Understand Entrepreneurial Startup Finance
I took more finance courses than I needed to back in college. To be honest, the subject bored me to tears and still does for the most part. After college, I discovered “entrepreneurial finance” which to me is endlessly fascinating. I break down entrepreneurial finance into two categories.
- One category covers how to turn an idea into an operating company with as little capital as possible.
- The other covers how to acquire control of an asset with as little capital as possible.
After that it comes down to managing your cashflows as you grow.
The Startup Guide covers the first category. My course on how to buy a business covers the second category.
So don’t break out in a cold sweat when I mention the F-word. Finance, of the entrepreneurial variety, can be both fun and rewarding for you. As I am fond of saying, entrepreneurship is like a 25-level computer game. If your knowledge of how to finance a startup is limited to “I’ll write a business plan and hope that someone gives me money,” you’re stuck at the bottom level.
Oh, the shame.
Let’s look at how many great companies are started. Ladies and gents, meet the “cash float” financing strategy used by elite companies such as Ford, Dell, Amazon, and Paypal to name but a few.
Entrepreneurial Finance 202: Cash Floats
Nobody ever talks about cash floats as a financing strategy for startups when investors are dragging their heels. They just aren’t considered sexy enough by rookie entrepreneurs. Rookies want to just write a business plan and have someone drop $500,000 or $5 million into their checking account as a result.
When the financing campaign bogs down after the first few months–as it surely will, if it hasn’t already –and your enthusiasm for the venture starts to wane, clueless people will try to be helpful by telling you that you just need to polish up your business plan, Powerpoint presentation, and “elevator pitch” a bit more. Then the money will roll in and you will finally be able to start.
With that type of advice it’s no wonder so few startups get anywhere.
I’ll let you in on a “secret.” (Yes, I know that’s an over-used word but it’s the right word here as this is indeed a secret.) If you really start to pay attention to the startups around you, you will begin to notice that they can, for the most part, be broken down into two groups.
One group, the bigger one, relies on the “let’s write a business plan and get funding” startup strategy. Very few of the startups in this group make much headway. In most cases, if you check with them every three months, you’ll hear nothing but scorn about investors who are “too stupid” to recognize what a gold mine their opportunity is.
The other, smaller, group consists of entrepreneurs who announce their intentions to launch a company and are in business within a month without ever having raised a dime from outside investors. They make the first group eat their dust.
This is the group to study if you want to succeed as an entrepreneur. Is there a common theme in their startup financing strategy you can learn and benefit from? The answer is a resounding “yes.” It’s the use of cash floats to get the company up and running and achieve traction. Smart entrepreneurs understand that they need to achieve some traction before investors will take them seriously.
If you want a quick intro to cash floats as startup financing strategy click here. The Startup Guide teaches you the intricate details of devising a cash float strategy to launch your venture.
If cash floats were good enough for Henry Ford, Bill Gates, Micheal Dell, and Jeff Bezos, and a host of other leading entrepreneurs, they should be good enough for you.
If you still don’t know how much startup capital you need you can take a look at these these online calculators.
The Starting Costs Tool – Calculate your start-up costs for your new business.
The Cash Flow Calculator – Get a feel for your cash flow with this online calculator.
The Sitting Duck Venture
A quick word about what to avoid as an entrepreneur. There are ventures that have such long odds that it’s best to avoid them. I’ll give you one example. Long ago someone called my office about help in raising $25 million to build a factory to make a new line of hair care products. The caller had been a hair-stylist for twenty-plus years. This person had no business experience. They had no manufacturing experience. They didn’t have a management team. All that they had was an idea for yet another line of hair care products in an already saturated market. You can just imagine how investors must have salivated over the thought of throwing their hard-earned money into that venture.
I call deals that can’t move forward even an inch without a massive infusion of capital by strangers “sitting ducks.” They are to be avoided unless you enjoy wasting your precious life away on lost causes. Leave these deals for the big boys who have a track record of raising and making money for investors.
I could go on and on about bad deals. You see people asking for half a million dollars to fund the coding of “the next Facebook.” (There must be millions of people with an idea for “the next Facebook.”) When an investor comes across such a request what they hear is “Give me money so that I can code at home in my PJs for the next two years without any financial worries.” Sure buddy, where’s my check book?” The Internet also makes it possible for people trapped in some remote location to solicit funding. I recall one fellow in Turkmenistan spending over a year on a well-known networking site asking for $2 million to fund some high risk consumer product.
Bottom line: get real. Investors back proven managers not first-timers with unrealistic expectations. They also don’t like deals which have to burn up a lot of cash for long periods before there’s any hope of a return. Geography is also a major factor. Investors prefer companies within a 30 minute car commute. No one in North America is going to wire money to someone in Uzbekistan to build a chain of ganeesh-gabob stands.
Now let’s take a look at using cash floats to finance a startup.
For the record, all my examples of crazy deals chasing capital are real. You can’t make this stuff up. Someone recently asked if they could raise millions without having to actually disclose their idea–wait for it–to their investors. In other words, the investors were supposed to go on faith that not only was it a great idea but that the entrepreneur could pull it off eventually.
The Funding Chain
Make sure that you fully understand the funding chain for companies. Think of it as a track & field relay race where the company is the baton being passed from angel investor to venture capitalist to investment banker. The Startup Guide is about getting out of the starting blocks. In some cases, it’s all you ever need.