Five sobering lessons for start-up dreamers

Move over remote working, there's a new office fantasy in town. Gone are the days when employees dreamt of working wirelessly on a sun-kissed beach with a piña colada in hand. Today, your typical employee is dreaming a lot bigger.

They want to invent the next Facebook or Twitter. They want to build a start-up. They want to be an entrepreneur. 

Australia’s start-up scene is a modern day gold rush. Perpetuated by concept of striking it rich on their own idea, people from all walks of life are quitting their day-jobs, shedding their suits, and setting up shop in a hipster-styled start-up hub. Many would-be entrepreneurs now hang their hat on a recent Google and PricewaterhouseCoopers study that found that with the right investment, Australia’s start-up scene could contribute as much as $109 billion to the Australian economy by 2033.

It also revealed that the sector could support as many as half a million jobs – a significant increase given that the research found that there were only 2000 tech start-ups founders in Australia.

So far, the start-up community has accepted all newcomers with open arms. In fact, they’re always holding events to encourage many to make the leap to entrepreneurship. But, make no mistake; they are not selling it as an easy road to fame and fortune; quite the contrary, in fact.

Many entrepreneurs offered some sobering realisations during one start-up evangelising event – a walkabout tour across the city’s start-up scene. Here’s what they had to say:

1. “Fail hard, fail fast”

Tour guide and entrepreneur Grant Downie repeated this mantra throughout the course of the event – and it’s easy to see why. Despite the success stories, the start-up sector is saturated with failure.  

Anecdotally, StartUp Victoria and Attendly founder Scott Handsaker told the group that between 80 to 90 per cent of all start-ups fail before they even find funding.

And the chances of success don’t get much better after getting some seed funding either. As Handsaker points out, 80 to 90 per cent of start-ups roughly fail to make ends meet even after attaining their first injection of cash.

There are plenty of reasons as to why a start-up can fail; the most common however, usually revolves around the business being based on a bad idea. This is why CareMonkey founder and CEO Troy Westley advocates that budding entrepreneurs should shed this fear of others stealing their ideas and share them with others before getting in too deep.

Better to have a friend poke holes in your business model, than to have it crash and burn after you have quit your day job. 

2. Don’t go part-time to build a start-up

Speaking of quitting, most aspiring entrepreneurs believe that they can have the best of both worlds with their start-up dream. Working part-time while building their pet project sounds good in theory, but it’s much harder in practice.

Downie says that most budding entrepreneurs who approach a business from this perspective end up spending more and more time at work, and less and less time on their start-up.

He says that entrepreneurs are better off saving between $50,000 to $100,000 before they leap into their project, so that they can spend a full year living off of their savings and dedicate their time on the start-up.  

To Downie’s point, most part-time work rarely stays part-time. The more you earn, the more likely your job will cannibalise time well beyond the set hours and can often leave entrepreneurs with little time.

3. Choose your partners carefully

There’s nothing wrong with going into a start-up by yourself, but chances are, you’re not going to have all the skills needed to launch a successful company. For instance, if you’re an IT pro you may need someone who specialises in law to help navigate the legal framework of your business.

Entering into any kind of a business partnership can have its own set of complications, but start-up partnerships can get particularly prickly due to this idea of ownership. It’s fair that you share a portion of the ownership of your business with your partner, but what happens if they get fed up with the idea and want to leave?

In most cases, they still hold a stake in the business, even after they have left to pursue other objectives.

This is why CareMonkey’s Westley set up a system where the ownership of his company is fluid and based on the amount of hours both he and his co-founder put into the business. His system is based on the book Slicing Pie.

To explain: if one week Westley pours 40 hours into the business and his partner only works 20 hours, then his share of the business grows. The partner then has to work an additional 20 hours somewhere down the line in order to equalise the ownership equation. However, as the business was Westley’s idea he holds onto a permanent fixed 10 per cent stake of the company.

Another point that many don’t consider when entering into a partnership is the gender of your co-founder. As with many other areas of business, gender is also an issue in the start-up scene, as the majority of start-ups are founded by two or more male co-founders.

This situation is baffling to Laura McKenzie, founder and CEO of the angel investment outfit Scale Investors. Her firm specialises in investing in companies with a female co-founder on the basis that according to data from the US and the UK, these start-ups on average generate higher returns and perform better at IPO.

4. Funding is both a blessing and a curse

There’s no doubt that a good injection of seed funding or capital can help a start-up get off the ground. However, as many of the start-ups on the tour confirmed, any form of investment can also end up having the unintended effect of stifling a company before it reaches its prime.

The problem is, investors often expect a start-up to generate some form of return within a particular amount of time, and this puts start-ups on a growth timeline that could force them to rush their idea and ultimately fumble it in the process.

“The moment you take that money, you’re on a treadmill,” StartUp Victoria’s Handsaker explained.

But don’t think that the flipside – self-funding or bootstrapping – your start-up is any easier.

Collis Ta’eed can testify to that. His start-up turned success story, Envato, operated as a bootstrapped company for the first two years of its life.

It’s hard to picture it now, given that Ta’eed spoke about his company in his multi-million dollar swanky new Melbourne offices, but he said the first two years of Envato’s existence was a struggle for both him, his wife Cyan Ta’eed, and his childhood friend Juan Rung – both of whom served as co-founders.

Aside from having to work freelance on the side to pay the bills, Ta’eed says that a lack of funds forced him to skimp on other corporate services, like hiring a good accountant, which complicated matters when he tried to scale the business and seek further investment.

CareMonkey’s Westley had a similar experience with a seemingly “cheap” developer service. The problem is, in order to cut costs, the service relied on automated quality assurance and testing, ultimately leaving Westley with an inferior product for his money.

“It was cheap… and I got what I paid for,” Westley said.

“Beware of cheap,” he said.

5. Be prepared to justify your company to everyone

It’s not enough to just have a good idea; you need to be able to sell it. The Australian start-up scene is notorious for its limited pool of funding and hence competition is fierce.  

Aside from sitting on advising start-ups, Handsaker sits on the deciding board for the AngelCube accelerator program – a program that funds and guides start-ups in return for a slice of equity in their company.

Competition for AngelCube funding and support is cutthroat, with Handsaker saying that as many as 140 start-ups each year apply to the program. This year only seven got through, and Handsaker adds that the cull isn't hard given how bad many start-ups are when it comes to the pitch. 

Pitching to the dragon's den may be daunting, but sometimes the hardest sell might be to the ones closest to you.

WeTeachMe co-founder Kym Huynh still has trouble trying to convince his mother that leaving his career in law to fund an workshopping start-up was a good idea. According to Huynh, to this day she still tells other family members that he still practices law.

Now, year and a half after founding WeTeachMe, the start-up is finally turning a profit. Huynh now has something to show for numerous nights of two minute noodle dinners and haircuts from less-than-qualified hairdresser friends.

And that is really the biggest lesson for all would-be entrepreneurs: perseverance. Dare to dream, but realise that even the most savvy start-up founders experience significant hardship and boundless complications along the road to success.

If you have the right idea and are willing to stick with it for the long haul, the results of an entrepreneurial day-dream can do more than just dispel the drudgery of a desk job. Who knows, it just might change the world.