Is having a 'startup fund' a good idea?

Question

I am a very passionate about saving money and also starting a business. Is saving money and having a startup fund a good idea?

Note: I am asking because startups are super risky and 99% of the times you fail and lose the money.

Answer 1

Saving money for the future is a good thing.

Whether spending those savings on a business venture makes sense, will depend on a few factors, including:

(1) How much money you need that business to make [ie: will you be quitting your job and relying on the business for your sole income? Or will this just be a hobby you make some pocket change from?]

(2) How much the money the business needs up front [some businesses, like simple web design consulting, might have effectively $0 in cash startup costs, where starting a franchise restaurant might cost you $500k-$1M on day 1]

(3) How risky it is [the general stat is that something like 50% of all new businesses fail in their first year, and I think for restaurants that number is often given as 75%+]

So sometimes investing in your own business is financially risky, and other times it is not risky. Sometimes it is a good idea, sometimes it is not. Either way, saving for a future business that you may or may not ever invest in, is still saving money. If you never end up investing in a business, you can instead use that money for retirement, or whatever other financial goals you have. So it's not the saving for a new business that is risky, it's the spending.

Part of good personal financial management is making financial goals, tracking your progress to those goals, and changing them as needed. In a simpler case, many people want to own their own home - this is a common financial goal, just like early retirement, or starting your own business, or paying for your kids' college education. All those goals are helped by saving money, so your job as someone mindful of personal finances, is to prioritize those goals in accordance to what is important for you.

As mentioned by Stannius in the comments below, there is one catch here: if you are saving money for a short term goal (such as starting a business in a year), then you might want to keep it in low-interest savings accounts, instead of investing in the stock market. Doing this would remove the chance that your investments fail right before you need the startup money. Of course, this means that saving for a business that you never end up starting, could earn you less investment income on your savings. This would be the risk of saving for any specific short term goal that you end up changing later on.

Answer 2

I am asking because startups are super risky and 99% of the times you fail and lose the money.

First of all, that 99% number is exaggerated. Only 96% of companies fail within ten years. But starting your own business is not a pure game of chance. It mostly depends on how good your business idea is and if you have the necessary skills and resources to succeed with it. Yes, there is luck involved, but a smart businessman can calculate the risks and possible rewards and then decide if a certain business idea is a good or a bad gamble.

Also, a business failing does not necessarily mean that the business owner failed. A good business owner knows when to fold. A business might be profitable at first, but market circumstances might change at any time making it unprofitable. A smart business owner notices that early, liquidates the unprofitable business as quickly as possible and refocuses on their next business idea. Only those who can not let go of an unprofitable business or take too long to notice that it is failing are those who get dragged down with it.

So should you have a "startup fund"? Saving your disposable income is never a mistake. If you never end up starting a business, it will eventually serve you as a retirement fund. So yes, you should save a part of your money each month. But should you start a company with it? That depends on whether or not you have a business idea where you know you will succeed. How do you know that?

• Is there a market for your business idea?
• Are you a professional for that market?
• A real professional with relevant real-world experience, not just an interested amateur?
• Do you know how to find customers, suppliers and employees on that market?
• Do you have the time, money and nerves to start your business?
• Do you have the time, money and nerves to start your business if everything that could go wrong does go wrong?
• Do you still have money left to finance your personal lifestyle during that time?
• Do you have a source of income you can return to when your business fails?
• Do you know the basics of business administration (how to do a cost-benefit analysis, how to do bookkeeping, how to pay taxes as a business, which laws and regulations apply to your industry, etc.?)

When you answered yes to all of these questions, then you might want to consider it.