Online Headshop Startup: a Case Study
All businesses need some kind of seed money to kick start their business plan. An online headshop is no exception
There are a few different ways to secure initial funding. One of the most common is for the business owner to get a loan. This requires some trust on the part of the bank, because the business is young, small, and has yet to start bringing in revenue. Every startup would need to put together a solid Business Plan
and demonstrate a safe prospective income stream to secure a loan.
In this case the owner Peter Kailo had previously worked as a glass blower where he learned the skills of hand crafting glass smoking pipes, bubblers sherlock pipes and smaller bongs. His previous carreer also put him in touch with some of the best glass blowers in the world as well as connections with larger glass labs like Toro, ROOR, EHLE, Illadelph, and others. But before being able to start Headshop Smokewire
Although getting such a loan can be difficult, it can also be the beginning of a good business relationship with a bank, which is extremely valuable to a startup.
Once in possession of a loan, the startup needs to acquire some inventory. It's important to have enough products in stock to meet initial customer demand. Going to a new store only to find that it will not be able to fill any orders because the shop has no stock leaves a bad first impression for customers.
On the other hand, since this particular startup was an online head shop so there wasn't a need to acquire a physical retail location, which saved on renting costs for a storefront.
Lacking a physical location doesn't mean that the shop doesn't need a way to display its wares, however. The shop needs to design, build, and host a Web site, which might also require setting up a secure online point of sale system.
The Web site will have some initial setup costs as well as ongoing costs for maintenance and marketing. The company can also spend money on marketing. This may or may not be worth the price. It is possible to do your own marketing by advertising yourself through social media and similar outlets, but this takes time and may not be effective. An online head shop can advertise through word of mouth, especially if it has a good reputation, but this does take some initial investment to get the word out.
Once the online head shop sets up a functioning Web site and acquires inventory, it can open for business. The business will face a different cost structure from a traditional business. Some costs that often figure big in the bottom line of brick and mortar stores, like rent and labor, will be minimal. However, other costs, like shipping, hosting, and storage might be high. The business needs to be aware of which costs are unavoidable and which can be trimmed safely. This is particularly important in the early days, before money begins to flow in and before customers know about the shop. Sooner or later, the bill for the startup loan will come due as well. The headshop needs to balance the incoming costs and be prepared to take early losses. Eventually, news of the headshop will spread far enough that customers will start to use it regularly and recommend it to their friends. At this point, the founders do not need to spend any more time or money on marketing. Their own customers will be their best advertisers. The fact that it is an online business helps, because the potential customer base is huge. There is no requirement that customers like nearby to know of the shop and use it. Furthermore, customers and potential customers don't need to know each other in person to discuss the shop. They can interact through social media.
The First year is the most crucial period for startups
Now that the headshop has been open for some time, the hardest part of running the business is over. For any small business, the first year is the most crucial. Nine out of ten startups fail in the first year. The business can expect to run at a loss because it takes a while to build up a large enough group of customers to outweigh the recurring costs
of running the business, and meanwhile the initial loan still needs to be paid back to the bank.
In this case the online headshop will need to continue to develop a good reputation for selling quality goods and delivering good customer service in order to attract new customers and keep old ones coming back.
It has met its first years goal, and can pay down its debt and think about investing in some improvements, such as better website design or expanded product offerings.
Reaching that plateau of stability is an important milestone, because in addition to being easier for the founders to manage, it also signals to customers that the shop is an established entity with a history, not just a brand-new startup that could vanish overnight. All in all, using the loan money wisely to make it through the first year, without being too ambitious about expansion or investment, was the key for this online headshop to enjoy lasting success.