Preparing Financially for Entrepreneurship
An aspiring founder asked what I did financially to prepare for entrepreneurship and what I recommend. I started my company over a decade ago. I wasn’t far removed from college, and the world was a different place in general (inflation is real). Here are a few things I thought about that others may find helpful:
- Reduce fixed expenses – Your personal cash flow (i.e., salary) will likely decrease during your early years as a start-up founder. Reducing your fixed expenses (recurring fixed monthly payments) will give you more flexibility. You want to be able to focus on the company. But you don’t want to reduce them to the point where life is miserable, either.
- Reduce debt – Eliminating or reducing unnecessary debt is easier said than done. But if you’re fortunate enough to be in a position to do it, it will help diminish financial stress and lower debt repayments or remove them from your fix expenses altogether.
- Increase savings – Start-ups are hard and unpredictable. It’s not unheard-of for founders to take small salaries, go without a salary, or inject personal capital into the company when times are tough. Savings are a financial cushion that helps you weather the early years. If you can, increase your savings before you start your company.
- Get buy-in from loved ones – If others are affected by your entrepreneurial decision (e.g., family or a significant other), being on the same page is important. Discuss how entrepreneurship will affect the household (including finances). It’s important for everyone to have an idea of what the journey will look like and buy in.
- Consider a Roth IRA – If you’re eligible, consider opening a Roth IRA (you can fund it later). This is a great retirement vehicle in the traditional sense and also an interesting tool that founders can strategically use to invest or hold alternative investments (e.g., private company shares).
- Eat in – We eat three meals a day. Eating out is expensive, so eating in can improve your personal cash flow quite a bit.
These are just a few things that aspiring founders can consider doing before they start their company. Everyone’s situation is different, so some of these won’t be feasible for everyone. Still, they’re good things to be aware of and think about. Building a business is hard. Minimizing stress in other areas in your life can help a lot.
Weekly Reflection: Week Sixty-Nine
Today marks the end of my sixty-ninth week of working from home (mostly). Here are my takeaways from week sixty-nine:
- Systems – I told myself I want to implement systems that help me work on things that are important to me in a healthy and sustainable way. This week I made great progress on one of those systems, and I’m already seeing it pay off. Looking forward to finishing it and regularly leaning into something that’s important in a way that’s sustainable and authentic.
- Time to focus – I blocked out some nice chunks of time this week to focus, which helped me move the needle on some big projects. Things ebb and flow, so I need to be flexible, but I want to be more intentional about taking time to focus.
- Juggling – I have a few competing priorities with similar levels of importance. This week it was harder to juggle them, but I got my arms around them more toward the end of the week.
Week sixty-nine was a busy one. Not hectic, but a lot going on. Looking forward to closing out the month strong next week.
Bootstrap or Raise? Why Not Both?
Had a great conversation with a founder who’s taking a hybrid approach to capitalizing his company. He raised a small amount of initial capital and used it to build the early version of his product. He’s been acquiring customers and fine-tuning the product based on feedback, in search of a product–market fit. Instead of raising more capital, he has his customers sign one-year agreements and pay for the entire year up front. The company is cash-flow positive and can stay afloat without raising again as long as it continues to acquire customers. The founder is thinking about raising a large round to accelerate growth once the business achieves product–market fit.
This founder’s capitalization strategy is interesting, and it’s working well for him. He raised capital to get off the ground but began bootstrapping the company after the investor capital was spent and the product launched. Customer revenue is the cheapest and best source of funding for a company. The challenge is getting enough of it to fund investments in future growth, which this founder is doing with annual up-front customer payments.
I like this founder’s approach, and I’m looking forward to watching his journey. I’m sure he and his team will find more creative ways to build a big business!
Company Equity: A Few Things to Know
Today I had independent conversations with two founders about founder equity versus investor equity. Founders usually set up only one company, so they often need to rely on other people’s advice. A few things I shared with these two founders:
- Common shares – Common shares are usually issued to founding team members who actively work in the business—ideally full-time if the business can pay salaries. It’s a good practice (and a requirement of many investors) that common shares issued to founders be on a vesting schedule.
- Preferred shares – Preferred shares are usually issued to an individual or organization that injects capital into the company but doesn’t actively work in the business. Preferred shares have a stronger claim to company assets than common shares do. Preferred shares issued to investors are usually not on a vesting schedule.
- Cap table – A cap table details who owns what amount and what type of shares, how much capital investors put into the company, and other details regarding capitalization of the company. Many founders do this in a spreadsheet because it seems easy enough, but small mistakes can be extremely costly down the road. Using—as early as possible—software like Carta or LTSE Equity (formerly known as Captable.io) is highly recommended.
Every company and investment has its own nuances and circumstances, so the info above isn’t set in stone. It’s just a high-level starting place for founders. Company equity and cap tables are important and something founders should pay close attention to. It’s worth spending the time to do research or ask others if you don’t understand something related to these topics.
Building “Operating Systems” for Small Businesses
I’m a big fan of software helping small businesses run more efficiently, and I’ve shared my thoughts on how workflow management can help achieve this. I’m always curious to learn more about how software aligns with this thesis. I’ve talked with founders who have deep knowledge in an industry and are building what they call an “operating system” for smaller players in that industry. The idea is that these industries are manual and inefficient. The “operating system” will handle most aspects of the business in a way that takes into consideration nuances of that industry, thus freeing up time the small business can use to focus on other things.
I agree with these founders. Some industries need software to handle their unique needs. But there are limitations to this that founders building operating systems for small business should consider. For example, accounting. QuickBooks has been creating accounting software for small businesses for a long time. The chances aren’t great that your operating system will be better at accounting than QuickBooks. Integrating with this established leader is likely a better strategy. And there are other examples.
Figuring out the most painful and inefficient problems small businesses face and solving them with an operating system is a good strategy (to begin with). That will create value, which should lead to customers. The less painful areas can be handled with integrations. Sure, everything won’t be in one system, but it’s a lot better than a completely manual process.
Operating systems for small and medium businesses don’t have to reinvent the wheel. They just need to solve the most painful problems well!
What Matters to Skilled Workers Is Changing
I’ve shared my views on how the current labor shortage is a challenge for companies that can’t meet customer demand. Since then, I’ve been asking more questions about hiring. I continue to hear from startup founders how hard it is to find good candidates, especially technical talent. Recruiting for a startup has always been hard, so this isn’t a total surprise. But I am surprised to continually hear leaders of seasoned companies describe challenges hiring skilled workers. I decided to reach out to friends who are skilled workers in high demand and get their perspective. I got some good insights.
I consistently heard that people are reevaluating their current employers. They’re looking at the actions their employers have taken throughout the pandemic. And they’re listening closely to their plans. For example, how companies address returning to the office is important to some people. If they like what their employers have done and the plans they’re hearing, they intend to stay. If not, they will be or are already looking.
How people select their next opportunity is another common theme. Many have reevaluated their personal lives and priorities. They want a work culture that respects their priorities. They’re spending more time with people they care about and want to work for organizations that don’t require them to sacrifice their life outside work.
Purpose is also starting to matter more to some people I spoke with. Recent US and world history has been eventful, and they’ve had time to think. Outside of profits, I heard that people want to work for companies that are making a positive impact on something besides their leaders’ bank accounts.
These conversations were relatively few; the sample size was small, so my observations are not in any way scientific. But the feedback was still revelatory. I think how companies recruit and retain talent is changing before our very eyes. I predict that the companies that recognize this and adjust will be more successful in attracting and keeping talented team members.
Teams Will Have Their Ups and Downs
Yesterday I watched an MLS game and noticed something interesting. The game was overshadowed by an unfortunate dynamic on the home team. The star player and the coach weren’t seeing eye to eye, so the player sat out the game. His team lost. There’s no guarantee the home team would’ve won if their star had been on the field, but naturally the fans, including me, wondered.
As in most relationships in life, teams go through their ups and downs. There will be wins and losses. Good days and bad. It’s normal—part of the journey. The teams that achieve greatness find a way to ride it out when things go wrong and stay united in their goal. They continue to operate as a team.
Building a big company requires a team. Founders should be mindful that keeping their team united and motivated to move toward the goal is one of their main responsibilities as the leader. Compromise will be required. People will have to put their egos aside at some point. At the end of the day, it’ll be worth it if the team wins together!
A lot of merger and acquisition activity has occurred during this last year. It’s often involved life-changing liquidity events for founders and team members. These events frequently come with conditions. If a fund invests a material amount of capital, they may well create a board of directors and usually want at least one board seat. The board members are the CEO’s bosses. Some boards are great and support founders; others don’t. The ones that don’t support are a challenge to deal with. If the company is acquired by a larger company, the team (including the CEO) usually become employees of the larger company. Finding the right role for each team member is a process, and no one is guaranteed to get the role they want.
I’ve chatted with a few founders in these situations, and they’ve shared that life post-transaction can be difficult. I spent time thinking about why these founders struggled after events that changed their lives for the better. Then it hit me. Founders have key characteristics in common. One has to do with the locus of control—the degree to which people believe that they, as opposed to external forces (beyond their influence), have control over the outcomes of events in their lives.
Founders like to be in the driver’s seat. This desire is what allowed them to become a founder in the first place. When it’s taken away or severely limited, it can feel unnatural for founders and emotionally diminish what should feel like a milestone win.
A strong internal locus of control is something that’s core to founders, and they should think hard about situations that could curtail it. What can they do to maintain it?
Weekly Reflection: Week Sixty-Eight
Today marks the end of my sixty-eighth week of working from home (mostly). Here are my takeaways from week sixty-eight:
- Regional capitals – I spent some time looking at different regions of the country and the cities most people think of as their capitals. There doesn’t appear to be a consensus about the southeast—a few cities were mentioned.
- Reflection – I’ve had a few conversations this week in which people mentioned reflection and how it leads to insights. I think reflection can accelerate learning.
- Learning – A friend shared an interesting observation: reading, thinking, and writing can help make people smarter. He’s got me thinking about this.
Week sixty-eight was a great, productive one. Looking forward to keeping up the momentum next week.
Customer Retention Matters
Customer acquisition was always top of mind at my startup. I’m not marketing-minded and I wasn’t smart enough to hire someone strong in this area, so we struggled. Eventually I figured out a decent strategy. When we acquired customers, we did so in a profitable manner. Over time, I realized that retention (which in our business model meant having customers who bought repeatedly) was key to our growth.
We spent tons of time, energy, and money trying to find new customers. Once we had them, it was easier to convince them to stay (purchase again) than it was to find new customers. If I had to continually replace old customers with new ones, fast growth would be extremely difficult. When I figured this out, we started to focus on the things that mattered most to our customers AND the type of customers most likely to be loyal. This, with other adjustments, allowed us to grow quickly to over $10 million in annual revenue.
Getting customers is important, but founders should also think about how to keep them. If your customers stick around, you’re on to something!