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This is addressed to entrepreneurs seeking startup and early stage capital. We’re seeing a great deal of confusion, frustration, and discouragement resulting from seemingly widespread misconceptions about the role — and availability — of outside investment capital.
Investment capital is something almost all would-be, and many active, entrepreneurs believe they need, or need more of. However, there are some very real downsides to investment capital — and even worse downsides to the belief that investment capital is necessary.
Investment capital is a business tool. But it’s only a tool. It’s not a magic wand! If you know how to use it, and use it in appropriate situations, and use it well, all parties can benefit. But violate any one of those conditions, and at least one of the parties is going to suffer — and the one certain to suffer is the entrepreneur.
Playing with other people’s money is much like playing with nitroglycerin. Yes, you can use it to blow a pass through that mountain in front of you — but make one tiny mistake and it can blow you up.
Even more pernicious is the belief in the necessity of investment capital. Everywhere the would-be entrepreneur turns — to attorneys, accountants, bankers — to business consultants, the BDCs, SCORE — he’s told, “Write a business plan”.
Now I challenge anyone to write a business plan, that these “experts” would consider viable, that doesn’t require considerable investment capital. Yet there are thousands of entrepreneurs starting businesses, running businesses, making money, who never thought about investment capital, who never thought about a business plan.
We’re not creating nearly the number of new businesses in this country that we could — or should. And I’m starting to suspect that one of the reasons is that we’ve got too many “experts” convincing aspiring entrepreneurs that they can’t.
Most of these experts have been inculcated — or educated — in the business culture of the ’50s and ’60s. That culture believed that money could buy business success. If you have a good plan, and adequately fund it, and execute it well, success follows.
That’s a formula that generally worked in the slow-moving, deterministic ’50s and ’60s. (But even then it didn’t always work, as in the cases where companies tried to “buy” diversification through conglomeration.)
It’s still the right formula where significant front-end monies are involved — starting a car company, an airline, or even a retail store. However, its success is much less certain than it was forty years ago, simply because the business world now has many more players and is changing much more rapidly than it did then.
Today, many market opportunities will be gone long before an entrepreneur can “research” a market — let alone devise convincing strategies and raise capital for attacking it. One day after the start of Desert Storm, entrepreneurs had Saddam Hussein dolls on retail shelves!
All indications are that speed-to-market, and short product life-cycles, will increasingly dominate tomorrow’s business environment. Concepts like “economy of scale” are rapidly fading in applicability, and concepts like “manufacture at point of sale” are rapidly emerging.
There is another formula for business success, and one I urge entrepreneurs — and their advisors — to consider more seriously.
Whereas, the prevailing wisdom views business as a military campaign, to be planned, executed, and “won”, there is an alternate wisdom that views business as a process, one in which the entrepreneur does what he or she is good at, has some fun doing it, and makes some money.
An analogy: A pilot flying a cargo to England would not think of taking off without a detailed flight plan. However, that plan is rooted in the belief that England will be there when he arrives. In a rapidly changing world, that well may not be the case — whereupon he’s a dead man, and his “investors” (the shippers) lose their load. Alternatively, that same pilot may take some paying customers up for a couple of hours of local sight-seeing — and never even consider a flight plan.
Business-as-a-process better fits the current times (and the likely future). It’s smaller, more fluid, more focused, faster to react. Business-as-a-process goes back to basics. It recognizes business as simply the process of selling something to someone for more than it costs. It recognizes that business doesn’t start with the “great idea” — nor with capital — but with a “customer”. Most importantly, it recognizes that the best way for would-be entrepreneurs to minimize their business risk is to minimize their monetary investment. Their investment in time is ok. That investment in time buys them an education they can’t get in any other way. Learning entrepreneurship is like learning to ride a bike — the only way to learn it is by doing it.
Some will say, “But that’s nothing but bootstrapping”. Yep, but with a little more attention to networking and partnering — and with the knowledge and confidence that this is no longer just the “poor man’s” way, but the preferred way — the intelligent way — to start a business in today’s business environment. It allows entrepreneurs, with minimum risk and minimum stress, to learn, develop, and sharpen their skills — with the essential insight that those skills, developed in that way, are precisely the skills needed to compete in tomorrow’s business environment.
Some will say that this is too slow. That it takes too long to bootstrap a company. Not so! How fast one can grow a bootstrapped company is limited only by the entrepreneur’s creativity. Many entreprenuers have found it easier, safer — and faster — to build a company by “inventing” win-win deals with outside resources — than getting bogged down in the quests and trappings of investment capital.
Some will say that this approach may be a fine way to make a living — but you’ll never make any real money that way. Again, not so! More than a few very large companies were bootstrapped — and many are still privately-held. Try telling their founders that they’re “only making a living”.
But that’s really not the point. Most entrepreneurs just want to do their own thing. To have control over their life, over their destiny. They do what they do because that’s what they want to do — and if they happen to do it well, money follows. But that was not the point of the doing. I can think of few successful entrepreneurs I’ve met over the years whose primary motivation was money — but I’ve met many unsuccessful ones.
The business-as-a-process formula works, and it would work much more frequently if more professionals and advisors would tell aspiring entrepreneurs to — “Just go do it”. That brings us to the questions posed in the title.
Why avoid the investment community?
1) It may be difficult to find the capital you’re looking for.
2) The search for that capital takes time and attention away from arguably more important things, like running your business or looking for customers — but, most important, from your “real” problem — how can you accomplish what you want with what you’ve got!
3) You’re dealing with a “customer set” (investors) typically much more sophisticated than you. Consequently, your odds of getting taken are high.
4) Unless you’re a very experienced entrepreneur, it is almost certain you will underestimate the capital required (or conversely, overspend the capital available) and end up losing control of the company, if not the company itself, leaving you with little, nothing, or even a large debt for your efforts.
5) Even if you get the capital you want, and use it very well, you’re still going to have to devote significant
time and attention to “investor relations” — and maintaining those relations may well conflict with other important relationships. Absent investors, your allegiances are first to customers, second to employees, third to vendors. But investors expect (and will demand) to be first. Be very certain you can live with that.
6) Again if all goes well, by taking investors’ money, you have made a commitment to them to give them an exit at the appropriate time. That exit is usually a public offering or, more likely, a private placement. Before taking that money, think hard about whether you really want go back to working for someone else.
7) And again if all goes well, recognize that the investors can exit — but you can’t. In either a public offering or a private placement, the new investors want you continuing on the hook. If you try to take out more than a dribble of your “paper worth”, the company’s value will drop precipitously, and neither your investors nor those handling the offering or placement will let you do it.
How to avoid the investment community.
1) Scale down your expectations. You don’t have to hit a home run the first time out. Concentrate on hitting some singles. When you get good at that, and you still feel you’d like to hit a homer, then try for it. In other words, don’t think in terms of selling to Ford or GM — think in terms of selling to their 3rd or 4th tier suppliers. Don’t think in terms of selling to Wal-Mart or K-Mart — think in terms of selling to local owner-operated stores.
2) Recognize that “investment” doesn’t necessarily have to come in the form of money. You can try to raise money to buy goods and services you need — or you can go directly to the suppliers of those goods and services, and try to cut a deal with them. I’ve seen entrepreneurs talk contract manufacturers into providing tooling and initial inventory of a product for nothing more than the promise to buy from them for a couple of years. (Those were great sales jobs; don’t expect the same results — but reasonable deals can be made.)
3) Try to work similar deals with customers. Offer favorable pricing, short-term exclusives, private labeling, influence on R&D, etc., in return for front-money, loans, loan guarantees, etc.
4) And don’t forget competitors. If you’re strong at something they’re not, you have the potential for a deal. Or, if you’re pursuing a small market niche, or a market that doesn’t yet exist, that could become big, you have the potential for a deal, because established companies, and especially larger established companies, can’t do that very well, and especially not cost effectively.
5) Use your imagination and creativity. There are as many different motivations as there are people. You can accomplish anything you want if you can find the right combination of people with the right motivations. The trick, of course, is finding them. But it’s certain you won’t find them if you don’t get out and look.
6) Lastly, minimize your costs. Don’t spend money on anything that you can figure a way to get for free. So long as you have more time than money, spend your time, not your money. Think of every dollar you spend as an investment. Know what you’re buying with each dollar and why, and what you expect from that dollar in (monetary) return and when.
Forget everything you’ve ever heard about “You’ve gotta spend money to make money”. You’ll find that sayings like “The best way to make money is to not lose what you’ve got”, and “Take care of your pennies and the dollars will take care of themselves” are much more conducive to business success.