Question: What do you do for a living?
Answer: I am an ‘entrepreneur’.
Conclusion: So you are Unemployed!
Negation and counter answer: NO! I am an entrepreneur!!
This epic conversation had held between Sean Parker and his girlfriend in the movie #The Social Network.
Many startup owners can identify with the conversation as it is difficult to ignore social backlash when you break the norms, particularly when you start your journey as an entrepreneur.
Being a jobseeker is a norm. Our education systems are inclined to provide the society with the educated seekers and hardly the creators. When you take risk and go against the flow doubt surrounds you, be it doubts by the family, friends or society but also the doubts generated from within! What if you fail? Which happens more often than expected. And no matter how evolved a society becomes, Failures remain unaccepted!
But for the brave hearts called Entrepreneurs…So be it! It is their conviction and belief in self and their ideas, which motivates them to ignore refuge of getting committed monetary benefits and taking defined risk.
Non committed monetary benefits and undefined risk is what defines an Startup! These are two very important reasons why many potential innovators and initiators are never able to muster the courage to start a startup. Often in such cases the pragmatic individual self takes over the dreamer self. Everyone needs some committed income to take care of his basic needs. There are families to take care of, kids to be sent to school, parents to be looked after and a lifestyle to be maintained. Some committed income stream is needed for all of them. When and whenever such needs start bothering you, your risk taking capability is compromised.
So, Are the individuals who start their ventures immune to such needs? Is their dreamer self too strong to be ignored? Or have they figured out the answers to the above needs? Not surprising at all…the answer is obviously NO! They are bound to face these problems like everyone else…and the problems arise when they choose to or are forced to ignore these needs.
We cannot deny that startups are risky business. And no matter how positive and hopeful we may be willing to sound, according to several surveys, nine out of ten startups fail!
They may fail for various reasons and the failure of the venture severely affects their founders and their families. The impact could be both psychological and monetary.
So, should a person be afraid of the above scenario and refrain from founding a startup? Or is there a possibility of keeping your head above water in all situations? In both personal and professional aspects of an individual, one common factor is Finances…Money! Logically if one of the two aspects is taken care of, the battle is half won!
Where in professional aspects, finance is driven by mostly outside factors. In personal aspects, finance is driven by mostly inside factors. Here are some actions items to be take care of on personal finance front which can help ease the burden.
1. Get your health checkup done
When you do not carry name of big brands to support you, getting even one single meeting from your prospective client or investor can be frustrating. Frustrations may loom large when you have employees dependent upon you. Journey in a startup can lead to emotional and physical upheavals when you need to work 7 days a week without being able to take a break.
It is hence important to know your physical limitation and condition beforehand. You should get full health checkup done before starting anything new. Some health conditions like high blood pressure may need immediate attention to avoid any consequent health ailments.
A middle aged person prone to heart diseases may want to have less aggressive business targets than a fresh out of college youngster with no such ailment.
2. Pay yourself as per Market standards
The view taken while founding or joining a startup is ‘high risk, high gain’. Many a times, the founders believe in trading ‘low salary with higher stake in the company’. In the hope of selling their startup or liquidating their stocks at very high prices later. The reality can be entirely opposite or the dream of high rewards may come true later than you thought.
It is hence advisable to pay yourself as per market standards. This will save you from any monetary frustrations in the meanwhile. And also your ability to maintain your current lifestyle will elongate your ability to be patient with your venture.
A person who is the sole breadwinner of the family, may need regular income more than a person whose spouse is earning.
3. Prepare your family for the change
Family is considered to be the first support system. An enthusiastic and emotional appeal to your parents or your spouse can get them onboard with your ideas. But the fact remains that your family will also face the challenges along with you. Your long working hours, lesser income and constant worry about making your startup work will leave them with an altered lifestyle and much lesser mind share from you than they are used to.
Thereby it becomes utmost important to talk to everyone in the family including kids with an open mind. You must appreciate that you may be motivated by your faith in your dream but they may not have any such motivation. Their personal dreams can be different than yours. You can get their support only if you are able to address their concerns well. The exercise is as important as getting an investor onboard.
A person with teenage kids may need to prepare them up for lesser time from papa/mummy or deferred purchases of latest gadgets than a person with grown up kids, who may understand the challenge better.
4. Get sufficient insurance
Emergencies happen and take us by surprise. Being an entrepreneur will not change the fact that being a human being we are prone to accidents and fragility of life. Medical emergencies are not only emotional and physical setback but are also a financial set back.
It is imperative that you have sufficient risk mitigation plan in place. Depending upon your needs, you should take life insurance, medical insurance, accidental and disability insurance, critical illness insurance, home insurance, travel insurance etc. Also you may consider taking professional liability insurance or worker’s compensation insurance keeping the nature of your startup in mind.
A person who is the only earner in the family will need higher life insurance coverage than a person who has no dependents and thereby do not need life insurance.
5. Check if you have enough savings
Even if a startup has great potential and can be a great investment for the potential investor and the founder, the money does not come easy. Any potential investor show interest in a startup when it is a running model (even if not profitable). It is very challenging to get funded for just an idea. To showcase a working model, initially you may be planning to use your own savings or borrow money in personal capacity. It usually takes couple of years before getting funds from an interested investor. Failing to plan for the scenario can get you in money troubles on personal front and you may unwillingly resort to work that is not aligned with your philosophy or work ethics.
Hence it becomes most important to plan and budget your expenditure in due course. You may be willing to compromise on your lifestyle and bring down discretionary expenditure but it may not be possible to bring down non-discretionary expenditure like house maintenance, school fees and monthly grocery etc. At least budget for 3-4 years of expenses from your savings along with some money to be kept aside for emergencies.
A person living in a rented apartment will have to the bear the continuous increase in rent than a person living in its own house.
6. Pay off all loans
Loans are the monetary liability which you have to pay in any case. Change in income stream will not change the constant flow of EMIs. And they will be a constant burden on you and thereby will dent your courage to take risk of starting something of your own. Also, if you default, then a bad credit score will reflect badly. It may indicate your inability to manage finances well.
Therefore the best way is to clear off all your loans before taking a plunge into startup world. You may have home loan, car loan, personal loan or credit card debt. You should first and foremost use your savings to pay them off before committing any money for your professional venture.
A person who owns the house with all debt cleared off will have more mental peace than a person who has the constant burden of paying EMIs.
7. Separate your personal assets and business funds
Startups are found on conviction. This conviction is the source of hope and the hope gives encouragement. The encouragement at times can be overwhelming. It can convince you to not only commit your time and attention but also your personal assets to the venture. If your conviction suffers a set back then you may be forced to liquidate your venture or declare bankruptcy. In that case if you have committed your own personal assets or parent’s assets, they will be attached during the process to pay off professional liabilities like employee’s salaries.
To avoid any such scenario, keep your personal assets and business funds separate. Your personal assets should only be used for your personal goals like education, marriage, retirement income for parents etc. as you may have originally planned.
A person with responsibility of aging parents will be more comfortable if there are enough funds and assets to take care of the retirement needs of his parents than a person who has done otherwise.
8. Keep your exit options ready
Exits can be happy or sad. An exit from your venture may be for several reasons. The idea could not take off as planned, the venture did not get enough funds, the investors could not see enough value, the co-founders failed to align or your enthusiasm itself has died to continue the venture. In any case saying good bye can be emotionally and financially challenging. It can be a happy exit if you have at least made money from the venture but it can be a sad exit if you could not make money you hoped for.
Hence it is important to understand and explore the exit options as well. Getting a job can be one quick action which can get you stable income stream while exploring other options like starting all over again. Thus it becomes useful to keep in touch with the current job market and keep your skills updated.
The youngsters from the colleges that offer deferred placements are more inclined to take risk of starting a startup than the youngsters who do not have any such assurance.
To sum it up, Your ‘Comprehensive Financial Plan’ is as important as your ‘Business Plan’.
You may even like to showcase it to your potential investors to ensure them about your money management skills.
It is a battle ‘half won’ and the other ‘half’ will be won by your ‘Believe in yourself’!