Dear Lifehacker, I'm tired of the rat race and have been dreaming about starting my own business for some time. Having never done this before though, I'm nervous about taking the plunge. How can I tell if starting my company is really a good idea or if it will be doomed to failure? Signed, Bitten by the Business Bug
Starting your company could be one of the best decisions you ever make — one that leads to independence, great control over your destiny and possibly big rewards. It seems there's no better time than the present too, as we're in the midst of a great entrepreneurial boom. However, there's no doubt running your own business is both challenging and risky. So, before you invest your time and life savings into your business idea, it's important to fully understand what it takes to be a successful business owner.
Don't worry, you don't need a master's degree or even any previous business experience to get started. Armed with research and a lot of self-knowledge, you can make this difficult decision. Here's what you should consider before you take that leap from employee to entrepreneur.
Consider the Pros and Cons of Working for Yourself
The first big question you'll need to answer is whether the benefits of being your own boss truly outweigh the disadvantages.
Pros: The pros are pretty obvious, since they're the reasons millions of people dream about ditching their conventional jobs. Your reasons for starting a business should include several of these motivations, rather than, say, just doing it for the money opportunity:
- You can make a living doing what you love (or at least what interests you)
- You're in control of every aspect of your work life, from when you work to where and with whom
- You can choose which clients to work with and which projects or what kinds of business to go after
- You might find better work/life balance and can even work with your family (although that's a whole other situation)
- You may get things done faster and better when you're free from office politics and red tape
- You have a chance to earn more than you would working for someone else. The money you have been making for others now shifts to yourself.
- You'll have greater job security. That might sound counterintuitive, but business owners typically have multiple clients, which lessens the pain if you lose one of them. Employees, on the other hand, have only one "client": their employer.
- You build something that's all your own, which gives you a great sense of accomplishment and also life purpose.
Cons: There's a flip side to every coin. Which of the disadvantages below will really trouble you?
- You'll have to deal with an uncertain income and possible cash flow problems ("feast or famine" describes it pretty well).
- Finances overall will be more complicated (hello crazy tax laws!). Also, if you want to get a mortgage or other loan, banks will look at you differently and you'll have to meet higher criteria.
- You have to be a self-starter every single day you work.
- You have to do everything yourself (or hire someone to help you). "Everything" includes: managing the business' finances, marketing your products or services, organising paperwork, dealing with lawyers and chasing clients for money owed to you.
- If you want them, you now have to pony up for the paid benefits you once got as an employee. These benefits can be very expensive, especially health insurance or even taking a vacation. (Business owners learn the true meaning of "time is money" when they try to take time off.)
- You may be more likely to overwork and burn out.
- You're exposed to the same problems that trouble those who work from home: isolation, pressure and loneliness.
- All of this can be much more stressful than working for someone else.
The good news is most of these disadvantages can be minimised or overcome. For example, you can use a budget strategy for managing irregular income, look into affordable income insurance you can buy yourself, and set your rates to account for time off.
Make Sure You Have What Every Successful Business Needs: A Good Idea and a Market
If you're not completely turned off by the reality check above, that's great. You might just have the tenacity needed to start your own business. However, besides your resolve, you'll also need two very important things to start a successful business: a good idea and people who can be convinced to buy into it.
Is it a good idea? Your business idea doesn't have to be mind-blowing. It just has to be good enough to build a business around, whether your plan is to start a dog poop scooping service or sell homemade jam. Loic Le Meur, founder and CEO of LeWeb conference, says not to look for the idea of your life or a revolutionary one, offering this example:
When Brian Chesky and Joe Gebbia founded AirBNB, they had no idea it would become the largest threat to the hotel industry with 250,000 rooms in 30,000 cities. All they wanted was to make some quick cash to help pay their rent and decided to rent an extra room.
There is no way of knowing what will be revolutionary until the first users start to love it and tell their friends.
Vet your idea with your friends, your social networks and anyone else who will listen, because the most important thing is not whether you think it's a good idea (most people who start businesses think theirs is), but whether other people think it's a good idea.
Is there a market for it? The million-dollar question is: Would people actually buy it? Where and who are your potential customers? Try taking your idea to 10 prospective customers and see how many would buy your product or service. You could also set up a small website or take out a few ads to test the waters for interest.
A few market research tools can also help you figure out if you're creating something people really want. Use Google Insights, Google KeyWord Tool and Google Search to check out trends related to your idea and scope out the competition. The Australian Bureau of Statistics, business.gov.au and Australian Taxation Office also offer helpful information.
In short, the only critical thing you need to start a business is something to sell that people will buy. With that in place, you could even start a business for $100 or less.
Find Out If You Have the Most Important Characteristics for Entrepreneurship
We've previously discussed in detail how to create a business plan, which will help you plan the nitty gritty details of your pending business. Beyond those logistics though, owning your own business also requires a certain mindset and entrepreneurial spirit.
Many studies conducted over the past few decades have identified that separate a successful entrepreneur from unsuccessful ones. MIT's Jeffrey Timmons and colleagues, for example, identified the personal traits and the behaviours entrepreneurs need, including:
- drive and energy
- high initiative and personal responsibility
- internal locus of control
- tolerance of ambiguity
- low fear of failure
- moderate risk taking
- long-term involvement
- money as a measure not merely an end
- use of feedback
- continuous pragmatic problem solving
- use of resources
- self-imposed standards
- clear goal setting
Some of these are intrinsic qualities, such as low fear of failure and drive/energy, while others are behaviours that can be developed, such as use of feedback and resources. Remember all those "cons" to starting your own business? If you have these personal traits, you're more likely to overcome them.
If you're the quiz type, this quiz from Forbes can help you find out if you're a "born entrepreneur", based on Thomas Harrison's exploration of signature entrepreneurial traits. Entrepreneur also offers an entrepreneur personality test.
Most importantly, be honest with yourself about your capabilities and patterns. If you're the type of person who's always misplacing paperwork or missing deadlines, starting a business probably isn't right for you. Many years ago, I ran a side business reselling web hosting space and domain name services. Although it was mildly profitable, it never grew because I really dislike doing sales and the administrative overhead was more effort than I wanted to put into the business, since I wasn't all that passionate about it. Really consider how much you're willing to put into your company and whether you have the stomach to play all the roles required to keep it going.
Remember, you don't have to jump in with both feet. Many successful businesses today were started part-time in someone's garage. With a few strategies, you might even be able to start your own business during your leftover time at work.
Keep in mind, however, that working full-time during the day and on your business in the off hours can be taxing, and your business might be more successful if you focus more fully on it. When you get to the point where you've built up a significant emergency reserve (one or two years' salary) or have gained several steady clients or many customers, you may be ready to kiss your boss goodbye.
Finally, know how you'll handle the tough times and when to call it quits. Passion for whatever it is you're starting is essential, because it is what will push you forward through the tough circumstances.
And just to be realistic, you should also plan for possible failure. A significant number of new businesses do fail (most commonly due to poor management and lack of planning), but failure still can be the highway to success.
Hopefully, the preparation you do will set your business up for success if you decide to go for it. Good luck!
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