Editor’s Note: In the new podcast Masters of Scale, LinkedIn co-founder and Greylock partner Reid Hoffman explores his philosophy on how to scale a business — and at Entrepreneur.com, entrepreneurs are responding with their own ideas and experiences on our hub.This week, we’re discussing Hoffman’s theory: You need to raise more money than you think you need — and potentially a lot more. Listen to this week’s episode here.
We have heard our share of business pitches. Think “Shark Tank” on a very small scale. We have also consulted with a number of startups. One thing we know to be true, regardless of the entrepreneur’s efforts, is that starting a business always takes more time and more money than he or she thinks. It is just that simple. Even the most brilliant business plan will have to change. Not because of the things put in the plan, but because of those pesky things not in the plan. It is the unanticipated items that cause most startups to take longer and cost more to reach breakeven. The bottom line is that revenue never ramps as quickly as you think it will.
We will share a few of our personal experiences with you to illustrate different funding methods and some lessons learned along the way that can help you think about funding your business.
Bootstrapping
When we started our company, Whitestone Partners, we worked out of the room over our garage. We didn’t have an assistant. We already owned our computers and phones. Except for buying business cards, purchasing bookkeeping software and paying a friend $300 to help us put up a basic website, we kept our costs to a minimum.
We believed that we would be able to sell our consulting services reasonably quickly. While we didn’t anticipate being able to replace our former salaries immediately, we thought that within three to six months, we would be able to pay our bills from the business and within a year we should be paying ourselves. We were wrong.
We hadn’t factored into our plan that we were completely unknown as small business consultants and within the Richmond, Va. market. To gain credibility, we wrote a book about small business. To write the book, we interviewed more than 100 members of the small business community. This took a lot of time and more money. However, it worked.
We started selling consulting services. Within 12 months, we were paying the business’s bills from our business revenue instead of our savings account. This was tougher because our business expenses had increased due to additional marketing costs. It took us two more years to grow our business to the point where it replaced our previous salaries.
The takeaway: If you are going to live on savings, you need a big nest egg. We are eternally grateful that we did. Remember, it…