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Chapter 4: Starting a Business - Page 4.12

Understand the Risks

I've spent many years as an entrepreneur and working with entrepreneurs. I understand and sympathize with the urge to create something, to build your own business, and make it work. However, I've also seen the disaster of the business start-up that absorbs more money than it should, and optimistic owners who keep dumping more money into a lost cause, digging themselves deeper into a hole instead of getting out of it.

The chart below shows simple lines indicating the cumulative cash balance over time for the three classic types of start-up companies; the successful service start-up, the successful product start-up, and the failed product start-up. This cumulative balance stands for how much money is spent or received and how much money is at risk. The actual times and actual amounts, shown in the tables (linked below), are not as important as the relative relationship between the examples.

Both the successful and the failed product company launches look the same in the beginning. The successful launch turns upward and generates money, but the unsuccessful launch never does. The service company, in contrast, generates less money but also risks less money. This chart comparison makes two extremely important points about the money at risk in different kinds of businesses:

• Product businesses usually require more investment than service businesses.
• "Bootstrapping" (starting the business without start-up capital) is much harder for product businesses than service businesses.

The Start-up Curve and Risk to Investment

The lines show the cumulative cash positions for two start-up product companies and a start-up service company. The product companies risk more than the service company.

The table illustrations in the these links are hypothetical examples of three classic types of start-up companies.

Successful service start-up

Successful product-based start-up

Failed product start-up

The successful service start-up requires less cash in any month than a product company, and so there is less money at risk. The next two tables demonstrate the difference in cumulative cash and the money at risk between a successful product start-up and a failed product start-up.

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Copyright © Timothy J. Berry, 2006. All rights reserved.