This is email 2 in a 5 part email series outlining how professionals discover startup opportunities and become full-time entrepreneurs. Sign up to receive the complete email series here.
In this article I describe how deliberate entrepreneurs finance their idea exploration, and outline some considerations to help you determine the forms of finance most appropriate for you.
You need to buy yourself creative space
The first question I’m often asked is whether you need to quit your job to find an opportunity?
Entrepreneurship requires creativity, and creativity requires certain conditions. For the majority of people, those conditions don’t entail working 80 weeks while trying to find ideas on the side.
If your job is less intense then it may be possible to explore opportunities on the side: this is an ideal situation! But professional jobs tend to be mentally demanding, and don’t leave much room for similarly demanding extra-curricular work.
So the answer is: it all depends. It’s depends on how much headspace and energy you have to explore opportunities. You don’t have to quit your job, but you most likely can quit if you want to.
This articles outlines the different ways people finance their search, so you can make an informed decision. Many high performing professionals end up stuck in their jobs in a vicious cycle: they don’t want to quit their jobs until they have a clear business idea, but they can’t get the headspace to recognise and nurture a business idea until they quit their jobs.
Even if they accept that they need space from work in order to find an opportunity, one of the main reasons people still don’t leave their jobs is financial uncertainty.
Lack of finance is a real barrier to Deliberate Entrepreneurship
Just as working 80 hours a week isn’t an optimal condition for creativity, neither is knowing that you have only 3 weeks to find a business opportunity or you won’t be able to pay the rent. It’s not just a matter of workfree headspace, it’s a matter of workfree headspace without having to worry about money.
For some people, time off work is not an option. They cannot afford to take even a month without a salary. Some of them will figure out how to make a business happen on the side, most of them won’t.
Luckily, with a combination of prioritisation and creativity, many people can buy themselves the time they need to find and launch a business.
I guarantee that you can do this with a lot less money than you think, as long as you are smart about it. I quit my job in debt and with 3 months runway and made it work. But I had a sense that it was possible, that more was possible that I realized. And I’ve seen this happen for many others.
The choice isn’t binary: it’s not a matter of salary or no salary. This is your first opportunity to think like an entrepreneur. This happens slowly – for instance, most people don’t realize freelancing is an option until they’ve quit their job, are actively talking to VCs and founders and are getting offered project work.
Financing is a real issue, but that’s no excuse for letting it become an excuse.
Calculate your runway:
- How much is your monthly expenditure?
- How much do you have in savings?
- How many month’s worth of savings do you have?
Most people begin to get jittery as their savings deplete, and it’s hard to think clearly (e.g. to walk away from a bad long term but potentially lucrative short term opportunity) when you’re worried about money. Be proactive about this, don’t just ignore the reality of your situation and hope everything will be OK, and try to keep a healthy buffer.
Your finances will shape your journey
The type of opportunities you’re looking for and the financial situation you have to start with will determine what type of financing options are most relevant for you.
If you only have a couple months’ runway, then you probably can’t afford to leave too much to chance: going part-time in your current role, applying for an idea stage accelerator program or trying to find someone else’s ideas to test are probably your surest bets.
If your runway is slightly longer, then you can be more adventurous. Perhaps you try to earn money directly from your own business activities (old school profit) or you start to put the word out that you’re looking for freelancing activities.
Here I give an introduction to and overview of the main sources of funds and how to think about them.
Financing your idea exploration: sources of funds
- Your current job
If your current job isn’t overly demanding or if you can cruise, then it may be possible to experiment and explore on the side. This depends heavily on your job and on how you operate. Don’t underestimate the amount of momentum needed to find and test a business opportunity, and the difficulty of building that momentum if you’re juggling too many competing priorities… At some point, your job will be draining too much scare mental energy to be compatible with your entrepreneurial pursuits. In the meantime, exploring on the side is the easiest and lowest risk way to get started.
2. Savings
Savings determine your runway, as outlined above. Don’t forget to budget for the time you’d need to find a new job if you decide to go that route.
3. Work part-time
Reduce hours in your job or get a new part time job. You already have a reputation and goodwill in your current job, and you know what the job entails and how to be successful in it. You’re also prepared to walk away from that job for entrepreneurship. Using that position to negotiate reducing your hours may make sense as a safe starting point, to allow yourself a day or two a week to focus on entrepreneurship with limited financial risk and easy reversibility. On the flip side, it may be too conservative a move: sometimes it takes ending one chapter to really begin another.
- Getting paid to test other peoples’ ideas
In my opinion, the best place to start the process of deliberate entrepreneurship is getting paid to test other people’s ideas. In practice, this means joining as a potential co-founder of a funded early stage opportunity that you find exciting.
The benefits are massive: from gaining experience hands-on working as an entrepreneur, developing your tangible skills, through honing your ability to assess risks and opportunities – the idea you originally thought was a sure thing may turn out to be anything but! There is also great long term potential: if you do end up onto a winner, you’re odds on favorite to join full-time as a co-founder.
The risks are low: there’s low commitment (in most cases a trial makes sense for both parties) and low downside risk (you’ll be getting paid). That said, joining as a potential co-founder will require full-time focus – it’s unlikely you will have much energy to explore other opportunities in parallel.
In this article I describe how to arrange trial projects so that you can get paid to test other people’s ideas.
- Accelerator programs:
Depending on your background and what you’re looking for, there may be accelerator programs available to you. For example, Entrepreneur First and Antler pay founders a monthly stipend (~$3k, depending on geography) to explore working with potential co-founders and validate business ideas.
A key selling point for these pre-idea accelerators is that they help you find a cofounder. Often they curate their cohort of 50 potential founders to maximise the chances of matching founders into pairs.
Additionally, these programs have coaches (I previously coached founders at Techstars and Entrepreneur First) and masterclasses where you can learn entrepreneurial skills such as customer development or fundraising 101.
There are also many specialist regional and industry accelerator programs (for instance a program for female founders in the health tech industry in Berlin). Get plugged into your local ecosystem to determine the accelerator programs on offer.
The caveat with all these accelerators is that they take an equity stake in any venture you form as a result of their program. With a quality accelerator this tends to be worth it for the brand and resources you receive, but is a factor to consider. Given this business model, they are looking for founders who want to build VC scale companies. If you’re not sure that this type of company is the right fit for you, one of these programs could be a sensible way to test that hypothesis…
Early in your search, these accelerators are a great launchpad to help you leave your job with financial certainty, quickly build a network of like minded entrepreneurs and learn new skills – on someone else’s buck.
- Freelancing:
Although not many people consider it as a viable option before beginning their search, many committed deliberate entrepreneurs eventually end up freelancing. It’s an effective way to earn an income while maintaining enough time to pursue entrepreneurial activities, getting the “feel-good” energy and productivity benefits that come from working, keeping your skills sharp and adding to your CV. If you can find interesting freelance projects in an industry in which you’re also exploring entrepreneurial opportunities, all the better. Above all, establishing your freelancing credibility makes your entrepreneurial quest a sustainable one.
The optimal balance I’ve found here is 2 days per week: this is enough work for you to feel productive without being too draining, and hopefully enough income to take the edge off your financial worries and cover the basics yet keep you hungry for more.
Some freelance opportunities simply fall into your lap, others require a more proactive approach. This means that it may not be a reliable source of income initially, unless you have existing potential clients. It can take time to establish credibility and find suitable freelance projects – there is trial and error involved. Some clients and types of projects can be quite demanding of your attention, draining you of the energy you need to search for entrepreneurial activities.
- Pre-idea Venture Building VC deals:
If you know for sure that you’re only looking for a VC type opportunity, then there are a growing number of VC firms who offer venture building “pre-idea” financing deals. The terms of these deals vary, but typically consist of agreeing terms for an initial investment, to be paid upon achieving certain conditions (for instance, finding a suitable opportunity or co-founder) within a specific timeframe (e.g. 3 months). Founders are then paid a salary (deducted from the investment amount) while searching for an opportunity. VCs often work with founders during this process. Some VCs bring a list of ideas that they would be willing to finance if a founder can assemble a relevant team.
- Angel & VC investment
The earliest stage of Angel & VC funding doesn’t require you to have nailed down a business model: having commitment to a vision and a credible team assembled may be enough to raise some initial capital. In that case you can use the capital to explore specifics of the opportunity space.
Of course, this is only an option if you’re credible, committed to a particular space and to building a particular type of high growth business.
- Profit:
Certain types of opportunity require relatively low capital and are more likely to result in positive cashflow than VC type opportunities. Many highly profitable small businesses exist online, selling services, selling info products, influencers, e-commerce sites, media sites affiliate marketing businesses -the list is massive. Even VC type opportunities can start off this way as ramen profitable.
In many ways, profit is the best form of finance. You have complete freedom to follow your curiosity and don’t have to answer to anyone.
Remember, you don’t need to have totally figured out your financing plans in advance. Time and again I’ve seen people be surprised about the sources of funding they uncover once they start their journey.
Still unsure about starting your journey to become an entrepreneur?
Keep an eye out for my next email where I describe how you can discover and assess the startup ideas that are right for you.
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If you have any questions, please email me.