Starting a business is a lot like getting married. In both cases, there's a certain amount of logic involved, but, ultimately, it's powerful emotions that propel us toward making the leap.
If you've never thought of entrepreneurship as romantic, you probably have never started a business. The prospect of being your own boss, doing what you love and maybe even making some amount of difference in the world can be utterly intoxicating.
The best way to improve your odds—and to limit the damage if things don't work out—is to temper your entrepreneurial romance with a healthy dose of realism.
Unfortunately, we all know that romantic feelings aren't a great indicator of success in either marriage or business. Up to 50 percent of marriages end in divorce — and the failure rate for businesses is even worse. With business failure comes real suffering, in the form of not only a bruised ego but also depleted savings, maxed-out credit cards and, often, personal bankruptcy.
So when a client tells me he or she wants to start a business, I go into tough-love mode. I generally don't try to dissuade would-be entrepreneurs, but I give plenty of straight advice, even if it means puncturing a few of their romantic illusions. Here are the three tips that top my list for aspiring entrepreneurs.
1. Share the financial risk
If you're planning to start a business, look for additional partners, investors or lenders. Relying on your own savings exclusively can be a recipe for disaster.
One of my clients — I'll call him "Oliver" — is a computer programmer in his early 30s. Two years ago, Oliver cashed out his stock options from his Silicon Valley employer and set out to launch an app-development business.
Oliver's approach was well thought out. He partnered with two colleagues for the venture, and each agreed to provide an equal amount of seed money. This wasn't a random number. It took into account not only the early-stage funding costs of the business but also each of the partners' savings and financial situations.
Each partner's remaining savings had to be sufficient to provide a personal income during the company's formative period. We helped the three partners carefully calculate these numbers.
In risking equal amounts of capital, Oliver and his partners ensured a softer financial landing for themselves in the event that their start-up failed. Additionally, their shared skin in the game created a valuable sense of cohesion and shared focus that are powering their business along.
2. Be bold in pricing
"Greg," an acquaintance of mine, had a great business idea that ultimately resulted in a failed business. The reason: He didn't charge his customers enough.
Greg's business was cleaning parking lots. He used his own savings to buy the equipment, which was his first mistake. The bigger mistake was failing to charge enough to cover his expenses.
Most people who leave larger companies to create start-ups don't fully appreciate what it costs to run a business. As self-employed entrepreneurs, people like Greg have to foot the bill for everything from fuel and bookkeeping to health insurance.
One expense that blindsides many entrepreneurs is the self-employment tax. Corporations pay half of their employees' Social Security and Medicare tax, while employees contribute the other half. But if you're in business for yourself, you're responsible for all of it.
Greg, it turned out, was charging about a third of what was actually necessary to pay himself a salary and cover his business costs. He boasted of having a ton of clients and impressive-looking top-line revenue numbers. But the top line doesn't matter — bottom-line profit is what matters. Greg's business went belly-up within eight months.
3. Create a 'sink-or-swim' deadline
Identify a date — say, a year or 18 months after launch — by which your business must generate enough income to support you. Your looming deadline will be a catalyst for decisive action and will prevent you from draining your savings to subsidize a doomed venture.
Many entrepreneurs have the romantic but mistaken idea that their business can only succeed through dramatic displays of commitment and sacrifice. It's the equivalent of an invading army burning their boats so that retreat is not an option. To most entrepreneurs, failure is a dirty word, and having a backup plan signals a lack of faith. It's an idea that's been popularized by second-rate motivational speakers. But refusing to accept the possibility of failure is the real problem.
Greg hadn't considered, or planned for, the possibility of failure. Without a sink-or-swim deadline, he exhausted his savings and today is in danger of losing his home. This sort of outcome happens all the time.
Oliver and his app company came to their deadline and all of their careful planning led them to continue on with their venture. Over the past year their income has varied, but they have the right metrics setup to ensure they remain profitable and successful. They understand that it will be a while before they have consistent six-figure salaries that they did in their previous corporate jobs. So they've created an ample slush fund for the foreseeable future.
In the end, it's no accident that Oliver is succeeding where Greg failed. One entrepreneur planned in a realistic way, and the other didn't. With that being said, there's never a guarantee that a good product, good planning or hard work will make a business succeed.
The best way to improve your odds — and to limit the damage if things don't work out — is to temper your entrepreneurial romance with a healthy dose of realism.
— By Bijan Golkar, CFP®, CEO and Senior Advisor at FPC Investment Advisory Inc.