Don't quit your day job ... yet. Or, at least wait until you talk to Carol Roth, a small-business advocate, "recovering" investment banker, and author of "The Entrepreneur Equation." In a new digital series, Roth takes on would-be entrepreneurs who want to abandon their careers for new small-business ideas. Here, she analyzes flight attendant Rachel Maxwell, who founded Maxwell Biometrics, a company that makes door locks that open with your fingerprint, in her spare time.
Too often, entrepreneurs evaluate a new business based on emotions, instead of a sound financial evaluation. The potential rewards of a new business have to significantly outweigh the upfront and ongoing risks that you are going to take and the issues that you will have to endure for you to be willing to try to reap those rewards at this time in your life.
When I looked at Rachel Maxwell, a first-class flight attendant by night, who spent her days starting a company that makes biometric locks that open with the scan of a fingerprint, she not only had characteristics that made her a good entrepreneurial candidate, but her risk-and-reward equation made a lot of sense. From a timing perspective, she was financially secure and, while she had, by all accounts, a very solid job as a flight attendant, I felt that even if entrepreneurship didn't work out for her, she would be able to at least secure a similarly sound job in the future, so her opportunity cost seemed low.
Measuring that against the opportunity for her biometric lock company, the rewards held a lot of potential vis-à-vis what she was giving up. She saw the opportunity for this type of lock, already being used in Europe, in the U.S. She put her own spin on it (including four deadbolts for extra security) and was granted a patent on the product — and got it on the shelves of Home Depot. The locks sell for around $500 to $600.
While her success is far from a lock (pun intended), she has gotten over some major hurdles and faced an opportunity with a lot of upside. If she fails — or is just modestly successful — her experience and what she will learn for a future entrepreneurial endeavor more than make up for what she's giving up in the process, especially given her solid personal financial foundation.
So, is this side project worth pursuing as a full-time job? I say, yes!
If you are considering starting a business, you must look at the risks and rewards of the endeavor. Here are a few evaluations that you can do:
1. Evaluate the "financial deal" that you are making. What are you giving up in terms of salary and benefits? How much money will you personally invest to start and run your new business? What investments might you have to forgo and what happens to you financially if you lose part or all of that investment? Do you have to take out a loan?
2. Evaluate your investment vs. what you could reasonably expect to make from the business over five or even 10 years. Now, evaluate if you should "make the deal" based on the financial merits of the risk and reward tradeoff (i.e. do you trade your salary, benefits, investment and/or even collateral for the possibility of making what you may be able to make, purely based on the financial return?).
3. Consider a by-the-hour evaluation. Look at how many days a week and hours per day that you think is realistic to achieve your projected financial model. Find out how many hours per year you will be working (interviewing other entrepreneurs in similar industries can help you with realistic estimates). Take the amounts that you expect your business to make each year in good, bad and normal scenarios and divide each one by the number of hours you expect to work. This is your per-hour wage.
Is this a wage that you feel good about and you feel is a good reflection of the value of your time? If not, the reward of your business may not be substantial enough to justify the risk.
4. Look at your business the way an investor would. Ask yourself if you are "betting the farm" on your business and, is the level of investment that you will be making prudent, given your financial situation? Another question to ask yourself is, "Would you consider making a similar dollar investment in any other potential investment"? Finally, would you advise a friend or family member (that you like) to take on the same level of financial risk that you will be taking on by starting a business if the roles were reversed?
Doing these types of evaluations will help you to think through whether the opportunity is big enough to justify what you are giving up and if you are in a position to take the risk today.
If you're an entrepreneur looking to turn your hobby or "jobby" into a full-time career, we want to hear from you. Email: AskCarolRoth@cnbc.com.