What Does Launching a Business Cost You in Time and Money?

So often you’ll hear business owners talk about how they didn’t pay themselves a salary for X amount of time or that they wore 87 hats during the first few months and years of starting a company, but how do you as an entrepreneur know when your sunk cost is part of an investment you’ll recoup, and when it’s time to call it?

That’s a hard one. And I’ll be honest, one I struggle with a bit myself. 

Part of it is due to the fact that I’ve been used to being compensated for my time. I started at Deutsche Bank before working at a small family office analyzing and making investments. While I enjoyed what I learned I also knew this wasn’t the life for me.

So business ownership beckoned and I had a great chance to work with someone I knew and trusted and we launched businesses together, some of which I’ve chronicled here.

But as someone who is naturally a doer and a grinder, I have to be careful about how I use my time. For entrepreneurs, this isn’t just the time-value of your hours, but also the opportunity cost of pursuing a particular business.

Launch

So as I alluded to above a lot of owners don’t factor in the cost of their time when starting their businesses. We (because I’m somewhat guilty of this too) just hand-wave away hours invested with statements like “It was 12 hour days for 3 months straight,” etc. While there’s a certain amount of this that makes sense, sometimes there’s a strategic problem that is lurking.

If you haven’t already read Michael Gerber’s The E-Myth, make a quick note to do so. The book uses a fictional frame to follow a woman as she goes from “your pies are so good, you should open a bakery” to actually doing so. One of the chapters deals with what it costs to run the business and that often means a salary for an owner-operator.

“But we can’t afford to pay a salary to me yet.”

Okay, but zero? How about $100 or $200 or even $500? If there’s no line item (that should steadily increase as the business gets more viable) how do you know that your business is even starting to do one of its primary purposes, i.e. providing a living for the owner?

There’s no excuse to not pay yourself something during startup.

Calculus

So when you actually do start to pay yourself, you can create a trajectory that leads to hiring someone to replace you, exit, etc. If you are actually paying yourself something, these numbers will feel real and less like complete projections.

The biggest mistake I see in non-tech startups are founders who don’t build in their costs to the operating model. Sure a business looks great when you provide free labor, but what happens when you want to hire someone to replace you? What happens when you want to sell? Sure, your margins may look good on the surface, but if the investor wants to replace you, your business may not make financial sense. Once you factor in how much your role should be paid  (and feel free to create best case/worst case variations) you can soberly assess: is this worth it?

Now keep in mind, this is only going to answer the financial question, i.e. is this a reasonable amount of compensation for me to take with the earnings trajectory/career path? It can’t answer the perhaps more important question: is this worth my time?

And I hate to be the bearer of bad news, but I can’t answer that for you. 

There are a few ways that I go about answering this question. Here are some ideas:

• How much do I enjoy what I’m building? 
• Is it a topic or area that I’m passionate about? If so, maybe I’m fine not making any money from it. 
• Is the upside so compelling that even if my passion isn’t there, it will be a worthwhile ride? This upside allows me to outsource the management. 

When it comes to the various businesses I’ve started, there’s typically a 4-square matrix that helps me determine whether something is worth my time. Granted, you can’t pursue everything even after doing this exercise, you need to prioritize the different projects. 

But the basis of doing this exercise is that you need to have done some financial projections. Without knowing how much you’ll be able to pay yourself, it’s impossible to debate the abstract idea of “is this worth my time.”.

Advice

So, while I can’t tell you whether something is worth your time, I can tell you that you can’t be paralyzed by ongoing analysis. Part of what I love about entrepreneurs (and why I love entrepreneurship) is the risk/reward of the journey. 

Entrepreneurs have to swing for the fences in order to build a business: creating a company is developing and peopling an entire universe with your rules and ideas. 

If you have done the financial projections (which include paying yourself at least something to start) and are comfortable, and feel that this is a good opportunity-use of your time, then please go for it.

If you don’t feel that way about either the time or the money, see if the idea works when you invest in a professional manager.. Just because you don’t want to be the captain doesn’t mean it isn’t a solid idea for a boat.

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