For the first post in my blog, the immediate question was “Where should I start?” Should I write an analysis of negotiation strategies in subsequent rounds of VC financing? What about methods for organizing stockholder, debt holder and optionee documentation? Or maybe my plan for listing companies on the NYSE?
Of course not. I should take the advice I offer entrepreneurs: start at the beginning! I know that sounds pat, but it is something we all need to remember. It’s great to think big, but first you have to execute the details. In a start-up, entrepreneurs need to focus their plans on developing a Minimum Viable Product, not on dethroning Facebook.
So for my first post, here are two very basic questions entrepreneurs should ask themselves when they are just cooking up a plan for a new business.
Will my idea run into regulatory problems?
Certain industries are heavily regulated by the government. Finance and banking, energy and utilities, and healthcare and biotech are obvious examples of highly regulated industries, and new businesses entering those areas need to consider the regulatory environment from the start.
But what about smaller businesses in less-regulated industries? When online sedan-dispatch service Uber started up, it may not have been obvious that they would face regulation from municipal Taxi Commissions, but that is exactly what has happened. However, through carefully planning its legal strategy and adapting its product, it’s managed to iron out potential problems in most cities and around the world (though it is still facing problems in Washington, DC).
Many other businesses face regulatory issues from the start. Internet companies face issues with DMCA, privacy regulation and state sales tax, among many others. Restaurants and bars are regulated by state alcoholic beverage commissions. And any business that uses real estate in any way faces zoning, environmental and property tax regulation.
When you are thinking about your business idea, it helps to try and think about the different ways in which your business could be regulated. Some of them may not be obvious. Once risks are identified, you can introduce methods of addressing regulation into yourbusiness from the start.
Does my idea present liability issues?
All businesses expose themselves to liability, but some do more than others, and do so unnecessarily. Some will remember Napster, which lost almost all of its investors’ money when it was shut down by court order. Napster and its investors could have avoided such losses by thinking about two things: evaluating the potential scope of its liability (in Napster’s case, it was catastrophic), and how it could be mitigated (Napster could have offered its technology as a paid licensing service rather than a free peer-to-peer service).
Like the managers and investors in Napster, entrepreneurs and investors are often blind to the risk of liability because they are focused on the positive value-creation aspects of their businesses (as they should be). It helps to have solid outside advice regarding risk assessment and mitigation strategies.
In evaluating a business idea, it’s important to think through liability risks up front. Taking informed risks is what creates value in a business, but risks have to be balanced by the potential for reward. Investors (and even customers) will be skittish about risky enterprises, so thinking through the scope of liability and the potential to mitigate is very important.