Considering a Startup as a Second Act? (Part II)

May 16, 2017

Wondering if you have what it takes to be an entrepreneur? Are you considering becoming a startup founder after some business or technical experience? Elana Fine, Executive Director of the Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business, recently shared her thoughts in a webinar entitled “Is a Startup Part of Your Second Act?” Fine considered three main questions: Why? What? and, How? Last week we explained Why, now let’s explore the What.

What? Different Paths to Entrepreneurship 

There are various options and paths to entrepreneurship, which involve varying degrees of risk. Fine discussed a number of possible options with the risk generally increasing in each option below.

Option 1: Launch a consultancy. Normally, launching a consultancy presents the least amount of risk due to the limited up front capital investment and the ability to leverage an existing network and expertise. Hopefully, revenue from the low hanging fruit in your network can help fund the expenses and future growth. The biggest risk involves demonstrating your skill set that influences your initial clients to increase their spend. This takes time. “Moonstrapping” or working on the side can be a useful way to mitigate the risk assuming there are no non-compete issues and the moonstrapping doesn’t interfere with successfully launching your business.

Option 2: Product/tech spin out or off. This could be a university or government spin out, link, or a corporate divestment. Many universities and government agencies have offices focused on tech transfer for commercialization that potential entrepreneurs can research. For corporate divestment, you may be able to identify a project your current company has decided not to pursue that you believe has market potential. Typically, this involves forming a new company and licensing the technology-IP. Using an existing project mitigates the risk of starting from scratch with less R&D investment and still offers high growth potential. However, the execution risk without corporate infrastructure can be high and negotiating the IP license can be tricky. You can mitigate some of the risk by doing some customer discovery while still employed.

Option 3: A lifestyle business related to your passion. This can be anything from opening a local standalone coffee shop to investing in a Subway franchise. These are called lifestyle businesses since they usually don’t involve high growth or scaling potential, but are a vehicle for an entrepreneur to create something of value and earn a satisfactory living over a longer period of time.

Option 4: Entrepreneurship through acquisition. This involves buying and running an existing business. The process from start through closing the deal can be lengthy, taking anywhere from 6 months to several years. You will need to have or raise a search fund to enable you to identify targets, perform due diligence on top prospects, negotiate the deal, raise additional capital, and close the deal. Much of the risk in this option is involved in the pre-close process. You will need professional and technical assistance from others who have undergone the process and understand the industry you are pursuing.

Option 5: Tech startup. This option usually involves high risks and high potential rewards – both financial and in satisfaction. Successful tech startups usually involve high growth (think the proverbial hockey stick forecast) and high margins. Extensive capital investment and a lengthy period of negative cash flows make this a very risky option. Given the needed capital investment, there usually needs to be an expectation of a high multiple sale of the business to a strategic or a financial investor or perhaps even an IPO. Risk can be mitigated through continuous customer discovery, bootstrapping, and strong execution.

All of the above options involve dealing with three categories of risk:

  1. Product Risk. Finding and or creating the right product to meet what the customer wants and needs.
  2. Customer Risk. Building a replicable path to customers who can and will buy. Can you locate sufficient customers?
  3. Market Risk. Can you build a viable business with a financial model that works?

Stay tuned for Part III of this blog series.