Being a successful entrepreneur isn’t always about what’s in your genes but what’s in the pockets of your jeans. Bank accounts, credit cards and lines of credit backed by cash are needed to handle the shortfalls and unexpected costs that can occur for any new enterprise. And where does that extra moolah come from? According to recent data, financial commitments to a budding business more frequently come from the owner’s relatives.
A 2012 Global Entrepreneurship Monitor report showed that up to 80 percent of the capital was derived from personal savings and family. In 2009, the average cost for a startup was $30,000, says the Kaufman Foundation, although many successful ventures have ripened on much less. Still, without millions sitting in accounts accruing interest, it’s especially hard for some parents to gather the courage to take the leap, even if their contributions can mean the difference between a company’s boom and its bust.
“There’s a lack of education about entrepreneurship that makes our community hyperfocused on risk,” says Dezmon Landers, 30, an Atlanta-based startup expert who assists entrepreneurs with navigating customer acquisitions and general operations (dezmonlanders.com). “Look at it as a family investment, like a home, and figure out how to get involved. Don’t be so afraid of short-term risks that you lose the overall benefit.”
Below are his suggestions for families who want to lend support to future CEOs:
Understand the entrepreneurial stages. Landers breaks down the five categories: The entrepreneurial worker advocates for entrepreneurs and dabbles in new ideas; the side business owner develops a small stream of income but maintains another job; the self-employed entrepreneur can support himself or herself through the company; the business owner generates the revenue to hire more staff; the actual entrepreneur is a businessperson who maintains one or more companies, has multiple employees and generates income without being present.
“Talk to family members about expectations because each type of venture has different needs,” Landers stresses.
Remember to create a company “must” list. If you’re planning to bankroll some of or all the expenses, make sure to review a business plan and discuss any items needed to launch. New businesses require capital for websites, computer systems and, sometimes, automobiles. Knowing what your costs will be will help determine how you can assist.
Assess your tolerance for risk. “Adopt an ‘how-can-I-help’ mantra,” Landers advises. “Are you willing to buy the computer system, pay for the website, gift a car or give a living allowance? Determine what you are comfortable investing. Entrepreneurs need everything, including health insurance.”
Minimize his or her burn rate. “In the startup world, the burn rate is all the must-have expenses,” explains Landers. “Cost of living is typically one of the biggest issues for entrepreneurs. Look into your overflow—spare rooms, insurance plans—to determine how you can offer assistance. Limiting finite bills will help an entrepreneur get into the black.”
Don’t be afraid to become a cash money partner. One way to help a nascent business owner is to enter into an equity investor partnership, which means you are buying into the company. If that is not an option, open a savings account or line of credit for the entrepreneur. The most important thing, says Landers, is to “make sure the details of the agreement are in writing.”