3 Ways Money Can Kill Your Business Dream
This year I turned 40. Feels oldish, but not when I consider it’s only been 18 years since college. In that time, I’ve raised money for nonprofits, lived overseas, worked on two masters degrees and in three companies, and started four businesses.
What do my experiences have to do with how money kills business dreams? What you were taught about money combined with your experience play a big role in determining how it functions in your business.
Entrepreneurs don’t fail only because they can’t sell their product. They also fail because they run out of money, or don’t make enough. You might be surprised how many businesses fail every day with impressive revenue numbers. Seeing friends and acquaintances succeed and fail, and combined with my own failures and successes, I’ve come up with the following three.
1) You Don’t Manage Your Personal Finances Well
It is almost impossible to succeed financially in a business if you have trouble managing your personal finances. What does it mean to manage your personal finances well?
The most fundamental aspects are, 1) knowing how much you need to make, 2) knowing what you can buy with what you make. Those two things might seem antithetical. Can’t I just make more money to cover what I want? Maybe, but not always. Can’t I just survive on what I make? Sometimes you simply make to little and need to find a higher paying job.
As an example: Usually, when someone buys a car with a loan, they determine what they can afford based on the monthly payment. Problem is, the car industry’s goal is to make you feel the monthly amount a good deal. If you feel the monthly amount is a good deal, you’ll ignore the total price’s impact on your actual income. In other words, this is why people end up spending 20% of five years of their gross income on one truck.
Is it possible to overspend in a business and survive? Yes, but the stakes are a lot higher. If you sign for the high car payment, you are betting on having income to pay for the length of the term. If your business spends 100k to have software developed, you are betting on attracting customers to buy it.
You are much more likely to be able to find income (any job) to pay a tuck payment than customers to buy your new software. Your software idea might be amazing and the end product, great, but that does not equal attracting real customers and revenue.
If you have trouble making car payments now, it is unlikely you will be able to take risks wisely with money in your business. Any commitment to buy now, pay latter is a risk. In business, pay to build now, generate revenue latter is a risk. For you, “building” might be buying equipment or paying needed employees for your business. If you have trouble evaluating risk in your personal finances, you will have the same struggle in business.
2) You Don’t Understand Risk, Specifically
People who know how to evaluate risk understand, and are at terms with who they are and the position they are in. Founders who are poor at risk assessment approach money like sheep. Sheep follow the crowd. The crowd, followed by some entrepreneurs, is in a different position than they are. Their crowed is sometimes full of people with money or rich uncles. Or, their crowd has vital connections that take years to develop.
The second business I founded was a cross-cultural training service. The product was online and in-person training businesses and non-profits could buy for employees they were sending to work in another country and or culture. It was a great service. I put a lot of work into it and some of my own money, but I didn’t understand the crowd who would actually buy.
The crowd (business executives) where not looking for quality cross-cultural training for their employees. If they were going to purchase such a service, it would only be through business consultants and trainers in their network. In other words, you had to be among the in-club. The quality of your service didn’t matter, but I didn’t know this.
What I did understand is being extremely careful investing my own money, especially since I’m not a venture capitalist with a pile of it to invest. What I did not understand was how my differences from the, “crowd” made the pursuit riskier.
Imagine if I had taken out a 100k home equity load to start that business. People do it every day. They spend years paying back a loan based on a business idea that either didn’t work at all, or will not generate the revenue to cover the loan and operating costs.
Understanding risk in business and entrepreneurship isn’t only about financial debt. It is also about things like the risk of having no income for maybe, a few years.
3) You Need to Make Money Too Soon
Humans need to eat. They need shelter, clothing, and medical care. I have a wife and three kids who all need these things. Yes, we all know this, why am I bringing it up? I bring it up because entrepreneur’s drive to realize their vision can sometimes be so strong, that even basic essentials are pushed aside.
Entrepreneurs like risk. Some like higher levels than others, but they all like some. Personally, I don’t like to take too many financial risks, but I am driven to risk my time and energy (blood, sweat, tears) in things that might not work out.
Business founders are often misrepresented as super money-motivated. Fact is, many simply want to make a living from the products and services they dream of selling. It usually takes longer than they think to achieve this.
Sometimes entrepreneurs don’t understand what it will cost to product their product and acquire customers. Maybe they make 200k in the first year, but had 190k in expenses, or even 250k. This is more common than not. Can your family live off 10k or -50k?
The less months or years a business founder has before they personally must bring home a salary, the greater the likelihood their business dream will be killed. Now, don’t let that detract you. Let it motivate you to hedge your bets so you can continue the pursuit of your dream longer and with less pressure. You will be better off in the long run.
