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For some people, side hustles are a way to earn a little extra money. But for those who aspire to start their own business, they’re a chance to test drive ideas that could become something much bigger than an evening or weekend endeavor.
Some very familiar tech companies got their start as side projects, including Groupon, Twitter, Craigslist and Instagram (which began as Burbn, a location-based app for whisky lovers). And, in some ways, it’s easier for today’s gig workers than it was for those founders to advance a side business into a fully-fledged startup. Here’s how experts suggest you make the transition.
Resist the temptation to go all-in too early
Being excited about transforming your side gig into a full-time startup is a good thing, but Shark Tank star and FUBU founder Daymond John warns that you also have to keep one foot planted firmly in reality. Do the math. Know how much you’ll need to make in sales to generate a profit that will match the salary of your current full-time job. It can slow the launch, but it ensures the transition will be smoother. That’s exactly what he had to remind himself to do as he was building his apparel company.
“Where I really wanted to go [as an entrepreneur]?” John told Inc. “I put 20 percent of my time into that while paying attention to my core [day job] business.”
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By holding off on making FUBU his sole focus, he was able to reinvest profits into the business, letting it grow while he paid his own bills with the salary from his full-time job. FUBU eventually became a company with $350 million in annual sales.
Move methodically
Hunter Ellenbarger, founder of Star Quality Studio, a design studio and creative consulting firm, agrees with the advice of going slowly. What started as a side hustle with him creating social media campaigns and content for artists and creators is now a full-time business. But he says if he had focused on it to the detriment of his job (as a member of YouTube’s marketing team), it could have turned out much differently.
“People should avoid leaning too hard into the hustle culture that will burn them out,” he says. “If you’re experiencing burnout, you probably won’t really have the creative fuel needed to build toward the career opportunities you want.”
Consider whether you want funding
As you get a better sense of what needs to be done with your fledgling startup, you may also find yourself facing funding needs. With a startup, especially one born from a side business, that will most likely be people from your personal circle. And there are unique risks, should you decide to accept their offers and even before you dip deeply into your own bank accounts if you have a spouse or family.
“When pitching friends and family, be confident but also lay out the worst-case scenario: ‘I don’t know when you are going to get this back. You may lose it all. I may need you to up the ante in order to prevent dilution,'” says Meg Cadoux Hirshberg, author of For Better or for Work: A Survival Guide for Entrepreneurs and Their Families. “Insist on drawing up shareholder agreements. Explain that you’re doing so because you care about the relationship. There should be no ambiguity, no cause for recriminations. Don’t take advantage of their eagerness to help.”
The SBA microloan program may also be an option, with loan sizes of up to $50,000 for equipment, working capital, or other business needs.
Assemble the right team
Side businesses don’t have to be solo ventures, and they’re often easier when you’ve got partners. But if you’re planning to convert that side project into a full-time endeavor, you’ll need to ensure that your co-founders are on the same page, and are willing to make the same sacrifices you are. And that’s a conversation you should have early on, Phillip H. Kim, associate professor of entrepreneurship at Babson College.
“It’s rare that all founding partners are equally committed,” he says. “How much time each will invest, what opportunity costs each will accept, and the level of ambition each has may differ. That’s especially true if one founder had the original idea and brought on the others, or if one founder devotes himself to the business full time while his co-founders hang onto their day jobs. You should all acknowledge disparities up front and address them to avoid disappointment.
Think like a corporation
Even if you’re still in the early stages of exploring a side business, it’s wise to view it as a startup for tax reasons, says Ohio-based CPA firm Harper & Co. Open up a separate bank account and credit card for income and expenses. Keep detailed records and set aside funds to cover your tax obligations. The IRS will let you deduct up to $5,000 in business startup expenses the first year, which could help your capitalization efforts.
Taking these steps will not only avoid any trouble with the IRS, it helps put you in a founder mindset, which can give you more clarity as you decide whether this side business is worth converting into a fully-fledged startup.
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