Living off of Ramen, instant coffee, and dollar slices is a classic rite of passage for most entrepreneurs. It comes with the territory when you’re bootstrapping. And to pay the bills during these early days takes some serious creativity. The AirB&B founders, for example, raised over $25,000 by selling a limited edition cereal, Obama O’s, during the 2008 election cycle. Most entrepreneurs opt for a more traditional route, such as taking on side gigs as consultants.
That’s how Art Chang funded Tipping Point Partners. Today, Tipping Point incubates a portfolio of startups, building teams and products around its own in-house ideas. In the early days, however, Tipping Point acted as an outsourced consultant, helping others launch startups.
Funding a startup through consulting gigs is trickier than it sounds, says Art. “When you’re smart and do good work. It’s relatively easy to get more [consulting] work. You risk getting sucked into doing more and more consulting work [and end up neglecting your startup]. You get addicted to those paychecks. Eventually, it stops being a good risk/return tradeoff. Yes, you’ve lowered your risk, but you’ve also lowered your return because you’re just covering costs, not growing equity in your own projects.”
When Chang realized that consulting clients were absorbing all of his time and resources, he decided it was time to stop the side gigs, even though they made up 80% of his revenue.
Here’s Chang’s advice on how to keep consulting gigs from overwhelming your real business.
- Before taking on a new client, ask yourself, “Does this client help me build equity value in my business? Will this project help expand my team, expertise, or industry contacts in a way that is relevant to the long-term business? If not, is the paycheck large enough to warrant the distraction?”
- Make sure there’s a clear exit scenario down the road. “Plan ahead before selecting your clients, as if you are writing a pre-nup,” says Chang. Choose clients that understand and accept that you won’t be with them forever. Otherwise, “If you’re valuable and do a good job, clients start to rely on you more over time. Clients start thinking of you as an intrinsic part of their business operations and you start to believe them. Once that happens, it becomes very difficult to exit that relationship.”
- If you’re already overwhelmed with consulting projects, try not to do anything drastic. As Chang says, “It’s like quitting a job. You need to plan ahead in order to save up before walking away from these steady paychecks.”
- Before you start winding down your consulting projects, it’s essential to be honest and open about the issues with both clients and employees. You don’t want clients or employees to feel like you’re leaving them in the lurch. Chang voiced his concerns to clients for almost a year before coming to a hard stop on consulting projects.
Once Chang decided to stop consulting, he took 90 days to transition Tipping Point away from consulting and toward its own portfolio. He stopped taking on new consulting projects and worked with current clients to ensure their projects could survive without Tipping Point’s involvement. In order to do so, Chang helped clients hire several Tipping Point employees who were intimately involved with client projects. To conserve cash, he laid off any employee that wasn’t directly involved in building Tipping Point’s own projects. He also invested some of her personal money in the business in order to compensate for the lost consulting revenue. Tipping Point eventually emerged stronger –without any consulting gigs to weigh it down.