There are lots of reasons why people start their own business, but most people fall into one of three categories:
If you're really lucky in life, you may find the perfect calling that meets all three reasons above, but for many, they'll have to pick which reason is most important. Ask any person who owns a local restaurant and they'll often tell you it not only consumes their life, but the lives of their entire family. Ask an artist if they think they'll ever become rich and most accept they're not doing it for the money. So before you start any business, you must first be honest with yourself and truly know the reason for doing so. Passion can turn into a grind if someone is paying you for something that must be produced at a certain time, under a certain cost. Most startup businesses will require you to put in way more than 40 hours/week to make them successful. If you fall into the first category and really want to generate more income, then there are certain things you must keep in mind.
The greatest disservice ever done to entrepreneurs was convincing them that they could start any profitable business with just a few thousand (if not, few hundred) dollars. We’ve seen the stories too many times, where someone has an idea, uses their savings, maybe borrows money from a few friends, and then it's off to Shark Tank where they tell their story about a million-dollar business in just a few years. The reality is that these stories do exist, but there are so many factors that go into what works and what doesn’t, and why so many small businesses experience the exact opposite of these stories.
Is It Good Enough?
I’ve been guilty of the syndrome of taking too long to build an idea, then going to market with a product or service nobody wants, while trying to do it under-capitalized. It is the trifecta of terrible entrepreneurship. I simply refer to it as “2 Years and $2,000” as that's the amount of time and money I spent on one idea that really was a hobby.
If your primary goal for starting a business is Reason #1, then you must be laser-focused on "creating" new money, while not draining your soul and your wallet, leading to more expenses. Don’t fall into the trap of trying to build out the most unbelievable product or service, trying to get everything perfect. It’s very easy to fool yourself into thinking that you have to have a nice logo, cool business name, and perfect product for people to buy from you. Going down this path leads to months and months of "ideating," designing, refinement, while no money is coming in. Yet money and time is going out. Before you know it, two years have gone by and you haven’t made a cent.
Does Anybody Care?
If you want to make money quickly, pick a product or service that people will pay for that doesn’t need any frills. I’m always amazed that even in our digital age, some of the best plumbers, lawn care services, and other owners of necessary businesses can make six figures and not have a website or even a business card. When you offer something people need and do good work, the referrals and subsequent business just comes. Don’t take two years trying to invent the next great thing, when you’re primary goal is to generate income and hopefully invest some of that money into passive vehicles.
My wife often jokes that I wasn’t meant for this world as I’m that person that always likes the unpopular stuff. I’ve lost count how many times I’ve liked a new restaurant or product from a grocery store that went out of business or stopped being sold. Because of this, I’ve found myself coming up with ideas that I think are great but don’t get others nearly as excited. Being an entrepreneur with an engineer's mind is tough. You are trying to build a new product while teaching people why it’s an innovation that people should get excited about. This method is another time and money trap for building wealth when the likelihood of being the next Mark Zuckerberg is slim-to-none. Pick a product or service that people already understand and you can instantly work on targeting a well-defined audience who have already expressed a desire for that product. This is not to say you shouldn’t dream or come up with new ideas. If that truly makes you happy, then you should do that – just note that may mean not reaching your original financial goals as early as you would like (or ever).
Can You Market It?
Another piece of advice also hits close to home for me when building a business. I remember growing up in the 80’s seeing those Honda commercials where they said it was the car that sells itself. I often thought that many of my business ideas would result in products that just sold themselves. As I got older, I realized that I could probably find the cure for cancer and still die broke if I couldn’t find a way to market it. Having a sales and marketing budget is critical when trying to launch a new business. There have been so many scams not just in your neighborhood, but even on Wall St. (think WeWork) that people are naturally skeptical. Marketing is critical to getting your business out there; don't fool yourself into thinking otherwise. If you don’t have both the time and money, then you must seriously consider whether you’re ready to go into business or are you better off getting a second job and pouring all that money into investments. I heard one entrepreneur say that he has many ideas each week, but they're just passing thoughts; he won't start any venture unless he's willing to spend the next 3-5 years putting a real effort into making it work. Most people give up after a year and are lucky if they make it to year two.
Who Do You Know?
One last thing you should consider in building your business is understanding the size of your network. The smaller your network, the more time and money you will need to market it. Many of those amazing success stories you hear come from entrepreneurs that had a little help from a strong network of people that could help buy, promote, or sell their product. This is why it is sometimes easier for children of celebrities to start their own clothing line, or cosmetics brand - they have access to a network that gives them an instant boost. Without this, you’re spending like crazy on everything from advertisements to reviews and never hitting critical mass.
There is no one exact way to reach your financial dreams, so consider what works best for you. If building a side business is a means to an end, make sure you define the parameters such that it is truly a side business and not a pit of money, time, and energy for the next ten years. There's nothing wrong with keeping something small for some extra funds each month. Alternatively, if you want to be on Shark Tank, that's great too, just understand the sacrifices that will need to be made. A successful venture requires a lot of thought and smart planning, and sometimes you realize maybe just having a hobby is okay too.
Welcome to StepChange (StpChg). A blog about personal finance, small business, and investing.