For passionate wantrepreneurs, the itch to launch and get started is almost too powerful an urge to resist. The reason someone leaves a stable, traditional career path and jumps into the fray of starting up usually revolves around passion. Passion is what fuels the transition from dreamer to doer.
Fortunately, dreamers are limited by capital. Why do I say “fortunately”? The constraints of capital force dreamers to keep their feet firmly planted or to suffer the consequences.
I am a firm believer that the capital raising, VC pitching, pre-launch phase of a start-up is critical to its success. Every pitch represents an opportunity to revise the plan, gain valuable feedback from potential investors, and improve efficiency.
1. Slash Your Personal Expenses
The first step in becoming an entrepreneur is preparing for the financial strains of the journey. Cash-flow is the name of the game. The more of your hard-earned savings and earnings you can keep in your pocket at the end of each month, the longer you’ll be able to stay in the fight.
Potentially, if you’re able to slash personal living expenses enough, you could completely self-fund your start-up. That’s HUGE! Outside funding is expensive, so get your personal finances in order to build business credit. Think about the value of Facebook’s stocks today. Just a 5% stake in the social media juggernaut’s early days would be worth millions today.
- Get onto a flexible, written budget that accounts for every dollar spent personally.
- Start selling anything and everything that isn’t nailed down.
- Slash monthly bills. Stream Netflix and YouTube instead of paying for cable. Sell your leased car and buy a reliable clunker. When your cellphone contract expires, pick up a prepaid SIM card.
- Cook healthy foods at home instead of eating out. And that Starbucks coffee? The best part of starting up is Folger’s in your cup!
2. Dip into the Equity of Your Home
Many impatient entrepreneurs choose to skip the process of raising outside funds or stockpiling cash. Instead, they take advantage of a home equity line of credit (HELOC) or a second mortgage. I’m personally not a big fan of this approach.
First, it eliminates the necessity to pitch to VC’s and other experienced investors. Missing out on their advice and the benefits of subjecting your plan to the rigors of the capital raising process is a huge loss. Secondly, you’re funding a speculative business with a form of financing that requires consistent, monthly payments.
Mark Cuban is fond of saying that only morons launch a business with a loan. Why? The bank doesn’t care about your business. During turbulent times, the bank will add increased stress as you’re pressured to cough up payments you can’t afford.
Trust me, turbulent times are guaranteed in any start-up. You do not want to be dealing with a silent partner that simply wants a monthly check and will do whatever it takes (including seizing your company’s assets) to satisfy the obligation on its timetable.
Sell Your Home, Instead of Borrowing Against It
If you want to access the start-up capital available in your home, sell it. Selling your home frees up your equity, without creating a bank loan.
And you can transition into life as a renter, where the cost of living is significantly more predictable and manageable. Say goodbye to handyman repairs, property taxes, and HOA dues. In terms of cash-flow, an affordable apartment beats home ownership any day of the week.
3. Start in Real Estate Investment
The path to entrepreneurship and starting up is never a linear journey. My business partner started out in real estate. His strategy was to begin to generate multiple streams of income from rental properties and use that income to launch his future business.
There’s some risk involved in this strategy, as tenants are sometimes late on their rent. There are also chunks of time where an investment property isn’t actively rented, meaning negative cash-flow. Plus, maintenance costs on rental properties are unpredictable and constant.
If you want a good laugh, check out some of the crazy excuses property managers have to deal with when the rent check comes due. Seriously, property management and being a landlord is a major time eater.
But renting out could be an effective long-term strategy for generating additional cash-flow and increasing your personal net worth. As an entrepreneur, both cash-flow and net worth should be buzzwords that get you salivating.
The absolute best strategy for starting up is to create something you can self-fund. You don’t have to launch everything right away. I like starting up in components and letting each piece of a start-up fund the next one.
But if you must take on outside funding or a loan to get going quickly, try to keep outside funding requirements to an absolute minimum. Quick cash gets expensive over the course of a successful business.