Startup Q&A #21: Evaluating Ideas, Choosing a Bank, IPOs, Building a List, and Partnerships
Matthew Paulson answers founder questions on validating ideas by finding profitable competitors, choosing community banks over big ones, why IPO first-day hype doesn't matter, and what partnership agreements must cover: roles, ownership splits, and what happens if someone dies or wants out.
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Hey everybody. Matthew Paulson here. Today we are going to discuss whether or not a business idea will actually make money. Choosing between a bank and a credit union for your business, investing in IPOs and partnership agreements. Let's do this. This is officially episode 21 of Startup Q and A, the online video show that helps startup founders, small small business owners and entrepreneurs grow their businesses faster and achieve their dreams of financial freedom. So whether you're just getting started or if you have 100 employees, this is the show that will give you actionable ideas and advice to implement in your business. Now, at Startup Q and A, we believe the best way to achieve financial freedom is to build a business that generates cash flow and invest that cash flow into income generating investments like real estate, dividend stocks and closed and municipal bond funds. We don't believe that you should build an unprofitable business trying to get a bunch of eyeballs to eventually sell it to a big company someday. We don't believe you should try to go public. We believe we should build a company that actually makes money and then you should put that, then take that money and use that money to make more money with income generating investments. So eventually, as your business generates cash flow and you're putting money into dividend stocks, real estate and municipal bond funds, eventually you'll have enough money in these investments or where the income from the investments will cover your living expenses and then you don't need the income from your business anymore. And that's not to say you stop working when you hit that point, but you then have the freedom to work if you want to work or don't want to work. And you can only work on the things that you're really most excited about. You don't have to work on the things you're doing just to have some money. So that is really what we believe in the show. I've been saying this on the start of every episode for the last several episodes to really kind of ingrain the mindset that we are following, that I'm following personally and, and that I teach on this show. That is really what I am trying to do to achieve financial freedom. I'm getting pretty close actually, and that is what I'm hoping to teach you to do as well in your business. Now, before we dive into the questions, we're going to do what I call the tip of the week where I provide a tip, trick or idea or resource that you can use to grow your businesses faster or achieve financial freedom. This week's tip is actually going to sound like an ad for FreshBooks. It's not. But I really think a lot of us are doing invoicing wrong. If you're still using Microsoft Word to do like an invoice template, throwing it out, sending it over email as an attachment, that is just the wrong way to do invoices. And it's probably costing you money. You really need to be using a web based invoicing tool like the thing that comes to QuickBooks or FreshBooks or there's probably 20 other solutions that do exactly the same thing. What I like about these platforms is one, you can create invoices really quickly with an online form. You can deliver them via email and via the mail so that you know they get it. You can actually see when they open your invoice and saw it so that you know if they saw it or not. That way if it's just stuck in your inbox, you can email them again and say, hey, I noticed that you haven't opened this invoice yet. Make sure to take care of it. You're also more likely to get the invoices paid because they offer online payment options. So if you see an invoice on the web you can, there's a pay now button. People are just more likely to do that and pay it right away if it's really easy than it is if they have to print out a copy of your invoice and put it in an envelope with your address and a stamp on it and write out a check. That just going to take a lot longer for them to do. So instead of taking care of it right now by clicking the payment button, using their pre filled credit card information from their web browser and clicking a button which maybe might take 60 seconds, they're going to say, oh, this is going to take me 10 minutes to write a check and mail this thing out. I don't want to do that right now. So they'll just stick it on their desk. They'll forget about it. Maybe they will never get around to paying it, which does happen. It's not that people don't want to pay your invoices, it's just they're lazy. So you really need to make paying your invoices as easy as possible. When we send out a MarketBeat invoice for advertising, it will go through a web based invoicing tool. It'll show up in their email and then they can view the invoice online. It'll tell us when they viewed it. They can pay it right away with a credit card or through PayPal. So they can really pay however they want to pay or they can mail us a check, but nobody does that. And because that process is just so smooth, we never have a problem with collecting on our invoices. And if somebody forgets to pay it, they'll get an email a week later saying, hey, your invoice is due and it'll keep bugging them until they pay us. We really never have to remind anybody to pay invoices. So if you're still using Microsoft Word, switch to a web based invoicing software package today. It's really worth making the jump. It'll take you a couple hours to set it up, but after that it is well worth it just to have the increased likelihood that people are going to pay your invoices that will allow you to get your money sooner than you would otherwise. So that's the tip of the week. Let's dive into the questions. Every week we take four or five questions that are submitted through Facebook or through our website and we try to answer them on the show. I try to answer them on the show. If you have a question for a future episode of Startup Q and A, go to the domain startupqa Co that will take you to my website. Under the Startup Q and A Show menu item, there is a link to submit a question. You can fill out that form. I also periodically ask on Facebook and LinkedIn and Twitter if anybody has a question. If you see one of those posts, feel free to reply to it and tell me what questions you have for the show. So the first question comes from Brian Cargill and he asks, how can you get better specific metrics prior to jumping into a specific marketplace and evaluating the success of your idea. So in other words, Brian is asking how to determine whether or not a small business idea will be viable before you actually start working on it. So I have an idea. I want to know, is this idea going to make money? So the number one way that I like to look at a given market to say, is this market going to actually make money if I go into it is kind of look and see, okay, who is already in this market making money? If there are existing competitors in this space that are all making a healthy profit, clearly it's a decent business idea because they're making money doing it. If they're making money doing it, you could probably make money doing it too. You just have to come up with a little bit better idea than they have, which usually isn't hard because you just have to look at the complaints that people have about other businesses, then build the same business I have and fix their complaints. Some people think having existing competitors in the space is a red flag because there are other people doing this, then you have to compete with them. But I actually think not having competitors in a space is more of a red flag, because if no one else is doing your business idea, it's probably not that no one's ever thought of it before, because there are millions of entrepreneurs in the US and around the world all thinking of new ideas. And it's just very unlikely that you are the first person ever to have that idea if somebody else isn't already doing your idea. I would consider that more of a red flag than a green flag because there's a pretty good chance that somebody else tried it and then it ended up not working a few times over. So be mindful of that. I view competition in a market as a good thing. Of course, there can be too much competition when a market is truly flooded. Like, we don't really need another financial advisor or real estate agent or insurance agent here in Sioux Falls. We have a ton of those we don't really need anymore. And unless you're going to do something dramatically different than what everybody else does, it's just going to be really tough for you to compete. But if there's a few players doing what you want to do and you think you can do something quite a bit better than they can, that is definitely more of a green flag than a red flag, because all those competitors prove is that there's a market there and you can exploit that market maybe better than they can. Yeah. So another way that I like to see how big a company can grow is to look at the Inc. 5000 list. So Inc magazine, they make a list of the 5000 fastest growing companies in the United States every year. We've got an award over there for that from last year. You can't see it, but it's there as part of the Inc. 5000 list. The companies on that list have to disclose how much money they made last year. And then three years ago, if you're thinking about starting a business, you might look on the Inc. 5000 list and say, okay, what companies exist on that list that are kind of like what I want to do and how much money did they make? So you could actually go on Inc. 5000 lists and look up how much money MarketBeat made if you really wanted to do that. So say, oh, I want to start a financial media company. I wonder how much money MarketBeat makes or how much money any of the other financial companies on the Inc 5000 list makes. You can just go to the Inc 5000 website and check that out and look that up if you really wanted to do that. So you could say, oh, there are lots of companies in this five to $10 million range that seems to be about the size that these companies can get. I'd be happy with that kind of revenue. So that might be a good sign that the space you're looking at is a good space to go into if there are plenty of companies on that list that make money in that range. One thing to note is if you're thinking about running a really small business, make 5,000 list. The minimum to get on that list is 2 million in revenue. If you are thinking about a business that only ever makes a half a million in revenue, that list probably won't be the best resource for that. Another thing you can do is check and see if there are people in the space that you want to go into advertising on Google. So let's say that you want to run some kind of digital advertising agency for Google Adwords. If you go into Google and type Google Adwords Agency, there are going to be a ton of companies that come up that are advertising against that term, and they wouldn't be advertising against that term if they weren't making any money doing it. So the fact that advertisers exist for keywords within your space is a good sign that people are making money, because people are not going to advertise on a losing proposition over the long term. They have to be making more money than they're spending on those ads to pay for the ads. So chances are there's a viable business model there if you see tons of ads. And when you search for stuff relevant to your industry, so that's just another thing you can check out. I think that's pretty much it for that question. Look for existing competition. Use the Inc 5000 list. Use Google to find competitors that are advertising really just are there a few other companies doing what I might want to do? Do they look like they have a pretty healthy business model? If the answer is yes, then that's probably a green flag for you to move forward. The next question comes from Marissa Poppins and she asks, how do I select a bank or credit union for my small business? Now, I recently had to answer this question for myself. I've been at Wells Fargo for years, but I decided that pretty recently it's just no longer the bank for me. Between the recent scandal of them opening Fake accounts for people. And just the fact that it seems to be a revolving door of talent and there's never one consistent person for you to talk to about your account. And there's not really anybody whose name that I have that I can call or email and get help with my accounts. That was just something I really wanted in a bank. And I'll kind of walk through how I made that process. Now, I do like credit unions for personal accounts. So for like just your stuff, your personal checking account, personal savings account. Credit unions are great for that. They're not necessarily so good for small business accounts because they're just not really set up to do that. Well, if you just need a checking account, savings account might be fine. But if you're looking to get a small business loan or anything like that, more often than not, credit unions are not especially set up for that. So for a business account, I would be focusing more on a community bank or a regional bank. So like, credit unions in their charters have specific missions and usually small business lending is just not part of that. So I would focus on a community bank, a regional bank, if I have a business that ever needs to borrow money from a bank. So for my business, I thought, okay, what are the community banks that I consider? I kind of made a list of them and a list of requirements, and I kind of settled on one, which was First Premier bank, because I already knew some people there. So I knew who would probably be my business banker because we hadn't cut with them. For another one of my businesses happened to know the president of the bank and a couple other executives. So that means if something goes wrong with my account, I can at least complain to somebody that matters and not to a teller who I can't do anything about my problem. So if somebody's going to tell me no, at least it'll be like the president or the vice president telling me no. And not somebody who's a teller that has no authority to do anything. So really, is there a bank where you have real personal relationships already that you can use? That way you have a problem with your account, you're asking a friend and not somebody who doesn't know you, who just has a job at a bank? For me, that was a big plus for Spamir. Second, look at their reputation. What are people that use the bank saying about the bank? So look at Google reviews, Facebook reviews, see if there are any complaints at the Better Business Bureau about them. And then see, just make sure that they actually offer the services that you need. The banking services that you need, maybe you need really good online banking like we did. I wanted to make sure that you could do specific things with online banking like mobile check deposit, you know, do business, bill pay, you know, a lot of the basic stuff like that. And you know, I kind of told First Premier, it's like I need to do all these things in order for you to give me my business. If you can do these things, I would be happy to give you my business. And they were able to accommodate me and they got me like higher check deposit limits for mobile deposit that they don't normally give. But because they said, I really need this, if you can make this happen, you can have my business. So they were able to accommodate that list of features of a bank account that I needed and they were able to do that for me. So, yeah, I think that's pretty much it for your business. You want a community bank, you want some place where you have relationships with people that might not always happen, but if that doesn't, I guess you skip that step. But then find a bank with a good reputation locally. The one that I do business with sponsors a ton of stuff. A lot of successful people that I know bank with them. So that is a good endorsement for me. And then just make sure that they can meet your banking needs as a customer. Alright? The next question comes from Troy Clongerbo. Troy asks Snapchat's IPO has gotten a lot of talk. Where do you weigh in on investing in IPOs, like Snapchat being someone with expertise in investing. So Troy's question really is, should you be investing in IPOs as part of your investment strategy? Now it's very tempting to look at an ipo, see it pop really high after the first day and think, hey, if I had bought shares of the IPO before it was public and sold it like the next day, I'd have a lot of money. Usually it doesn't work out like that. You more often than not cannot get shares of an IPO before it goes public because brokers will have like a specific allocation to that. They give it to their big investors first. As a little guy investor like you and me, typically you cannot get shares of an IPO before it's public. So any bounce that you would see on that first day, you probably wouldn't be able to buy shares until after that big bounce has already happened. You also noticed that like after an ipo, after the company's had its initial bounce for a few days, they tend to go back down to like below where their IPO price was that happened with Snapchat. It happened with Facebook a year or two ago. So that, you know, usually it's like a big bounce and then it kind of goes down and then it like settles off at the price that the market really thinks is worth, you know, a couple weeks later. So I would only invest in an IPO if I really think it's a fundamentally good company that's going to really grow over the next several years and really take over the market like Facebook has, frankly. I mean, I'd be more looking at the fundamentals of the stock rather than is this going to be a hot ipo because usually you can't get in on the hot jump anyway. You have to buy it after it cools down. I would not think of an IPO any differently than I would any other stock. It's what's this company's growth potential? Do they have a solid business model? Is their valuation fair? Just common questions that any investor would ask when researching a stock. The next question comes from Micah Kennedy. And Micah asks, I recognize that you've built massive email lists, providing a lot of email content for for those of us who are just building a list, our giveaways, baiting subscribers, the best and only way to build a large list, like providing the 40 best tips for as a free download. So Michael wants to know, how do you really grow a large mailing list? Is it just a matter of putting out a bunch of free reports or downloadable content behind an email signup form? Or is there something else you do need to give your readers incentives for signing up for a mailing list? But that's not really what made my list skyrocket in size. The dirty little secret about mailing lists that are giant, is that really the only way? I mean, you do have to do everything right in terms of list building. Lead magnets, opt in forms, having good visible opt in forms as a good copy and compelling offer, you need that stuff. But really the only way to get to a six figure email list is to have a lot of traffic or spend a lot of money. So I mean, you need to get 100,000 people a month or more on your website or you need to spend a lot of money with Facebook ads and Coredge and all the other list building opportunities that cost money that I've talked about on previous episodes. We've probably spent more than half a million dollars in the last three years growing our mailing list through various advertising methods and with an average cost of, say, three bucks. I can attribute maybe 150 to 200,000 email leads to of the people on our email list to paid acquisition methods like Facebook ads, Google AdWords, co registration, advertising or affiliate program, all that stuff. My list would probably be 150,000 people smaller than it was today if we didn't have these paid acquisition methods in place. So yes, these things are important, but really your question is maybe not so much how do I build my email list bigger, but how do I get a ton of people on my website so that people are actually on my website to fill out my opt in forms? This isn't a traffic show unfortunately, because I'm only really good at getting financial traffic and I'm not going to share those secrets with just everybody. So yeah, your question probably is more how do I get traffic on my website than how do I build a giant email list? Because once you have that big traffic stream in place, you have decent opt in forms, you're going to get opt ins. So, so really your email list is just going to be a function of the money that you spend and the traffic on your website. So if your email list is not growing big enough, if you have a decent offer with a decent pop up, that's probably not your problem. It's probably are you spending money to build your list or are you getting a ton of people on your website to build your list? If the answer to either of those questions is no, then the issue is not with your list building efforts, it's with your, I guess efforts to get people on your website. But that is just something I'm not very good at helping you out with. So I'm not going to try on this episode. Next question is kind of a follow up from last week's episode, but actually had a few people ask it. But the question is, what does a good partnership agreement look like? Now I've had a lot of feedback just about partnerships in the last kind of weeks since we recorded the previous episode. So I just wanted to follow up and say, you know, talk about what a really good partnership agreement agreement looks like. You do need to have a partnership agreement with everybody that you're in business with. And I'm not Talking about a 30 page document written up by a lawyer that covers just literally everything that could go wrong in your business. Because frankly, if you need like a 30 or 50 page document outlining a partnership agreement, you probably don't know the other person or trust them well enough to be partners with them. Frankly, in my business partnerships I've got two and three page partnership agreements that outline some very basic things about the business, what people's responsibilities are. And those types of agreements have served us well. And the reason you want these things is just so it clarifies and make sure you're on the same page with your partners about everything you had talked about. When talking about your partnership. Just having it on paper makes it so there's no confusion about what you agree to or what you didn't agree to. So in my partnership I've got a list of things that I include. So I include the responsibilities of every partner in the business. So effectively, who's doing what, who's doing marketing, who's doing accounting, who's doing operations, who's doing sales, who's doing customer service, who does what in a company? So what is every partner initially responsible for? Partnership should also include? What happens if somebody wants to get out of the business? What happens if somebody dies in the business? Does the wife become a partner in the business or and does she or the husband of the deceased partner and what kind of voting rights do they have that does matter? Who owns what percentage of the business should be in your partnership agreement, how profits and when profits will be distributed should be in there. So you're going to distribute profit monthly, quarterly or at the end of the year. Whether or not anybody is taking a salary in a business that should be in there, whether or not any people putting any money into the business to help it get started and if so, how much money is that? What rights do partners in the business have in the business? Do they have the rights to see financials? Do they have the rights to vote on stuff? What rights do partners have? Then if there's a dispute, how is that dispute going to be settled? Are you going to use an arbitrator? Are you going to just sue each other's pants off? What? How are you going to settle those disputes? And then finally, whether or not you are going to have a non compete in place. So say I'm partners with Jason and Stevie and go, go photo contest. Do I want to leave and start my own photo contest? Can I do that or not? It's good to have that outlined in there as well. Having just a simple partnership agreement, it shouldn't take you more than a couple hours to figure out and write down because there are plenty of templates online that will kind of get this kind of skeleton in place and just kind of fill it out. But it just will save you a lot of headaches down the line because if it's all on paper, you all agree to it, you both sign it. There is never a question over who owns what or what people said they were going to do or not do because it's all on paper there and that is what it is and nobody can dispute what it says. Definitely have a good partnership agreement in place. If you have any follow up questions about this, feel free to email me mattattpolfson.com probably even send you like a sample of one of the ones that I have if you really want to see that. And those are the questions for today. If you would like to subscribe to Startup Q and A and get next Monday's show delivered to you automatically go to the domain Startup Q and A co and there are links to subscribe via email, Facebook, RSS, iTunes, YouTube and Stitcher. We really do try to be everywhere with the show. You can also follow me on facebook@facebook.com matthewpaulsonpage if you want me to add me as a friend. It's Facebook.com MatthewPulseon I'm also on LinkedIn. Search for my name there. I'm on Twitter at D as in Dog, P as in pony. Follow me there. I really do try to be everywhere with this show so that you can consume it how you want to, where you want to, and not have to fight over you know what program I want to be as part of your existing consumption flow for podcasts and video content and audio content. So I'm really trying to make this show available as far as far and wide as possible. If you would like to help spread the message of Startup Q and A, go to itunes. Leave us a review and that will help us spread the message of entrepreneurship and financial freedom further, farther and faster. I think that's it for this show. I'll see you next week.
