3 Ways to Pay Your Bills While Validating Your Startup Idea
So you’re in the beginning stages of launching a new venture and considering how you might pay the bills (yours and now the start up’s, too!) while finding a substantive way to validate your startup idea before you commit more resources.
If you’re like many entrepreneurs who have traveled down this path before, you may find that there are more and larger expenses associated with just the beginning stages of your startup than you originally anticipated.
During the most recent economic downturn, a Citibank survey of 750 small business owners found that 23 percent had gone without pay for at least a year.
Writing for the Small Business section of the Houston Chronicle, startup consultant Ellis Davidson says that during the first year of running your own business full time, you are very likely to make less many than your prior salary:
“A rule of thumb for an entrepreneur says that in the first year of running his own business successfully, he will make less than his prior salary, as most of his profits will be reinvested in the business.
In the second year, he can draw his regular salary. In the third and subsequent years, he can draw a larger salary — plus any proceeds from his ownership of the company if he sells shares or outright ownership.”
There are three main ways entrepreneurs continue to pay for their own personal living expenses as well as find money for the many important expenses of their fledgling business, and you may end up going through all three at different stages in your startup’s growth.
1. Growing your startup as a side project while working full time
This method offers the greatest stability and exposes entrepreneurs to the least risk as they find market validation for their startup idea.
Fast Company says “Don’t Quit Your Day Job,” and it’s sound advice, at least until your startup has reached a certain critical mass of success and positive cash flow.
Because your start up is doing something new, there’s no guarantee that the market is going to respond to it and reward your business with sustainable profits. It’s a high risk, high reward activity.
Managing and mitigating that risk by taking it easy and working on your startup part time while holding down your current job — especially if you have financial obligations like a mortgage or a family — is a smart move.
Interestingly enough, one study by the University of Wisconsin-Madison found that entrepreneurs who run their start up on a part-time basis are 33 percent less likely to fail than those who quit their jobs to run their startup full time.
The downside of this approach is that it will require sacrifices: Less time for leisure, less time with friends, and slower growth.
One powerful way to grow faster and ease the burden of running a startup while working full time is to get one or two great partners with complementary skills to launch your venture with you.
2. “Bootstrapping” with money from friends and family
At some point along the way you may find that you run into a barrier to your startup’s growth, and that barrier is a major expense that you can’t handle on your own, but need to be able to pay for in order to advance to the next stage of your business.
You may need money to create your first working prototype or order your first round of inventory. You may need to pay someone with a specialized, technical skill to help you with a necessary aspect of your startup.
At this point in a new business, many entrepreneurs turn to family or friends for a small loan to help them get over the hump and keep their startup rolling.
Data compiled by Fundable shows that 36 percent of funding for startup ventures comes from family and friends. And on average these family members and friends invest a total of $23,000 in a startup.
It’s important if you go this route with your start up’s initial costs that you are very confident in the direction that your startup is heading and have a clear reason for the funding you’re seeking and the payoff you expect.
Even though you’re getting a loan from someone you know, take it seriously that you are entering into a business agreement. Have a clear business plan that includes how you will use the funds, and a clear plan for repayment of the loan.
3. Getting funding from an investor
An infusion of cash from an investor can really help to get your start up off the ground, but angel investors and venture capitalist do not suffer fools.
You have to have a rigorously researched and supported business plan with all of your assumptions carefully proven by demonstrable facts and data, not just your own intuition or best hopes for your startup idea.
In addition to a very solid business plan, you will need one or both of two things to make an impression on an investor to risk money on your startup idea:
1. A record of sales and data attached to those sales that can substantiate the fact that you have an idea that the market will reward.
If you have a track record of people buying your product or service, then you might really have something. Even better is data about who is buying your product, why they’re buying, and the number of repeat customers.
2. Short of actual sales, no business plan is complete without market validation of your startup idea in the form of customer interviews.
This is truly a specialized discipline, and to benefit your business plan your interviews must create an accurate assessment of your idea that you and potential investors can be confident in.
To accomplish that, you need a questionnaire that is carefully crafted not to lead the respondents, and you need to select the right people to take it according to demographics and other criteria relevant to your idea. A tool like IdeaCheck can be helpful to take care of these tasks for you.
