Starting your own business is a daunting undertaking—especially when we face the startup costs involved. For some startups, in the biotech field for example, the capital requirements are so massive there’s no possible way to bootstrap—they must seek investors. But for creative entrepreneurs the hard costs associated with starting up your creative business are fairly low. Really, the main cost is your own time—which can be significant when you factor in the opportunity cost of forgoing a regular paycheck. But the immediate demands for hard cash are minimal. But what creatives often fail to consider, are the longer-term soft-costs, which can end up leveraging your business, and dragging you under.
Are you ready to take the struggle out of finding new clients?
When a startup founder goes on Shark Tank to seek an investment there are typically two distinct motivations. One is to get the help of an experienced partner to guide them through the complex process of managing a growing business. The other is the practical need for cash to keep up inventory to fulfill sales orders, and to market the new company. Without enough cash on hand, even the best products and services will get crushed on the rocky shores of cash flow failure.
For a typical startup they need cash up front to fulfill sales. But the creative entrepreneur needs cash for what follows later. In fact, because the need for cash is so low at the outset, many creatives get fooled into thinking that they’ll never need significant capital to maintain their businesses. This is a huge mistake and leads many creatives to unwittingly over leverage their businesses.
You see, a typical founder can calculate their manufacturing costs, project their sales volume and therefore know exactly how much money they’ll need before they start receiving payments from their sales. They know what’s needed ahead of time. But creatives have the opposite problem. They often get paid about half of their project fees up front—before they’ve delivered any product at all. This creates a dangerous illusion. It looks like they have money in the bank, but because they haven’t “manufactured” anything yet, that money is actually a liability—until it’s earned. In a real sense it represents debt, not profit—you’ve leveraged yourself from day one.
What if a typical product-based startup miscalculated their production costs. They would end up hitting a wall. They wouldn’t be able to fulfill their orders. And they’d see the problem right away. But what about creatives? What if you miscalculate the amount of time, the production costs, needed to complete your project? You won’t know that until much later. You could end up collecting many sales orders, and to begin fulfilling them, only to find out that each order was under funded. You will have over leveraged yourself, and that will inevitably overwhelm your time resources. You’ll need to work longer hours, without pay to cover.
Another leverage problem, common to creative entrepreneurs, is the debt of necessary business overhead time that’s left unpaid. When you ignore business related activities like properly planning your schedule, managing your finances, or neglecting your marketing—you are heaping up time debt—further leveraging your business. If you’ve ever felt like you just needed a few weeks, or months of focused time to get your business in order—but you couldn’t afford that time—you’ve felt the negative impact of leverage on your company.
So how can you cover these debts? Where can you find enough startup capital to build your business? The first step, ideally, is to count these very real costs up front, and ask yourself if you have the capital to cover? Do you have sufficient savings to go without pay for a few months if you need to? Secondly, you need to factor these costs into your sale price. You can’t afford to charge just enough to get by this week or month. You need to be building up resources that will enable you to cover your long term time liabilities.
Because startup costs for creative entrepreneurs follow after, rather than precede their business activity—these costs often surprise, confuse, and confound. But if you properly factor them in, and build your business model accordingly, you’ll have a much greater chance for success in your creative business.
Until next week: don’t let the business of creativity overwhelm your creative business.