Certaintly people tend to underestimate the true cost of starting a business, that is undeniably true. That being said there are also a lot of untangible benefits of starting a business as well.

1. You cannot be laid off, you are in charge of your own financial destiny not some VP of HR in the ivory tower

2. Flexibility of hours and ability to create your own work life balance. Sure there are times when customer demands will make this difficult. But many entrepreuners find that they get better quality time with their families.

3. Not all businesses require significant start up capital, take independent consultants for instance, a few thousand dollars and a home office and they are up and running if there skills are in demand.

4. Doing what you want to do, keeping up your skill sets and keeping the value you earn.

Good clear example. Thank you.

that is why most business are formed from the young and unemployed or immigrants that can’t get a job. there is no opportunity cost for their time or conversely, risk for changing from a job to a new business. the family business is the only legal means of exploiting the young and keeping all cash within the family economy. this is why a socialist, welfare state never does well, there is no need to sacrifice when all is good. LOOK at Greece!!! or the other PIG nations, no need to work when unemployed. innovation comes out of profiting from your efforts, not having anything else to do is a catalyst.

Good point. Many entrepreneurs really don’t think things through when starting up a business, especially the financial aspects. That’s one of the many causes of why some businesses fail. They just want to get started and dive right into their “dream” business. Some entrepreneurs just glance over the cost and time commitment for starting and maintaining a business. Then they don’t learn how to maintain a healthy cash flow or manage their finances. Some entrepreneurs become overwhelmed with their business and finances, then they fail or want to file for bankruptcy.

Maintaining a business is the biggest part and many entrepreneurs don’t take the time out to do some planning & research. That could show them a lot about how viable their business idea is. It takes a lot to start a business but even more to maintain it.

Your article is interesting, from my experiences you don’t need $100-400K to start a great business. I would also comment that the personal costs can be huge if you are married with kids..you learn the true meaning of time is more valuable that money. I started my first business after reading Inc.Mag’s “Great Businesses Started for Under $1000″ and I never had to have a major upfront cash investment. I have 3 businesses now($2mil+) and none ever needed more than $10K to start. Entreprenuers have to be very resourceful, creative and “boot strap” minded.I see many articles that scare potential entreprenuers becuase of the upfront costs/investments that are thrown out there, they think they need investors or have to get a SBA loan, and there is nothing worse that trying to pay huge debt off starting a business, that is what kills 50% of new businesses, they can’t produce the cash flow to pay themselves and the debt.

Ren, nice article and quite on spot. Yet I disagree a bit on your calculus. What you call as “opportunity costs”, which is essentially foregone income, or additional costs, and I view them just as a first approximation only, should be deduced from the business annual income, not added up on the balance sheet items. I mean if I quit my job to start up a business, irrespective of business performance, i will forego my salaries not just this year, but also the salaries of the next years, especially if the option to return to my previous job/sector of employment, is non existent. Yet you are right, accounting standards and most small business owners fail to account into the opportunity costs and the cost of their own time, labour, effort and stress they input into their own business.

Sean, starting up a business is like holding a long call option. As such the only point is if its is priced correctly. Not everybody is born to be an entrepreneur, moreover, starting up a business the No1 problem is access to capital. Sometimes, entrepreneurship is not a choice, is the only (legal) option, especially if the job market perceives you as “unemployable”.
Additionally let me inform you that in my country the any unemployment benefits, are derived from the insurance contributions/premiums withheld from the employees’ salaries every month, the benefit level is fixed, and at most 50% of net salary, and it is received for max 12 months, with many restrictive conditions. Essentially its only objective is to prevent the jobless to become homeless for 12 months. If this is a welfare state, let me laugh out loud.

yes, i call that a welfare state and this comes from my Greek friends that started with nothing arriving in Canada and are millionaires now. they had no welfare and were actually homeless when they got here. North America is rife with examples of these stories. you will be amazed at how entrepreneurial people can be when they have no choice. i believe if the Greeks you know are half as resourceful as the ones i know, Greece will be fine. but if the Greek finance PhD’s don’t think Greece is a welfare state, then Greece is in a lot of trouble. I do hope all goes well for Greece and my comments above using Greece as an example but other countries are in this situation and many have come out of it. i meant no specific offense.

Its not an issue of offense. Its an issue of talking without obsessions and prejudices, with full information and an open mind.
There is welfare state when the richer fund and subsidize the poorer. When even the poorest can live decently, have a home, food, free access to healthcare and education, regardless if they have a job or not. When the percentage of population below poverty line is small, and when the income inequality is not astronomic. PIGS countries dont have such a welfare state. You can find such welfare states in Northern Europe, Holland, Nordic countries, Germany, Switzerland, even UK. By coincidence, the most developed economies and societies probably.
In my not so official definition, there is a welfare state where you can see runaway girs beg you to let them pregnant. In some countries, bearing children can be a normal job, not just a duty or a liability.

I earn much more than the average, yet if tommorow I get fired, all I will get is a tiny fraction of my salary as an unemployment benefit, just for up to 12 months. In this setting I have no reason to rest and live on the benefit. Being unemployed will dramatically change my life, even temporary Nevertheless, every month I pay insurance contributions. Most probably over my life I will pay more money for unemployment insurance that I will get in the form of unemployment benefits, in the same way I have paid so far more money than collected for my car insurance. Do I mind? Not at all. I buy some sort of safety and mitigate the risk of ruin. I dont even mind for the fact that having such an insurance is obligatory and not optional. I am not a parasite, unless the insurance business is based on collecting premiums for covering non existent risks.
I do not underestimate the importance of healthy entrepreneurship, at worst case one successful entrepreneur is one jobseeker less, on the other hand, I dont perceive entrepreneurship unconditionally as some sort of sacred cow or a deity. Probably because I ve seen more parasitic entrepreneurs…

Ren’s example is a little simplistic. The problem is that it implies that such decisions can be quantified with simple math. Evaluating the risk of a new venture relative to the risk of a job is more complicated. Core assumptions are often more art than science.

Certaintly people tend to underestimate the true cost of starting a business, that is undeniably true. That being said there are also a lot of untangible benefits of starting a business as well.

1. You cannot be laid off, you are in charge of your own financial destiny not some VP of HR in the ivory tower

2. Flexibility of hours and ability to create your own work life balance. Sure there are times when customer demands will make this difficult. But many entrepreuners find that they get better quality time with their families.

3. Not all businesses require significant start up capital, take independent consultants for instance, a few thousand dollars and a home office and they are up and running if there skills are in demand.

4. Doing what you want to do, keeping up your skill sets and keeping the value you earn.

Ren’s example illustrates the case of a gainfully employed person who walks away from a well paying job in order to start a small business with a capital investment of $400k, including $100k loan.

This scenario, while plausible and not without precedent, represents a naive way of going into business. This probably explains why the small business failure rate is so high.

I think it would behoove entrepreneurs to establish their businesses in their spare time while they are still employed. The entrepreneur should begin the business with clients already in waiting for a service business or with product ready to sell for a retail business. In any case, don’t give up one source of income unless and until you have secured another one.

In this way, the new business can obtain a running head start on the expenses that will inevitably pile up and much of the start-up risk is avoided.

Regardless of the type of business, the fact is that you don’t have a viable business until you have sufficient customers to generate the revenue necessary to sustain the business.

Your reason for leaving the salaried job should be that you are so busy keeping up with the demand of the new business and the customers are so many that you couldn’t possibly tear yourself away to spend eight hours working in someone else’s business.

Ren,
Speaking from experience as a bootstrapper, you hit the nail on the head.

There are several paths entrepeneurial execs can take.
1. Continue in a low to mid six-figure management track at a large company including benefits
2. Join an already started “Start-Up” where the salary is meant as a token typically $100-$125K where VCs set a compensation mix of salary and equity.
3. Start a company and have no income for the first 6months to 3 years depending on when/if you get capital.

In my experience, at least in Tech companies, is that many companies are started while people are employed by someone else and when a prototype or business plan is fundable, then they leave.

In some cases, like me, I started my software company, by having consulting customers fund the development. But, what I did was divert the profit/cash flow from my consulting into the funding of hte software. The net benefit to the entrepeneur was zero until I started selling the service to others and able to capitalize the build and get a return.

At the same time I started my company, I had a conversation with a good friend of mine who was CEO of a company that was acquired. He looked at the idea of starting a business versus getting a mid-six figure income (salary, benefits and bonus). In his calculations, it would have taken 10 years and a significant risk of failure (new business success probablity) compared to making $500K a year. He chose the job versus startup.

One more consideration for your calculcations…. You should consider some risk adjusted cost of capital or use of capital perspective. The risk of start-ups (success or failure), especially in the first years, is high.

The greatest lessons I have learned as a serial entrepeneur is that you should:
1. Always know the economics of your business,
2. Know whether your business will succeed in the first 9 to 18 months and be prepared to kill it if necessary
3. As a founder, pay yourself first (don’t always reinvest your money back into the business)
4. Not be afraid to take in capital after your product is proven, sold, and you need expansion (just make sure you can “live” or let go based on who your investors are
5. Understand what role you play and as the company expands and grows, what role you should play or even exit if necessary

Thanks for starting the thread. Good stuff.

Regards,

David A. Rosen
President & CEO
Acrelic
davidr@acrelicgroup.com

WarpSales Home: http://www.acrelic.com
Acrelic Group: http://www.acreligroup.com

Blog://www.davidarosen.com
Linkedin: http://www.linkedin.com/in/davidarosen

Good material to learn from; a lot of good replies linked to the article.

I’ll add that the cost of not developing a “business owner” mindset and the cost of not adopting the behaviors and habits of a successful business owner are seldom factored into a business plan if a business plan is in fact created.

Many people say their business failed because it was undercapitalized. If they objectively assessed how much time they invested avoiding things (e.g. overcoming fears of selling, having critical conversations with family members also involved in the business, etc.) most would agree that doing the right things faster would have increased their odds immensely for success.

Kirk – 770-329-5508

$162 to start. Averaging about $4-5000 a year in overhead. No limit on income. Redirect your spending and teach others. e-commerce business which is where everybody should focus their attention. I love it.

Your article is very good and the comments have valid points too. I am a counselor for SCORE and we help small business start-ups just for this reason. Thanks for sharing.