Editor’s note: Joe Procopio is the Chief Product Officer at Growers and the founder of teachingstartup.com. Joe has a long entrepreneurial history in the Triangle that includes Automated Insights, ExitEvent, and Intrepid Media. His columns are a regular part of WRAL TechWire’s Startup Monday package.
RESEARCH TRIANGLE PARK – When you make the decision to start your own company, you’re taking on much more debt and risk than you realize. And it isn’t all about dollars and cents.
Unless you’re independently wealthy, and even when you are, your costs as a founder are going to be driven primarily by your time, your sweat, and as much help as you can get from everyone around you. This ultimately results in a number of different kinds of real, expensive debt.
As a career entrepreneur, I’ve experienced this debt buildup with every single venture. Relationships and friendships get strained. Favors get called in. Your mental health is constantly in jeopardy. You tap your network dry. And let’s not sleep on the actual money that’s coming out of your pocket.
Here’s what I’ve learned about how to keep all that debt from pulling you under, from over 20 years running or working with dozens of startups.
Some debt is always OK
The discussion sprung from an answer to an entrepreneur’s question in Teaching Startup about how to avoid and manage technical debt. Our expert gave a great answer, and also noted that some technical debt is perfectly fine. In fact, in most cases, a debt-free approach is impossible, just like it might be on the financial side.
This answer spurred further discussion about all the different kinds of debt an entrepreneur takes on. You might not realize it right away, but eventually you need to pay all this debt back. And if you wait until the end of the startup’s run to do that, it may be too little, too late.
You understand financial debt… right?
Too many entrepreneurs start their journey by shopping their idea to investors right away. What they don’t realize is, even if they succeed in raising capital out of the gate, they’ve now put themselves on a treadmill that will perpetually speed up.
Sure, the return on that $50,000 seed money might be achievable through organic growth, but that’s not the plan. Investors expect a return on the returns of each additional round of investment at increasingly higher valuations.
If you’re not prepared to run the treadmill at maximum speed for a long time, don’t step on the treadmill.
Why is a startup the only pursuit where overextension of personal debt is OK?
It’s one of the most stupid things I hear when it comes to a startup — the idea that an entrepreneur must risk everything they have in order to succeed. People, this is false. It’s just a glorified romantic notion. In every other aspect of life, we’re told not to risk more than we’re comfortable losing. This is true for business as well, I assure you.
Always strive to maintain a forecast of a healthy return waiting for you when you exit. Believe me, I’ve had proceeds from successful exits swallowed up not only by the money I put in, but also the time I could have spent doing something else.
Relationship debt is the hardest to pay back
I’m sure you consider your family the top priority in your life, and maybe your friends too. But we’re always forced into decisions that will impact them, either directly in terms of time or indirectly in terms of being present.
So when it comes to relationship debts, they should be short-term loans only, paid back in full and with interest. And make sure you keep up with the installment payments.
As an aside, be especially mindful of that one person who has sacrificed more than the rest to make your vision happen.
Network debt is personal, even when it’s your professional network
You will always be asking for favors from your network — introductions, resources, even investment. Sometimes these favors happen without you even asking, when someone you may or may not know well goes above and beyond to help you out just because.
From a strictly professional perspective, these favors don’t require being paid back, at least not in kind. From a personal perspective, it’s your responsibility to keep track and to pay them back.
This is true even when you lose. And this is true even when the favor gets you no further than you were before. So never ask for any favor you don’t need. Never accept any favor that you know won’t help. And pay back what you can, when you can, all the time.
Moral debt is a thing — try to avoid it
I’m not going to get preachy here. Just stay out of the red. You know what to do when you incur it.
Sometimes you’re not going to be able to pay it all back
Look. Let’s be honest. Not every startup is a winner. Failure isn’t an excuse, but it’s real, especially when starting a business. If it happens, don’t let it prevent you from showing your face and paying your debts.
Failure is never forever, and when you get through to the other side and have made as many people as whole as you can, well, the best entrepreneurs start all over again. The bad ones just declare bankruptcy — personal, relationship, network, and sometimes moral.
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