#1 - Consider “Allowable Acquisition Costs” (AAC) - The math here isn’t rocket science but many people fail to get the concept right when they start a company.  Here’s how it works.  Take the amount of profit (not revenue!) that you can reasonably expect to receive over the lifetime of a customer.  For example, if you sell a subscription product that is $10/month with a profit margin of 40% and the average person stays subscribed for 8 months then the total lifetime value to you of that customer is $32 ($10 * 0.40 * 8).  

You still have to go a step further here though and do a Net Present Value analysis (http://en.wikipedia.org/wiki/Net_present_value).  That’s beyond the scope of this article but in general you can assume that you want a business where you can receive as much cash/profit as early in the customer lifecycle as possible.

The higher the Allowable Acquisition Costs the more ammunition you have to acquire customers.  If your AAC is $30 and your competition’s is $300 they will be able to pour a ton more into marketing and promotion than you.  Get as clear as you can on what this number is before you start your company.  You’ll thank yourself later.

#2 - Spend a lot of time doing customer development in the early stages - I met recently with an entrepreneur who hasn’t officially started his company yet but is out interviewing all sorts of people about his idea.  That’s the way to do it.  Most people decide to start a company first and then go out and start talking to potential customers.  Actually, most people don’t even talk to potential customers before building a product!

Don’t make that mistake.  Get out and talk to people about what you’re planning to build before you write that first line of code or even set up your entity.  If you’re not familiar with customer development I’ve compiled a lengthy list of customer development resources on my personal blog.

Mistakes are usually significantly cheaper in the earliest stages of a company.  And they’re cheapest before your company starts.  While customer development approaches depending on the type of the company you’re building and might not even be necessary in some businesses (e.g., biotech, cleantech, etc.) for most companies a good customer development mentality is the difference between success and failure.

#3 - Define your competitive advantages early - You have to assume that as soon as you get successful you’re going to have 100 knock-offs.  How are you going to deal with it?  Perhaps it’s defending your intellectual property through patents.  Maybe it’s a viral customer acquisition strategy that makes it easier for you to get bigger the bigger you get.  There are a number of different ways to protect your turf and, as with customer development strategies, they are going to vary depending on what type of industry you are in (e.g., intellectual property protection will be more important in high-tech industries while a viral customer mechanism is going to be more important in consumer internet).

Part of defining your competitive advantages is understanding your core competencies.  If you’re really good at building technology then you’re going to have a stronger business if you can make the tech itself a strong part of your competitive advantage.  But if you’re great at building online communities then having a company which depends on your ability to build defensible technology is probably not the way to go (and vice versa).  

The costs and time required to build technology has fallen significantly in recent years.  This means that good ideas are copied more readily.  Don’t let that scare you.  But be prepared to build in highly defensible elements into your business as early as possible.

#4 - Be unique but not too unique - This kind of goes against the previous advice but at least when you start there shouldn’t 100 other people doing something that’s similar to what you’re doing.  If there are then you’re going to have a ton of difficulty standing out in the marketplace.  That’s not to say that if the market isn’t big enough you can’t be the winner.  After all, there were a lot of search engines already out there when Google got going.  And YouTube was far from the only video sharing site getting going a few years back.  However, to the extent that there’s a lot of competition you’re going to need to have some really special sauce to when the race.  

But the converse is true as well.  If there’s no one else trying to solve the problem you’re trying to solve then you need to look really hard at whether it’s actually a problem.  That’s not to say that there aren’t any other people trying to solve the problem in different ways.  That’s fine and actually should be encouraging to you.  But the landscape is littered with companies that perfectly solved a problem that was a big deal to the founders but to not many other people.  

#5 - Find what you would do for free - Cliched advice of course, but insanely important.  So many people start businesses around things that they thing are good ways to make money versus things that they are passionate about.  Here’s why that’s flawed.  Stuff is going to hit the fan.  There will be days when you want to quit and go do something else.  Your ability to persevere is usually directly correlated with how passionate you are about bringing your vision into the world.

I think one of the best ways to assess your level of passion is to ask yourself what you’d do if your business idea failed.  If the answer is that you’d try to do the same thing again (with a different approach of course) then it’s something you truly are passionate about.  On the other hand, if you have a business that fails and you immediately start looking around for a completely different business to start then I think you have ask yourself how passionate you were about that first idea.

I know that’s true for me.  I can’t think of anything I’d rather do right now rather than try to revolutionize education.  eduFire is just a vehicle through which I try to accomplish this aim.  If eduFire didn’t exist I’d be trying to figure out some other way to make this happen.  

I hope this has been helpful.  I’ll be covering all these ideas and more in my upcoming entrepreneur bootcamp series.

Photo credit: http://www.flickr.com/photos/kwerfeldein/2104791931/