Is Starting a Business Really Easier and Cheaper than Ever Before?
When I left my corporate job to start a tech company, it was the height of the start-up craze. I read countless articles about why it was the right time and that it has never been easier and cheaper to start a business. Even today when I read these articles in I would like to laugh out loud. And sometimes, I actually get really annoyed that young people are told that stuff.
Let me tell you something: firstly, starting and running a business is never “easy”. Sometimes I even wonder if the people writing those articles have ever founded their own companies. And coming to my second point about how “cheap” founding a business is – well, it probably depends on the perspective, but I did not find it cheap. Let me share what I think about the most common myths:
It Is Easier than ever to Start a Business
My main point of criticism about these articles is that starting a business is almost always seen as just registering a business. Registering is a very, very small step in the actual process of starting a company. This first step may be easy but there are so many more factors to take into account. (See below)
Fees for registering companies depend on the country where the company is registered. (Read more about how to choose the right location for your business.) While there have been attempts to lower these fees in many countries, I would not call them “cheap”. The most important thing is to not only factor in the cost for the actual registration but also all the fees that you will need to incur to keep the business up and running. For example, I needed an auditor for handling my reports – it is not something a lot of people immediately think about when you register a business. Most people discover that in the course of the founding process. In any case, please inform yourselves very well about all the costs involved BEFORE you start any business.
It Is Easier to Raise Money
This is my favourite myth by far. Magazines, blogs and even (silly) TV shows depict the start-up scene as mostly male founders in hoodies who raise a substantial amount of money by presenting a concept written on a piece of paper. It often comes across that as a founder, you do not even need your own capital, people will just throw money at you. While there may still be some exceptional cases with the piece of paper, I personally have not come across any start-up recently which got a substantial amount of funding based on a mere concept. Times have changed since 2014. Most of the time, investors want to see a founder who put their own money in. Why would they invest if you yourself do not even want to spend your own money?
Moreover, investors will ask for a (basic) prototype. A concept alone will not be enough. This strategy allows them to see if you as a founder have what it takes to develop a product and a business from scratch. Depending on the industry and product, developing a prototype requires a substantial amount of capital. I do not think that we can call developing a prototype “cheap”.
Furthermore, I think the immediate connection made between starting a business and raising money is very wrong. There are so many successful businesses which grew organically and without any external investment. The articles praise investment as the holy grail. Once you have it, your start-up is successful. If you bootstrap (ie. grow the company organically and with your own money), you are perceived as being on the brink of failure. The downsides of having an investor – such as potential different goals and the pressure to exit – are rarely covered. (Read more about if you need an investor to start a business here.)
Moreover, nobody actually talks about how to get access to capital. Almost all of these articles make it appear that you meet investors at conferences or start-up events and then the money comes from itself. Or, that investors are already part of every founder’s network. Almost all the start-ups I know who received funding partnered with investors with whom they already had already built up long lasting relationships – very often even before the company was founded. Network is an important factor.
(On a side note: I am writing this article about my own experience with investors in Asia and Europe. I cannot speak for the environment in Silicon Valley, maybe the situation is very different.)
Businesses are Easier to Manage
Similar to starting a business, I disagree with the view that companies have become easier to manage. Companies are always made up of people and it is a very demanding task to manage their expectations, performance and development. The articles argue that because there are so many software tools for tasks such as bookkeeping, managing a company has become easy. Needless to say, these tools may make our lives easier. However, they will never completely substitute the people.
I really love to work with a great team. And I also really enjoy to motivate team members and push them to achieve their goals. But this is nothing which is easy. It requires a lot of effort, time and the ability to actively listen and understand every team member’s aspirations, needs, strengths and weaknesses. Managing products is not an easy task. People management is neither. Everybody who calls it easy has probably never been in a leadership position themselves.
Furthermore, our world is becoming more connected and complex at the same time. I think this is another argument why it has not become easier but actually more challenging to manage businesses on a daily basis.
An important factor neglected in all the articles is the opportunity cost. In my case, I not only gave up a steady and substantial income, I also opted to give up my career and move in a completely different direction. It always sounds romantic – to walk away from your job to follow your passion. (Oh, how I love this expression…) But in reality it is very, very hard. It means giving up a lifestyle which you were used to. It means thinking twice before spending every cent. It means digging into your savings which you have built up for years. It means giving up the aspiration of buying a home or saving for retirement. If you consider these opportunity costs, I think it is quite clear that founding a company is not “cheap”.
Product Development, Marketing, Salaries
When I started out, I repeatedly came across the recommendation of having a buffer of 20 to even 50% on top of your planned budget. This is very true. Even if you try to plan every single step, there will always be costs which you did not expect. It is similar to building a house. Suddenly, there is a problem with the roof and your costs spike.
First and foremost, unless you are a superhero and can do every single step of the product lifecycle yourself, starting a business is not cheap. You will rely on other people who you will have to pay. We are all good at certain things – some of us are great programmers but they need support for marketing or the other way round. There is no business which can survive by being run by a single person. Because even if we had all the skills, we would not have the time to do everything ourselves.
Another big mistake is to neglect marketing cost. It is natural: first we focus on the product. Marketing seems so far aways. And social media is always a good excuse – it is so cheap to market online nowadays… This ends up being a big problem because suddenly companies are faced with the reality. Marketing is expensive. And even the “cheap” online channels need substantial investment – professional pictures, copies, maybe even paid campaigns.
To sum up, I think that there have been a lot of structural improvements to facilitate starting businesses. Nevertheless, even though the framework has changed, I would not consider founding and running a company easy. It is easy to be deceived by the media. Never forget that a so-called overnight success was being prepared for years.