Seeking Passive Income Is a Death Sentence for Aspiring Entrepreneurs New entrepreneurs should consider passive income only after a business model is established.
By Alex Barker Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Passive income is the pinnacle of online entrepreneurial pursuits. Everybody wants it. Few have it. Fewer make enough to live on it.
The idea of "passive income" (money earned on a regular basis as a result of little effort) fascinated me when I started my entrepreneurial journey. I followed online experts who laid out the "perfect path" to passive income. Unfortunately, I spent two years seeking this elusive Holy Grail of income with little to show for it.
Related: 7.1 Steps to Create Multiple Streams of Income
Too many aspiring entrepreneurs hear the same message that I did about passive income. Many seek passive routes first without understanding the power of pursuing active income (or, said differently, "trading time for dollars"). A new entrepreneur should pursue active income first. Let's dive into why.
The quickest way to make money online
Let's imagine that two new entrepreneurs wish to start side businesses using their experience in recruiting. The first entrepreneur, named Anh, pursues active income by selling recruiter services to local businesses. The second entrepreneur, Steve, aims for passive income opportunities by creating a "niche website" with exclusive information on recruiters. He hopes visitors will click his article links and purchase products. In exchange for his work, he'll receive affiliate commissions from purchases.
Who will make money first?
After three months, Anh is trouncing Steve. Anh generates more revenue faster than Steve. Anh is on the streets reaching her ideal clients, learning about their major problems and figuring out how she can solve them.
Steve, on the other hand, must wait for his potential customers to find his obscure website. He promotes his website on social media, but Google won't recognize it for at least three to six months. Steve also won't meet his potential customers, so he misses out on direct feedback and won't know if he's creating the right content.
Related: Passive vs. Active LLC Members: Who's Paid What?
Here are three advantages of pursuing active income before passive income:
Easy to start
Consider the time it takes Anh to make her first dollar compared to Steve. After three weeks of visiting businesses in her local area and submitting proposals to websites like UpWork.com, Anh can easily get her first client and can use her revenue to obtain more clients. Anh gains real-world experience by interacting with her clients and hearing about their problems. While Anh is killing it, Steve is stuck his in basement tweaking his website to fix a menu bar problem.
Easy to adapt
Active income can quickly adapt based on client feedback, market changes or business needs. Passive income pursuits may lead down a path where there is only lost money.
Although Anh may fail, she fails "on the job." She can quickly rebound and can take what she learns from her previous failed attempts and approach the next potential client differently.Steve, on the other hand, must wait to see if his website will generate income after receiving
thousands of visitors. Steve cannot learn as quickly as Anh. While Anh is securing another client, Steve must wait to analyze the data.
Related: Are You Diversifying Your Income? You'd Better Start.
Easy to scale
Active income is based on one product or service idea. After Anh establishes a stream of clients, she can focus on scaling her business in different ways. For example, she could create different tiers of her service, expand to different industries or hire another recruiter. And, Anh's services could easily turn into products or courses, thereby generating passive income. For example, Anh notices that her clients struggle with defining their desired applicants. Based on this client need, Anh creates a training course and sells it on her website.
Returning to Steve's business, he hopes that he gets enough traffic on his website to generate sales, but it's slow going as he hasn't received income from affiliates (affiliates often take one to three months to send commissions).
New entrepreneurs should consider passive income only after a business model is established. Anh will eventually develop passive income sources, but not until she receives feedback that the market is asking for her solution to a client problem.
Said differently, Anh seeks validation for her business idea first - the best first step. If you don't believe me, ask the guy behind HotShot, who appeared on Shark Tank. He spent $3 million in six years building his product without making a sale.
After seeking active income and getting to know her clients and their problems, Anh knows that she can offer solutions and build something once that will hold value over time. Steve, on the other hand, is still crunching numbers in his basement while he waits for sales to happen.
