Skin in the game: Should you put all your savings into your new startup?

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Somehow, in a few moments in our lives, most entrepreneurs – or aspiring entrepreneurs – have already asked that question in silence. This question denotes not only a will to accomplish our goals, but also a big bet with what we have achieved so far in our professional paths.

To start a company is not an easy task. Not only your pockets, but also your patience and resilience will be tested in your relationships to all stakeholders involved: your family, your team, the local government, suppliers, prospects, clients and so on.

A few observations must be taken into consideration when deciding if you should invest all your savings in your new startup. I will summarize a few that helped me and others that could have helped me in the beginning, in my companies and startups:

  • Planning: Entrepreneurship is more like farming and mining, than like hunting and racing. A draft of a business plan and a timeline of goals and milestones can help in that sense. Be honest to yourself and to your team about the milestones and listen to every stakeholder. The best consultants are (hopefully) already in your team – talk to them. This point is important because you will need a common agreement of what is achievable, and these milestones must have a maximum resource and time spending limit.
  • Keep an overview: Have one day for treating each important area of the company. Some entrepreneurs divide the week into Finance, Sales, Product Development, Marketing / PR and Human Resources days. Of course, in the hectic environment that the initial months of a startup will go through, that division may be more flexible, but don’t see those areas only once a month. See each of them as often as you can. The more often you visit and measure the evolution of those areas and do that as a habit, the more you will be able to divert course when something not forecasted happens. That way, you can stop loss faster than waiting to react.
  • Product development: Try to be incremental in your product development to avoid frustrations. The Japanese differ in the way they claim patents from the West because they try to patent every step up to the new invention, contrarily to the Western countries that, in general, try to patent the long leap to invention. Use the same rationale to your savings: why bet everything you have in your bank account in a fancy office and a highly talented team if they are not yet so motivated because the product is not good enough to be sold to the market? Be cautious in the way you spend your money.
  • Runway: Have a money reserve for at least 1 to 2 years, or for the time you forecast that it will be your limit to stop trying to get clients and sell your product. Some authors say even 3 to 5 years. It will depend on your segment and how regulated it is. Many entrepreneurs begin their companies while still going to their jobs working for someone else’s company. That may be a safer way to test the waters and decide by yourself when to plunge into the sea for the Ironman challenge you are about to begin.
  • Live modestly: Be aware that for a few months you will have to spend less in your private life, because many defaults can happen and some clients may delay their payments, and your pocket may and will become the company’s rescue net. Although there is all the classical discussion about separating your private accounts from those of your company, it does not matter in reality. In small and in startup companies, they do get blurred and it has not to do with your inability to separate them, but with a call for corporate survival.
  • Dedication: The more you (I) like what you are doing; (II) have knowledge about the base of your market and about your product; (III) decide for a not so saturated market, the least you will have to use from your savings. Remember, when starting a company your most precious capital is your time, and your client is your biggest investor besides you.
  • Spend your money wisely: Cut costs everywhere you can. When creating your Minimum Viable Product (MVP) try to create it in a way that not all your savings are drained, and test it a lot internally and with beta testers before you go to market with it. You can begin simple and grow more complex, but ultimately it does not matter how many extra functions you want to add to your product. It matters if your client is ready and wants to pay for them.

If you can follow the majority of these rules, your savings will stand a higher chance of survival, and your company will likely succeed without major accidents.

At the end of the day, the question you need to ask yourself is: how much of my savings and time can I allocate to my new endeavor? This question only knows one person who can answer it precisely – and that person is you.