Recently I have been meeting with various folks, weary of the lull in their current business or lack of work, who want advice on starting a new business as an alternative to continuing their current path (making their current business succeed or finding a job or consulting gig).
I can understand their emotional state: they are bright and restless and need to engage their skills and to experience the feedback and stimulation and identity of working in the world. They despair of economic recovery. They are young and want to take their shot, or middle-aged and want to do something to control or enhance their savings or retirement fund. In most cases they have enough personal savings or 401Ks to get through a year or so without salary, but after that year, there will be nothing. So they want to take an action and not remain passive.
I admire their spirit. I want to support their vision and their courage. And I want to warn them, and you, about the realities and timing of successful ventures.
Here is what has alarmed me: these first-time or next-time entrepreneurs are suggesting that they build software companies (Internet or SasS or database/metrics or social media) involving product development, when they have never built a technology product before. They are not techies. They have their savings to live on but no capital to pay a team or consultants, or to launch and market, or to search for investment. They seem to think that building the software gets them a business, without understanding all the steps necessary to capitalize, launch, market and sustain a business over several years before there is any return on their risk.
And they do not think about “lost opportunity” costs. It takes many years to create a return on your risk of starting a business. There is the “hidden year” of planning, sometimes 2 hidden years of planning, assembling a team and writing a plan or a pitch. Then a year minimum to build the initial product and search for capital. Then, if successful, you can spend another year to close the capital, launch and achieve market traction. At this point, your company is still an early stage business with no return of wealth creation, and we are 3-4 years into the venture. Next, market share must be attained, then defended against competitors, some of them young, lean upstarts with disruptive new technologies (like you were 4 years earlier).
At this point, say 5 years in, having sustained all this, your company begins to have a valuation that can create a significant return on your risk and a possibility for exit and wealth for you, if you have not lost your control or ownership of the company to your early-stage or savior-stage investors. So, if we assume 6 years from concept to wealth creation, given you were smart and savvy and the industry market timing and the capital markets cooperated with your vision, you may have a way to cash out.
Look at all those “hot new companies” that are your inspiration — look for their hidden years, look for their changes in their business models if they were too early to market, look at what ownership the founders have now. The story of risks and rewards are in the details.
I am not citing here the statistics on how many start ups fail (surely you know this). I am showing here how long you take this risk before knowing that it will bring you the reward you want. How old are you now, 6 years later? What have you risked? Your savings, your mortgage, your retirement fund? Your career path? Your family – current or future? The accumulation of salary or consulting fees and the filling up of your 401K? Can you re-enter the job market now if you need to, older, with a long gap in your resume?
Let me suggest more simple alternatives. If you have a business, make it work by targeting immediately adjacent markets for your products or services, expanding your vision of how you can build on its success despite this economic lull, or how you can transfer its offerings to new territories, or new customers with minor changes in product application, service packaging or pricing models. Effort in this direction will take far less than 6 years and all your savings to achieve, and you may find a new energy and enthusiasm for your work in these new explorations.
If you do not have a business, then take your skills and build a simple and cost effective service business, with minimal overhead, aggressive networking and a calling in of favors, to extend your expertise into the world as an independent consultant or advisor. Be creative with pricing, pro-bono work, building your track record, using your social media. Keep your costs and risks to a minimum, and keep your energy high.
No one knows what recovery from this economic downturn will look like, when it might appear, and most importantly, when that recovery will actually have an effect on you. Economists disagree. Uncle Harvey doesn’t know. Your banker/broker has only an opinion. This is my 5th economic downturn (between technology sector downturns and general economic ones), and the strategies for surviving these times can be summarized:
- Minimize costs and risks.
- Get creative using your existing business or personal expertise to move to immediately adjacent markets or territories.
- Be flexible and creative about pricing to suit market conditions, while still being paid for your value.
- Keep your energy, health and spirits high for the duration.
- Do not take new long-term risks until your capital and market conditions allow.
- When you can, save your money as a buffer against the next downturn.
Economic downturns are a pattern of life and business. In my full support of the entrepreneur, I want to see new, successful companies built with as many supportive factors in play as possible. Even in a downturn, a business can be built or built anew with the best strategies.