When starting up a new business, there are tons of funding options. Many of these involve loans, angel investors, and venture capital. Unless you're sitting on a huge pile of money, you'll probably need to find outside help to jumpstart your startup. But what if you could use your own savings for your business?
The IRS ROBS project, or Rollovers As Business Startups, allows company founders to rollover 401(k) savings into their new corporation's profit sharing plan to fund the business. As a bonus, ROBS allows you to avoid the withdrawal penalties and taxes associated with early withdrawal of your 401(k).
Using your savings to start up a new company can be risky. You could end up losing big if your bet on your company doesn't pay off. In fact, the IRS investigated these ROBS financing plans from 2009 to 2010 and found many of the businesses had already gone under three years after using this method. It's hard enough to lose your business, but by using ROBS, you're also putting your life savings at risk. Still, entrepreneurs are those willing to make a bold move and take a big risk for an even bigger reward.
If you choose to rollover your 401(k), know you're not alone. There are others who have successfully traveled down this road. Here are some tips from entrepreneurs with big dreams who have used ROBS to successfully launch their companies:
Have Passion For Your Business
Frank Mastronuzzi knows the online dating business; in fact, you could call him something of an expert. Mastronuzzi started at online dating giant Match.com way back in 2000, and watched as the online dating sphere exploded.
Soon, he noticed the LBGT community was being misunderstood and undeserved by the more traditional dating sites. So, in 2007, Mastronuzzi rolled his 401(k) into startup funding for his new relationship-focused dating website, OneGoodLove.com.
"Working at Match.com, I knew the online dating space. I understood the LGBT market and I knew there was a need for a relationship-focused dating site," Mastronuzzi said. "We believe that everybody deserves to find love, and we are helping one person at a time."
Thanks to Mastronuzzi's passion for helping other people find their own passion, OneGoodLove.com has 150,000 members on the site and is growing every day. This doesn't mean he hasn't faced challenges, but his sincere enthusiasm for the mission statement of his site has helped his company overcome these hurdles.
"Traditional institutional funding was not ready to fund a LGBT company in the middle of the gay marriage debate," Mastronuzzi said. "With funding sources dry as a whistle, we could have not launched our company without the use of ROBS funding."
Have a Great Idea
Matt Hendrickson and Lauren Smith are the founding team behind talent acquisition platform Ascendify. Both looked at the current recruiting landscape and realized they had a great idea for how to get talented job seekers into great companies faster and easier.
Their social platform, Ascendify, helps enterprise businesses connect with the talented people who could very well be their future workforce. By helping these companies build talent communities, Ascendify allows employers to form relationships with job seekers before a hiring need arises.
"Before we rolled over our 401(k), we considered all funding options," Smith said. "We wanted an option that would allow us to focus on product development with the least amount of distraction. We knew our product could make a meaningful impact in the recruiting space, and it was worth the risk of using ROBS funding."
Smith and Hendrickson trusted their great idea, and so far, it's paid off. Shortly after debuting their product, the company was offered multiple seven-figure acquisition deals. They turned down the offers to continue making change in the recruiting space, and last year Ascendify was named one of the top new HR products of 2012.
Understand the Risks
Still, there are risks. After all, the IRS investigation uncovered that many businesses started with ROBS funding go belly-up within the first few years. Not every ROBS story is a success story. It's important if you're considering using ROBS funding that you prepare yourself for the possibility not everything might go as planned.
Linda Jamerson, CEO of Aluminum Case Company, used her 401(k) to buy an existing company and bring it into the 21st century. The company, founded in 1946, had no Internet presence and certainly no social media buzz. By taking the company digital, Jamerson and her husband saw a big spike in sales the first year. This doesn't mean, however, using their savings didn't come without risks.
"It can be a challenge dealing with friends and family who aren't entrepreneurs. They're worried you're giving up your safety net and risking your retirement money," Jamerson said. "Although we have our good and bad days, we believe every day working for ourselves is better than the best day working for someone else."
Believe in Yourself
Being willing to take risks is what makes a good entrepreneur. The key to success when using your 401(k), however, might just come down to belief. You need to really and truly believe in yourself, your vision, and your business.
"It's like going to Vegas. You should only take what you can afford to lose," Mastronuzzi said. "I think entrepreneurs who really believe in their company, product, and team should take this calculated risk and use ROBS to fund."
Have you used your 401(k) to fund your business? Would you? Share in the comments!