As you begin your journey as an entrepreneur what are your expectations? If you’re like many new entrepreneurs, you’re probably thinking you have a great idea for a new business. You assume you’ll dedicate your time and talents to your startup for the next year or two, get it to positive cash flow in three years, and in five years you will be in control of your destiny. You’ll be in charge of a profitable business venture with opportunities to either grow it or sell it.
But how often does this really happen? A quick Google search tells us, not often.
It’s well documented that 50% of all new businesses fail within the first five years. You probably already knew this and I’m assuming you believe your business will be in the surviving half. It could be. But it’ll take more work and more time than you think, and probably some good luck along the way.
In the first years, the odds are stacked against you. But after the first two, the odds start to change. I found this Inc. article that broke it down really well:
“Unlike humans, who are more likely to die in the following year as they age, businesses that survive past the first two years are less likely to die in each subsequent year. So, while 25% of new business don’t make it past year one, only 10% of the business that make it past year 5 will die off in the following year, and only 6% in the 10th year.”
The downside always exists, but it does diminish as you grow. So you’ve got to be well-prepared for those early years.
How can you be better prepared? It all starts with re-thinking your expectations.
Based on my experience with the Innovation Fund’s portfolio companies, a realistic expectation on the time to success is ten years—not five. The fund has invested $11 million in 165 companies. I looked that the 107 we funded at least three years ago (to give them some time to grow) and of those that are cash flow positive, less than half hit this metric by the third or fourth year. A more accurate target for just being cash flow positive would be five to six years.
And about dedicating your time and talent—it’s for that whole ten years plus however long you keep the business going. The big difference is that during the first few years you’ll be providing your time and talents with little to no cash return. And the longer it takes to get to cash flow positive the longer before you can get on the payroll.
There are always exceptions to this rule. If you have access to a large universe of funding from grants and awards, you might be able to take a nominal salary as you develop the business. Once you’re in a position to attract significant equity funding, you’ll be in position to take a reasonable salary. Of course the definition of a reasonable salary is greatly influenced by the equity investors.
If you’re serious about being an entrepreneur you need to be in it for the long haul. You need to create reasonable expectations for your entrepreneurial career along side your lifestyle needs. Don’t fool yourself into the trap I have seen many fall victim to the, “I’ll do this for a year or two” mentality. For most entrepreneurs to be successful, it means having the ability to hold on for five or more years while you get your business off the ground floor.
Entrepreneurs do not focus on this piece of the entrepreneurial process enough. Many of the companies applying to the Innovation Fund are led by entrepreneurs who believe that a few years of hard work will get them to “success.”
The truth is that you need to be able to survive the first few years and be positioned to survive for three to four more years after that. You need to have a long enough run-way to get to significant funding (significant begins with your first equity raise of $1 million or more).
Most Innovation Fund companies that have been successful have raised $1.5 million or more during their first five years. So, you need to have a plan that includes what kind of capital you need to raise, how you’re doing to raise it, and the team you’ll need to be successful. Your team had better include advisors who know about the funding sources that fit with your business model.
Knowing how to reach funding sources is just one part of the process you need to have, but without it you are likely to run out of gas after the first few years.
My two takeaways for you:
1) Recognize the length of time it will actually take to get to success.
2) Don’t quit your day job or if you don’t have a day job get one. Once you have enough funding or cash flow you can then dedicate all your time to your business.