Thinking of a starting up a new small business? Not so fast.
From August to September of 2016 venture capital firm First Round Capital interviewed about 700 founders of startup companies and asked them questions about their businesses. Their answers are important to consider if you’re thinking of joining their ranks.
The good news?
91 percent of those interviewed said that now is a good time to startup a company. In my opinion, they’re right – capital (if you can get it) is inexpensive, business conditions are favorable and technology is enabling many innovative companies to grow in ways that could never have been possible only a decade ago.
But the fun ends there. Many startup founders raised concerns that should make you seriously consider your plans. From First Round Capital’s State of Startups report, here are five reasons why you may want to reconsider your decision to go out on your own.
1. You will not have as much control as you think.
Many people go into business for themselves because they want more control over their lives and don’t want to always have to answer to a boss. If you’re starting up a home business or want to just become a freelancer that may be the case. But if you’re looking to start a new company and grow it into something substantial then you’re going to have more people around you then you think. 77 percent of the startups surveyed had more than one founder. And for those that had to bring in outside investors a full two-thirds of them feel that over the next few years the decision making power will rest more in those investors’ hands and not their own. This may not be the control you desired.
2. Money will be tight.
To grow your company you’re going to need capital. Capital today is available. You can get loans from online lenders that may charge up to 50 percent interest annually (not kidding!). But for most who are looking to bring in equity investors the competition is fierce and the dollars are dwindling. Almost a quarter of those surveyed said that if they’re not successful it will be because of lack of capital (case in point – the recent demise of Lily Drone). Getting capital takes a while too – 60 percent of startup founders said it took them more than three months and another 60 percent said they had to pitch their company to more than six investment firms. Scarily, more than one in ten had to pitch to more than 30 investment firms! What’s even more concerning is that 55 percent of those surveyed believe that it will get even harder to raise money the next time they go out for capital. Hope you’re a good salesman.
3. Oh, and you will spend more than you think.
Whenever someone tells me that they’re starting up a business and asks for advice I always advise them to make sure they have two big things in reserve: time and money. Time, of course, will be a factor – a typical startup founder will spend most days and nights on their company. Of course, money is also as important. If you’re starting up a business, make sure you’ve done your cash flow projections and have enough cash in the bank to meet those projections. Then, do something else: double it. Make sure you’ve got twice as much in the bank. That’s because, like all human beings, you can’t predict the future and your cash flow projections are wrong. Whatever time you think it’ll take you to become cash positive is probably off by at least six months to year. The startup founders in the First Capital survey found the same: 51 percent said their burn rate was higher than it was than a year ago.
4. Get ready to work long hours.
Did I mention time? Did I mention that you’ll be spending most days and nights working on your business? That’s right, I did. And so did 66 percent of those surveyed. They admitted that they leave the office after 6PM. That’s just the employees. If you’re a founder you’re going to get in earlier and leave later than the rest. You’ll be traveling on the weekends, answering emails at night and taking calls during dinner. Your life won’t be yours. It will be dedicated to your investors. All of this will have an enormous impact on the quality of your life. Is your significant other ready for this? Are you?
Starting up a business is tough stuff. The information I reported above is not anecdotal. It’s for real. Want to know what else is for real? Of the 700 companies surveyed, only 28 percent have been around for more than five years and two percent have been around over 10 years. Sure, some of these are young companies. But if the numbers match what others report, staying in business for more than five years is an exception, not the norm.
What do you wish you knew before you started your business?