Over the last 10 years, I’ve worked with a number of startup companies that have passed through EnterpriseWorks, the UIUC technology incubator here in Urbana-Champaign. These entrepreneurs are always very smart and very hardworking. They are also likely to fail. Even with this early support system, the odds are stacked against them. According to the Small Business Administration, an average of 80% of employer businesses survive the first year, 70% survive at least two years, 50% survive at least five years, 30% survive at least ten years, and only 25% survive at least fifteen years. Stated another way, the five-year survival rate is only 50%. These are horrible odds considering how much blood, sweat and tears goes into these endeavors. As a startup owner, your chance of staying in business for five years is no better than the flip of a coin.
So, what is the alternative? Don’t startup, start in! Yup, instead of starting a company, I suggest buying one. It’s actually much easier than starting a company. And if the company has already been in business for five years, the odds of continued success are much, much better. But there are more advantages than just increasing the odds of success.
If you buy a profitable business, you can use the profits to fund your new ideas. This should also allow you to keep more equity as you would need less outside investment. You wouldn’t be beholden to venture capitalists or other investors. This might also allow you to buy additional assets you need. Additionally, you don’t have to build a team from scratch. You will already have some key players in place. Hence, you can just “start in” on growing the business. This is an especially good fit for software companies or internet-delivered services.
To make this work well, here are two key things to consider. First, you want to buy a business that already has a substantial amount of the infrastructure and workforce that you need. For example, you probably wouldn’t buy a bakery to help you launch your medical device company. Second, you don’t want to fund the acquisition with your own money (too risky) or rely solely on outside investors (equity loss). The trick is to structure the purchase using alternative funding that a) reduces your personal financial risk and b) costs little or no money out of pocket. There are numerous ways to do this, but that is a topic for another time. The point of this blog is to just let you know that this is a viable option that could actually increase your odds of long-term success while you work on bringing your great idea to market.