how to start a tech company

Start a Tech Company: A How-to Manual

Dec 13, 2022

If a great idea was all that was needed to start a successful tech company, everyone would be a millionaire. Most people have had one or many novel ideas in their lifetime for how to make something better, work faster, fix common pain points caused by the current options available in the market, and even brand new ideas that have no analog. Mark Twain famously quipped, “There is no such thing as a new idea. It is impossible. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope.” 

Many credit Steve Jobs with the ability to know that things like iPhones, iPods, and iPads would be popular before there was anything on the market that they resembled, but Star Trek fans from the 1960s were quite familiar with the concept after watching their favorite crew use their PADDs (Personal Access Data Display) to operate the USS Enterprise.

Yet some ideas are so novel that they are considered groundbreaking and change the very way that we live our lives. No matter how novel or groundbreaking, the idea simply isn’t enough. In order to start a tech company, make money and find true success (different than raising money, which is also a feat on its own), you have to develop an actual product and get it to market. You will also need to form a proper business through which to accept said money, hire a team, and if applicable,  obtain patents and/or Intellectual Property (IP) rights. 

Entrepreneurs tend to be extremely laser-focused on their passions but not quite as focused on the micro details, the small stuff that they may not be as passionate about but are required to do nonetheless. In order to help ensure that you’ve checked all of the boxes and are ready to go the moment your product is finished, we’ve created this how-to manual to help you build more than just your product: this is how you build your business. 

Step 1: Research, Planning, and Strategy

You’ve more than likely done as much research as you can regarding the specifics of your product, but have you done enough research to fully understand your competition? Any entrepreneur should be extremely well-versed in everything there is to know about the competitors they will be vying against for customers’ money or attention. Aside from just being something that is good to know, your competitive research will be a vital part of your business plan, which will be required if you want to raise money from anyone other than friends & family. 

Competitive Research

You may not enjoy research and feel like it’s taking your attention away from your new tech startup. But there are vital questions that must be asked and can only be answered by diligent competitive research. Your pricing, branding, messaging, value proposition, and many other core components of your marketing mix all depend on how your competitors have positioned themselves and their pricing. The following questions should be answered long before your product ever hits the market.

The Vital First Question: How Do You Compete? 

The key aspect of any business is competition. Even if your tech startup doesn’t charge end users money and instead plans on making money through ad revenue, you are still competing for attention. The more attention you can win, the higher the engagement on your platform, and the greater your user base.

At its core, all businesses are competing in one of two factors: price or differentiation. 

If you think that you can offer a product or service for cheaper than the competition, you may opt to enter the market with a lower price point. Perhaps you have novel ways to make the production process less expensive, or you are merely willing to take a lower margin to win market share away from the current market participants. Maybe you even conducted a competitive white space exercise (which you can read about in greater detail here) and discovered that there is an opening at a lower price point.

The problem with competing based solely on price is that it leads to a “race to the bottom.” If a new competitor enters the space at a lower price point, the incumbent companies typically respond by lowering their prices as well. The new entrant wants to continue winning new customers so they in turn drop their prices, and this continues until profits are sucked right out of the product.

The other factor upon which companies may compete is differentiation. This means that new entrants choose to make their product or service different enough that price isn’t the primary factor upon which customers make their decision. For a service-based company (even SaaS), the company may add a human touch or a more responsive customer service team in an otherwise cold and impersonal industry.  Physical products may vastly increase the quality of the product, or add additional elements or benefits that other competitors do not have.

The good thing about competing based on differentiation is that your price point isn’t directly anchored to your competitors. If your product or service is different enough, it will not be a factor (or as much of a factor) in the customer’s purchase decision.

For any entrepreneur, this must be the very first question to ask when you get serious about offering your product or service in the marketplace: will you make your product cheaper, or different? 

Who Are You Competing With?

A question that is very close to second place in terms of the importance that new entrepreneurs need to know is who they are competing with. When it’s time to begin your competitive research, we highly recommend that you read this article about conducting a competitive white space exercise. More than a few entrepreneurs have taken the time to do one of these and discovered that they weren’t really competing with the companies they thought they were, and there are other direct competitors that they hadn’t even considered!

Before you jump in and start a tech company, there are several types of competitors that you must consider. In addition to your direct competitors. Remember that a competitor is any other option that a customer may choose to spend their money (or time) on instead of yours, which may open up your competitive marketplace significantly. 

Direct Competitors: another company offering the same product or service as you. Ex: Coca-Cola vs Pepsi

Indirect Competitors: Companies that are in the same category as you, but sell different products or services to solve the same problem. Ex: Gatorade vs Coca Cola

Replacement Competitors: Companies that are not in the same category, but whose products or services could still be chosen instead of yours. Ex: Frozen pizza cooked at home vs McDonald’s

Identify Your Competitors

To identify your competitors, you must embark on a mission of deep-dive investigation. Thankfully, technology has given us more tools than ever to do this, and there are still some old-school tools that can provide a windfall of competitive intelligence. 

Web Searches

The most basic and simple way to find information on your competitors and potential competitors is through an online search. It should bring you insights if you are search-savvy, but it can lead you astray just as easily. The company’s own websites will only offer the information that they want people to see, and many review sites within the same product or service category are written by competitors whose content strategy will always put their own products at the top, and discount their competitors’ benefits. As the adage goes, you can’t believe something just because you saw it on the internet.

Business-Specific Databases

If you are taking your new venture seriously and want to know as much about your competition as possible, there is a wealth of information available through specific databases. These are often created for marketing and research-oriented teams but can offer everything you need to know about your competitors. They may be quite expensive to access, but if you have a college degree, business schools often have access to these databases that they provide to alumni for free. Some of these databases are:

  • Prizm
  • Simmons OneView (detailed US consumer information)
  • PrivCo (compiles detailed data on many private companies that don’t file publicly)
  • Mintel Academic (consumer information)
  • DMA Response book (marketing data)
  • Passport (contains detailed information on global and international companies)
  • American Fact Find (data sets and profiles)
  • Business Insights: Global (global corporation information)
  • Statistical Abstract of the United States (US Census-like data)
  • NetAdvantage (industry classifications, filings & annual reports, company details, executive details)
  • Mergent Intellect (tickers, industry codes, company briefs, competitors, corporate family tree, financial details)

Some of these databases will not only provide information about your competitors but may also have vital data that can drive your marketing and help you find your future customers. You will have to include information like that in your business plan as well, so you may as well research it all at the same time!

Other Places to Find Competitor Information

  • National or global trade associations
  • Industry associations and publications
  • National business registries
  • Government databases

Identify Your “White Space” Within Your Competitive Matrix

Once you know who all of the competitors are within your competitive space (both direct and indirect), you can perform your competitive white space exercise to determine where an opening is within the market for you to compete. You are not likely to find much success if you bring a product or service to market that fixes the same pain points, provides the same benefits, and is at the same price point as your competition. You may sway a number of your competitor’s customers away from them, but there will not be much room for growth. 

Write Your Value Proposition

Now that you know how, where, and with whom you are competing, it’s time to sit down and write your own value proposition. It may not seem like all of the research above is helpful for a statement describing what your company offers to customers, but it falls right in line with the last statement that we made above. You need to set your company apart from the competition, and your first step in doing that is by understanding not only what the competition is providing to customers, but also how they are presenting themselves to the marketplace.

If you’ve never seen the Silicon Valley episode where every startup pitches their obscure, uber-technical software as “making the world a better place,” it drives this point home quite well. Additionally, if you’re a tech entrepreneur who hasn’t watched Silicon Valley in its entirety…what is wrong with you? Start watching it now!

Here’s a great five-minute video on writing a value proposition for your startup. If you’re more of an old-school type who prefers to read and learn, here are the steps:

  • Clearly define your audience – be as specific as possible
  • Define what it is that you do
  • Define the unique way that you do it
  • Write your value proposition in the following format: “We help (X) to (Y) through (Z).”

Write Your Mission, Vision, and Values Statements

There are some companies out there that have mission statements that are either downright corny or follow the methodology of the Silicon Valley clip linked above. The big, successful companies do not fall into this camp, and typically are the ones who took these seriously. Why? Because these statements are used both internally and externally to communicate the very essence and beliefs of your company to customers, stakeholders (external and internal), and employees of your own firm alike.

Here’s a great, short video that walks you through writing a mission statement, and a slightly longer one (8 minutes) that will take you through the mission, vision, and values statements. We also love how Lenny Rachtisky summed it up here.

Draft Your Business Model

Even if it’s a highly abbreviated one, you will need a business model. At the very least, you will need one to raise money, which most startups have to do to bring their product or service to market. Those that find success in the market need to raise more money to scale what they already have. 

There are a lot of different formats for business plans available online, but the generally agreed upon traditional business plan format encompasses the following sections (we talked about it in depth here):

  1. Customer Segments
  2. Value Propositions
  3. Channels
  4. Customer Relationships
  5. Revenue Streams
  6. Key Resources
  7. Key Activities
  8. Key Partnerships
  9. Cost Structure

You may decide that you want to get creative and build your own type of business plan. This may work for your own internal use, but the people who fork over large amounts of money to startups don’t particularly like people who don’t follow the rules. They like sure thing bets (at least, as “sure thing” as a startup can be, which is generally a 10% success rate). They may not take too kindly to or appreciate not having the information that they are used to seeing from the hundreds of pitches and business plans that they see and evaluate every week.

If you want someone to help walk you through the process, here’s a good 2-minute video that will explain the finer points of a business model canvas and what needs to be in it. 

Step Two: Officially Forming Your Startup

Even if you’ve built your Minimum Viable Product (MVP) completely on your own and don’t have any other team members to worry about equity, paychecks, benefits, or anything else, you still need a legal entity in order to raise money or even accept money from customers one day. 

The purpose of the creation of corporations was to limit liability for investors and owners so that if something goes wrong and a company harms people or goes bankrupt, the lawyers can’t go after every single investor to sue them. As an owner, this is an extremely important point, and I have some bad news for you: if you are successful, you will be sued.

100%.

It doesn’t matter if you don’t do anything wrong, or if your product works exactly the way it should. We live in an extremely litigious society, and its come to the point where any successful person can expect to be sued, either for something legitimate or something frivolous. 

Creating a corporate entity provides tax benefits, and legal and liability protections, and will be required if you hope to bring on any investors at any level (angel, VC, or bank financing).  You will need your formation paperwork and EIN from the IRS just to set up a company bank account, so you might as well get on this now. There is a much longer discussion than we can get into here regarding the pros and cons of each type of corporate structure, but here are the basic ones for you to research and decide which is best for you:

  • LLC
  • LLP
  • C-Corp
  • S-Corp
  • DBA

There are companies online like LegalZoom and ZenBusiness that make it extremely easy and cost-effective to form a new company, but make sure to do your due diligence and set up the right one from the start!

File For Your Federal EIN Number

Once you’ve created your company, you must file for an Employer Identification Number (EIN) with the IRS. This is extremely important, so we’ll state it again:

Only file for an EIN AFTER your company has been formed.

Most states are sticklers for the names of companies, and many will reject your proposed company name if it is too similar to another company’s name that has already been filed. In some states, they will allow companies in different industries some wiggle room, in others that don’t matter.

You will have to conduct a name search when filing your company to ensure that name is available for that state. If you file for an EIN before you have your company name and filing documents, you will have to repeat the process (and pay more fees) if the name that you submitted to the IRS turns out to be unavailable. 

Open a Business Bank Account

There are many tax advantages to owning and running your own business, but it doesn’t matter unless you run your business finances through a business account. Opening a business account is extremely easy, but you will need your EIN and corporate formation documents in order to do it.

Take your time to research the best options available to you. If you don’t expect to be able to raise money from Venture Capital (VCs), then a local bank may be much more beneficial to you. The traditional, large banks are not prone to giving money to any companies that have less than two years of positive tax returns to prove that they are viable, but some local banks do work with and provide financing for startups.

  • Additionally, there are a large number of online-only banks that offer business accounts, and some have significant tech stacks for integrations to your business and offer fee-free checking accounts. BlueVine, LendingClub, and Navy Federal Credit Union even offer interest-bearing business checking accounts, which means that they help your money make you money. We also recommend Mercury for startups. 

Closing Thoughts

Everyone has an amazing, potentially world or life-changing idea at some point in their lives, but it’s what we do with that idea that makes the difference. Many (most, actually) will “die on the vine” and never become anything more than the flash of a lightbulb in the person’s head, or at most something that they may have scribbled down on paper and brainstormed for a few weeks before throwing it in the garbage can.

The difference between those ideas and the ones that make it to the marketplace and truly change the world are the people behind the idea, the ones with the tenacity and audacity to do whatever it takes to take the idea from their brain or notebook and build a team to help them turn it into a reality.

Entrepreneurs are often “big idea” people, those with a vision they want to show the world, yet not enough time or focus to take care of the little stuff like the requisites listed above to form and start a proper company. If you have an idea and the passion to bring it to the world, firstly, kudos.

But if you want that idea to ever see the light of day and be anything more than paper on its way to being recycled, follow the steps above. A tech company will have different needs beyond merely building a product such as developing a tech stack, finding employees, privacy policies, and many more such tasks.

We will get into those details in future posts, but this one is the key: if you don’t start the company, it can never truly be a success. Work your way through this list to turn your idea into a proper startup, and we’ll help you see it through to success!

article by Kellie Clark

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