A recent article stated that financial reasons are the cause of 80% of startup failures. This makes sense since everything costs more than anticipated in a new venture. Especially for those jumping to a startup from a corporate role, there will be plenty of surprises as the corporate role probably provided “extras” as a part of the job.
Often-Overlooked Expenses
The following are some of the easily-forgotten costs sapping your piggy bank when pursuing your own venture:
- Opportunity Cost
- Healthcare
- Self-Enrichment
- Networking
- Premium Business Banking
- Tax Services
- Subscriptions
- Phone
- Ability to get loans
- Business Development Costs
Money in Hand
Additionally, many entrepreneurs dream and speak in revenues instead of profits, which is a huge #entrepreneurfail. I wish I had realized this earlier when I provided a service that barely broke even. And that didn’t even take into account my time and travel costs.
What to do?
The moral of this story is to AIM BIG – It is not worth pursuing a business that may only make a fraction of your past salary. You need to pursue a sustainable venture, not just a hobby. Sure the new business may make you happy in other ways, but remember all the costs and the fact that it sometimes takes 2+ years to even get something off the ground. You have to decide if a small-scale business is worth your time.
Were you surprised by all of the startup costs when you started pursuing your own ventures? Tell us about it in the comments below.
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Anshoo Grover
Valid argument….
This is exactly where I see the need for professional funding for startups:
Would love to have some investors’ take on founder salaries, etc. (if they are at this forum)
The only point I dont completely agree to is the opinion that lack of money is the reason for the failure of startups. A business will fail because it is not a good business, or is not executed properly. I see the lack of money as an effect, and not the underlying cause of failure. Let me illustrate this with an example, say an e-commerce business fails because it is not able to compete against others, because the competition has deeper pockets. One would argue that given enough money, it would be able to succeed – This makes it seem as if lack of finances is the cause. What I ‘opine’ is that it is the strategy that is at fault. Logic: Nobody stopped the founder from raising more money… If the path to success requires deep pockets, and the execution is being done without it, it becomes the planners fault.
Would love to have other perspectives on this…
asha chaudhry
hey anshoo,
have u read this – https://www.therodinhoods.com/forum/topics/the-mystery-of-entrepreneur-s…
The Mystery of Entrepreneur Salaries
If Agatha Christie and Sherlock Holmes were commissioned to solve the ‘Mystery of Entrepreneur Salaries’, my guess is that they would prefer to get married, go on a honeymoon, have kids and settle down.
Neither of them would hazard a chance to solve the world’s most complex mystery.
But who needs Agatha or Sherlock, when you have Rodinhood?!
These are my findings:
– Entrepreneurs feel guilty in taking salaries
I have met more entrepreneurs than the number of times you’ve shook hands with people; and not even once have I come across an entrepreneur who has boldly spoken about her salary.
The discussion around salaries is ‘hush hush’, and muted. Entrepreneurs tell me how much they draw in a very guilty, often self-incriminating way. I always wonder ‘why’?
Being an entrepreneur myself (I did not draw salary for 15 months in my first venture), I believe that the anxiety to save every drop of cash in the startup instills this strong belief that cash taken out for ‘self’ salaries is doing injustice to the business.
Well, the fact is that it does impact cash flow, but an entrepreneur must survive. Love and fresh air does not impress anyone anymore. It makes the other person pity you… even offer to buy you lunch!
So, there is no running away or feeling guilty about being priced.
– Entrepreneur salaries are important to show the real picture.
My Marwari accountant brain clearly segments ‘expense booked’ from ‘expense paid’. In other words, even if a legitimate expense is not ‘paid’ (to preserve cash), it still needs to be ‘booked’ or accounted for as a payable, so that the real picture of the business is revealed.
Hence, if goods are bought on credit or advertisement delivered (but not paid), these have to be shown in the P&L of the business so that it reflects the true position of the business (as in is there a profit or loss) and also who are creditors that need to be paid.
In the same vein, entrepreneurs need to at least ‘book’ their true salaries, even though they may withdraw it later, at their own pace. The reason is simple. If the business cannot afford to pay them, then it’s a business not worth having.
And if the business can easily afford to pay them, then it means that real and genuine ‘value’ has been created in the enterprise! Hey, it even signals that a professional CEO could be employed!
Even better is a situation when startups with ‘salaries outstanding’ get funded, the entrepreneur can even take some money back home and also negotiate a better salary post funding.
If the VC doesn’t allow taking money home, at least the amount of payable salaries shows as capital contribution by the founders towards building the business!
– How much is too much? How little is too little?
There is no science or ‘pay commission’ that determines how much should entrepreneurs be paid in their own Companies. We all read of greedy CEOs who pay themselves millions of dollars and of noble souls who pay themselves a dollar each year as compensation. So how much is too much and how little is too little is anyone’s guess.
My benchmarks are:
– The entrepreneur must have her basics provided for.
So depending on the lifecycle of the entrepreneur, the usual costs of living, supporting family and the occasional holiday must be built-in, into the payable salary.
– If the entrepreneur is a ‘career professional’ migrating to an entrepreneurial career, then the salary must at least take care of what I call ‘lifestyle maintenance’.
This means that if the professional has a certain lifestyle that she could afford via the salaries of her previous job, then that lifestyle must be maintained in the new entrepreneurial role. Sure, they can be no more room for savings, but the last thing you want is the kids of the newborn entrepreneur to wonder, “What the heck did mom do wrong to punish us like this?”
– Salaries vs. Equity
There is a big misnomer in the community that if you are the entrepreneur promoter with the largest chunk in equity, then there is no need for any significant salary. At best this applies to serial entrepreneurs who have already become rich.
But in startups, there is no guarantee that the equity may even convert into pots of gold. However, the days and years spent in building the business can never be recovered. If you are a first time entrepreneur, struggling with a startup, do not be fooled into believing that you should be slogging all day long, building a golden castle but eating cabbage soup in the community soup kitchen.
– Venture capital influence
A few VCs bully entrepreneurs into not drawing reasonable salaries. They reward these entrepreneurs by funding their company but punish them into not letting them take some monthly money home.
This is perversion of a miserly level. I ask why these VCs should indeed draw obscene salaries themselves, when the money they have raised from their own financiers has still not borne return?
I believe that entrepreneurs need firmness and dignity while negotiating salaries before they close their investors and investments and not leave this topic open, to be treated like vagabonds in hope of VC kindness at dinner time.
All in all:
– If you are an entrepreneur, price yourself correctly and reflect that in the business.
– Take some cash home and keep some payable. Maintain a healthy balance.
– As an owner of the company, be reasonable in your salary demand but don’t feel ashamed of being paid!
– If VCs ask you to work for charity, tell them to go and invest in Mother Teresa’s business instead.
Rishi
Very well captured Kriti.
Anshoo Grover
Quoting you ‘ If the business cannot afford to pay them, then it’s a business not worth having.’
This is the summary of your argument and I ‘completely’ agree to it. Infact, I can go ahead and suggest that this seemingly controversial issue should be used as a quick test to ‘judge’ how good you financier is.
Thank you Asha for these pearls of wisdom… they greatly boost my confidence as an aspiring business person to stand for what I believe.