Before you start: are you even ready? (part2)
Key aspects of building mental and financial resilience. As no one can guarantee startup's success, make sure to don't sabotage yourself. Part 2: Financial Preparation.
So, you've decided to build a startup. If you're fortunate enough to have identified an urgent and repeatable problem, you might jump straight into development.
However, even then, you'll need time to find product-market fit, onboard your first clients, and more. Even if your assumptions prove correct (and they often won't, as you'll learn through numerous pivots), you'll still need time from your last salary to the first salary you pay yourself.
In the previous article I was writing about mental preparation, this part is about finances but it’s clearly not an investment advise. It’s just a thought process that I followed to prepare myself for entrepreneurship.
You might be wondering, "How much do I need to start"? There's no universal answer, but I decided that having cash flow for 12-16 months would be sufficient to kick off. If I fail, I'll still have enough to pay my bills and find a job.
Of course, there's pre-seed VC and angel investors' money, but are you willing to give up a significant portion of equity just to validate your idea before even building a prototype and finding a client? They’re not there to give you money, they need return on their investment - can you deliver without any traction?
And conversely, are they willing to trust you enough to deliver returns despite having no traction or expertise in building from scratch?
My answer was: NO, and it took me about two years of preparation.
Shall we start?
Build a Safety Net & Financial Intelligence Early On
I recall reading "The Psychology of Money," and what resonated with me most was
“Your net value = your ability to generate income - ego.”
It was a shock:
Do I really need this car that costs more than a mortgage?
Do I need to eat at that restaurant and order Ardbeg instead of regular drink?
Can't I ride a bike or walk instead of using Uber?
Questions started to pop up and made me realize that while working in a high-performance, well-paying industry, I had fallen into the trap of cost-of-living inflation.
Rebuilding financial habits takes time, so don't wait - start distinguishing needs from wants.
No one will decide for you whether you should have a mortgage or where to live. For me, the best option was to buy a plot instead of making a down payment on an apartment and keep renting to stay flexible. For you, it may be different.
But get rid of all leases, consumer credits, and 0% installments—they will hurt your burn-rate when you stop making 9-5 money.
On the other hand, ensure you don't have to worry about how you save, where you put your savings, which accounts finance your company, and which are for your pension—maintain basic financial hygiene.
In the Polish context, I highly recommend “Finansowa Forteca” by Marcin Iwuć and “Atlas Pasywnego Inwestora”. For your local equivalents, just ask Perplexity to recommended similar approaches - it’s pretty good use of AI :)
Let’s be honest: If you're not ready to handle your personal spending, how can you manage a company's Profit & Loss (P&L)? Start small with a home budget and keep learning, as building financial intelligence is an ongoing process.
so…
Learn the Basics of Corporate Finance
…Don't wait until you have your own company to start budgeting—begin with creating a personal and household P&L.
For Polish readers, there's no better resource on home budgeting than “Finansowy Ninja” and Michał Szafrański's blog.
Then, take on a more mature role in your company by owning any P&L or cost center. Asking your boss for conference tickets with flights and accommodation is easy, but calculating whether you can afford it in your P&L and ensuring other employees can go will teach you a valuable lesson.
Understand the finance sector. Yes, you're building tech, but you might want to raise a round, sell your company, or make it a healthy dividend-generating one. Use your prep time to learn about capex/opex, understand EBIT, and the difference between revenue and gross margin.
Make sure you understand the game you're playing - learn basic financial metrics and their implications of business’s health. Doing a master's in finance with CFA was too much of waste & effort, so I dropped it. However, working with controlling and finance on data strategy and reporting towards Private Equity shareholders helped me understand what funds care about.
Recently, someone I trust recommended the book "Financial Intelligence" by Karen Berman and Joe Knight. I haven't read it yet, but it seems like a good starting point if you’re new into the field.
Don’t Put All Your Resources Into It*
*(Apart from time and commitment, you need to be more than 100% on board!)
Experts will tell you to start small and keep your 9-5 job until you find the right idea—listen to them. I'll cover product discovery approaches in later posts, but finding the right thing to work on takes time.
For me, it took about five months. Starting from day one with "I want to build a startup, but don't know what kind" wastes personal savings.
Another option is to have a second source of income. I decided to mitigate risks by spending 1-2 hours a day on growth consultancy, maintaining a healthy balance of financial income.
Also, know what to do if you fail and set a deadline. Instead of chasing unicorns, maybe consider getting a job in your field and returning to the challenge after finding your niche?
For me, it's one year of full commitment, with a backup of six months to rethink and find a job without touching pension funds or getting into debt.
Help Yourself by Fighting “Fast Thinking” and “Black Swans”
To make the most of financial preparation, understand two key concepts about decision-making processes and world uncertainty.
First, from Daniel Kahneman’s “Thinking, Fast and Slow”:
Our brain works in two thinking systems:
System 1 is fast, automatic, and intuitive. It operates with little effort and leads to errors—it's an autopilot.
System 2 is slow, deliberate, and analytical. It requires effort and is more reliable for complex tasks.
We fall into traps called biases. IMO the most important are:
Anchoring bias: We tend to rely too much on the first piece of information we get, leading to poor investment/saving decisions if the initial data is misleading.
Availability heuristic: We make decisions based on recent and readily available information, leading to overconfidence or avoidance of certain opportunities based on recent events.
Overconfidence bias: We overestimate our ability and knowledge, putting our finances at risk.
Learn how to use System 2 and how to avoid biases in financial decisions - you don’t want to find yourself into troubles by allocating all your money into NVIDIA, because semiconductors/bitcoin/”you name it”/ are a safe bet (for now).
Second, from Nassim Nicholas Taleb’s “The Black Swan” - that teaches us about extremely rare and unpredictable events that have a huge impact on financial markets and economies. Fun thing is that after they occur, people rationalize them as if they were predictable (everyone supported “The Big Short” main character and knew about housing market crash, right?)
Understand his “barbell strategy” (allocating a large portion of the portfolio to safe investments that protect from black swans and a smaller portion to risky investments with potential for large payoffs).
Think about different scenarios and avoid overreliance on financial models and predictions.
By doing so, you'll build a safety net that can endure shocks without destroying your budget and even benefit from disorder. Thus, aim to become "antifragile." (also Taleb’s concept - read about it!)
…
And more than ever, be cost-cautious. In the next episode, I'll cover “Why You Shouldn’t Attend Fancy Conferences,” as I just did this week, aka “focus on building, not on spending” :)