FOR THIS BOOK to be fully effective, it requires you to have a lot of honest conversations with yourself. Now is time for another one of those honest conversations. You need to ask yourself, “What is my relationship with money?” (This exercise only works if you provide a truthful answer.)
A lot of us—myself included—have really messed-up relationships with money. Understanding our relationship with money is critical because it takes money to start or buy a business and to continue to finance the operation of the business. While you are involved with your new business, you need to be able to support yourself and take care of your responsibilities, and that requires money too. Whoever said that “money makes the world go ’round” wasn’t kidding.
Sometimes when you are in a relationship, it is hard for you to be objective about that relationship. The same goes for your relationship with money. So try to take a step back, or even get some insight from those who know you well, so that you aren’t B.S.–ing yourself when you evaluate your tie to your money, or lack thereof. If you have any of the following issues with money, it is going to be very difficult for you to maximize any new business endeavor.
This is the easiest money relationship to evaluate. Starting a bona fide business costs money. If you are clever and can barter, borrow, and beg your way into covering a lot of your start-up costs, and have persuaded someone like your parents or a friend to let you live in their basement, or your spouse to support you while you pursue your dream, you may be better off than most, but not having money is an immediate roadblock to entrepreneurship. Even if you consider franchising, most franchisors require an upfront franchise fee and for you to be able to finance the start-up costs. Additionally, many established franchisors (I recommend working with an established franchisor to get the most out of the franchise route) require a minimum net worth from potential franchisees.
The less money you have, the less able you are to start a business. Businesses are risky, and part of the risk is putting your money on the line. Even if you find investors, they will be less likely to put in money unless you are sharing a substantial part of the risk. Moreover, the more money an outside investor contributes, the more ownership of the business they will require. If you start giving away ownership, your business becomes more and more of a job as you have more people to answer to and less personal participation in the upside of the business.
If you have limited cash, bootstrapping (scrappily starting your business without external capital) may be an option for you. You may also be able to raise capital with a working prototype. However, this is going to favor certain industries and types of business. The entrepreneurs behind a new tech business may be able to raise capital with just a working prototype of its new application. The entrepreneur behind a new retail store may have a much more difficult time under these circumstances. You may decide to scale back and start a smaller business because you don’t have much money. But if you go too small, ask yourself how much money you can make from the business and if you can take what you have done and scale it into a larger business opportunity. Based on your answers to those questions, is it worth it?
If you don’t have money, you should consider making and saving as much as you can before starting a business. The opportunity will still be there once you have saved up the start-up capital (and if it is not, then it was a fad, not a business, and you dodged a bullet).
If you can’t manage your own finances, then you shouldn’t be an entrepreneur trying to manage a business (and implicitly, the business’s finances).
Many Americans have lots of debt. If you have debt from credit cards and loans, especially where you are paying a high interest rate, you need to pay that debt down first.
Getting rid of your credit card debt is a no-brainer. You may be paying up to 18 percent per year or more on your credit card balance. You would be thrilled to have an investment that gained 18 percent a year. Another way of looking at this is if you wouldn’t take out a major business loan that required you pay 18 percent a year in interest on that loan, then don’t do the same on your credit cards. Paying your credit cards off is your best “investment” and should be required before you invest in your own business.
But being responsible with your finances goes much deeper. Financial responsibility is about making good decisions and only buying things when you can afford to do so. If this is not a strong suit for you in your personal life, and if you tend to make bad judgments about your personal expenditures, these issues will be amplified even more for your business. If you can’t evaluate what you should and shouldn’t spend your capital on without getting into debt, and if you seek immediate gratification from making purchases, you will get yourself into big trouble in your business.
When you start a business, you have to sacrifice. If you are used to having your every whim fulfilled, you will eventually resent the business. Or worse, you will get yourself into a bad debt situation from which you can’t escape. Sometimes, it takes years before you can even pull a reasonable salary out of the business while you are funding the business’s inception and early growth. Are you going to be able to pass up the newest iPhone or a luxury vacation because you need to spend your money on the business?
If managing your money is something that you are not good at, that you feel you don’t understand, or something that you don’t want to deal with, don’t start a business, period.
The last messed-up relationship with money that I will talk about is one that I suffered from for many years (and relative to what I am worth, maybe still suffer from). To understand it, you have to understand my family. My father was a union electrician, and for most of my life my mother was a stay-at-home mom (before she got a jobbie and before my parents got divorced). My parents moved to an up-and-coming area in the northern Chicago suburbs when I was two years old. My father had gotten married later in life (at least it was considered later in life at that time in the early 1970s; he was 36) and had lived with his mother prior to marrying, so he had saved up a lot of money. My parents were able to buy a nice house in what was then an emerging area called Deerfield.
Fortuitously, Deerfield became one of the most prestigious suburbs in the Chicagoland area. It had—and has—one of the best and most competitive public school systems in the country. My family was surrounded by professionals like lawyers, doctors, accountants, and commodity traders. Since my father had gotten in early, he was able to afford the house, but it was a stretch. He was not, however, able to afford the entire lifestyle of my neighbors.
Worried about the influence of our neighbors, our father set out to teach my sister and me the value of a dollar. However, he went a bit overboard and made us completely afraid of spending a dime. There was always the requirement to save for fear that if we spent our money, we wouldn’t have any later in life and we would be destined to live in a box in downtown Chicago under Lower Wacker Drive (Chicago’s version of “living in a van down by the river,” as Chris Farley made famous in his Saturday Night Live “Matt Foley” sketches).
This fear followed me through college (where it intensified when I racked up $40,000 in college loan debt) to my first job out of college in investment banking. When I graduated, I took the cheapest apartment I could find in a nice neighborhood in San Francisco; a studio apartment that was only about four hundred square feet. I was fortunate to have landed a lucrative job and was able to pay my college loans off within my first full year after school.
My savings were starting to accumulate, and after several years, I had a very healthy bank account. However, I was cautious about every single purchase. I didn’t have any concept of balancing saving money with actually enjoying it. I went to dinner and would never order anything expensive off the menu. Ordering alcohol at a restaurant or a bar was a no-no because it was way too costly. While my colleagues were shopping at Saks Fifth Avenue, I was still trekking over to T.J. Maxx (which, frankly I still do, because I love getting the “Maxx for the Minimum”).
It took me years, and lots of dollars in the bank, to relax to the point where I could actually enjoy a nice dinner out without forgoing the appetizer or dessert because it was too expensive, or buy a pair of shoes that cost more than $39.99. With this kind of money sickness, it was hard for me to invest in a meaningful way in anything early on in my career. Even though I had the financial capability to take the risk, I simply didn’t have the stomach for it.
I have managed to get better control of my money sickness over time. As I evaluated starting businesses and investing in other people’s businesses, I became more comfortable with certain types of investment risk. My risk taking is typically based on very calculated, educated decisions vetted over long periods of due diligence, which I think is a sound strategy and one I am very comfortable with. It is the Warren Buffett way. In fact, when the 2008 financial crisis hit, I was not affected as much as many of my peers because of my more calculated financial approach.
That being said, if you can relate to having a similar type of money sickness, or if you have any other financial dysfunctions, you need to take extra time to evaluate the long-term implications of any investment you are going to make (as well as the reality that you may not make much, if any, money for a while) and decide if you can emotionally handle the financial relationship you will be required to have as a business owner. If not, well, you probably know how this sentence should end.
What can you bootstrap, barter, or otherwise finagle in starting up your business to get to a point where you have begun to create some significant value? The more value you create through achieving milestones, the more that value will help you to minimize some of the business risks.
Write down the answers to the following questions:
If you have a large amount of debt—other than in your mortgage, assuming you can still pay the mortgage while you invest in your business—seriously consider paying off the debt before taking on an investment in a business.
If your answers to four and/or five are “no,” I hope you don’t need me to tell you not to start a business right now.
Write down your answers to the following questions:
If you are stressed by financial risk, that creates an issue for the risk side of your Entrepreneur Equation. The opportunity cost of giving up an alternative investment is also a risk. Your return requirements will help you evaluate the other side of the equation, which shows the rewards of the opportunity. Your answers above will help you evaluate both sides of your Entrepreneur Equation in more detail.