Volume III: To build or to buy

Starting anything isn’t easy and building a new business has historically been fraught with peril. I don’t have any hard statistics on how many fail. Those statistics are difficult to come by because small businesses are not required to file public financial statements. The best you can generally do is look at the number of businesses opened and closed during a given time period and do a bit of guesswork.

These numbers alone still need a bit of interpretation, since a business can be sold for a profit by the owner, or it can close and declare bankruptcy. It’s also possible that a business can remain open for years without really turning a profit, but not losing money either. There are other scenarios that can materialize, but these are the most common.

I’ve heard some failure statistics in the past, but nothing concrete. It’s just a conglomeration of speculations by guys with PhD’s or Economics degrees. Everything I’ve read points to a similar trend. The first few years, the failure rate for a new business tends to be quite high, regardless of the industry. As time goes on, the odds of a small business surviving become much higher. I suspect that this is partially due to the amount of debt incurred within the first couple of years, coupled tightly with the ability to make sales as a new business. It is certainly related to the number and type of risks that the owner takes during that time.

As the business owner learns about the industry, and how to be successful in that industry, the knowledge gained eventually becomes more valuable than the money the business is making. If this sounds counter intuitive, don’t worry. It is. In the early stages of a business, establishing income is more important than knowledge. Without cash, you can’t pay your bills, you can’t market your products, and you will quickly go out of business. More importantly, you can’t grow your business if you’re not making money. As time goes on, the role of knowledge and cash gradually reverse until knowledge is more important. Your knowledge of the industry will allow you to make better decisions, keep you in business longer, and make exponentially more money which helps to grow the business.

In the early stages, it’s quite possible to make a bad decision, spend too much time or money on a project that never stood a chance, and promptly go out of business. But it is early mistakes that make a business stronger and more viable. In fact, they can save you from a spectacular demise later on when you have tons of money in the bank and aren’t paying close enough attention.

You must make as many small mistakes as early as possible while avoiding the large expensive ones. Each of these mistakes will be a learning experience, so whenever you make a mistake, be sure to pay attention to why things went wrong, how you can avoid it in the future, and what you could have done differently that would have resulted in a success. As a new business owner, you should expect to make mistakes and realize that there is an associated cost to pay for each of them, because no business has ever succeeded without making some mistakes along the way.

The cost of these mistakes will come in two forms. Time, and money. Obviously, time is money, but given the two of them, I would prefer to spend money, rather than time on nearly any given occasion, because I feel that time is far more valuable. If I spend $2,000, I can eventually make that money back. But once you spend time on something, you will never get that time back, barring of course that time machine my future self has yet to send to me. I can’t wait till I get my hands on that lazy bastard.

So, let’s say I need to write up a functional spec for some software I’m developing. I have a couple of different options. I can either write my own word processor with only the functionality that I need, go with an open source solution, or I can buy Microsoft Word like the rest of the world.

Now, I have no doubt that I could write a word processing software package. But at what cost? Neglecting the extreme stupidity of challenging Microsoft in their home territory, how many hundreds of thousands of hours would it take me to write that software? I can get Microsoft Word for around $229, and the whole suite of Office for the list price of $499.

Let’s say I’m paying myself or another programmer $50/hour. Even if we shift the decimal place one slot and figure that I could satisfy the software needs of 10 employees for the one time cost, I’m fairly certain it couldn’t be done with only 100 hours of work. If you know someone who can write an entire software package that duplicates everything in Office in under 100 hours, drop me a line. I’ve got a job waiting for them.

I’ll be saving the merits of Open Source software for another article, so humor me while I skip that discussion right now.

Money is the other cost that you will run into. Every business spends money. Some of it is required expenses, such as computers, software, office supplies, and most importantly, paying your employees. Other expenses are calculated risks. Many programmers who start their own software company are not business majors. It will take a few attempts at some things to figure out what you need to do and how to go about it correctly. Each of these attempts risks failure and each of these failures will cost you money.

Whenever you make a choice to spend money on something for your business, you should run through a quick checklist of questions in your head.

1. Is this something that we could do without?
2. If this does not pay off, will the business have trouble meeting payroll?
3. Will the business be set back by more than a couple of months if it fails?
4. Could the time/money be spent later for this instead of now?

If you can answer ‘Yes’ to any of these questions, then you should seriously consider what you are about to spend your time or money on, because it could mean the end of your business. Now, this isn’t to say that you should never do something if you answer ‘Yes’ to one of those questions. It just means that you need to seriously consider the consequences of it not paying off for you. Remember that in the beginning, you will make a lot of decisions that can severely impact the viability of your business. One mistake can kill it outright. Your goal should be to make it past the first couple of years without making a mistake like that.

After you survive the first year of business, all the while putting money in the bank for emergencies and paying all of your bills on time, you are well on your way to owning a business that will provide you with an enjoyable and flexible career for years to come.

And that’s really the reason you decided to start your own business isn’t it?