May 6, 2010
Of all the things founders worry about when starting a business, losing money is often at the top of the list. Here are a few ways to limit financial risks for yourself, and for your investors:
1. Take a phased approach. Plan your business in time segments, like months or quarters (4 months). Set specific goals for each phase, with budgets, and ways to measure your performance. That way, you can stop every once in a while, take stock of how you are doing, and decide how to proceed—without any nasty financial surprises.
2. Track all expenses. If you don’t measure it, you can’t control it. A simple way to do this is to use a dedicated bank account and credit/debit card, so you’ll have all the numbers in one place.
3. Make sure everyone involved is aware of the risks, and can afford to lose the money they’ve put up. That includes spouses and kids, as well as investors.
4. Keep partners, families and investors up to date on progress and setbacks. Try sending a monthly email report, with information about each important area of the business.
5. Know when to fold ‘em. If things are going poorly, and you really don’t think they’ll turn around, consider exit options that will return at least some of the money put into the business. For example, look for ways to sell off assets, and close up shop while there’s still some cash in the bank.
October 8, 2009
Just read an interesting article on Silicon Valley Watcher, describing the economics of a vc-backed exit:
“…Here’s how the math works against EVERY employee at an overfunded startup – take the mint deal for example: $170M exit (maybe $70 or so is future perf related so that leaves $100M), even without liquidation prefs, the employees get basically nothing. $40mil VC = maybe 60% of the company, 20% for the founder CEO, 3% each for the next 5 guys. That leaves everyone else sharing $5mil to vest over the next 4 years. And even that’s skewed for a few people. So with the biggest VC exit of the year, the employees are basically vesting a $20k annual bonus. gee thanks. Huge VC rounds are only good for people who own big, early, preferred chunks already.”
Of course, that kind of exit is pretty rare, especially lately. And usually there are a few founders splitting that 20%. Plus, of COURSE there are liquidity preferences up the wazoo, so the pie gets reduced (VCs get their investment amount off the top, or sometimes 2x that amount, before the pie gets divided among them and the others).
June 1, 2009
This is the third in a series of posts on startup risks. I’m not trying to dissuade anyone from starting a venture – I just want to help make sure you are aware of the risks. And don’t worry – I’ll blog about the rewards, too.
Career Risk. While some entrepreneurs start company after company (aka “serial entrepreneurs”), others turn back to the job market. Unfortunately, your resume can look odd after a few years at startups, making it tough to fit neatly into any well-defined corporate roles. And if employers sense that you’d rather be starting your own businesses than holding a job, they might perceive you as a “flight risk”. If you manage to land a job after being an entrepreneur, you might find it difficult to fit in. Once you are used to turning on a dime, the slow pace of change at a large company can be frustrating. And after being in control, it’s tough to follow orders. The first time your boss Doogie Howser tells you to get on a plane to Timbuktu on a Friday afternoon for a meeting you consider a waste of time, you’ll know just how spoiled you’ve become.
Finally, entrepreneurs are likely to have rollercoaster careers, often with extreme highs and lows. They may dip into savings and forgo income while planning a venture, pay themselves just enough to get by during building years, and earn big payouts upon selling a business. But they can also experience sudden, significant challenges. Like rollercoasters, entrepreneurial career paths require intestinal fortitude.
…After I posted this, I got two amended charts from a lifelong friend of mine and fellow serial entrepreneur, Scott Kennedy. Just had to share:
May 31, 2009
Just how risky is it to start your own business? In the next few posts, I’ll discuss the various types of risk startups face, and explore some ways to mitigate those risks.
Financial risk. The prospect of losing money is the most obvious type of risk startups encounter. Of course, not all money is created equal in the eyes of a founder. It’s always tough to lose your own money. The only silver lining is that when you lose your own money, you don’t impact relationships with investors (relationships with husbands / wives / kids is another story…). Losing money for investors who are friends or family members may be the roughest of all. There’s nothing quite like the joy of attending a family or college reunion and making small talk with an investor who bet on you and lost. Here are some ways to mitigate financial risk:
- Build the business in phases, with budgets and milestones. For example, tell yourself and your investors that you’ll spend 3 months and $50K to build your prototype, and stick to those goals.
- Track expenses. One simple way to do this is to use a separate bank account and credit / debit card.
- Make sure everyone involved is aware of the risks, and can afford to lose the money they’ve put up. That includes spouses and kids, as well as investors.
- Keep investors up to date on progress and setbacks so there are no surprises. Try sending a monthly email report, with information about each important area of the business.
- If things are going to hell in a handbasket, consider exit options that will return at least some of investors’ money, like selling off assets, or closing down the business while there’s still some cash in the bank.
Startups typically demand that investors are “Accredited”, which means they are aware of the risks, have a minimum level of income / net worth, and are investing an amount that won’t put them out on the street if its lost.