So you want to be an entrepreneur, but you’re feeling a little nervous about taking the leap into the self-starter world? I made the jump less than a year ago and have learned a lot in the process.
When I was approached by an accelerator to co-found my current startup, TestNotice, I was working at a fulltime job with a full suite of all the key benefits: salary, paid time off, healthcare, and a 401k plan. This is a lot of security and comfort to give up for an opportunity that, at least in the beginning, would offer none of those perks. However, the opportunity to co-found my own startup, not to mention the equity shares, made the 5 year projection look much more promising than staying at my regular desk job, which had limited options for growth. So I took the leap.
Financial Considerations
When thinking about how you will finance your day-to-day life without a salary, you need to look to at 2 key pieces: fixed costs and variable costs. Fixed costs are things that you can predict will be consistent over time, such as your monthly cell phone bill- you can pretty much predict to the penny what the cost will be per month assuming you don’t blow through your data usage. Variable costs are more malleable, flexible, and easier to have control over. For example, your food budget for the month is a variable cost, and if you substitute your daily lunch out with friends for a homemade brown-bag alternative, you can lower those costs and reel in the spending. After a long hard look at what a realistic budget would be for my fixed and variable costs, and comparing that with my savings, I was able to project out what my monthly burn rate would be and how long I could sustain myself. This brings us to my next point:
Quality Of Life Considerations
When thinking about cutting down your expenditures to allow yourself ample time to get the startup running, it’s important to keep in mind what things are truly important to your quality of life. If you don’t compromise at all, you only buy yourself a short window to get the startup profitable which can be stressful and sometimes lead to unrealistic expectations. If you cut out too much, you might find that you have sacrificed everything for a company that may or may not be the next big thing. The trick is to find the middle ground. I wanted to be sure I allowed ample time to give this company a real chance, before having to either take on outside investment (which can result in giving away equity and sometimes control of the company), or before throwing in the towel and trying to find full time employment working for someone else. The more money I had saved, and the lower my burn rate was, the more time I could have to get the company off the ground. This meant I gave up my apartment in San Francisco, and at the age of 33, moved home to live with my parents. This meant that I no longer went out for lunch, drinks, or bought frivolous fun things on the weekend. I went from taking black car Ubers everywhere, to driving a 1995 station wagon. At the end of the day, my quality of life didn’t depend on clothes, outings, vacations, or ubers. However, I did establish boundaries where my quality of life was more important than the money: Trousers my Schnauzer was a non-negotiable, must-keep-him-at-any-cost part of the deal. You might be ready to hold off on that new car you wanted, or take on a roommate in your spare room, but don’t sacrifice the things that are truly important to you. For some people it is the gourmet, craft coffee that is imported in and costs $5 a cup, but without it you can’t function. Figure out what is most important to your happiness and quality of life, and let the other things go.
Timeline
The 3rd and maybe most important part to consider before taking the entrepreneurship path is your timeline. Maybe you can live off of your savings for a full year, and then you have to either get a part time job, raise money for your company, or dip into your Roth IRA. Maybe you can live with a friend, family, or supplement your housing costs with a roommate for a few months, but after that it starts to impede on your quality of life (or theirs). Starting a company is exciting and incredibly rewarding, but it should never make you feel resentful. If you start out knowing that you are giving this project a 6 month, 1 year, or 2 year runway, make sure to check back in with yourself and your goals along the way.
As Benjamin Franklin once said “Failing to plan is planning to fail”.
Set yourself up for success with your financial plan, your compromises for quality of life, and a realistic timeline, and you will be grateful that did in the long run.