5 personal finance mistakes that first time entrepreneurs must avoid
Entrepreneurship is hard. First time entrepreneurs make it harder for themselves by making some basic mistakes regarding their personal finances. Here is a quick guide on what these common mistakes are and what one can do to avoid them.
1. Don’t take a personal loan to fund the business
Problem: Entrepreneurs often take a loan (personal loan, credit cards, or loans against property) to fund their businesses. This high-risk strategy could personally expose you to financial distress.
Solution: As much as possible, you should bootstrap your business through savings, or using money that is not going to put your own financial future or those of your financial dependents at risk.
2. Estimate upfront the cash needed up to raising angel or venture funding
Problem: It’s common to see entrepreneurs underestimate the capital needed at the really early stage of a business for basic things like travel, communication, demos etc. You can burn through your savings well before you have anything significant to share with potential investors. As a result, you might be forced into making a rash decision such as taking a high cost personal loan in order to bridge the gap.
Solution: Understand what your personal capacity is to supply cash to the business. Before this “oxygen” runs out figure out if you can achieve milestones relevant to the angel or VC. If you think you do not have sufficient funds of your own, consider brining on a co-founder who can supply additional capital in addition to complementing your skills.
3. Avoid giving personal guarantees to friends and family
Problem: Strapped for cash entrepreneurs often raise money from their loved ones and give a personal guarantee to the backer, whether express or implied.
Solution: Recognize that an early stage venture is risky and make your backers understand that they could lose their entire investment in case things do not work according to plan. Under no circumstances should you assume any personal liability.
4. Incorporate at the right time
Problem: Entrepreneurs often spend significant amounts of their personal money during the very early stages of a venture on items such as travel, communication, market survey or a basic proof of concept. However, they don’t account for these expenses in the business because they have not incorporated a company. This might result in entrepreneurs not getting credit for the monetary resources they have invested into the business.
Solution: When the expenses become material, it might no longer make practical sense for you to fund the venture from your personal account. Consider incorporating the business and capitalizing it with your money. Thereafter, spend from your company account so that you load the venture with its true costs and also your business can claim tax benefits.
5. Protect your Foundation
Problem: There is a romanticized notion of entrepreneurs surviving on cheap noodles and sleeping on a friend’s floor in the early stages of start-up life. To keep costs low entrepreneurs stretch themselves beyond reason, thus ignoring basic foundation goals.
Solution: We agree that entrepreneurship calls for personal sacrifices. But, in India we have no state funded welfare support, so we are on our own. Ensure that life’s basic needs are being met. Additionally, when you raise funding, negotiate a reasonable salary so that you at least have your basic household and family expenses under control.
[Guest article by Kartik Varma, Founder of iTrust Financial Advisors.]
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About the author - The article has been contributed by guest author. If you would like to share your opinion/insights/write a guest post, please get in touch [ashish at pluggd.in]
Excellent post Kartik. If I am not wrong, you had written a series of posts for pluggd.in earlier, where you had shared your experiences of starting iTrust. Those were some of the best posts I have read here and were really helpful.
I am glad I am following most of the points you mentioned. I had a question though.
“..if you can achieve milestones relevant to the angel or VC.”
If you are a first timer, how do you decide what is a milestone relevant to the angel or VC? Is it the number of users/customers you have, the number of users/customers who gave positive feedback, the rate at which the number of users/customers are growing…??
Shashi normally, generally and logically …
Angel funding should start at the planning phase itself.
VC funding should start at foreseeing revenue.
But, Currently, presently and illogically …
Angel fund starts at foreseeing revenue.
VC funding starts at after foreseeing break-even.
Kasi
Hi Shashi,
Thanks for the comment.
For milestones that might be relevant to the angel or VC, you need to exercise some business sense. What milestone will give a potential investor the conviction that you are on to something? Often the user base that you have, or paying customers that you get, can be a good milestone, but it can vary by business. Best if you get some feedback from people around you who are commercially savvy, or perhaps even informal feedback from potential investors.
Often, different investors will attach a different premium to milestones. Ultimately, you need to achieve what you think makes long-term sense from a business perspective, rather than do something just to please a potential investor.
Different industries will also have different sets of relevant milestones. If you are starting a web service, your traffic and registered user base is probably a good starting milestone. However, if you are building a power plant that might take 3 years to build, it will be a while before you can show any users, even if its obvious the demand for power is there. Your milestone might be more around all the licenses you have got and the percentage of completion of your construction.
Hope this helps.
Kartik
Nice article.
But there is a famous quote among VC circle about raising money from FFF’s ( Friends, Family and Fools )… until you reach raising money from VC’s.
Whoever says raise money from FFF, is the biggest fool.
First of all, a person (who is not your friend and family), and invests in your venture can’t be described as fool,if so, then the entrepreneur is the biggest fool, since he has put his money and time also.
In India, VCs have to be more innovative and apply their sense.They will invest in 11th me-too company, but they won’t invest in first company.
Remember VCs invested a lot in Indian version of youtube like apnatube, meratube,teratube,,,tubehitube:),,all of them flopped,,none of them is successful.
So go to VC/angels only when you have started getting revenue.
I second your thoughts. VC’s, Industry, Government and even bigshots like Azim Premji, Narayan Murthy do nothing but prove their dumbed version of life. They call it vision…:-)
WOW!! that is one hell of a comment.
Sorry for being naive, but why go to investors if there is revenue coming in from the start up? one can be a bit more patient and reinvest all the profits for start ups’ further development to see more profits….can somebody explain with relevant examples.
I think one should go to investors when there is a potential for earning in future but that future is too far or risky.
Umesh, You want raise money even when you are profitable, because you want to accelerate the growth. e.g. If you are running a service apartment company, it will be a profitable business, but will take sometime to scale. In case you raise money, you can grow it very quickly. example is Siesta Hospitality or mera cabs.
Thanks for the Examples Abhishek. iHave gone through their bussiness. Yes in such bussiness definetly investment is required to be scalable. can you give any examples related to a paid web product / service that required to be venture funded?
I think the real lesson here is “cash is king” and without it you have no chance of survival. I agree with many of the ideas but not the one of getting a personal loan. If you really want something BAD enough…then the risk is worth it so that you don;t look back and say I wish I had of…
Failure is not fatal…
Dear Karthik,
Is this one from the heart or from the head ?
Really liked it.. though its bulleted and in a presentation format.. sounds like an experienced person passing on words of wisdom.. and for once not trying to be a so called “thought leader”..
Appreciated..
Thanks for sharing with us.Your blog is very informative.keep posting.. capital loans
Posts on your blog are very informative and engaging,
During initial phase Cash is very important availability of it can make or break your business. Therefore while considering any business purchase we should spend very frugally and entrepreneurs should ask themselves that if this expenditure is really necessary.
Thanks
The article is such a wonderful and informative one but the problem with some persons who are first time Entrepreneurs is that they don’t seek advice from others who as been there and overcome the obstacles. Information is power and we should always seek this.
It kills me to see people who dig themselves very deep on point 1.
I made that mistake once and i clearly realize what this article is all about.
I feel the advice in point 2 is practical and something that any entrepreneur should detail out well before taking the plunge.
Not taking enough risk. If the thought of taking risks keeps you awake at night, you’ll need to temper those feelings. When it comes to investing, you’ll need to take some risks or you’ll never be able to grow your money. At best, you’ll be able to keep it in a bank account that’s FDIC-insured. Or, perhaps you’ll invest in tax-free municipal bonds. But with risk comes reward in the stock market, the kind of gains that will keep you in cups of gourmet coffee throughout your retirement. The best time to take a risk is when you have twenty or thirty years until you retire, and a retirement account you can’t touch.
I love your list! Especially the bit about cars. I have a co-worker who is living rent free with her sister but is living paycheck to paycheck because of a $430 monthly car payment! That is almost the price of our monthly rent (of course, split in half, I only pay $230 on rent!). I just cannot imagine financing a car. They lose so much value in the first couple of years… Just no. I drove the car I was given when I was 16 (a car that was only a year younger than I am) until my parents literally made me give it up. (It leaked oil and had no airbag. The parents got paranoid.) My dad bought a car for $900 wrecked, fixed it up – total put in about $1,800 – and I’ve been driving that car ever since. I will drive it until it dies for good. And you know what? When I do need another car, I will shop around and buy used. And I will pay in cash or I’ll take the bus until I can afford to do so.
I liked your list, but the problem is point no.1. Now, if I dont borrow from friends and families, to fund a venture which I think is brilliant, how will I start? I beleive the VC`s and AV`s will come in only after you have a working model and some past results to show. Suppose I need 25 lakh for a start-up, whom should I approach if not family and friends?