Investing in your own start-up

Before asking other people to invest in your business idea, you need to be willing to spend your own money. Just don’t risk more than you can afford to lose.

After I’d made several baseball wallet prototypes and had a design that I liked, the Vanderbilt MBA students I was working with conducted a market survey. They went to a little league practice and asked the players and their parents what they thought of the wallets and if they would buy one. The responses ranged from “I think my son would just lose it, so I’d want it to be cheaper” to “Oh, (her son’s friend) would LOVE this. He’s a baseball fanatic.” But the truth is that what someone says they will do and what they'll actually do are often two very different things. The only way I could really know if there was a market for baseball wallets was to put some on the market and see if people would actually buy them. So I paid to manufacture 1,000 wallets. I chose this number because it seemed like enough inventory that if the wallets were successful, I wouldn't run out immediately, but not so much that I’d go bankrupt if I they didn’t sell (and I spent the rest of my life giving baseball wallets to friends and family as Christmas gifts).

I’ve met people starting businesses who would not invest their own money and others who spent more than they could afford. The first group included an entrepreneur who designed a Halloween costume that had received very positive feedback. He had to keep turning down orders because the only models he had were his display samples. He refused to spend any money upfront with the faith that his costumes would sell. Instead, he was waiting for a guaranteed order of 10,000 items from a wholesaler like Wal-Mart. Then he would have made those 10,000 costumes and turned a nice, safe profit. But the problem with waiting for a large order is that they rarely come, and typically only after the business first sold one at a time to individuals, then 10 or 20 to small stores, and finally worked their way up to orders of several thousand items. Besides, most start-ups don’t have the infrastructure in place to fill an order that large.

On the other end of the spectrum was a woman in her fifties making disposable ear and mouth-piece covers for the tellers at drive through windows. She had quit her regular job to give her more time, taken out a second mortgage on her home, and cashed in her retirement plan to get this business off the ground. When we spoke, she was excited about a contract from McDonald about a year ago. Unfortunately she was losing money on the deal because it only gave her the right to sell to individual stores. She was responsible for convincing each store manager to carry her product. The best way to do this, she decided, was to travel around the country and personally meet each owner. I said that if she was losing money on a customer, no matter who they were, she should consider ending the partnership. Because she had already spent so much time and money, she refused to change her strategy. I declined her request for several thousand dollars in exchange for part ownership of the company. She believed that with enough money to pay for her travel costs, her business would become highly successful. I didn’t have the money, but even if I did, I wouldn’t have invested. She had thrown so much money at her company (way more than she could afford to lose), and it had become a financial black hole. I don’t think she will be profitable unless she changes the way she’s running things. And being so close the retirement age, she’s put herself in a vulnerable financial position with almost nothing to fall back on.

Before launching your company, it’s imperative that you learn as much as you can and plan carefully. But at some point you will have to take a leap of faith. You won’t know if your business will succeed or not unless you just go for it. And this step will likely require you risking your money, as well as relationships, ego, and everything else of value. Just make sure that if you fall, it’s not too far, and the landing isn’t too hard that you can’t recover.