Recently I’ve been getting a number of questions from part-time entrepreneurs and those with an idea they want to pursue on what criteria they should use in making the decision to quit their current day-job  to pursue their entrepreneurial dream full-time.  Clearly this is a very personal decision but it comes down to how prepared you are.  There are 3 reasons most businesses fail:  First, it wasn’t a good enough idea with a big enough market; second, the company ran out of cash before they could gain traction, third, really lousy timing because of external factors beyond their control.   

While you can’t predict the future to marginalize the 3^rd reason, I find a lot of entrepreneurs don’t properly mitigate the first two.  For those, here are 3 essential homework questions:

1) Do you have enough objective, trustworthy, and credible external feedback to determine that your idea is good enough and the market big enough?   

2) How realistic are your market, headcount, revenue, and expense projections to determine how much cash you’ll need to see you through to profitability? 

3) Do you have the financial stamina to live without your current income for 18 to 24 months at a minimum, or can you lock in enough funding? Let’s take a brief look at each:

Objective, trustworthy, credible feedback

Many entrepreneurs don’t do a proper external validation of their idea because they’re afraid that the “idea will be stolen,” so they ask friends and associates and then get started with very little outside input.  Don’t fool yourself with the excuse that you’re in “stealth mode” to keep from doing this critical homework.  If you need time after you’ve validated your market and product before spreading the word far and wide, fine.  But not doing your homework could leave you unprepared – for competition, for fund-raising, or for bringing on customers.   

By all means, go ahead and file any patents while you’re working, as they take time anyway.  But when you’re truly serious about pursuing your idea, then you need to be comfortable with talking about it with potential investors, customers and partners.  You will not get more credible, reliable feedback than from those who you would potentially be asking for a commitment.  It doesn’t mean these specific people will become your investors, partner, or customers – but people like these, which makes their feedback so valuable.  You can usually pick out the “newbie” entrepreneur by their insistence on a nondisclosure just to hear the high-points of their idea.  Sorry, but that won’t happen.  That’s because potential investors, customers, and partners can’t trap themselves into a possible legal issue if they happen to know of another company already doing what you’re thinking of doing (which is frequently), or meet one after they’ve met with you.  So know in advance what you feel comfortable discussing, and like I said, get any intellectual property patents filed if you’re that worried.

Watch those assumptions

Most entrepreneurs tend overestimate their potential revenues and underestimate the costs and length of time to get there.  It isn’t as if they’re lying – they truly believe their numbers.  But there is a psychology to wanting to see success so much that tends to play out in the numbers, especially in highly competitive people.  So whatever you’ve put on paper, one test would be to cut the revenues in half and double the expenses.  How does it look now?  Hey, investors WILL do this, so you might as well run this scenario too and see what they will see.

Find the capital first

If you’ve validated the idea correctly and have been conservative with your projections, then it’s a matter of finding the money to live on while you build the company.  We are in a recession – in behavior if not in a mathematical sense so investors are pulling back, which is why it could be critical to your success to be able to fund your company out of your own pocket for at least 18 to 24 months.  It doesn’t mean you will have to do it – you may find funding in a shorter period of time.  But I’m encouraging you to be very realistic, especially when you may have difficulty finding a new job in this economy if your idea fails to gain traction.  If you don’t have 18 to 24 months banked, find a funding source before you quit your job. One of the reasons so many tech startups are created by people in their 20s is they don’t mind living a really low-cost lifestyle to help fund their fledgling idea.  There is a lot of truth to the fact that a steady paycheck and family obligations kill off an entrepreneurial spirit pretty quickly.  But if you do your homework on the idea and the market, and create a realistic budget and a plan, you’ve mitigated a lot of the risk right there. 

Now is a GREAT time to start!

If you do appropriately validate your product idea and can see yourself through for at least 2 years on your own or by locking down a funding source, then now is an excellent time to start a business.  Since few people will take this level of risk during a recession, you will be in a unique position to build market share almost undisturbed.  This allows you to focus on getting the kinks out and building a customer base so you are in a strong position for when market conditions change – because they will.   I’m a believer that the best companies emerge out of the tough times – if you can make it there, you can make it anywhere.

Fiscally conservative

When I speak on this topic, there’s inevitably someone in the audience that tells me I’m too conservative, then cite as the basis for their comment that some of the biggest startup successes came out of ideas that, to this day, have no real revenue, like My*Space, Facebook, and Twitter - which have either sold for millions or have attracted obscene amounts of investment.  With respect to My*Space and Facebook, they certainly did have a revenue model – it was all about online advertising.  It just turned out to be a faulty model.  There is some truth to this with Twitter – it sure has attracted millions of users - and millions in funding, but it doesn’t appear that anyone knows how to make money off it yet.  Keep in mind that each of these scenarios makes the next group of venture capital firms and potential purchasers of startups just a bit more cautious – I'm sure Twitter's owners/investors would sure like to find a path to revenue now…So my advice is to start with one.

Have a question?  contact me at natalee roan [at] yahoo.