For this issue, it is best to look at two phases of MLM companies, start up and maturity.

Although many things can go wrong in a startup direct selling company, two factors are repeated with frequency for the failure to launch. The first factor is inability to recruit. This business is based on recruiting a successful sales force to market products. (Obviously, there are many important factors ranging from logistics to personnel to technology to quality control to distribution… and all these can go wrong as well.) It should be noted that the need for capital is in inverse proportion to the ability to recruit. A MLM company that can recruit is often positioned for fast growth and may even become a cash cow. If the company does not have that native ability, it needs sufficient capital to hire the talent to make it happen. And in the absence of the recruitment asset, a company should plan on a much longer trajectory to profitability.

And the recruitment challenge dovetails with the second major reason that companies fail at the onset: lack of adequate capital or funding. Many companies start the business without adequate capital to allow for a one or two year run to become profitable. In fact, many companies assume that they will be profitable within months or that they will not need capital for growth. The lack of buffer capital to survive the early unprofitable days of a company is a prescription for early failure.

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Although it would be nice to think that venture capital firms were salivating to fund direct selling companies, this is not the case. First, the amount needed, which often is merely a few hundred thousand dollars is “too small potatoes” for most venture capital funds. Even the best MLM companies are often started by inexperienced business persons. Venture capital firms are not comfortable in this context.

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A Vice President of Marketing should have a demonstrated record of building, managing, and sustaining network marketing sales organizations.

The two leading causes of MLM company failure are lack of capital and the inability to recruit. In fact, your need for capital is in inverse proportion to your ability to recruit. Many of the leading direct selling companies have been founded by individuals with long track records of building downline sales organizations. If you possess that talent, along with good product or service, you are well on your way. However, if you don’t possess such capabilities, it may be necessary to hire such talent, often in the form of a Vice President of Marketing.

A Vice President of Marketing should have a demonstrated record of building, managing, and sustaining network marketing sales organizations. You don’t just want a hand holder. You want an individual who has the capability of locating founding distributors and working with them to build a broad-based sales

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Recruit Top Distributors

Your ability to recruit directly equates to your success.

When you are starting your MLM, direct selling, network marketing, or party plan business, you’ll find that recruiting experienced distributors is often essential to your company’s success. And if you don’t have the background yourself as a successful recruiter then you need to budget for a “sales manager” position for an individual who does have that capability to recruit.

Your ability to recruit directly equates to your success. If you have a background in recruiting and a background in direct selling, then your need for capital will be substantially lower. Recruiting top distributors will enable your company to have the capital to stay afloat and even grow. If recruiting is slow then you will need to raise one to three years of buffer capital in order to support your company in the event of stagnation or loss. And remember, the remuneration that is offered to top distributors will be effective in their decision to stay and help grow the business.

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How much does it cost to start an MLM company?The costs of startup vary widely, depending on the type of product/service being offered and the need for infrastructure. It is obvious that a company which is engaged in its own manufacturing, ownership of warehousing and distribution facilities, etc. will expend much more than a company which is furnished by suppliers of private label products or is involved in a service-type product. With respect to the initial infrastructure costs of a startup MLM, it may be reasonably expected that a company will expend, during the first year, $100,000-$200,000 for four key infrastructure elements:

1)      Legal

2)      Software

3)      Compensation plan design

4)      Creative design for online and offline promotional materials

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