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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Mandated kits are typically in the $50-$100 range.

Frontloading generally refers to a process in which a MLM company, or a sponsoring consultant, encourages a new consultant to purchase far more than is commercially reasonable under the circumstances. Often the “push” is explained to the recruit as necessary to qualify in the compensation plan. This is an unacceptable practice is often one indicia of a pyramid scheme.

On the other hand, virtually all regulatory agencies recognize that purchase of an “at cost” sales kit is an acceptable practice in the mainstream of leading direct selling companies. Such mandated kits are typically in the $50-$100 range. They generally entail “hard copy” or online supply of sales and marketing materials as well as ongoing, updated sales and marketing materials for one year. Typically the mandated sales kit does not include product and generally a company offers an optional deluxe kit that may include product. Such an optional kit, which is often referred to as a “fast start” kit, may contain several hundred dollars of product. This is not unusual. Although the same regulatory standards on upfront, mandated purchases are applicable to party plan companies as they are to other companies; it is not unusual to see party plan companies mandate a beginning starter kit that contains a wide array of products, with a price tag several hundred dollars. Regulatory agencies are very liberal in their view of such mandated purchases in party plan companies because party plan companies are so overwhelmingly retail-oriented and the movement of product to retail customers is the norm, and not the exception.

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