How to Go From Unemployed to Entrepreneur

With the economy losing jobs, people might try starting their own businesses.

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It's pretty hard to feel good about these unemployment numbers. But if you've lost your job and have thought about starting up your own business, then I highly recommend this personal account by Steven Miller, a manager at Standard & Poor's, about how being laid off led to his new identity as an "accidental entrepreneur." His story shows the truth to the saying "necessity is the mother of innovation." His unemployment led him to start his own commercial loan analysis business, which he later sold. The silver lining in the unemployment numbers is that many people may find the courage to be entrepreneurs after job losses.

The problem is, if you've recently lost your job, you're going to be looking for security. That's not exactly the life of an entrepreneur. But Miller has some tips for how to overcome the uncertainties of striking out on your own:

1. Do what you know . It seems obvious, but everyone I know who has made money as an entrepreneur has done so close to home where their knowledge, rolodex and experience are the deepest.

2. Surround yourself with excellent partners . Last year I got involved in a new start-up business called Black Mountain Systems. I was invited in as a founding investor and director by my friend Mike Zupon of The Carlyle Group. Mike insisted that when we went out to raise money we did so by tapping strategic investors who would be more than a wallet for us but also provide us with (1) a starting list of potential customers, (2) a circle of strong references and (3) an aura of inevitability in the space by tying the business to an A-list board and investor group.

3. Have enough of a cash cushion . Like all entrepreneurs, I hate dilution. But I found with our start-up and the several others with which I've been involved, sales come more slowly than expected and collections even more so. There are two times in the life of a start-up where raising money is most advantageous. The first is at the outset when you are dreaming big and dazzling folks with your business plan, your charm and good looks and your potential.

The next time is when your business is cash flow positive. Between those two events, however, the entrepreneur is playing a weak hand. Venture capitalists and even angle investors can be demanding because without their money you may be stuck. With this in mind, I've come to view it wise to raise enough money at the beginning to weather the inevitable challenges in developing your product, selling it and, most important, collecting receivables.

Just how much to raise is a complex decision and forces the entrepreneur to weigh dilution against financial wherewithal. In my own experience, raising an amount equal to twice your peak year-one cumulative loss is a good amount to raise—enough to give the start-up a decent cushion without crushing the entrepreneur's initial stake in the business.

4. Be in business . My friend Mike Rushmore is an accomplished entrepreneur and my partner in Black Mountain. When he started up his LoanX business, he used to say over and over: "the first rule of being in business, is being in business." Sage advice indeed.

5. Family support . This last point, I think, is the most important. If you are in a relationship, a committed, supportive partner can make all the difference. Certainly, in my case she did.