meets the needs of your target audience.
- Pricing research: Determine the optimal price for your product or service based on market research and competitor analysis. This will help you set a price that is competitive and profitable.
- Distribution channel analysis: work out the most effective distribution channels for your product or service. This can include online marketplaces, direct sales, or partnerships with other companies.
Success doesn't come overnight...
Some of the most well known startups in the world almost failed before going on to huge success, and this is worth bearing in mind when launching your startup. If your product doesn’t address a market need or a competitor already does whatever you do better, it may be time to consider pivoting.
Here are three examples of successful startups that snatched victory from the jaws of defeat:
- Airbnb was founded in 2008 by three friends who had the idea to rent out air mattresses on living room floors. The idea really didn’t land with investors but after several rejections from VCs, Airbnb landed investment, pivoted to become the homesharing business as they are now and are currently worth over $25 billion
- DoorBot founder Jamie Siminoff appeared on ABC's Shark Tank with the hope of raising $700,000 but was unsuccessful in gaining investment. Five years later, after refining its business model and undergoing a serious rebrand to become Ring, the company was acquired by Amazon for an estimated value of between $1.2 billion and $1.8 billion, and its products are now sold in over 90 countries worldwide.
- Slack - now one of the most widely used communication platforms in workplaces across the world, Slack never intended to create this type of company. Stuart Butterfield’s company, Tiny Speck, developed Glitch, a game that failed to attract investment. Butterfield then identified a potential pivot - the platform that Tiny Speck’s US and Canada offices used to communicate. Cut to 2022 and Slack was acquired by Salesforce for $27.7 billion.
Understanding legal and regulatory requirements
Starting a business involves complying with several legal and regulatory requirements to ensure that your business operates lawfully and avoids any legal disputes. Here are some of the key legal and regulatory requirements for starting a business in the UK:
- Business registration & incorporation: this varies by geography but UK business rules and regulations dictate that you identify the type and category of your company and register it accordingly. There are various options to register your company including sole traders, limited companies, or partnerships. Each has its process to follow, which can be found at GOV UK.
- Insurance: This is vital to protecting you and your company in the event of it just anything goes wrong. Employer’s liability insurance is a legal requirement for all businesses in the UK (unless you have no employees!). It’s designed to cover any compensation costs that crop up if an employee becomes injured or ill in the workplace.
- Shareholder & director documentation: unless you are the sole director and owner, put agreements in place which prevent any future disputes or problems.Disputes between co-founders are much more likely than you’d think. Shareholder agreements and term sheets should also be created to ensure your relationship with investors is defined and protected.
- Taxation: making sure your tax affairs are in order will prevent any run-ins with HMRC and avoid the worst case scenario of investigations, fines and penalties. Make sure your business is registered for all applicable taxes, including Corporation Tax (and VAT if you have reached the required threshold). Many founders use an accountant to support them with their HMRC submissions.
- Employment laws: Understand and comply with employment laws, including minimum wage, overtime, and employee benefits. Make sure to properly classify your employees as employees or contractors to avoid any legal disputes.
- Intellectual property: Protect your intellectual property, such as trademarks, patents, and copyrights. Consider working with a legal professional to register your intellectual property and defend your rights.
- Data protection: Comply with data protection laws, such as the GDPR if you handle personal data. This may include obtaining consent, implementing security measures, and providing data subject rights.
Legal and financial professionals can help founders to ensure they are complying with all legal, regulatory and fiscal requirements, though this can often prove a very expensive outlay for startups with limited resources. ConnectdLegal provides all Connectd members with access to a suite of legal documentation including NDAs, terms sheets and employment contracts, and we work with LegalTech pioneers .archlaw to provide bespoke advice for thos founders who need extra support.
How to create a business plan for your startup
We’ve already covered a number of aspects that are intrinsic to building a business plan even at the MVP stage, including market research and crystallising your USP. However, when it comes to creating a comprehensive business plan, there are certain things that you must include in order to open doors to valuable conversations with investors.
Your plan should be a blueprint which outlines your goals, strategies, and projections, backed up by the metrics, data and information you will need to stay on the track to success. And bear in mind - your business plan is a living document which you will undoubtedly change, update and amend as your business grows.
Finally, remember that investors want to see honest and realistic plans and projections from startup founders. There’s no point in offering something you can’t back up or deliver, so make sure your business plan is robust, clear and realistic.
Below are some of the crucial aspects that your business plan should contain:
- Financial plan: This should include a projected income statement, balance sheet, and cash flow statement for at least three years. You should also include funding requirements and projections of potential revenue and expenses.
- Marketing strategy: Determine how you will reach your target audience and the tactics you will use to promote your product or service.
- Your team and organisational structure: Define the roles and responsibilities of your team members and how they will work together to achieve your business goals.
- Executive summary: This should be a brief overview of your entire business plan that summarises the main points and goals of your startup.
After completing the business plan, review it to ensure that it is realistic and achievable. Mentors, advisors and other, more experienced founders can be excellent sounding boards, able to provide objective advice and suggestions that you might otherwise have overlooked. Your first iteration is very unlikely to be investor-ready, so be prepared to revise your plan. Similarly, you should revisit your plan regularly and reflect any changes in the market, your competition, or any other consequential factors.
Connectd’s Venture Builder team specialise in helping founders to produce the full range of investment collateral, including business plans and financial models. You can hear from just a few of the hundreds of founders we’ve helped to get investor-ready here.
Business start-up advice: funds and growth tips
The time it takes for a startup to become profitable can vary widely and depends on various factors. For some startups, profitability can be achieved within the first year of operation, while for others, it may take several years. In some cases, startups may prioritise growth and market share over profitability in the early stages, which can lead to longer timelines for profitability.
According to a study by CB Insights, it takes an average of between three and five years for startups to become profitable.
Do bear in mind that becoming profitable is not the sole measure of success for startups or for those investing in them. Other metrics, such as customer acquisition, retention, and revenue growth, are also important indicators of a startup's success.
We’ve pulled together a few tips for attracting investors and sustaining your startup’s growth:
- Be honest, be real, be rigorous - from the get go, investors and wider stakeholders will be looking for transparency, realism and honesty. Make sure you are open about your plans and regularly update investors, both potential and existing, with the need to know data and information.
- Be yourself - at early-stage, investors are placing their faith (and money!) as much in you, the founder as they are in your product or plans. Be authentic, embody the passion you have for your business and build strong relationships with your investors.
- Make sure you plan for the long term - build out a 3 year plan for your business. This will be the northstar for your potential and progress. Revisit this often and don’t be afraid to change things up if conditions dictate.
- Be prepared to pivot - some of the world’s most successful startups have thrived only when they’ve pivoted their businesses 180 degrees from their original product and plans. Whether it’s business model, market or brand, a fresh direction can often bring success, especially in turbulent times.
- Lean on experience - tapping into the advice of a mentor or board advisor can prove invaluable to time-poor, inexperienced founders. It’s an almost impossible task to keep all the plates spinning on your own, so drawing on the expertise of a seasoned professional can help steady the ship, fill gaps in knowledge and skills and make your business a more balanced and attractive investment proposition. Many investors themselves will offer advice and support once they have chosen to invest in your company, so once your funding journey is underway, make sure to leverage this resource too.
- Perseverance - you haven’t become a founder because it’s the path of least resistance - quite the opposite, in fact! Embrace the challenge, learn from your mistakes and missteps, and who knows, you might just become the next unicorn…
If you'd like to access Connectd's extensive network of engaged advisors and investors to boost your startup's growth, you can join our platform here.