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Just read a Seattle 2.0 post by Mark Maunder entitled, “Should I burn my 401K to start a business?” I must admit that I like reading stuff like that, because running small businesses is a risky proposition on any day, and even the smallest thing can inspire me.

That said, for many reasons (including those raised in comments that readers have attached to that post), the question is moot: most people in their 30s don’t have significant savings, and the tax penalty for breaking open your 401K is way too steep for it to be worth it, and it wouldn’t be enough anyway.

Plus – and I’ll say up front that I get that the point of Mark’s post was probably to be inspirational, rather than literal – the figures he uses strike me as misleading. And that’s a relevant point here, because while entrepreneurs are typically viewed as risk takers, the real secret to entrepreneurship is understanding and mitigating risk, not just taking it (but, inevitably, you’re still going to have to be tolerant of risk if you’ll walk this path).

For example, referring to Mark’s figures, you must realize that funding a startup in your 30s, from your 401K, such that the startup is profitable in two years and then sells five years later at a price that nets you $5 million is way beyond a long-shot.

But, assuming you’re sufficiently risk tolerant, have some business savvy, marketable skills, etc, there are some more constructive questions to ask than, “Should I spend my 401K on my start-up?” Here’s a convenient list:

  1. “Should I leave my current bigger-company job in order to join a start-up that’s already got some funding?”
  2. “Should I keep my day job for another year or so while I try to grow my thing on the side?”
  3. “Does my current employer have an incubator team that I could join while I seriously consider my options, write my business plan, etc?”
  4. “Have I ever worked in sales or marketing [if I’m an engineer], or etc [etc]?”
  5. “Can I think of a service-based business model that would be cash flow positive in the first month?”
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2 Comments »

  1. Also depends on what you’re trying to do. A friend went off to make a small consulting business, and that isn’t a huge deal - you just have to pay yourself, maybe a couple of other people. If you want to make a real company, then ask yourself what skills you don’t have, and figure out where you’ll find people to do that. For example, I’d be a lousy CEO, and a worse CFO. If I were going to do a start-up, I’d need to locate people that I really trust to do that, and are good at it. You really need both trust and competentcy - the venture cap people may not cough up someone who has either.

    Or even if I have the skills, maybe I need to delegate some of that to focus on the overall company. I hooked up with a start up at a very early stage (Internet Security Systems), and one of the reasons it succeeded was the founder knew what he wasn’t good at, and hired good people to do those things. Plus he had a lot of luck, and made a few really excellent hires.

    Last bit of advice - keep it lean, and take as little funding as you possibly can.

    Comment by David LeBlanc — January 25, 2010 @ 9:57 pm

  2. I think it also depends on what the start up will be doing. If you are doing it because you want to be your own boss and have the flexibility to call the shots, make all the decisions, enjoy all the rewards, suffer all the losses yourself, etc. there is merit to that. If you are doing it to have a flexible schedule so your spouse or significant other can head off to school, or to raise children, then has off to you if you can make a go of it.
    For some, it is definitely about control. Especially in a bad economy we see it all around us. Suits making poor decisions, or ones that everyone knows will cost more in the long run (layoffs) than they are worth. As you go thru your 30’s and head towards the 40’s, your needs change as do your desires. However, to all of you bold enough to give it a go in the face of those who are afraid, a tip of the cap to you is in order.

    Comment by Richard Roy — January 27, 2010 @ 10:34 am

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