Before You Start a Business, Make Sure You Have a Safety Net. Here are 13. When you start a business, you need to be prepared for every eventuality.
By Stephen Key
Opinions expressed by Entrepreneur contributors are their own.
All entrepreneurs need a parachute. Because, whether you're selling a product or a service, starting a new business involves risk. I've been an entrepreneur all my life, and, looking back, I've relied on safety nets at every stage in my career. I think not having the right safety net is what stops a lot of people from pursuing their entrepreneurial ambitions.
Before I list 13 safety nets you can rely on, I want to illuminate how they have helped me launch, sustain and grow different businesses.
Related: The Complete, 12-Step Guide to Starting a Business
When I was in my early twenties, I began designing products. The first one was a novelty baseball cap that had foam fingers you could rearrange to send a message, like the peace sign. I ran an ad in a magazine to test the market for demand. This only required fabric, a sewing machine, and money for the ad. I didn't need a safety net. I didn't sell very many.
My next endeavor was opening up a store in Capitola, a quaint seaside tourist town in Northern California. This was in the 1970s. I made everything that I sold in the store -- primarily soft sculptures made out of nylon. My rent was about $150, and I had two partners who split expenses with me. I didn't have to borrow money, because I had saved about $10,000 before getting started. In this case, my savings were my safety net. For the next four years, I supported myself as I enjoyed watching the waves go by.
A few years later, I caught a break selling my creations at a festival in Sausalito when an individual connected me with someone who could scale my business. Meeting Steve Askin, who was running a company called What's New, changed my life forever. Within 30 days, he was representing me and selling my products to stores across the country. The orders were coming in so quickly, I borrowed $5,000 from my father so that I could hire people to help me sew, and thus deliver on time.
It was obvious I was in over my head, so I taught Askin's factory employees how to make my creations instead. This time around, my safety net were my parents. This was also the first time I was exposed to the idea that someone else could make, market, distribute and ultimately sell what I originally invented. This is called licensing, and it became my preferred business model.
Related: How to Think About Economic Moats When Starting a Business
The answer why is simple: Even though I'm an entrepreneur, I'm risk-averse, and with licensing there's basically no risk involved. Your licensee is already in business and on the hook for the heavy lifting of product development, meaning manufacturing, marketing and fulfillment. In other words, they take on all the risk.
It took me a while to get good at licensing my ideas for products. Until then, my wife Janice had a full-time job and supported me. I also took on quite a bit of freelance and consulting work to supplement my income during this time.
Later, I started a business selling uniquely-shaped guitar picks. We sold mostly to fans, not musicians. Four of us pitched in a little bit of money so we all had equity. Soon enough, our picks were being sold in thousands of stores including Walmart and 7-Eleven. We became a Disney and Taylor Swift licensee. Getting into Walmart was both exciting and daunting. We had to scale up, and to do that, we needed capital. The bank would not loan us, so I invested my own capital (about $250,000) to fulfill the Walmart order. This was money I had saved as well as inherited.
It doesn't matter how much you prepare; there are going to be unforeseen obstacles. That's just the nature of doing something new, which is what entrepreneurship is all about. It's worth it.
That said, running out of time and money are two extremely common challenges for any new business. You need a safety net to prevent you from an unnecessarily rough landing.
Personally, I like to keep it simple. To be sure, there are more complicated ways of raising money, like working with angel investors or even venture capitalists.
1. A part-time job
I highly recommend taking a part-time job to supplement your income when starting your business. Find one that's flexible and doesn't demand five days a week for eight hours a day. If you can find a part-time job in the industry you're interested in and can learn from, that's even better.
2. Freelance work
I began freelancing for toy companies that I approached about licensing my ideas for products. Some eventually did license ideas from me, but the freelance work I was offered helped me pay bills as I was learning how study product lines. I also did freelance work for Mattel as well as other toy companies, which included traveling overseas for manufacturing and design.
Related: 5 Ways to Start a Business with Cheap or Free Money
3. Develop a side-hustle mentality When You Start a Business
Yes, you want to be self-employed. But there can be great value in gaining industry experience first. Personally, I encourage you to seek out a job a startup. I look at the time I worked at the toy startup Worlds of Wonder as a side-hustle. It was a full-time job, but I was already dreaming about running my own business. I volunteered for every assignment that I could, because it was all a learning opportunity. So no, I don't think you need to quit your day job right away. Your mindset is what's most important.
4. Choose a partner wisely
If you're passionate about becoming an entrepreneur, you will need the support of your spouse. After I quit Worlds of Wonder, being able to depend on my wife Janice was instrumental. I earned income as a freelancer and through temporary gigs, but it was really having the freedom to fail that made a huge difference.
5. Consulting
Worlds of Wonder hired me to be a consultant after I left. The pay was great! I was also able to submit my ideas to them and although I didn't license anything, I was once paid a large holding fee of about $15,000.
6. Stay lean
Like I described above, I started a guitar pick company with three other friends by investing our own money. I believe two of us put in $10,000 and the other two put in about $2,500. We grew from there.
7. Find a partner
I've been running my coaching business inventRight with my business partner Andrew Krauss for 20 years. What's truly amazing about this venture is that we didn't put in one dollar. We produced seminars for the first couple years and then started selling coaching online. We had no overhead and no costs. No risk, no safety net needed.
8. Grants
It's possible to get grants from the government to start your business. The process is not complicated, but it must be done correctly. Entrepreneur contributor Kedma Ough has written at length about how to do this, including here, here, and here.
9. A loan from a friend or family
Personally, I find it very nerve-wracking working with friends and family, especially when borrowing money is involved. I don't recommend it.
10. Crowdfunding
I absolutely love this business model. Pre-selling an idea through crowdfunding allows you to raise capital to start your business with. The major issue is that people think they have a money problem, but it's really a knowledge problem. This is why so many crowdfunded projects that raise oodles of funds still fail to make it to market. Running a business is not easy, even when you have capital.
Related: Jeff Bezos Shares His Best Advice for Anyone Starting a Business
11. Savings
I used my savings to start three companies. This is a great safety net, but it requires discipline.
12. Licensing
If you focus on selling the benefit of your product idea first, you can spend very little of your own money licensing. No safety net required.
13. Testing
You can stay lean by focusing on a prototype and spending money on ads. Is anyone interested? Today you can do this using social media platforms. Companies in the "As Seen On TV" space run ads for products that don't actually exist yet. Over the years I tested my ideas at street fairs, festivals, in magazines, and convenience stores. Extremely low risk.
Before you start pulling out your hair and not sleeping at night, create a safety net.
Please realize, you will always doubt yourself a little. And it will be rough, always. These are the only constants. With the right safety nets, you can become an entrepreneur without putting your future and the future of your family at risk.
