Hollywood producers say “never spend your own money.” I agree.

Ah, my first post. To this particular blog, anyway. I could do what I usually do and agonize over how to introduce myself and this blog, but I think I’ll just jump right in. Consider yourself welcomed.

I’ve started a lot of businesses in this lifetime. Depending on how you count, it could easily be over a dozen. I try to launch at least one new product or service every year.

I’d like to do more, but there are only so many hours in the day. So, I enjoy talking with other entrepreneurs and following their ventures. Some are serial entrepreneurs like myself, and they start a lot of businesses. Most of those businesses fail or don’t perform as intended, but that doesn’t bother them much, they learn from it and keep starting new businesses.

Others would be more accurately labeled “wannabe entrepreneurs.” The wannabes usually want to hire my web design company to build them a big expensive web site, which they plan to finance with a bank loan.

Hearing plans like these puts me in a forehead-slapping mood. The simple fact of the matter is that most businesses fail. No one plans to fail, obviously, so we are talking about failures that you don’t and can’t expect. And not necessarily because of a bad idea, bad plan, or bad execution. Everything can go right, then one day, your parents fall ill and you decide to shutter your business to spend more time with them.

You need to start with the understanding that the odds of your business being around in 5 years are slim to none. You need to be 100% okay with that. It’s really not a big deal.

Most of the first-timers I’ve met seem to believe that every failure is avoidable, and a failing business can always be saved (usually with more money). They want to put everything they have and everything they can get into making their venture successful. When it ultimately fails, their crushing debt and lost life savings are a constant reminder of their failure, and their first venture becomes their last.

How do you avoid this destructive line of thinking? For me, I recognize that there’s probably only a 1-2% chance that the business I’m starting now will be my last, and maybe only a 50% chance it will be the last business I start in the next 12 months. With this in mind, I tend to be very conservative in the way I finance new businesses.

While not everyone would agree with my way, I still like to preach it anyway, so please bear with me.

My way recalls that old Hollywood adage: “Never spend your own money to make a picture.” This is usually seen as a way to stick some poor sucker with the bill when the movie inevitably flops.

In Hollywood, maybe. But in business, if you can’t convince your fellow businessman to open his wallet, it means one of the following:

  1. Your idea is bunk.
  2. Your idea is good, but not yet fully developed. For example, perhaps your target market is too small, or incapable of paying the price you’d need to sell at to be profitable.
  3. Your idea is good, your plan is sound, but your pitch is not compelling. If you can make your product but you can’t sell it, failure is assured.
  4. Your fellow businessman is broke. Why’d you pick this guy?

So to validate your idea, your approach and your pitch, try to get someone else to finance the development of a new product or service as a way to make sure that my idea is sound.

But that someone should not be a bank. And unless you’re experienced, probably not investors either, and especially not venture capitalists. Remember, we’re looking for a low-risk approach. We don’t want to start deep in a sea of red ink, clawing our way to the surface. It’s a difficult and demoralizing path, especially for the first-timer.

Here’s what I do. I develop a concept, on paper, in my spare time, in enough detail that I can price it, determine a target market, and estimate what level of sales I need to be profitable. (If I can’t get this far, I do more research, or I just shelve the project for a while and work on a different one.)

Once I have my rough plan and pricing, I try to pre-sell the product or service to a few pilot customers. At a tremendous discount: remember, these people are paying you, in advance, for something that doesn’t even exist yet. Do make sure, however, that they would also pay the regular price if the product did exist.

If enough people bite, you have some capital to build out your concept. If not, either cancel the project and return the money, or rework your concept and try again.

There you have it. A simple and effective way to validate your business model, test your sales skills and raise money, with minimal risk for all involved.

Now get out there and launch your product! Then come back here and tell me about it.

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