5 Steps to a Successful Start-up

By Karl Stark and Bill Stewart

We're always on the lookout for entrepreneurs who get it--the leaders who are modeling what it takes to launch a successful start-up. We found a great example recently in David Klein, CEO of CommonBond, a start-up aiming to help M.B.A. students with education funding.

David and his co-founders, Michael Taormina and Jessup Shean, are M.B.A. students at the University of Pennsylvania's Wharton School and are part of Wharton's Venture Initiation Program, a highly selective start-up incubator that helps Wharton entrepreneurs.

CommonBond is filling a void in the student lending space by raising capital from individual investors (sometimes referred to as "crowdfunding") and providing loans to M.B.A. students, who have lower loan default rates than the broader student loan population. In addition, CommonBond has promised to fund a year's education of a student in the developing world for each M.B.A. degree. This social mission is inspired by companies such as Warby Parker (incidentally, also funded by Wharton grads) and TOMS Shoes.

After we met Klein last week, we thought it was clear that he's executing in a number of areas that we see as "best practices" for launching a start-up. Here are five things he's doing that other entrepreneurial CEOs can emulate:

1. He has a clear, simple view of the company's value proposition.

It's so important to be able to clearly communicate how your company creates value for a customer in a concise way. If you can't summarize your business model in a three-sentence elevator pitch, it's probably too complex.

2. He's entering a proven market.

So many entrepreneurs think they need to invent the Next Big Thing. That's rarely a successful endeavor. In most cases, the Next Big Thing doesn't exist--because it's not that valuable. We'd much rather see a business model that improves on a proven market than one that relies on creating something entirely new. It's a relatively easy mental leap to believe that a better product is going to take share from an existing market.

3. He has a revenue and profit model that will create cash flow to fund growth and create a return for investors.

This a basic business principle, but it's surprising how many start-ups actively look for funding with no clear view of how to create a return for investors or eventually fund growth from cash flow.

4. He has a view of how he will invest in and improve his business model over time.

Financial services is a competitive market that could be saturated by financial institutions in a few years. The important thing is that Klein can articulate a clear, logical view on how CommonBond will achieve market share in the short term (given its relationships in the M.B.A. community) as well as many ideas on how it will invest in sales and marketing efforts to enhance its competitive advantage over time.

5. He is asking for funding at the right time and for the right reasons.

CommonBond has already built the financial and legal infrastructure necessary to fund loans. It already has students signed up to apply for the first loans. Its last step is securing the investors. So many start-ups ask for capital first, before building anything. Investors would always rather buy something more tangible than an idea.

Klein seems to have the company on the right track. Of course, that doesn't mean CommonBond will become the next billion-dollar start-up, but at least he is giving it a better shot at success.

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