Because startups like Airbnb and Dropbox are becoming very successful and making their founders millions, everybody wants to form a startup these days. But what most people don’t realize is that startups involve a lot of time, energy and sometimes even money.
Download this handy cheat sheet about 5 questions you need to answer to run a startup.
Although it may seem rewarding to start up a company, it can be painful. So, do you think you are up for the task? Well, if you are unsure, you should have your answer after you read this…
Can you work with a partner?
When it comes to starting a business, you ideally want between two and four founders. Why? One is no good because there is too much work for one person. And you will be working a lot!
But if you add any more than four founders, then it becomes impossible to make quick decisions.
Another reason you don’t want to do it alone is that you have no one to hold you accountable for results. Two founders can feed off of each other’s energy. Some of the most successful startups were led by two people.
Yes, there are great examples of companies succeeding well with only one founder. Evan Williams became the solo founder of Blogger when his partner split, yet he was able to sell it to Google. And in some cases even with more than one founder, people believe that there is The One who makes it work. Everyone in the Valley talks about Aaron Patzer at Mint.com as The One who made that company work.
But there is no getting around the fact that operating a startup will squeeze you. Having somebody around for emotional and creative support is important.
Are you old enough? Young enough?
This might sound like a strange question, and it might even sound like I’m discriminating, but the truth is age does really matter when it comes to launching a startup.
The people who are really good candidates for a startup tend to be between the ages of 23 and 38. Any younger than that, and most people probably won’t take you seriously. Any older, and you probably won’t have the time or energy to work until 3 a.m. every night.
This is not to say that someone who is younger than 23 can’t form a startup. Fifteen-year-old Daniil Kulchenko sold his cloud-computing startup to a Vancouver, BC, based company.
And a 2009 study by the Kaufman Foundation, called “The Anatomy of an Entrepreneur,” showed that the average age of founders was 40 years old.
The bottom line is forming a startup means you decide to squeeze your entire work life into four years or so. You won’t have time to do anything else but work. Starting a company isn’t for everyone.
Can you secure early funding?
Even if you can work with a partner and are the right age, not having enough money to operate your new business will hurt your chances for success. Before I tell you ways to secure early funding, it helps to know the causes behind undercapitalization so you can avoid it.
- Wrong industry – Never pursue a startup in an area you don’t have any experience in. This can lead to underestimating the costs it will take to operate your company.
- Bad Business plan or no plan at all – Investors will want to see a business plan, but the other reason you need one is so you can realistically evaluate whether your business will make it. Your plan should tell you whether your startup is viable and how you’ll overcome worst-case scenarios.
- No accountability – One of the reasons it’s so important to work with a partner is that he or she can hold you accountable to ensure success. Besides, business owners with coaches or mentors outperform the competition.
- Lack of difference – Entering a saturated market without any sense of how you are different from competition will result in low sales. Give customers something better or faster or you won’t survive.
- Failure to retain – It costs more to close new leads than it does to retain prior customers. And happy customers are paying customers. Companies that fail to work on customer service and retention will slow the cash flow.
Once you know you’re not making any of the above mistakes, you need to figure out how much money you’ll need and where that money will come from.
There are two schools of thought on this: raise as much money as possible or raise enough money to last a short period of time. The second is the most common, so I’m going to focus on that.
The idea is to estimate what it will cost you to get established and operate for one or two years, and then raise enough money for that period. When you’re about six months away from running out of cash, raise more.
Now that you’ve figured out how much you’ll need, add another 40%. This 40% is known as “Augustine’s Law”, named after a project manager in the 80s who discovered that 40% was the average cost overrun for his projects. And if you know anything about startups, you’ll know they never go the way you expect.
So, where do you get this funding?
- Angels – These investors usually invest $10,000-100,000 to cover expenses while the company gets on its feet.
- Venture capitalists – Investors who come in with the big money, but they also take a bit more of your company.
- Friends and families – If you have a wealthy family or friends, ask them if they’d be willing to help you out.
- Bank loans – If you’ve got a strong business plan, a bank could lend you the funds you need.
- Bootstrap – You decide to fund it yourself because you can keep expenses low. No dilution of your shares with bootstrapping, but not a lot of cash to work with.
Can you limit your spending?
Like I mentioned above, startups usually fail because they run out of money. If you can’t secure the money, you won’t get anywhere. But if you get the money, you need to spend as little as possible. Here are some money saving tips.
- Avoid hiring people. Use temps or contract workers.
- Resist paying yourself lavishly.
- Live well below your means.
- Save money and pour it back into the company.
- If you do have to hire, don’t hire expensive people.
- Avoid buying lavish office furniture. If you need office furniture, buy it cheap, used or simply borrow it. Ask friends and family if they have furniture in storage you could use.
- Operate out of an apartment in a good neighborhood. Renting commercial space is expensive.
You don’t have to get big fast, you just have to have enough money to keep going. I’ve learned that the best companies take time to mature. It takes time to reach sustainable profitability. So, be patient.
Do you want to make a lot of money?
The reason they want to be rich varies. Here are four:
- Poverty – Some grew up in poverty and want to get out of that and help their parents get out of it too.
- Generous – Some entrepreneurs just want to be rich so they can help causes they believe in. Bill and Melinda Gates are famous for the causes they support.
- Control – Some people want to be rich so they can have independence and live their lives the way they want to.
- Royal – Other people like the idea of owning yachts and multiple homes and traveling around the world.
In some cases, entrepreneurs want to be rich and keep control, but as Harvard Business School assistant professor Noam Wasserman says, “Very few entrepreneurs can achieve both.”
In his 2006 paper Rich versus King: The Entrepreneur’s Dilemma, he says:
The Larry Ellisons of the business world are few and far between. In fact, there is a fundamental tension between the money side and the control side—getting rich often means selling control to investors; keeping control reduces the payday.
That means you need to decide what’s most important to you. It’s not easy making money, and there are ways to live comfortably without working very hard, but if you want to go down the entrepreneurial path, go for it! I’d love to help you any way I can.
Being an entrepreneur is a very demanding way to live. It requires a lot from you as a person, and it will challenge you in many ways. Trust me, I may be young, but I’ve been through a lot of ups and downs as an entrepreneur.
Of course, it’s not for everyone. And it’s a good idea to evaluate if you have what it takes to start a company. If you think you do, then what are you waiting for? There’s never been a better time to start!
What do you think it takes to run a startup?
P.S. Do you have a startup that needs help growing? click here.