Matching Up the Three R’s of a Business Start-Up

Matt Uncategorized

When starting a business, there is an equilibrium that must be struck between what I call the three R’s – risk, reward, and requirements. 

I talk with a lot of owners who will use a term such as “I just want to make 25% on my investment” while also asking the question “How much do I actually have to work in my business?”.  Here is the thing – if there as a risk-free investment that paid 25% that you didn’t need to do anything for, everyone would do it.

You can argue that the stock market pays on average 7% every year.  Most of us are mere participants in the stock market –I am not doing much personally to drive my Apple stock higher each day.  I am making 7% for doing relatively little.  However, my entire investment is at risk.  Between October 2007 and March 2009, the Dow Jones lost 56% of its’ value.  My entire investment was at risk. 

However, for the most part, the stock market is a relatively safe investment that over time, will equal out to 7% returns.  On the other hand, some would argue that starting a small business is a much riskier investment. As risk increase, the potential reward should increase as well.   In the stock market, there is relatively little risk that my investment will every be worth zero (an if mine is, everyone else’s probably is as well).  However, as a business owner, there is a much greater chance that my investment will be worth zero.  As such, I should be compensated for taking an additional risk. 

How much extra should I be compensated?

That is a tough question and one that is personal to everyone.  Some people may be OK just being compensated marginally more.  Others, however, will want to be compensated significantly more. 

Up to this point, we have discussed reward and risk.  However, we now must turn to the requirement.  The requirement in this equation is how much are you going to be involved in the business? I would argue, for a purely passive investment (one that you don’t participate much in), your potential reward will be much lower.

When Mark Zuckerberg started Facebook, he eventually goes to the point where he needed additional funding.  Mr. Zuckerberg himself had invested a significant amount of time but relatively little money.  As most people do, Mr. Zuckerberg sought outside investment.  As we sit here today, everyone in this equation is probably happy with how it turned out.  However, Mr. Zuckerberg is the one who came out with the greatest value, in part because he was not a passive bystander. 

If you are looking to start a business or franchise that you won’t be personally involved in, your potential reward will not be as high in most cases.  This is acceptable….I am not saying that if you start a business you must be involved in it.  There are many cases where franchises, in particular, are started with the owner hiring a local manager to run the location.  However, in this instance, one must accurately weigh this into their potential reward. 

There are other factors that weigh into how one should measure risk and reward. For instance, are you making a lifestyle decision when opening your business?  While this may seem like a funny thing to consider, if you are starting a business that will give you personal fulfillment, you might be willing to accept less of a return. 

At Monkey Bizness, we believe that our concept can be run with different levels of “requirement”.  However, just as we described above, the level of “requirement” you are willing to commit will directly affect the level of reward that you should expect.

If you are interested in talking to us about becoming a Monkey Bizness owner, please reach out to us.