Know what it takes to start a business. Some businesses are easier to start than others. Here’s how to understand the differences.
I’ve spent many years as an entrepreneur and working with entrepreneurs. I understand and sympathize with the urge to create something, to build your own and make it work. This is a fabulous thing when it happens. I’ve also seen the disaster of the business start-up that absorbs more money than it should, and optimistic owners who keep dumping more money into a lost cause, digging themselves deeper into a hole instead of getting out of it. With some planning, you can predict, before you start, what you’re going to need. Some businesses are a lot more expensive to start than others. Try to understand the difference.
The following illustrations outline the start-up costs for three different companies. The first illustration shows actual numbers for a successful product company.
Successful product start-up
This illustration shows a failed product company.
Failed product start-up
The final illustration in this comparison is a chart of all three of these start-up companies. It shows simple lines indicating the cumulative balance for each business. This cumulative balance stands for how much money is spent or received, and how much money is at risk.
The start-up curve and risk
The lines indicate the cumulative cash balance positions for each business. This balance stands for how much money is spent or received, and how much money is at risk.
Both the successful and the failed product company launches look the same in the beginning. The successful launch turns upward and generates money, but the unsuccessful launch never does. The service company, in contrast, generates less money but also risks less money.
The chart comparison makes two extremely important points about the money at risk in different kinds of businesses:
- Product businesses usually require more investment than service businesses.
- “Bootstrapping” (starting the business without start-up capital) is much harder for product businesses than service businesses.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
