In the fall of 2009, Alyssa Richard left her $70,000-a-year job in Toronto to spend a couple of months on a Hawaiian beach mulling over what to do next. A graduate of Queen's School of Business in Kingston, Ont., she knew it was time to launch something of her own. As an associate consultant for business consulting firm Bain & Company for two years, she was familiar with U.S. mortgage websites, so she focused on the online mortgage market in Canada, which she believed was under-served. When she came back in January, 2010, Ms. Richard founded RateHub.ca, a website that compares Canadian mortgage rates to help consumers find the lowest rates in one place. The company monetizes its traffic by selling leads to mortgage brokers.
The transition from employee to entrepreneur hasn’t been easy for the 26-year-old, who had to adjust her personal spending. As a young professional with a healthy salary, she had a certain lifestyle she enjoyed with her friends. While she’s chosen to invest her money in a business, her friends have continued on with their career trajectories and lifestyles, which sometimes leaves Ms. Richard with difficult choices.
“When you’re going from a salaried position to starting your own business, you’re investing a lot of your savings and your salary goes down, sometimes even to zero,” says Ms. Richard. “I had to eliminate dinners out whenever I wanted, shopping trips to the U.S. and vacations, as well. Now, for the first time, I find I can’t afford to buy my best friend a wedding present or go to the bachelorette [party]or do these things I used to do without thinking about it. So it’s changed how I live. That’s a challenge I hadn’t really thought about before.”
But Ms. Richard has no regrets about starting the business. She believes that the longer you spend in a corporate job – and as your salary and responsibilities increase with a mortgage and family – the harder it is to start something on your own.
“The sooner, the better,” says Ms. Richard. “Now is the time. I’m not married, I don’t have kids, I can take those risks. I feel blessed that I’m doing it at this stage of my life.”
As Ms. Richard reflects on her experience, Barbara Garbens, owner and president of B L Garbens Associates Inc., a fee-for-service financial planning firm in Toronto, offers her advice.
Ms. Garbens feels that at 26, Ms. Richard is more of a rarity than a typical entrepreneur. She sees her as mature and with a lot of confidence that not everyone has at that age.
What she thinks Ms. Richard has done right is that she’s been able to take her business management knowledge from Bain & Company and apply it to her own business. She also approves that Ms. Richard has kept her personal finances in order.
While Ms. Richard seems to have all the criteria she needs to succeed, she says that lot of people who start a business in their mid-30s and 40s have an advantage because of their experience, a more established network and savings, as well as potentially a dual income with a spouse or partner.
“Most people starting out need to build a network first and get some experience,” says Ms. Garbens. “You need to be practical and have money saved so you can support yourself and make sure your idea can fly.”
Debt load and expenses
Ms. Richard doesn’t have any dependents and very little personal debt (less than $2,000 on her credit card). Because she works from home, RateHub.ca covers a portion of her rent, leaving her with $525 in rent, plus a third of the utilities. She tries to keep grocery costs down by participating in a supper club and uses the subway as much as possible. Each month she has some left over from her current annual salary of $40,000 to spend on dining out and entertainment – her acknowledged weakness.
Her biggest cost is five full-time staff. Her only paid advertising is Google AdWords.
“She not bleeding and has very low debt,” says Ms. Garbens.
But Ms. Garbens is concerned that with five staff full-time on salary, Ms. Richard may have more staff than she needs and recommends she keep an eye on costs. She suggests that Ms. Richard automate as many processes as she can, which could help with costs, as she may not need as many staff. Also, if there is staff changeover, it’s a much smoother transition if there are established processes in place.
Financial planning before launch
Ms. Richard’s personal investment in the business was nearly $30,000 of her own savings. Since then she’s been earning "sweat equity" through her time and by drawing a reduced salary. She had seed investors from the beginning, which made it easier for her to launch the company. The trade-off is giving up equity early on, she says. Her one regret is not saving as well as she could have during the two years she worked for Bain & Company.
“If I could go back, I’d be more frugal, like the way I live now, and then I would have had more to invest in my business,” says Ms. Richard. “I would have been more aggressive about saving.”
Ms. Garbens backs up that idea. Have a nest egg, she advises: You need an emergency fund of about six months' income to carry you if the business doesn’t pick up right away. You also need a network of people who will refer business to you. Otherwise, it’s tough to get started.
And a business plan is crucial, she adds.
“Think it through before you take the plunge,” Ms. Garbens says. Before leaving your job, think through how you’re going to make money, how you’re going to market your product, who you’re going to call for networking. “Put some ideas on paper, brainstorm with friends, do some market research about the idea to see if there’s a need for it, and a need in the area where you’re going to launch. Talk to people who are in the business and ask about the hurdles they’ve had to overcome. Sometimes you can piggyback by being an intern in a company to someone with the same job to see if it suits you.”
You can’t avoid deviations from the business plan, as unexpected things inevitably come up with a start-up. But a business plan is like a blueprint.
Finally, she says that, if you ever dream of running your own shop, watch your debt level. Pay off debts as fast as you can before you launch anything.
Financial challenges during start-up
“In early 2011, the company needed a cash injection, but I was tapped dry,” says Ms. Richard. “I desperately wanted to keep my share of equity, but I needed to pony up some cash. I was very tempted to cash in my RRSP that I accumulated while working at Bain, but had promised myself I’d do everything possible to keep it. In the end, I ended up moving to drastically reduce my rent, and negotiated with my other shareholders to draw a lower salary throughout the year to meet my buy-in.”
Ms. Garbens suggests entrepreneurs be prepared for such situations by disiplined budgeting.
“Pay yourself first, then put aside 10 per cent and save it,” says Ms. Garbens. “That way you learn to live on what’s left and you never really ignore yourself.”
She recommends dividing expenses into discretionary expenses and fixed expenses. Fixed are what you absolutely must pay for, such as the roof over your head and groceries. Discretionary ones are what you want, but don’t need.
“Do you need those new shoes?" she asks. “Probably not. But if your rain boots have holes, you do.”
Ms. Garbens's other tips include: Pay attention to taxes. People might not use an accountant or a tax preparer so they don’t necessarily know the big picture. Tax planning can help you make sure you don’t leave any money with the CRA that has your name on it. And if you've invested outside your business, for instance in the market, look out for the costs, such as fees. Over time, they may erode your wealth.
Ms. Richard's company is approaching the break-even point, according to Ms. Richard, but there are many growth opportunities she still wants to invest in. After a year and half, she realizes that building a profitable company is a marathon, not a sprint. Her short- to mid-term goals are to hit more than $1-million in revenue, have a profitable business and be able to work from Maui one month a year.
“You see traffic, revenue and profits grow, but never as fast as you’d like,” says Ms. Richard. “You hit your goals and milestones but you’ve already set bigger ones and it’s hard to stop and appreciate the progress that’s been made. You need stamina and determination to keep growing and pushing the envelope.”
Ms. Garbens suggests Ms. Richard think about a longer-term issue: her exit strategy. While Ms. Richard is a long way from that, Ms. Garbens suggests she start thinking about it now, in case factors affecting her business change, or her passion for the business wanes.
“A lot of people leave it until the year before they want to retire. You need to think through the process of leaving the business about seven to 10 years before you actually do."
“As an entrepreneur, you’re exposed to a lot of risk and you just have to be able to block it out, deal with it and move forward,” Ms. Richard says. “No regrets. If this business should go under, I’m confident in my ability to go out and get a job.”
Special to The Globe and Mail