CHAPTER 7
Investing in Your Own Thing
I was commuting past the Oakland, California, airport every day [to my job at a solar power company] while raising my kids. That takes an hour with no traffic, and those days didn’t exist. But I did very well. I became the regional head of my company. And I was miserable. I didn’t like being in a company where I was constantly on a treadmill. I also saw an unserved need in the marketplace—the market for solar power was opening up, solar and power storage was growing, and I knew that if big corporate buyers could buy [from a women-owned business] they would.
So, two years ago, I gave up that huge salary and bonus and started my own company with a partner. We do advisory work to bring in current cash and we’re developing large-scale solar batteries [large enough to power 35,000 homes or more], which is a growing field. What we brought in this year is nothing like what we made from our former employer. But over the years I know I’ve made companies a lot of money. Ultimately, I feel I’ll be more financially successful on my own.
—Dana, 50s, entrepreneur
On that day in 2016 when Dana hung out her shingle, she was just one of the 887 women launching a business every single day according to the State of Women-Owned Businesses Report from American Express. More than 9.4 million businesses—30 percent of US businesses—are women owned. But because the rate at which women are opening business is climbing at 1.5 times the national average, that percentage is growing fast.
I was another one of those founders, though I came to the party earlier—in 2005—and for a completely different reason: I got fired. I had been at Money magazine for almost a decade when it happened. The editor who had hired me had been kicked upstairs, I’d applied for the top job (which I didn’t get), and the new guy wanted to put his stamp on the place. But this time was different. It was happening to me. And I was petrified.
I went through my contacts and made a few calls to folks I knew at other business magazines. But it very quickly became clear that replicating my salary with the office and the assistant, the 401(k) and the bonus was going to be difficult, if not impossible. So I asked myself: What if I didn’t take another full-time job and instead cobbled together a string of part-time and freelance ones? In what was a harbinger of the gig economy to come, I was already doing a lot of work on the side—writing columns and books, giving speeches. What if I just did more of that?
“Start a company,” my accountant said as he handed me the phone number for a service that would—for a few hundred bucks—help me incorporate over the phone. I dialed the number so quickly, I didn’t even have an answer when the customer service rep asked me what this new venture would be called. Photos of my kids nearby inspired me to borrow—and string together—their middle names. “Samuel Bennett, Inc,” I said. (In later years, a colleague who was asked too many times to explain the name spun a yarn about how Mr. Bennett was a patriot and pioneer in finance from the time of Alexander Hamilton. I’ve told it myself on occasion.)
I opened a business checking account, applied for a corporate credit card to more easily track expenses, bought health insurance, and hired an assistant. I decided to forgo office space. My assistant was happy working from her apartment. I was not really happy working from home (I was lonely) but I didn’t feel like paying for an office. I dealt with the lack of colleagues by trying to see at least one real person a day. (Usually it was my friend Diane for a morning run.) And a decade later, my small business is less small—and growing. We have space in a WeWork coworking space, a diverse workload that includes a weekly podcast, the HerMoney.com website and newsletter, Your $—an in-school magazine that goes to two million fourth, fifth, and sixth graders, and some consulting. Today, if some company offered me the equivalent of the job I was fired from, I wouldn’t think twice about turning it down.
WANT VS. NEED, REDUX
When you listen to the stories of women who start businesses, the reasons they strike out on their own seem almost as varied as the businesses themselves. In fact, they can be boiled down to two—want and need. Either you want to start a business because you sense an opening in the marketplace, or you need to start one because your other options pale by comparison.
In the business journals, the two groups are called “opportunity” and “necessity” entrepreneurs.
Necessity entrepreneurs tend to be a little less aspirational, a 2017 report from Stanford University explains. They want to control their own lives and destinies but aren’t generally out to make a fortune. Many want to take care of their families and need more flexibility to do that. Some even see an ageist society staring them in the face and jump before they’re pushed. They want a comfortable lifestyle, but they’re fed up with having to look for cover if they have to dash out the door before the boss.
Opportunity entrepreneurs think bigger. They see that—after investing their start-up capital—they can earn more money by going it alone. They are more likely to hire other people. They create faster-growing businesses. And they do so by spotting an opportunity—an unserved or underserved niche in the marketplace—and going after it.
That can be exceedingly profitable, as entrepreneur Jennifer Hyman learned. Hyman’s younger sister, then 25, had been invited to a wedding. She went to a department store, selected a trendy designer number, and put it on her credit card without a second thought. As the older, more responsible sibling, Hyman thought this was ridiculous. “I was nagging her,” she told me on the HerMoney podcast. “I really tried to get her to wear something she already owned. And her response to me was that she didn’t want to wear something in her closet because she had been photographed in everything in her closet—and those photographs were up on Facebook.” (Instagram, where those photos would more likely show up today, hadn’t even been invented.)
For Hyman, it was “a lightbulb moment.” She realized that young women of her sister’s generation didn’t really care about the owning aspect of many things. They were comfortable subscribing to a service like Netflix for movies or Spotify for music. When they needed a ride, they called an Uber or Lyft; it didn’t matter that they didn’t own a car. And when it came to their clothes, owning didn’t matter nearly as much as being able to walk into a room feeling confident, knowing they weren’t going to get dissed on social media for being an outfit repeater.7
By now, I’m sure you know where I’m going with this. In 2009, Hyman and her partner Jennifer Fleiss launched Rent the Runway, which rents single items for special events and has a subscription program where you can rotate everyday items through your closet four at a time. The company has over 1,000 employees, millions of members, and by the end of 2017 had raised nearly $190 million in venture funding. Hyman is the CEO.
A BUSINESS OR A HOBBY? A FREELANCER OR AN ENTREPRENEUR?
Maybe you’ve had it, too—that lightbulb moment. Maybe you’re one of those people who have what you’re sure are brilliant business ideas on a regular basis. JJ Ramberg, the host of the weekly small-business show Your Business on MSNBC, explains the all-too-typical trajectory: “You’re sitting around with your partner or your spouse or your kids and you say, ‘I have this idea!’ Everyone gets excited about it and tells you it’s great and [as a result you’re convinced that] it’s great. And you spend all this time and money on it and you launch it and nobody wants it.”
There are a lot of fantasies we have about starting our own businesses. One of the most dangerous is the Mrs. Field’s Fantasy. It goes something like this: I make the best/most beautiful/most unusual toffee/succulent gardens/personalized dog paintings anyone has ever seen. If I quit my day job and focused on that, I’d be a gazillionaire. The problem is the many assumptions within that singular daydream. Is your toffee indeed the best, or is it just the best in your family or your small town? Will people worldwide want to buy succulent gardens not just tomorrow and next year but for the foreseeable future? If you did quit your day job, how many dog paintings would you have to create to match your current salary (much less achieve gazillionaire status), and could you do that with just your two hands?
And—this is important—would you continue to enjoy something that you do for pleasure if you had to do it for work? One of the most common fallacies in starting one’s own business is that because you like doing a thing, you’ll be good at running a business that does that thing. But running a business is about so much more than making the widget or providing the service.
Say you’re an Etsy seller—not too big a leap as 88 percent of Etsy sellers are women—and your thing is making knitted Minnesota Vikings hats. Every winter, there’s a surge in orders as people decide one of your creations would make the perfect holiday gift for their tough-to-please brother-in-law. Now imagine that this year the Vikings are the odds-on favorite to win the Super Bowl. Orders are rising fast. How would you scale to meet that? Would you want to scale to meet that? Are you ready to hire other knitters or invest in (gasp) knitting machines, to oversee quality control, to deal with the fact that more customers overall may mean more dissatisfied ones? Do you want to do all this? Or do you just want to create your fabulous hats and make some extra money?
If the Vikings/knitting analogy leaves you dry, there are hundreds of other ways to ask this question. Do you want to open a restaurant—which requires getting permits, requisitioning supplies, advertising, and marketing—or do you just want to cook? Do you want to put your fabulous style on display by opening a cutting-edge boutique—which requires ordering, invoicing, staffing—or do you want to find some way to earn money from your fabulous style sense, perhaps by being a stylist or personal shopper?
In other words: Is this a business or a hobby (or a side gig, which is somewhere in between)? If it is a business, is it the sort you can grow or one that just enables you to make a nice living working for yourself? They are not the same thing. If you work for yourself and can find a few sustainable clients, you can build a nice, generally stable lifestyle. Building a very large company is something entirely different. So is building a small or midsize company, for that matter.
If you don’t believe me, just look at payroll. As a business owner, payroll has been a huge frustration for me. It’s time consuming if you do it yourself, expensive if you hire out, and even if you do hire out, you have to be constantly watching over your shoulder for mistakes. There’s a terrifying statistic that one out of three businesses currently does payroll wrong—which means you could be in for costly fines. And payroll is just one tiny little example of all the things that go into the business soup.
By the way, there are no right or wrong answers to this question of scaling versus freelancing, business versus hobby. The mistake, says Marc Prosser, cofounder of FitSmallBusiness.com, is not understanding a) the difference and b) that you have to choose. In his practice, Prosser sees people who are conflicted. “They’re either upset that their business isn’t growing or they’re upset about the lifestyle,” he says. “You can have a great lifestyle basically taking on select clients. Or you can try to build a large business. But the two don’t work together.”
PROOF OF CONCEPT
After the idea phase for many businesses but before you invest tremendous resources, it helps to prove it will work.
That means research. Before launching Rent the Runway, Jennifer Hyman did a deep dive into the economics of the average closet. She knew that the average American buys sixty-four items of clothing every single year—regardless of how much they earn. She also knew that 50 percent of the items in our closets have been worn three times or fewer, and that that percentage has been climbing over the past decade. That confirmed her hypothesis that we want constant newness and constant variety. She also knew that because 70 percent of Americans are projected to live in cities by 2030, closet space was going to be increasingly tougher to come by. Put it all together and you can see how Hyman came to believe that “the closet of the future” is going to be one where everyone will have a subscription for getting dressed.
There are many ways to gather the sort of information you need to build a business case. Say you want to open a bakery (a longtime fantasy of mine). You might start, small business expert Marc Prosser suggests, by spending a day at each of the local bakeries in your area, pretending to be a customer. By counting the people coming through the doors and watching what they’re buying, you’ll be able to figure out how much revenue the bakeries are taking in. You can learn an awful lot just sitting in parking lots and watching, but you may find you don’t need to be that stealth. “People are often surprised at how open other business owners are to sharing their experiences,” Prosser notes.
All of that information you’re gathering becomes the backbone of your business plan. For the record, Hyman and her partner Jennifer Fleiss—who met at Harvard Business School—wrote one. Many other entrepreneurs don’t.
For three years, I hosted a daily one-hour radio show on Sirius XM’s Oprah and Friends channel. I interviewed countless entrepreneurs and in the process of eliciting their stories always asked two questions: How much money did you launch with? And did you have a business plan? The answer to the first was almost always “$5,000.” (Even Spanx founder Sara Blakely started her billion-dollar journey with that.) The answer to the second was almost always no.
So, I am mixed on the necessity of a formal, formatted business plan that checks all the business school boxes. I am not mixed on knowing the answers to the following basic questions that every business plan should pose:
• What need is this business satisfying?
• How are we different from the other solutions in the market?
• Who are our customers?
• How will we reach them?
• How big is our market, how fast is it growing, and why?
• How will we make money?
• What are the economics of our business: How will we get from pricing to break even to profitability? What kind of money will we have to spend to get there? And how long will it take?
• What does our competition look like?
• Who will do all this work?
• Are there any legal or regulatory hurdles on the horizon?
You don’t just have to know the answers, by the way, you have to know the answers in detail. You may have decided that the best way to reach your customers is online, so you’re planning to advertise on Facebook or Google. That’s a start, but you have to go further. If you give yourself a $10,000 marketing budget, you need to know how many people you’re going to be able to reach with that. Marc Prosser explains: “It’s only once you dive deep enough to understand that it costs, roughly, $3 a click on Google in your industry and you know how many of those clicks actually become customers, you can figure out that you’re going to have to pay $300 a customer. All of a sudden your assumption that you’ll get customers for $50 doesn’t work.”
You don’t have to do all of this yourself, by the way. There is a wealth of free business mentoring advice available to people who look for it via the country’s Small Business Development Centers (part of the Small Business Administration and searchable at SBA.gov), SCORE.org, and Women’s Business Centers in general (searchable at AWBC.org).
What may happen in the process of answering these questions is that you decide the business isn’t viable or that it isn’t right for you—the market you thought was there isn’t there, you don’t have the skills or the capital to launch, or it’s going to involve more tech time than people time and you’re a people person. That’s incredibly valuable information to have, and the fact that you’ve gotten it before you quit your job or invested thousands of dollars is huge. It’s like the recent college grad who decided to work a couple of years as a paralegal before applying to law school and hated that work. Sure, she invested some time, but not three full years while incurring over $100,000 in graduate school debt. I’d say she won.
WHERE TO GET THE MONEY
Starting a business takes capital. Sometimes a little, sometimes a lot, but you need to know both how much and where it’s going to come from. It will probably come as no surprise to you that women tend to rely more on ourselves for start-up funds than men do, the same way we rely more on ourselves to drive the carpool, do the laundry, and hit the grocery store even when we’ve already got a packed day of work. Self-funding makes sense in many situations, but not all. It’s important to understand that there are other options. And even though it’s more difficult for women than men to access those options, that doesn’t mean that you shouldn’t a) consider them and b) try them if appropriate.
According to Investopedia, the number one reason businesses fail is lack of capital, i.e., not having enough money to keep the doors open. Almost 50 percent of founders blame this when they shut down. Yet the number wouldn’t be nearly this high if entrepreneurs were a little more rational—and planned—about how long it takes to be able to pay yourself a salary, let alone hit profitability.
How long it will take for your business to start making money depends completely on the type of business you’re starting. If you’re leaving a law firm to start your own practice—and you know your current clients will follow—you can make money from the start. Those types of businesses—where what you’re selling is you and you can often keep costs down by working from home at least at the start—are easier to launch, but generally capped in terms of the amount of money that’s possible to earn. If you’re trying to start the next Rue La La? It’s way too optimistic to figure you’ll be able to draw a salary six months from now. Two years is more typical. Which is why having at least a year’s worth of living expenses banked (maybe two) before quitting your day job is the way to go.
Lacking that, you can follow the path of Twitter, Craigslist, Houzz, Khan Academy, and many other businesses that were launched as side hustles. You keep your job and your paycheck, do whatever you must during the day to keep your employer satisfied, and work on your project nights and weekends. The money you need to fund your launch can come from your current cash flow or other alternatives you can access yourself. Proving that your idea has legs while you’re still drawing a salary may also give you the confidence you need to take it on full-time.
It’s a bit of a dance. You don’t want to spend more than you have to. But you also don’t want to starve your new business of oxygen by not giving it enough money to grow. That’s why you see entrepreneurs turn to their savings, retirement accounts, home equity, credit cards, small business loans, friends, and family.
But wait, you ask (sounding a little too much like an infomercial): Isn’t there free grant money available to start businesses? Yes and no. The Small Business Administration’s SBIR (Small Business Innovation Research) program does give grants of up to $1 million. But they’re largely limited to high-tech companies with great commercial potential and they’re, as you might expect, extremely competitive. There are some state-run grant programs and community ones as well (and you can easily seek them out online), but most grants are very small and not all fields have them. In addition, small business loans aren’t readily available until you’ve had your doors open for a couple of years. And getting a line of credit from a bank—even on your home, in some cases—can be equally tough. To come up with start-up capital, you’re going to have to rely on you or the people closest to you. (And think twice about the latter. Sitting in a restaurant with your aunt who gave you a $25,000 business loan can be highly uncomfortable. You suspect she’s wondering how you can afford to order the paella when you haven’t paid her back a cent. You’re probably right.) Here are the other options.
BANK LOANS AND VENTURE FUNDING
Until 1988, women could not access capital in our own names. You might have had a profitable business with great credit, and you still would have needed a male cosigner—age sixteen or older (yes, pimply male teenagers full of raging hormones and sometimes uncontrollable impulses were considered more responsible than adult women)—before a bank would give you a commercial loan. President Reagan put the kibosh on this.
So, you can now sign your own application for a bank loan. But that doesn’t mean you’re going to get it. A report from the Urban Institute shows women receive just 16 percent of conventional small business (SBA) loans each year. It also doesn’t mean that you’re going to get enough. A 2017 analysis of customers from loan portal Fundera shows women apply for loans that are $35,000 smaller on average (including SBA loans) than the ones men apply for, are charged higher interest rates, and receive the loans for a shorter term.
Ironically, we often see applying for less in funding as a form of minimizing the risk we’re taking in our businesses. But by underfunding—some say underfinancing—we’re actually putting the entire enterprise in jeopardy. It’s better to seek enough to give you the runway to make it to profitability.
Once you’ve got a couple of years of consistent revenues, bank loans, including SBA loans, are in range. And that’s a good place to start. SBA loans are granted by banks, credit unions, and online lenders, but they’re guaranteed by the Small Business Administration. That guarantee allows lenders to grant them at lower interest rates because they’re not shouldering 100 percent of the risk. You can borrow up to $5 million in an SBA loan (although the average loan amount is closer to $400,000). If this sounds appealing, go to SBA.gov and start gathering the paperwork.
Because of their attractive rates, SBA loans are not always easy to get. Institutions (big banks, community banks, credit unions, online lenders) also make other—non-SBA-backed—small business loans (or small business lines of credit—which you draw upon as needed to finance day-to-day operations, only paying interest on what you’ve borrowed). Their rates are just typically higher, so again, shop around. And don’t forget credit unions: When small business capital essentially dried up in the aftermath of the financial crisis, credit unions were still out there making loans. They often have very competitive rates. And, if you think you can’t borrow from one just because you don’t belong to one, you’re wrong. You can join one as you borrow from it.
And then there’s venture capital. If you’ve got a really, really big business idea, raising venture capital is a road you will eventually consider. It has to be really, really big, because VCs are not interested in your stable business that’s growing 10 percent a year. VCs are looking to make one hundred times their money. And when they make a bet, they’re betting on you as much as on the business itself.
What they don’t often do is bet on women. In 2016, just 17 percent of global venture funding went to companies with at least one female founder, according to Pitchbook. Less than 3 percent of venture capital goes to companies with a female CEO. The Muse’s Kathryn Minshew is famous, or rather infamous, in the VC community not for being one of those female CEOs who successfully raised money—but for the number of times she was turned down before she got it: 148. What holds women back is bias in the industry. Men (it has been documented) are evaluated on their potential, women on their track record. When you’re starting a company, that track record doesn’t exist. What got Minshew through was persistence—and the ability to learn from each consecutive session about what to do differently.
Her advice: Learn as much as you can about the specific investor you’re pitching. “Some want you to start immediately [talking about] growth and traction,” she says. “Others are looking for the story of how it came to be.” You also have to approach networking as part of the process. When she was just starting out, Minshew didn’t know many people in the tech community. So she started showing up at local events, introducing herself to the other entrepreneurs in her community. “They could make introductions to investors,” she said. “[That’s better] than trying to be the eighth person in line to corner the investor at some happy hour event.” And, she advises, know what you’re best at—and sell that. “There are five things that any investor might care about. It’s better to be a ten out of ten on one dimension than a seven out of ten on all of them.” So, is it the cool technology you’ve built and patent protected? Is there a huge opportunity? Is it your team? Your revenue? User growth? As she pitched (and pitched and pitched) for her seed financing round, Minshew focused on the latter. “We did our best to make that so standout that eventually people had to pay attention to us,” she says.
What Have We Learned
• There are two reasons we start businesses—we want to or we need to. It’s important to understand your rationale for going into any new venture and, even if you don’t write a business plan, to know the answers to questions about how and why you’re likely to succeed.
• Getting funding for businesses in the first few years of existence is more likely to rely on personal sources—your credit, your home equity—or people you know, via crowdfunding. Tread carefully.
• Once you have a track record of a couple of years, you may be able to apply for and get a bank loan. If you’re on a faster trajectory, raising venture funding becomes a possibility.
Where Do We Go from Here
Buying a home is high on the list of the security that many women covet. It’s exceedingly possible (and being done more than ever by single women), but you should approach it as thoughtfully as any other investment. That’s even more true if what you want to buy is a second home. And if HGTV has you thinking you might want to flip (not flop), well, that’s possible, too.