How to survive the first year

Piece of cake: Start-ups that build up plenty of cash and credibility in the first year are likely to last Jennifer Soo

The website design outfit The Web Showroom opened for business in February 2007, based on the idea of allowing very small businesses to build their own websites using templates. But the business encountered a problem almost immediately after it started.

“The technology was great and worked and did everything we hoped it would do,” says managing director David Lawrence. “But the websites that people built were horrible, to be honest. [The decision to pull the product] came down to the company that we wanted to run. We wanted to be delivering a great service.”

The first year of business is undeniably a tough time. In a survey of BRW Fast Starters companies that were just four years old or younger, 46 per cent of respondents identified “year one” – the most popular choice – as their most challenging time.

“We went back to the drawing board and realised that the first launch was close to right but just a little misguided,” Lawrence says.

Instead of sticking with the original concept, The Web Showroom switched its focus to designing bespoke websites for clients that could afford to pay more for a more sophisticated service.

Although its marketing budget of about $25,000 to $50,000 for the first launch was “completely wasted”, the work that had gone into building content management systems could be tweaked and used to underpin bespoke designs, Lawrence says.

The company scrapped the build-by-template idea after about four months. “We launched a second time but with a better message . . . that you need to use our incredible Australian developed software to power your website but just as importantly, you need to also utilise the prowess of our staff to ensure your website works,” he says.

“The shock to the system in year one meant that much of year two was still spent paying back debts from the money we invested to start-up the business. By 2009, we had turned things around.”

And by 2010-11, The Web Showroom had revenue of $3.2 million.

In this case, the year one hurdle called for a complete rethink. But even if you have your product and market fit right, the first 12 months is full of obstacles.

The two biggest issues are cash and credibility. Without new customers, cash is in short supply. But entering a market as a new brand means credibility is equally scarce and this impedes the hunt for new customers.

Both issues can affect relationships with external parties such as suppliers and lenders. “The most difficult part from day one was working to convince suppliers of the solid business case for supporting my company, so we could expand our range to include their products,” the founder of online photography supplies vendor CameraPro, Jesse Hunter, says.

“We found some suppliers earlier on who were willing to take the chance. We did everything we possibly could to promote their products and add value.” Hunter used its initial success as leverage to attract even more brands.

As a wholesaler, Audio Active managing director Jeremy Bouris was having problems on the other side of the distribution equation. Although he was wary of taking on bad debt, he had to offer generous credit terms for retailers to initially buy his stock. “We’ve had two shops go broke on us but luckily the debts were manageable,” he says.

Bouris had to take a chance on his customers. Usually it is the other way around. David Kane founded Power Access, an equipment hire company that rents boom lifts, in April 2008. Often decisions about procurement are made by habit. “If you’re happy with a company, you’re not going to go anywhere else,” he says.

“It’s about convincing that person to make the habit of contacting you instead and that’s easier said than done.”

Kane used a sweet surprise to seduce the decision makers – jelly beans. He went door knocking and dropped off leaflets attached to a tub of jelly beans to ideal customers, such as builders. He says he used marketing devices such as pay-per-click search advertising, too, but adds “I’ve still got customers that have generated hundreds of thousands from that initial jelly bean campaign.”

Kane’s customer acquisition strategy was low cost and creative.

Enscope co-founder David Young went for efficient. “We started the business without any clients, so we found gaining cash flow to be the most challenging part of establishing our business,” he says.

Enscope provides project management, engineering and construction services for the gas industry. Young and his two co-founders previously had worked with a multinational in the same area. It would have been “questionable” to be lining up clients before they left their employer, so they didn’t do that, Young says. But nonetheless their background helped in identifying target customers.

“We already knew all the projects that were happening,” he says. “We targeted the specific areas where we believed we could be successful.”

Young says this approach was the “exact opposite of going in and putting in 50 proposals for tenders”.

The founders of Enscope found a way to keep cash flow healthy. “We just didn’t pay ourselves for the first year,” Young says. That strategy only worked because the founders had been saving for 18 months before the start of Enscope and were in “reasonably solid financial situations”, Young says.

Direct mail advertising company Letterbox Deals also encountered problems with cash flow and customer acquisition. The company differentiates itself from other catalogue distributors by using Australia Post. The catch is the postal service requires “up-front payment of hundreds of thousands of dollars” for a campaign, managing director Jamie Bakewell says. As well, Blakewell says that printers were “initially nervous about extending credit terms”.

The business had a fallback, as it was originally funded from the cashflow of the founders’ other company – digital agency Tonic.

That solved the cash problem but not credibility. Bakewell says selling the idea of “category exclusivity” to customers was tough initially but now seems to be working. This means that, for example, if a telecommunications client runs leaflets with Letterbox Deals, it would not work with any of its competitors.

Bakewell says that “it was really hard building the business with that rule” but he says it has been helpful in negotiating with clients. Although the company is “at the mercy of our advertisers” when it comes to getting feedback on the efficacy of campaigns, Bakewell at least knows a clients are happy if they won’t give up their exclusivity.

Letterbox Deals could at least lend some credibility from Tonic. The founder of search engine optimisation firm QuantumLinxAsh Aryal did something similar by teaming up with other companies to work on lead generation. The firm worked with a web developer and a web hosting company to run marketing campaigns externally and promotions targeted at each other’s customer databases. They shared costs and paid each other referral fees.

Aryal says the strategy was successful because “you’re basically borrowing authority from someone the customers already trust”. With trust comes credibility. Entrepreneurs in their first year of business hope that this will then bring cash and eventual success.

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