by Ken Vincent, Featured Contributor
Depending on which survey you believe, there are several million young people in their 20s that have the dream of starting their own business. These people are nearing graduation from college, or have graduated in recent years. They are largely either unemployed, or employed below where they thought they would be, or even in an industry that is not consistent with their college degree and interests.
Why do these people want to start their own business? Well it seems there are several reasons. They think they have an idea that will set the world on it’s ear. They will be the next Steve Jobs or Bill gates. Or they don’t like working for someone else. After all, those old folks in the offices have all kinds of antiquated rules and methods that are unacceptable. They don’t want a “boss” telling them what to do, how to do it, or holding them back. Some surveys show that the majority of jobs in a few years don’t even exist today, so why not ride the wave of this invention.
Let us look at some realities that one of these 20 year old people need to understand. We’ll call this person “A”, not to diminish their individuality but just to make this shorter and generic.
Here are some of the options that A has:
- Create a new product, or just a better version of an existing product;
- Develop a software or technical concept that doesn’t yet exist;
- Sell expertise in a given field;
- Buy a business;
- Buy a franchise.
Let’s toss buying a business or a franchise as those probably require more capital than can be made available. Now, if A is going to create a new or better mousetrap that requires making one or more prototypes and again that is probably not financially in the cards. It is unlikely that A, being relatively young has enough real experience to get much traction in the marketplace as a consultant, trainer, coach, or expert. So now we are left with creating a “soft” product or idea. That doesn’t require a lot of up front money, but it does require some.
Who is going to support A while that idea develops, gets into the marketplace, and produces a livable salary? Mom and Dad? A spouse?
Who is going to start paying off that huge student loan? It takes money to market a product, even an idea. There are other up front costs too. Where does that money come from?
One of the early issues is what type of structure will this new venture have? Each option has numerous legal and tax considerations. Money is needed to explore these options and to draw up documents.
- Proprietorship
- Partnership
- Limited partnership
- C corporation
- LLC
A is not likely to have a lot of hard assets to use as collateral for financing from traditional sources such as banks and venture capitalists. So, Mom and Dad? Probably tapped out getting the college degree and may very well have a house under water and perhaps another kid or two to get through school. They are also looking at retirement in a few years and they aren’t near being ready for that. Other relatives? Likely in the same boat as Mom and Dad.
Well, let’s assume that A has managed to cover all those issues. Now we can look at the statistical odds drawn from C of C, SBA, WSJ, and other recognized sources.
- As an average, it takes 2 years to get an idea into the marketplace.
- 50% of new ventures fail in the first two years in the market.
- Of the remaining half, 50% of those will fail in the following 3 years.
- Thus, A has a 25% chance of the venture being alive after 5 years. The 75% that failed lost all or most of the front money that was invested.
- It will be between 5 and 7 years before the new business can begin spinning off profits that can be taken out of the company as “income or salary”.
Assuming that most of us know one or more of these people we are calling “A”, what is your advice to them? Throw the dice and go for it, or spend a few years getting experience and developing some capital? If you are so sure that your “A” will be one of the 25%, are you sure enough that you will gamble some of your assets to support the effort, or is your support more theoretical?
