True confessions: I started a business; mistakes were made. Lots of them. Now I’d like to share Part 2 of my story, which includes three more small-business owner tips/lessons learned from the trenches.
1. Running a Business with Your Friend Is Not Just Like “Hanging Out.” The only way it’s similar to hanging out is if you equate hanging out with getting married, mingling your finances, and having a kid all at the same time. I’d known my business partner since college. Thought I’d known him well. Then we started a business. Learning after the “kid” (aka, the company) is born that you forgot to have the conversation about how to raise and finance that child can be one painful, expensive, time-burning bummer.
We got so swept away with the romance of designing products that we never had the hard conversations about managing money, decision-making, roles and responsibilities, and growth. Nor did we codify these conversations in a “prenuptial” (aka, partnership) agreement. My advice? Have these hard conversations as fast and as early as you can because when the first problem pops up, it will be shocking and exponentially harder to address as time passes. All partnerships encounter disagreements, but they don’t have to be destructive if you are prepared.
Also, think through your motives for taking a partner at all. In its recent article, “Avoid These 7 Partnership Killers,” Entrepreneur offers suggestions on how to steer clear of costly mistakes—the most expensive one being the loss of a friend.
That said, many friendships not only tolerate business partnerships, they thrive along with their business. This Forbes article highlights successful businesses with friends as partners, all of which seem to be rooted in strong communication skills, empathy, and the ability to let go of your ego. As one entrepreneur put it, “You can’t be like a dog with a bone.”
2. Running My Business Is Probably Not Going to Be Just Like—or Better Than—the Design Part. It’s a real kick to transform an idea hashed out on a napkin into a product. However, designing products has almost nothing to do with running a business, much of which involves what I like to call “drudgery.”
For some folks, the litany of required tasks—bookkeeping, invoicing, purchase orders, customer service, trade shows, fulfillment, inventory, accounts receivable, vendors, etc.—is a joyful part of the experience of owning your own business. For me? It was torture. These things don’t show up in discrete blocks that you can knock out in a scheduled three hours on a Friday afternoon; for me, they showed up as 45-minute flash fires every day. In between working on consulting projects to keep the lights on and my business going, I fought these tedious fires, one by one, feeling lonely, schizophrenic, and unproductive.
For many of you, this story won’t resonate. But for some, the vagaries of running your own business will come as a surprise. None of the above is meant as a caution to avoid entrepreneurship, but rather as encouragement to go in with eyes wide open. Running a business is a brute effort that probably has no resemblance to the thrill of creating your product. My bogeymen were the necessary mundane chores required to keep my products business moving along, as well as the loneliness. Yours might be something else, such as the pain of [insert selling, raising money, hiring people, etc. here].
Think through what myths you might be carrying into your ideas of entrepreneurship and try to shatter them before you get started. As a prompt, check out this Forbes’ guide to 15 Entrepreneurs on What They Wish They’d Known When They First Started Up.
3. Don’t Quit Your Day Job—Yet. Not so fast. Everything will take longer and cost more. With a partner, multiply that by two. In the honeymoon period of starting a business, it’s easy to gloss over some basic math. In our case, we were making a relatively low-cost item. Out of profits come known expenses (website, trade shows, storage, and so on) and unforeseen costs (packaging redesign, moving storage facilities, changing fulfillment centers, etc.). When you sell a low-cost item in a crowded, noisy field with slim absolute margins, you need to sell a lot of them to make money.
Consider our case: Our average suggested retail price across five SKUs was about $10 per item. Most of our sales were wholesale, so that’s about 50 percent of retail to generate $5 in sales. From that we subtract the cost of making it, packaging it, and shipping it back to the U.S.—about $3, for $2 in gross profit. From that $2, we need to pay for website expenses, fulfillment, storage, marketing, tradeshows, an inexpensive desk in a coworking space, bookkeeping, taxes, and so on. So, for each item we sold, we were lucky to keep $1 of it. To get back into a target income, let’s say we each want to take $75,000 each out of the business a year. To hit that target, we needed to sell $1 x $75,000 x 2 people = 150,000 units, or about 12,500 units a month.
Our initial customers were museum stores, small boutiques, design boutiques, and home stores. An average order for this kind of outlet might be three cases, or 36 units. So to hit that 12,500 units a month required a customer base of about 350 stores ordering three cases a month, consistently, forever.
At that level, we are selling $1.5 million a year, which sounds awesome. But $75,000 each in profit does not, especially in San Francisco where we live. This math doesn’t take into account the capital investment in inventory ahead of making sales. If it’s costing us $3 per unit to make the item and get it to the U.S., we need to put out the equivalent of almost $40,000 a month to buy goods to sell. And, even though our units are much higher, our items are so low value to our factory partners in China, the price breaks with higher volume don’t help much. Our math isn’t a universal truth, but it’s more common than I expected.
The math of running a small-products business can be brutal in the early years. Walk yourself through it and set your financial and timing expectations accordingly.
Want to learn more? Read Part 1 of my story, and for more small-business lessons, check out When Life Gives You Lemons: 4 Business Lessons from the Kid with a Lemonade Stand and Manufacturing Costs: 9 Considerations to Make Before Taking Your Idea from Prototype to Production.