Seven Kinds of Entrepreneurial Debt

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When I need to relax, I paint little miniatures. It’s a hobby I have had since I was a teenager, and once a nerd, always a nerd.

But as an adult nerd with disposable income and dedicated “hobby time,” I am part of a community, and I ran into a YouTube video of a fellow hobbyist talking about “hobby debt.”

Miniature painters tend to amass more unpainted little orcs and space marines than they can realistically paint. It’s not just that this is money spent unwisely —and this particular hobby is quite expensive— no, it’s also about cognitive load. If you know you have a whole army of undead skeletons to paint, you quickly feel overwhelmed whenever you consider picking up that brush.

That got me thinking: what kinds of debt do we have in our entrepreneurial lives? What can we do to deal with them, and how can we avoid overextending ourselves?

Before we dive into the particular kinds of debt we can find in our businesses, let’s clarify: debt itself isn’t good or bad. It’s a tool. It’s leveraging today at the cost of tomorrow. Sometimes, debt is a perfectly adequate way of reaching eventual ownership, as we can see with mortgages for homeowners. But there are also disastrous outcomes of mismanaged debt that we can only avoid if we know what’s looming out there in the dark.

Pressure from debt is real. Many people develop mental health issues because they can’t handle the mental and institutional pressures from owing: be it money, time, attention, or responsibility.

So let’s talk about seven kinds of entrepreneurial debt: financial, technical, knowledge, operational, relational, emotional, and physical debt.

Financial Debt

When people think of debt, the first thing that comes to mind is money. Borrowing means doing something sooner than you could otherwise but paying interest until you have paid back the full amount — and then some.

Financial debt is a common thing in business, and it’s all around us. Most old-school small companies take a bank loan or a mortgage at some point in their journey. A farmer who needs to build a new barn goes to their credit union to get some financial support. A flower shop establishes a line of credit with their business bank so they can get through an unexpected price hike for imported roses. Accounts payable become a massive source of debt at a certain size, as revenue is trickling in over time.

For digital entrepreneurs, this looks a bit different. Particularly in the Indie Hacker space, funding is rare, as the businesses established here are usually low-expense and high-margin, particularly when they’re self-funded. We settle our subscription invoices the moment they’re being generated, as we use credit card captures and direct PayPal debits. This immediacy removes a lot of debt from our day-to-day lives. Still, it also makes it harder to use money as leverage: we’re restricted to using revenue from annual plans and lifetime packages to finance the growth of our self-funded businesses.

Some businesses take the VC route. Venture capital may not be debt, as it’s equity, but there are several forms of venture debt that still allow sizeable cash injections into businesses without giving away huge swaths of business ownership.

Other businesses choose a hybrid model of bootstrapper-compatible funding, such as the Calm Company fund or TinySeed.

No matter where financial debt comes from and what it looks like, it’s an obligation. It binds your entrepreneurial goals to the financial goals of someone else.

You have to be absolutely clear about this before entering into such a relationship: you might need to realign your plans to work with different incentives than those you set out on your business journey. If you think you can handle that added pressure, this might be for you. If you want to retain complete control at all times, you’ll need to build a customer-funded business from day one that comes with its own restrictions.

What definitely won’t work is attempting to build a moonshot business without a budget. If your dream is to disrupt the online education industry, you’ll need access to significant amounts of financial resources. But if you’re set on building a lifestyle business —something that allows you to live your life the way you want— and help a particular group of online teachers have an easier time at work, you likely won’t need debt. This was my experience building FeedbackPanda, at least: we started it as a side project, it grew organically into a self-sustaining business, and it stayed that way until it got acquired.

Financial debt also introduces risk to your business beyond the risk of a predictable goal misalignment. If you fail to make interest payments, you invite repossession, further debt (to cover the initial obligations), and liabilities that make your business less attractive to acquirers.

As I said earlier: debt is neutral. It’s a tool for leverage. But like any tool, you have to know how to handle it. My recommendation is to avoid it as much as you can unless you’re absolutely sure you can’t make it happen on your own.

Technical Debt

But enough about money. Many other and more surprising kinds of debt deserve to be talked about.

Let’s look at technical debt, a concept that is well known to most developers but often unheard of for new entrepreneurs. This term was coined by Ward Cunningham back in the early nineties to communicate the true cost of short-term hacks for a business. A quick solution today is a refactoring obligation for the future. That way, technical choices that aren’t well thought out eventually result in reworking old features, leaving less room for building new things. Like financial debt, this causes interest payments, just of a different kind.

And that’s not always a bad thing. Suppose your quick and dirty solution of today allows your business to prosper so you can later hire several engineers who will clean up the code at a later point. In that case, that’s a better choice than spending months building the “full” feature yourself without a new single customer.

Still, this is where technical debt falls short of the predictability that we experience when taking a loan: with financial debt, we know the principal, we see the interest rate, and we can calculate how much we’ll have to pay, overall. Technical debt is much more nebulous: maybe the quick feature we built doesn’t need to be maintained at all, as the business pivots away from the need to offer such a feature. Or maybe, what we expected to be refactored in a few days turns out to take a whole rewrite of the entire product, costing us months of development time. There are a lot of contingencies here, and we often won’t be able to adequately assess them until they actually occur. Tech debt estimates are hard.

Particularly when you’re just getting started. Everywhere you look, experienced founders tell you to build a Minimum Viable Product. You’re not wrong to wonder if that isn’t just another way of saying, “incur a lot of tech debt before you even have customers.” Such a prototype is usually built in a way that won’t scale without significant rework.

It’s built for that reason because you don’t even know if the business is going anywhere. That’s the leverage part of tech debt: if you save time today to not waste weeks and months building a product that nobody would pay for, it’s very effective debt. But once you have found a repeatable business model and face the interest payments (or the risks of not paying them), your debt becomes a genuine liability.

This is the kind of debt that I’d recommend for you to take on, particularly in the very early stages of your business. Yes, your prototype might not scale well once you have a few hundred customers. But if they are paying customers, you also have the resources to throw more computing power on the problem or get it fixed from the ground up by a hired helper.

If you’re not familiar with the problems that can happen at scale, read up on them. Tech debt is something that you’ll face eventually. Be prepared.

Knowledge debt

And preparation leads us to another kind of debt. When you are building your very first business, you’re likely relatively inexperienced. Even if you have an MBA, the reality of “jumping off a cliff and building the airplane on the way down” will require a lot of experimentation and learning.

That learning comes at a cost. Every day that you spend trying out new things and learning from your mistakes creates a time debt: you can either spend an hour learning how to deal with tax filing procedures in your jurisdiction, or you could spend that hour learning from customers.

The reality of building a company —any kind of company— means that you have to redirect a lot of your attention to things that are not relevant to your core business. The time you invest and the growing pains you struggle through are the interest payments for that knowledge debt. It’s a kind of opportunity debt — you stand at a crossroads, and you can only take one path out of many.

Every minute away from your customers is a minute you have to spend with them at a later point. It’s a minute where something you should learn for your business’s success is supplanted by something you have to learn due to external pressure.

Obviously, this is unavoidable. It’s needed. After all, businesses don’t exist in a vacuum, and once you know what to do, it becomes much more manageable. But it is something that founders aren’t quite aware of until they are thrown into the deep end.

The antidote to knowledge debt is automation, documentation, and eventually delegation. Anything you learn can be turned into a Standard Operating Procedure — first for yourself, to save you time next time you have to execute the task, and then for someone else to do it in your stead.

Hiring people isn’t just about increasing revenue. It will also clear your mental schedule: the more you can focus on the things that matter more than anything else, the more impact you’ll have on your business.

There is another perspective here, too. You can learn too much about a particular topic. Many entrepreneurs are avid readers and consume as much as they can before jumping into working on something. Well, you can over-learn — overemphasize the theoretical part of entrepreneurship — which similarly reduces the time you have for experiential learnings. This debt will never come due: it’s time you take away from something else that would have been a higher-leverage activity. Since we only have a limited amount of time for many activities, prioritizing what needs to be done to keep the lights on is a fundamental task for founders and a great opportunity for leverage.

Operational Debt

A business won’t run without day-to-day stuff like sending messages to customers who haven’t paid their invoices. Someone needs to keep maintaining the knowledge base. There are always things to do just to keep things going.

And you’ll be cutting corners for this reason. Instead of spending an hour on an infographic for a quick post, you create something fast that will get the point across for now.

But then, people start retweeting it. And your social media contractor uses it in another post, maybe even in a video. What you thought would be quickly forgotten is now on your permanent record. This is an example of marketing debt, and you’ll find this in every part of your business because it’s fundamentally unavoidable in a world where time is the most scarce resource.

Similar to knowledge debt, incurring operational debt is deferring the important for the urgent. With anything you do that needs to be done today, you miss an opportunity to do what should be done today. The solution? Again, establishing processes and getting other people to do it.

It’s a lesson I learned very painfully for myself while running FeedbackPanda. We hired way too late: I was mired in the customer service conversations and random interruptions that my actual work —building features and integrations that would make our product better— was delayed and done without the proper focus it deserved.

This very much changed when we handed over the business to our acquirers: even while we were still on board during the transition, the fact that I had a developer to help me out made a gigantic difference. I should have done this much earlier. If you think “you can still handle everything,” be warned. You’re stretching yourself thin.

Emotional Debt

Being overwhelmed will eventually take its toll. Many founders report stress, anxiety, burnout, and other kinds of mental health challenges.

The more you focus on your business, the less you’ll find time for self-reflection.

And it goes further than that! The people around you are impacted by these things as well. If you have an understanding partner or go at it completely alone, that’s less of a problem. But we all have responsibilities outside of our entrepreneurial circles, and we’re expected to show up still and do these things, no matter how we feel.

And running a business is an emotional rollercoaster. When you’re bootstrapping, every new customer is a step towards financial independence and a source of great joy. But where there’s light, there is dark. Every canceled subscription is a reminder of how brittle your business is. It’s stressful to know that you’re one step closer to bankruptcy with every ex-customer — even if that’s just imaginary.

These triggers cause real emotions to surface. And whenever you ignore them, you acquire emotional debt.

The core problem with emotional debt is that it’s a kind of debt that can’t be solved by anything but focused reflection and digesting all aspects of the feelings we feel. Integrating traumatic and stressful experiences into our lives needs time and opportunity that we rarely have in our busy founder lives: I don’t recall ever having a day that was less stressful than the day before during my entrepreneurial journey with FeedbackPanda. There was always something: a customer canceled, a bug appeared, an integration needed last-minute adjustments, and new regulation was introduced that ravages the whole industry. Always something.

Over time, those experiences add up and turn into anxiety or even worse mental health issues. Unless you find time to take a break —a real break from your business and everything that has to do with it— you will keep carrying these things around with you. To resolve this, I recommend setting up processes that allow you to detach from the business — and that’s definitely harder said than done.

Even worse, apparently, technical debt has a direct compounding effect on emotional debt. That’s not surprising: when you know that you’re facing a complete rewrite of your whole application, can you really be joyful about building a feature today that you know will be scrapped a month from now? It stresses me out just thinking about it.

Consider therapy, downtime, finding distraction and relaxation in hobbies that give you an outlet for emotions. You can’t let these things fester in your mind. They need to come out, be worked through, and integrated as learnings and experiences.

Relational Debt

Not only do you need to deal with these high-potency emotions, but you also need to keep an eye on the relationships you form and maintain while building your business. You can only ask your co-founders to pull all-nighters so many times. Overpromising and underdelivering for a prolonged period of time will cause discord and animosity among your early believers.

In business, relationships are everything. From purely transactional relationships (between your business and its customers) to long-term partnerships based on trust, you’ll only find business success when you foster and maintain real connections with real people.

This extends to your life partners and family members as well. When you dive into a business, you’ll likely neglect your prior responsibilities a little bit. After all, being a founder rarely is a 9-5 job, and no matter how much we’re trying to build Calm businesses, there will still be days and weeks of pure chaos.

That takes a lot of forgiveness from your loved ones. They’ll support you in your efforts, but they will also expect you to compensate for all those evenings you spent with your landing page instead of them.

This kind of debt can sneak up on you and explode your whole life if you don’t actively pay it back as soon as you can.

Keep that in mind whenever you prioritize your business over someone else.

Physical Debt

And keep that in mind when you prioritize building another feature over working out. Or when you grab a quick snack instead of cooking a healthy meal because it’s faster. What’s the benefit of creating an amazing self-funded business when you’re too busy dealing with a failing body at the end of the journey?

If you work for 80 hours a week and find no time for the gym even though you know how good that would be for you, you’re incurring physical debt.

A 30-minute walk a day will do wonders to give your mind some refreshment and your body a chance to do something. Anything will do, really. You’re a whole human being, not just an idea machine. Keep your body active, and the mind will follow.

So much so cataclysmic. It’s not all bad. Debt is leverage, and if you do it carefully and intentionally, using debt to do something today instead of later can be an incredibly empowering thing.

Just don’t forget that it can also come back to bite you when you least need it.

It all starts with awareness.

So keep your eyes open.

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