I found this article the other day which gives good advice to people thinking about making a startup company. I know from experience that these are key points worth taking seriously.

I started a small company with two friends/associates in February 2007. We had all seen The Secret (a positive thinking DVD) the year before but realised that you couldn’t buy it easily in the UK at all. So we set up a website to sell it and imported a load from the US. I researched adwords and made a great site that converted visitors to purchasing at 40%!

Anyway, we sold tons of DVDs to customers and shops (and even other wholesalers) in the UK and Europe in a very short period of time. We quickly discovered that selling in bulk is way easier than selling tons of individual units. So we discussed how scale up the business such as outsourcing the shipping because it was becoming laborious and time consuming and we all had other main businesses to take care of at the same time. We successfully outsourced the shipping to a 3rd party (who also sold DVDs via Amazon for us) but they took quite a lot of management and we weren’t getting the level of accuracy that we’d have liked.

All of a sudden we started to find it *really* hard to get the DVDs from the US and eventually we discovered that this was because an “official” UK wholesaler was going to be selling The Secret soon and the makers of the secret had forbidden any of the US wholesalers from selling to anyone in the UK! Clearly they didn’t want to share in the “wealth creation”! This actually made us all feel pretty gutted (they were actually pretty rude about the whole thing) but we tried to find alternative ways to carry on selling The Secret (we had tons of orders but no stock) but we kept hitting dead ends.

So in the end we decided to sell products on an affiliate basis instead of direct because it was a lot easier that way and we made a special website to do that from. By this point I had actually put in a lot more work than my colleagues and we discussed this and they agreed to catch up their portion of the work whilst I took a break and focussed on programming my current game. However, they never did step up to the plate and do anything and thus the business ground to a halt.

Eventually I got them to sign the business over to me in case I wanted to do anything with it, but by then I was doing so well with my game programming that I didn’t have the time or inclination to renew the business. So I closed it down last year to reduce admin. It feels sad to close down a business, but at least we made a profit whilst we were trading and we were a roaring success for a while. But because it was not the primary business for all of us, it eventually fizzled out. Sure we could blame the radical shift in the business model that was forced upon us by the makers of The Secret, but I’m sure that we could have made the new site work well if we had put some decent effort into it.

The failing was with us, there’s no point in denying that. However, we all learnt many things. We all found out what parts of a business we didn’t like doing and where our strengths lay, and now we are better equipped for starting another business should we ever need do (I’m bound to start another business one day, it’s in my nature!)

Analysis

So here’s what I believe we got right and wrong from the 13 sentences in the article I linked to above:

1. Pick good cofounders: The original idea was from one of the cofounders and they were both certainly well versed in the subject matter of The Secret and had good ideas, but they weren’t that interested (and were too busy) in the nitty gritty of running a business. Nor was I interested in the nitty gritty, but someone had to do the work and thus I ended up doing it. Ideally I’d have started a business with cofounders that were prepared to put in an equal effort into areas requiring equal skill unless we agreed otherwise at the start. If you agree to split profits 3 ways but then you do >50% of the work, it’s a sure-fire recipe for feeling demotivated, trust me.

2. Launch fast: Yeah did a pretty good job of this once the idea was put forward. But we could have done it even faster with more focus if we didn’t have other main businesses. Also if we’d had the idea 6 months earlier we could have made a killing and stockpiled tons of DVDs before the business model changed. Ah, hindsight.

3. Let your idea evolve: Originally we were selling to individuals but once wholesale orders started coming through we realised this was a much easier way to make bigger profits more quickly and so we tried to attract more of those orders. Later on the business model changed completely to having no stock and making affiliate sales, but that never got off the ground (as I’ve mentioned in the top half of this article).

4. Understand your users: I believe that all of us understood what our customers wanted well and our website reflected that, hence the very successful conversion rate.

5. Better to make a few users love you than a lot ambivalent: We offered good prices, fast delivery and had a no quibbles refund policy. Also we made sure that wholesalers were treated well. Lots of people recommended the site to their friends which showed that the customers were happy.

6. Offer surprisingly good customer service: I’ve kinda covered this in point 5. It’s essential of course.

7. You make what you measure: I measured the adwords performance and site conversion rate very carefully and tweaked them to push up the efficiency and it worked. I also kept the accounts up-to-date because looking at the money coming in made us all feel excited and motivated.

8. Spend little: We ran the business from our homes so there were no major overheads. The only real expenses, apart from a few domains and setting up a company, were buying the actual DVDs and then shipping them to customers. Mainly we used my credit cards because this allowed us to spend thousands of pounds that we didn’t need to pay off for about 50 days.

9. Get ramen profitable: We weren’t in business long enough for this to happen. We were making a profit, but also there were other competitors and slowly the margins got eroded as price wars began.

10. Avoid distractions: Having other main businesses was a major distraction and no doubt a major fail point of the business.

11. Don’t get demoralized: We did get pretty demoralised when we discovered that we could no longer buy stock. Then we worked out an alternative business model and got a great site made for it. But by then I guess the momentum had worn off and we didn’t make it happen.

12. Don’t give up: We didn’t give up initially, but I took a break thinking that the other guys would keep their word and carry it on so I could come back to it fresh. But they never did. So maybe they gave up first and then I did? They may not view their inattention as giving up, but certainly the business was static by that point. Of course eventually I closed the business and that is giving up, but that was so I could focus my strengths in a more profitable area (making casual games), and that’s working out very well indeed.

13. Deals fall through: This didn’t really apply to us unless we count the fact that our US wholesale source of DVDs totally dried up.

Some Advice

It’s worth mentioning that starting a business with friends will strain your relationship at points especially if you feel that someone is not pulling their weight. However, you’ll also learn a lot more about your friends and how they cope with certain situations (good or bad). We did have lots of fun too though such as getting creative with marketing ideas and visualising success etc. We are all still good friends – maybe better friends because of it. This is largely because we aimed to discuss things maturely and positively (always looking for solutions) without getting angry and in that I believe we succeeded.

I now know that it’s important to identify the skills that will be needed to run the company and to make sure that they are evenly split across the founders. For example I ended up doing all of the accounts, a large part of the initial web development and optimisation, the Adwords stuff, lots of the customer service etc. The other guys did lots of stuff too, but it did feel somewhat weighted towards me in terms of skills and time. For example one of the founders didn’t really know anything about accounts or how to make a webpage (they do know now though ). Clearly it’s important that you all have a general understanding of the core aspects of running a business and that you each have some special unique skills that you can bring to the table. Later on you should be able to outsource a lot of the day to day work anyway, but someone has to do it right at the beginning (unless you start with outsourcing in mind from day one I guess).

Also we waited too long before starting a proper company and getting a company bank account set up (actually the bank took ages too). This meant that we all had to juggle a lot of our personal money round at the beginning and it was very time consuming, complicated, and a bit stressful. Knowing that your personal credit card is maxed out with stock that you have to sell ASAP can induce anxiety – in fact I made sure that the other guys bought some stock themselves so that they understood the sense of urgency I felt when it was my own money on the line. We only waited a month or so before setting up a proper company, but it was still too long. Mainly the problem was not having a single bank account (which Paypal was pointed at). Perhaps one of us should have just quickly set up a brand new personal account that we all paid an agreed upon amount of startup capital into – except that none of us actually had any decent capital spare and I had the biggest limits on my credit cards.

Hopefully if my ex-business partners ever read this they will feel that it’s a fair and accurate account of our business. I’ll admit that as the business grew more hectic and I was doing more and more I probably put them under pressure in a way which may have led them to do less work, so it was counter-productive. It’s worth bearing that sort of thing in mind for sure.

And there we have it, a summary of what went right and wrong with my little foray into a specialist DVD wholesale business (gosh that sounds like dodgy movies, wink wink, nudge nudge, instead of positive thinking films). Anyway, I hope that you found it useful.

I was recently contacted by Joni Lauri, a student from the Helsinki School of Economics, who was conducting survey research on independent online-based game developers for their Masters Thesis. Anyway I took part in the survey which asked some pretty interesting questions and Joni has posted a summary of the findings in this thread on Indiegamer. Well worth checking out.

Someone recently emailed me and asked me these questions:

1) How did you setup your business? Limited company? Did you have to do anything special with inland revenue because your sales are online / international?

2) How did you manage your books? Was it simply a case of keeping bank records for transactions + royalties?

3) Did you always pay yourself a wage from it – and if so how did you go about doing this?

I’ll answer these from a UK perspective but some of the information should be relevant to setting up non-UK companies too.

1) Setting up a Limited Company

I set up my company as a Limited company called Jake Birkett Computer Solutions Ltd. in October 2002. This was so that I could supply IT consultancy services and contract programming to other businesses. I now use it exclusively for Grey Alien Games which is a “trading name”.

To set up a company you have to file various forms with Companies House, but I hate all that form filling so I used a 3rd party that did it for me for £90, all I had to do was fill out an online form. Still, to fill out the online form correctly may require an accountant’s advice (more on that later). Also once per year you have to file an “Annual Return” to Companies House which costs £15 if you do it online. To set up a Limited Company you need TWO staff members, one can be you (the Director) and the other could be a family member or associate who doesn’t actually need to do any work (the Company Secretary).

VAT registration

If your company is not VAT registered then you do not need to do anything special with HM Revenue & Customs (this is the new combo name for Inland Revenue and HM Customs and Excise which were always two separate things). However I voluntarily VAT registered even though my income was below the £67,000 threshold where registration is mandatory. This was to look more professional to other UK business (when I was doing consultancy, although it’s irrelevant now I sell games) and also to write off any VAT incurred on purchases as an expense – meaning I claim it back from the government once every 3 months (this is pretty cool as I save 17.5% + about 20% tax on games and electronics that I buy for my company – yes games, if you write games as a living, then buying games for research is a valid expense).

Being VAT registered means that any games you sell on your own website using say Paypal have to include VAT and you must log the amount of VAT from each sale and declare it every quarter to HM Customs and Excise. However if you use a 3rd party payment processor like BMTMicro, Plimus or Share-IT, they actually collect the VAT for you, along with their fees, and just send you the remainder, so that’s really easy (no extra paperwork). Furthermore, if you sell your games on portals and receive royalties, the portals will deal with the VAT (if any). Besides because the money often comes from the US, there is no VAT on it because UK companies cannot charge VAT to companies outside of the EU and when you receive royalties it’s the same from an accounting point of view as you invoicing that US company for the royalties due even though in practice you never actually make an invoice. It’s a convoluted issue, so if in any doubt, ask an accountant – I’m not a qualified account so please take everything I say as “advice to the best of my knowledge” not “gospel”, thanks!

Self-Employed

Finally, if setting up a Limited company seems like too much hassle then you can just go self-employed (as an individual), which costs nothing. You’ll have to keep basic accounts i.e. Money coming in (royalties/invoices etc) and money spent out (for business expenses etc). Keep this up to date then at the end of the year fill out a tax return. Basically they’ll look at your profit (i.e. income – expenses) and charge you however much tax you should legally pay (around 23% unless you are raking it in). You might want to hire an accountant to help with this the first time…

2) Managing your accounts

If you run a Limited company you are legally required to submit annual accounts to Companies House and fill out various tax forms for HM Customs and Excise. It’s a minefield and one slip means that you could lose a metaphorical limb. That’s why I hired an accountant.

Before setting up my company I went to a local recommended accountancy firm (Donovan Atyeo) and spoke to them about my plans. They gave me a free initial consultancy and answered tons of my questions and advised me on the best way to proceed. I was so confident in their advice that I hired them to manage my accounts on an ongoing basis and they have done a great job ever since. It costs me about £500+ per year to do this which may seem like a lot of money but I look at it like this:

- They have saved me tons of money by making sure I get maximum benefit from the way the system is set up. I’m not talking about “loopholes” or anything dodgy, just how to make sure I don’t pay too much tax and that I claim back every penny I can etc.
- I really hate filling out long-winded financial forms that I might make errors on. They do this for me and probably way quicker than I could. I see this as money well spent. My time is far better spent making MORE money programming games. Remember that! It’s tempting to do everything yourself (graphics, music/sound, accounts, marketing etc) but you’ll be spreading yourself too thin. Do what you are best at and delegate the rest.
- They have probably prevented me getting fined or paying interest by failing to send off the correct forms at the correct time.
- I got lots of business from them sorting out their computer systems and those of their associates

They also deal with my PAYE (more on this later) and my personal tax return and helped to advise me about tax matters with regards to moving from the UK to Canada. Now that I’m here they are acting as the registered address for my company, which means that they receive all important documents and bank statements on my behalf.

Book-keeping

Note that my accountants don’t do my day to day book keeping for me, they just summarise and check everything and send off the correct forms. I keep detailed spreadsheets of all my business transactions which I supply to them at the end of the year. Some people hire a book keeper to do this part but I enjoy it as I can see how well I’m doing instantly. It’s really important not to fall behind if you keep your own books. Here’s what I keep records of:

- Debtors (Money coming in. Dates, amounts (Net/VAT/Inc. VAT), Company, Reason etc)
- Creditors (Money going out. Dates, amounts (Net/VAT/Inc. VAT), Company, Reason etc)
- Balance Sheet (This is a summary of Debtors and Creditors and PAYE, great for a quick overall picture including an estimate of my annual tax liability).
- Cash Flow (This logs money in and out of my bank. Great for seeing at a glance how much cash I have available for dividends or big bills etc).
- VAT Input/Output (summarises all the VAT from Debtors and Credits so that I can see how much I owe HM Customs and Excise each quarter)
- Mileage (Logs miles driven or cycled so I can claim a tax benefit for them).
- Parking (Logs all parking costs to be claimed back)
- Director’s Current Account (logs all money I’m owed by the company for expenses I used my own money on, and when I paid myself back).
- Dividends (Logs all dividends paid to myself)
- Assets (Keeps track of all new assets over £50 and all “disposals” which is assets sold or thrown out).
- Utility Bills (Because I worked at home I was able to claim a portion of my utility bills (phone, Internet, heat+light, and even council tax and mortgage interest more recently)).

Phew that probably seems like a lot of things right, but once they are set up they only need the occasional addition. I tend to add things as they happen and double check everything once a month. I have a checklist to remind me what things I need to do on a monthly basis. If that month falls on the end of quarter there’s more to do, and at the year end I have to check everything is good and send it all to my accountants.

3) Paying yourself a wage

If you pay yourself a wage from your company you have to use the PAYE system. It’s pretty complicated so I got my accountant to handle that. Over the life of my company I’ve paid myself (and the company secretary) different amounts depending on how well the company is doing. I’ve never paid a very big salary because I prefer to take most of the money out of the company via Dividends. In the past there was a tax advantage to doing this but the advantage has moreorless been removed now by the government (bah!)

You shouldn’t pay yourself dividends every month instead of a wage otherwise it may look funny to HM Customs and Excise, so quarterly is probably the most frequent you can get away with (although mine have sometimes been more frequent and a bit more random due to when big money has arrived and when I’ve really needed it!). Every time you pay a dividend you must hold a company meeting (with yourself and the company secretary) and note the amount you plan to pay in a minuted meeting that you then sign. In reality this is just a simple one page document that you modify every time you pay a dividend, then print and sign – easy!

Advantages To Having A Company

If you run a company it becomes an asset that other companies may consider buying that is separate from you as an individual. If you are self-employed, no one would ever “buy” you, they would probably just hire you (although they could buy some of your assets like a website or IP). Also if you do become an employee, like I am now, it’s very handy to still have a company ticking over in the background which is essentially nothing to do with you as an individual so that your employer can have no control over it. Some people even assign their companies over to their wives or trusted friends when they become employees of another company to avoid any “conflict of interest” issues.

It looks good on your resume if you owned and ran your own company, especially if it has been going for more than 5 years. Your accounts are publicly searchable too on Companies House. Plus you can re-purpose your company to handle other types of business once it’s set up if you get any bright ideas. Naturally you need to get a proper company bank account too, I forgot to mention that earlier. The banks will charge you for transactions made. I have a fairly low level of high value transactions and it costs me about £10 per month.

Anyway, I love having a company that is making money whilst I’m asleep and I love looking over my accounts and seeing how well I’m doing. I like that feeling of control and freedom even though it takes a certain amount of upkeep.

Well I spent way longer typing this than I planned, I hope that you find it useful!