You need money to start a new company. Where do you get it from? Easy: Imitate then innovate. Sam Ewen of Interference, Inc. (remember the Aqua Teen Hunger Force LiteBrite ads?) recently visited Sloan and pointed me to this quote (arguably) attributed to T.S. Eliot as an example of one source of inspiration:

“Good poets borrow. Great poets steal.”

Now, no one is condoning theft of another’s intellectual property, but if you see a successful business in the same space you’d like to be in, copy the service/product/business model to quickly acquire some clients. More importantly, you’ll bring much needed cash in the door because the idea you copied has at least a few paying customers.

Once you’re generating some cash flow, start playing around with your product/service by testing out different ideas and products.

In February, we conceptualized a new hardware product  and bid out the design/development of 3 working prototypes for $725. Four months later, did it work out? Here’s a shot of the working circuit board and custom CNC’d plastic housing:

The actual design process revealed a whole host of issues that needed to be considered and solved –Many of them concerned the plastic housing. I’ve posted the entire 4 month long transcript from RentACoder if you’re interested in seeing the entire process in more detail.

From the transcript (113.21 KB), you’ll notice Tharaka, the engineer, is extremely knowledgeable and competent. This is perhaps one of the greatest aspects of RentACoder –those bidders bidding on your project are (generally) bidding on items in their area of expertise. This turned out to be crucial as new items popped up. In addition, utilizing off the shelf parts such as the LCD screen from CrystalFontz and a generic plastic housing greatly reduced the research and development costs for building the prototype.

The next step is finding a shop to produce 100 of these things. A quick Google search revealed thousands of contract manufacturing companies to perform the assembly. I contacted E-TekNet  and provided them with the deliverables from the RentAcoder project: bill of materials, circuit board design, and one working prototype. E-TekNet offered two different options for this project. The first option was for me to visit Digikey, Mouser , and other such sites to purchase all of the items myself from the bill of materials (BOM) and ship those items to E-Teknet. In the second (and more expensive) option, called “Turnkey”, E-Teknet takes the BOM and orders the parts for me. I selected the first option and will order the parts myself. E-Teknet is responsible for building circuit boards (often called PCBs) and placing the parts on those circuit boards. The same steps need to be repeated for the plastic housing: I took the second prototype sample from the RentACoder project along with the instructions and sent them off to the vendor of that plastic housing.

The upside of this process is that it keeps costs low. The downside is that the final assembly will be performed by me when the circuit boards and plastic housings show up on my doorstep in separate boxes. In larger future orders, it makes sense to have a turnkey solution in which the final assembled product is what ultimately arrives at your door.

The last of the three prototypes will be used to create a very simple first version of software to allow a computer to control the display. Version 1 will display the current temperature from Temperature@lert and nothing more.

So, that’s it. 100 units of a brand new working hardware product will show up at my front door in about 4 weeks. I only hope the software is ready in time. J

Part of being a good corporate citizen includes becoming involved and supportive of the local community. I became involved with the Washington Men’s Camerata, a semi-professional men’s chorus based in Washington, D.C., a number of years ago and agreed to lead up the fund raising efforts for 2007.

At the conclusion of the season, the group’s president, Joey Coleman, and I took a look back and created a list of what we had learned. While every group’s mission and objectives differ, the list below serves as a great starting point to create a fundraising roadmap.

First, some quick background on the group: The Washington Men’s Camerata is a GRAMMY nominated men’s chorus composed of approximately 60 members. The group receives funding from the NEA, ticket sales, CD sales, community donations and membership dues. By founding the National Men’s Choral Library, the Camerata has steadily acquired the music of men’s choruses and university glee clubs as they go defunct.

1. Match it. Using a matching grant with a hard deadline pushed our members to act quickly lest we lose the matching contribution. It also created great buzz and served as a real motivator.  The fact that we could publicize this to potential donors as well greatly increased the timeliness and importance of our "ask."

2. Build a base. Large donors are great, but should be considered the top of a pyramid with a large base of smaller donation amounts.

3. Plastic works. Accepting credit cards allowed us to collect more funds than if we had accepted checks alone. Having an online tool for quickly processing donations was HUGE.  Recipients got an email link and less than five minutes later made a secure donation.  Partnering with Network for Good (sixdegrees.org) gave us additional credibility as well demonstrated we were a vetted non-profit (based on their criteria for participation).  This was particularly important once we moved beyond the first degree of contact with donors and increased exponentially as we got further away from the original "askers"

4. Build a brand. Raising money for a non-profit group that is not a charity is difficult. However, spending time up front creating a brand and message enabled us to tell a good story in the first 20 seconds of introducing the idea. The concept became “The Demetrius Project”, named for the first librarian at the Library of Alexandria. The project aimed to preserve the dying art of men’s choral music. I cannot stress the importance of a good "story" enough.

5. Thank everyone. Upon making a donation, we sent each donor a thank you note and a “library card”. Before the campaign starts, you should have the thank you/recognition process systematized.  Ideally, our donors got several "thank you's" - one via email from Network for Good confirming their donation, one via email from the member who solicited them, and a letter via mail for a touch outside the typical channel (in this case, email).

6. Motivate your members. Member contributions and their personal networks were the keys to success in this fundraising event (although a fair amount of our donors came from friends of friends of members - 3 degrees out and beyond).

7. Inform the group. Making members’ contribution amounts public knowledge increased pressure for 100% participation.

8. Remind the group. Weekly status reports were sent out and included rankings for most dollars and most number of people each member was able to bring in that week. Again, a pre-planned system for doing this would have made it more comprehensive, more timely, and thus more effective.

9. Incent the group. Prizes were given to members at the end for the tops in each of the aforementioned categories.

10. Think, what’s next. Fundraising is not a one-off event. It involves cultivating a relationship with a base of donors. When asking, you should already know how you are going to keep communicating with the donor to keep them interested.

11. Block 'em.  Getting a block of donations is more time-effective than getting them one at a time (e.g., Notre Dame Glee Club and UVA Glee Club).  You make one ask and everyone contributes all at once.

12. FREE Prize.  It would have been nice to give everyone a FREE prize at the time they made their donation (e.g., free song download).  Nothing like a give followed IMMEDIATELY by a get.

13. Make it Easy.  Pre-writing emails for members to send worked well.  Make it as easy as possible to promote your cause while allowing for some customization/personalization for those willing to go the extra mile.

14. Find your Seal Team.  Identify the people who are going to be really good at this and set the bar for them even higher than the rest.  Have them motivate and support each other.

15. Let it Be Anonymous.  More people donate when they don't have to let anyone know they donated.  This is why collection baskets work at church (along with peer pressure).  More than 6% of the 750 donors were anonymous - as well as the number one donor who required anonymity.  Network for Good estimates that about 18-25% of their donors make contributions anonymously because they want to support the cause but don't want to be "bugged" by the organization/cause after they contribute.

16. A Ticker Works.  Find some way to let people see donations coming in real time - both in term of numbers and volume of $.  People want to keep track 24/7 - not just when you have set aside time to tell them about progress made.

17. Keep Asking.  We began our campaign in March - a mere three months after a big annual ask.  People who had already donated, donated more.  Approximately six weeks after this campaign ended, we again went back to the members and asked for $500 donations to support the Kennedy Center concert.  We raised $6,000 almost instantly.  Moral: Keep asking and they will keep giving.  You can probably ask more often then you think and people give for different reasons so make sure to ask in different ways (e.g., annual ask, short-term project with deadline, one-time concert sponsorship, etc.)

18. Keep Going - Even After the Deadline.  We've received over $700 in donations since the campaign ended.  You may not be promoting the cause anymore, but there will be stragglers.  Make sure your mechanism allows for them to play as well.

The bottom line is don't do it! Hire someone else to.

Ok, I'll admit that's no more than a trite blog technique for getting your attention, but the reality is that when Temperature@lert switched over shipping operations to a fulfillment company, things really started heating up. A fulfillment company holds your product in its warehouse and ships it out via USPS, FedEx, UPS, etc. whenever you send them a copy of an order. It's incredibly easy to do and will free up your valuable time to grow your Micro-ISV.

For the past two years, we've been rushing at the end of each business day to pack up and ship out customer orders (hopefully in time to make the UPS and FedEx cut-offs). Sometimes, we'd make it and sometimes there would be a last minute drive to the airport where the express delivery services had later cut-off times for same day shipments.

Again, we turned to our friend Google for some help. I investigated Webgistix and One World. Pricing for both firms was competitive, but One World easily won our business by including free, seamless electronic integration with our shopping cart vendor, Volusion. Here's how the business process works now:

1. I ship a whole bunch of product to One World's warehouse in North Dakota, USA.
2. A customer places an order at temperaturealert.com (the Volusion shopping cart system).
3. One World polls a special web page on our Volusion site that provides them with a list of new orders.
4. One World pulls the products in each order off their shelf, packs them up, and slaps a shipping label on the box.
5. An email is sent by One World to the customer indicating the tracking number. The tracking information is also sent back to the Volusion site and the order is marked as shipped.

There is a monthly minumum fee for the service and you also pay actual shipping costs, but it far outweighs all the time wasted chasing down express delivery trucks at 8:59p.

Need a quick and dirty roadmap to get your Micro-ISV off the ground? Following these 20 steps will get your latest idea off the ground and out the door. Don't be afraid to deviate from the list and try new ways of presenting features or ideas. After all, failure is a startup's best friend.

1. Create your software product
2. Purchase an end user license agreement (EULA)
3. Create an auto update strategy
4. Setup a license activation web service/website
5. Build a proper installer
6. Obfuscate your assemblies
7. Automate your build/release strategy
8. Test test test!
9. Register a domain
10. Obtain reliable hosting
11. Configure email for domain
12. Design a website and write the content
13. Create the best possible screenshots of your product
14. Install traffic monitoring on your site
15. Setup and maintain a FAQ
16. Get a credit card payment account and connect it to your website
17. Offer a free product
18. Support customers in a timely manner
19. Ensure your help systems are useful and easy to use
20. Market your product

For more inspiration on getting through this list for your new idea, be sure to watch the the 90-day challenge section for details on how each of these items becomes reality.

Last Saturday, schechterTech conducted an experiment on buying your way to the front page of Digg.

At the same time, Wired reporter Annalee Newitz was conducting a similar experiment for an upcoming article. She quickly traced through the users who were paid to Diggher post and found some had also Dugg my post. Annalee was kind enough to call me and ask about my experiment for her upcoming article.

Check out the article (currently on the front page of Wired.com today) to learn more about Digg's official position on User/Submitter and Annalee's experience.

There's no way to know if this challenge is successful unless there is some way to measure the goal: achieving profitability in 90 days. In addition, keeping good records enables one to plan ahead and build a good foundation for a profitable business. Smart Startups Don't Wait to Set Up Accounting Systems.

When it comes right down to it, accounting is all about tracking the money coming into the business and the money flowing out of the business. Every dollar you spend or earn should flow through this account. Doing so will make life a lot easier by saving you time in the event you neglect this duty for a few months.

Get Paid

This would also be a good time to decide how we are going to get paid (after all, that is why we are starting this Micro-ISV). Three of the most common ways for Micro-ISVs to be paid are via purchase order (or "PO"), a PayPal/Google Checkout service, and credit card transactions.

A purchase order is a document issued by a customer to your Micro-ISV to purchase the services listed on the PO for the prices listed on the PO. It provides a record and legal agreement between you and the customer regarding the purchase. The upside for your Micro-ISV is that in the event of non-payment, you can use the PO as a legal document in a court of law to demonstrate the buyer’s intent and to facilitate collection efforts. Another PO disadvantage is the general book keeping duties that are involved. For example, once the PO is received, you'll have to enter it into the accounting system, generate an invoice or bill to send back to the customer, and finally be sure that you receive the payment. There are electronic PO systems, but they're overkill for our brand new Micro-ISV. On the other hand, the benefit to the customer is that POs usually have terms associated with them. The terms are similar to the grace period with a personal credit card: they specify the length of time the customer has to pay before finance charges kick-in. Moreover, POs often provide companies with greater control over purchasing in order to decrease fraud.

PayPal and Google Checkout are very easy ways to start accepting money for goods or services because they require very little information and setup to get started. There are no monthly fees and you simply confirm your bank account information with them and you're off and running. However, ease of use comes at a price: the fees associated with each transaction are generally higher. These services also tend to hold on to your money for a few days before transferring it into your company bank account. Additionally, the transfer process usually has to be manually initiated by logging into their website.

The final option is to accept credit cards. The upsides here are that fees are reasonable and the money is deposited quickly, automatically, and directly into your company bank account. However, just like obtaining a personal credit card, accepting credit cards also requires an application and credit check. Additionally, there is usually a minimum monthly fee involved (usually totaling around $35). In order to keep the accounting simple, we're going to pick one method of accepting payment to start and that will be to accept only credit cards. Since there is a monthly fee for this privilege, we're going to hold off on actually applying for now. We'll come back to it in a future post.

Meet with an Accountant

Once things get rolling, it's a good idea to invest in a part-time bookkeeper (around $25/hour) and eventually you'll need to find a real account once the dough starts pouring in. A good accountant will save you more than you pay them. Since our goal here is to stay simple, we'll circle back up on those services when we need them.

Learn the Lingo

Here's a list of some of the more frequently used accounting terms:

Bootstrapping - Financial bootstrapping describes a company or project started without external funding.

Bottom Line - The bottom line is your income minus your expenses. It generally appears on the bottom line of a financial statement

Burn Rate - This is total the amount of money you're spending each month.

Cost of Goods Sold (COGS) - This is what you are spending to purchase materials to manufacture your products or what it costs you to purchase inventory to sell.

Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) - Too long for me to explain here. Visit Fool.com or Wikipedia for more.

General and Administrative Expenses (G&A) - This is the amount of money you spend to operate your business (including overhead) other than COGS or sales costs.

Gross Profit - Subtract the cost of goods sold (COGS) from your sales to obtain the gross profit. Do not subtract G&A expenses.

Income - This is money flowing into your business from any source. Examples include sales, loans, or interest from money in the bank.

Net Loss - If you subtract all of your expenses from all revenue and the number is negative, you have a net loss.

Net Profit - If you subtract all of your expenses from all revenue and the number is positive, you have a net profit.

Overhead - These are the expenses you have each month even if you don't make a sale. Some examples include rent, phone service, and administrative salaries.

Profit - This is the money left after subtracting your costs. There's gross profit and net profit.

Revenue - The total amount of money coming into your business from sales.

Triple Bottom Line - Triple bottom line accounting expands the traditional definition of profit to include benefits to people and the planet. The phrase was coined by John Elkington, co-founder of SustainAbility in 1994.

Variable Expenses - Variable expenses increase with the number of sales you make. Spending more money on advertising one month to increase your sales is an example of a variable expense.

Open the Books

The next question is what do we track these inflows and outflows with? I recommend Intuit's Quickbooks for $99. Quickbooks is very easy to use with a minimal amount of training. It's important to emphasize here that you need to take the time to figure out how to use it properly -either by reading the included documentation or by taking advantage of one of the many links from a search of Quickbooks Training. I've used Quickbooks in the past. So, I have a basic understanding of how to use it. However, it's easy to make a mistake that can cascade down through the records ending up in a real mess. If you want to save some cash, investigate Microsoft's free accounting offering for small businesses.

I've purchased the $99 version of Quickbooks and stepped through a wizard to set-up a company from one of their templates for a services based company. The wizard addresses many of the important questions that need answers to setup your company's books. It's important, however, to pick the best accounting method for your business. A good accountant can advise you on choosing between cash basis and accrual basis.

I setup a new bank account with a $0 opening balance. Then, I made a deposit of $25 and set the category to one of the defaults: Owner's Equity. Since I purchased Quickbooks on my personal credit card, I'll add the $99 purchase price to our running list of expenses in the text file. Once our expenses reach $1000, I'll show you how to create an expense report and enter it into Quickbooks. Why $1000? That's just an arbitrary amount I've picked to keep paperwork and effort to a minimum. There's no sense in creating and processing an expense report for every single item as we purchase them -besides, there's no money to pay back the expenses with anyway.

Here's a sample Quickbooks file I've prepared to support Wajadoo: Wajadoo Sample File.QBW (479 KB). Don't forget to backup your Quickbooks file on a regular basis.

Prepare Financial Forecasts

Aside from helping you figure out where your money is going, preparing even simple financial forecasts will allow you to set goals. Having something to work towards will help you stay focused and grow faster.

The best forecasts are created from a "bottom up" approach. That is to say, you start with the amount of money you will receive from each sale and what your costs are related to those sales. The "bottom up" approach results in much more realistic forecasts. Conversely, the "top down" approach would look at a 20 billion dollar industry and aim to capture 5% of it. "Top down" forecasting is not very useful for planning what your true numbers will be.

All of this planning takes time and energy. It's a good idea to speak with others in your industry or perhaps contact a local trade association for more knowledge specific to your product or service industry.

For the 90 day challenge forecasts, I've put together a spreadsheet assuming a pricing model similar to 37signals: financial projections1.xls (136 KB) Areas in yellow are where you can type in your numbers. Areas in blue are calculated for you. Play with the numbers and product costs to see your startup's financial future. There's also a break even analysis page that shows Wajadoo will not meet the profitability mark within the 90 day challenge time frame. I'll have to work hard to figure out how to rectify that. Either way, this type of tool is useful for thinking about the different income and expenses you're start-up will face. The numbers may not be accurate more than a few months out, but at least you'll have goals to shoot for.

Additional free spreadsheet templates are available on line from various sources here and here.

Keep Good Records

You're going to start amassing a lot of papers: bank statements, credit card statements, credit card payment processing statements, incorporation paperwork, etc. Now is the right time to buy a pack of folders, label them for each of these items and start establishing a filing routine to keep things organized. Good record keeping will save you money. You'll be very happy you did when it comes time to file your first income tax return.

Remember: Tax-related documents should be held for 7 years. Other important items such as incorporation papers, copyright filings, and tax returns should be kept indefinitely.

Learn About Taxes

Speaking of taxes, it's also a good idea to seek out a little bit of knowledge about taxes. It will help you make better decisions on spending money, categorizing expenses, and keeping more of the money you earn.

Deductions - When you own your own business you can pretty much "deduct your life" as one Columbia University MBA grad told me. A deduction is an expense, such as a telephone bill, that you can subtract from the businesses income in order to reduce the amount of income the business has which means the business pays less taxes. Keep in mind that the rules around these write-offs aren't aways simple. Here are some guidelines quick tips for entrepreneurs just getting their feet wet:

Startup Costs - Under a 2005 tax law change, small businesses can now deduct $5,000 of general startup costs and $5,000 of organizational costs paid or incurred after Oct. 22, 2004. Any additional costs must be amortized over 180 months.

Employees - If you have employees, you must match their social security and Medicare contributions, but these matches can be deducted.

Travel - If a you take a trip that combines business and pleasure, but primarily conduct business on the trip, you can deduct the travel costs as well as other business related expenses such as a car rental.

Sales Tax - Most services do not require sales tax charges, but many product are taxable. If you need to collect sales tax for your products, register with your state's tax department. They will provide you with the monthly forms to fill out to stay on top of your payments.

Quarterly Tax Payments - If your business's tax bill for a year will exceed $500, you will need to make an estimated tax payment every quarter. Estimated payments help you keep up with tax bills and avoid cash flow problems and penalties. By the end of the year, your quarterly payments need to total 90% of the tax owed for that year or 100% of last year's tax amount (unless your income exceeds $150,000 in which case you must have paid 110%). Estimated taxes are due four times a year: April 15, June 15, Sept. 15 and Jan. 15.

Return Due Dates - Corporations with a calendar tax year have a due date of March 15. If you follow a fiscal year, taxes are due 2 1/2 months after the end of your fiscal year.

For more information and specifics about small-business tax information, visit http://www.irs.gov/businesses/small. This is a short list of things I learned the first time around on one of my start-ups. Taxes are always changing (and I may not always remember things correctly outside my area of expertise. So, always run your stuff past a real accountant. For more on financial management and taxes for entrepreneurs, check out Entrepreneur's tips and their tax center.

For Next Time

As accounting issues come up, we'll come back to this system to address them. At this point, our expense totals for the new Micro-ISV are now $478.94. In the next post, I will refine the idea for Wajadoo and build the website based software that we'll be selling.