I meet with a steady stream of budding entrepreneurs itching to start their first business, and they all have great visions of the company they're going to build. Very few, however, have answered the most critical question they face before committing themselves to a particular path: Do they really want the kind of life they're going to have to live while they attempt to realize their dreams? To answer that, you need to look very closely at the numbers, as I learned a few months ago from a young mother named Selena.
She had come to see me with the notion of creating a business around a play space where parents could hang out while their children played together. She would also offer classes and host children's parties. As the grandfather of two little girls, I had a pretty good idea of what she had in mind. I told her we should begin by seeing if her plan could succeed from a financial standpoint. First, did she have enough capital to get the business up and running? And second, could she keep it going long enough to reach positive cash flow?
"How do you decide that?" she asked.
"I don't decide it--you do," I said. "It has to be based on what you think."
Selena's first assignment was to calculate her startup costs. She went home and came back a few days later with a list of them, totaling $199,000. "Can you raise that much money?" I asked. She said she thought she could, but she'd have to take out a second mortgage on her home, put in her life savings, and get some help from friends.
"OK," I said. "So it's possible. You're also going to need working capital. We need to see how much." I asked her to go home and write down what she expected her sales and expenses to be month by month for the next three years.
"But how do I know how many kids I'll get?" she asked.
"You don't," I said. "It's a guess. Make reasonable estimates. Most entrepreneurs are overly optimistic. You should try to avoid that."
Sometimes I wonder whether people listen to me. Selena listened a little too well. She came back with projections that showed huge losses. When I questioned her, she said, "You told me not to be overly optimistic."
"But you can't have one person in a class," I said. "You'd never run the class."
So she went back home and repeated the exercise. The revised estimates she returned with were much more realistic. I asked her how she'd come up with her numbers.
She said that, because she'd be stretching her finances to raise the startup capital, she would have to work overtime for the first two years to pay her expenses. She paused. I could see her contemplating the implications of her statement. "But do I really want to do that?" she said softly, more to herself than to me. "I have two young kids. I have plans. I want to work until my daughters are in high school, and then I want to travel with them."
I didn't say anything. I just watched. "And I'm taking such a risk," she continued. "Not that I'm afraid of risk. If I fail, I could recover. But I don't want to work seven days a week, from morning until night, for two years, with the chance of it all coming to nothing." I sat there silently, amazed at her ability to make the connections on her own.
She left soon after. I haven't heard from her since. I assume she's decided not to move forward with her business plan. Meanwhile, she taught me a lesson. Now, after I go through the numbers with potential entrepreneurs, I ask them, "Is this really what you want to do with your life?"