As we address the issue of entrepreneurship, we cannot escape the issue of financing businesses from
the outset. Money is required for almost everything in the continued lifespan of the company.
Stemming from the concept of a seed that is required to raise a crop, the initial money put forward to finance a business or a venture is known as seed capital. It is almost always a nightmare for every new venture, business and even the veterans will assure us that in the days of old, presently and in the days to come, seed capital has never changed its nature of abundance/ scarcity or minimality.
That said, I got curious about these revered people in the world of startups called venture capitalist and angel investors. According to Investopedia, a venture capitalist is an investor who either provides capital to business ventures which are at their birth stage or supports small companies that wish to expand but do not have access
to financial institutions or the capital markets. For venture capitalists (VCs), the success of the business or venture is their focus as their main goal is to secure a return on their investment. In the event that the business is not so successful, they lose their money; but if the business does get on the right path, their portfolios are increased in value much to their delight! To some extent of the definition, the same applies to angel investors.
They are willing to put in their money to get your business off the ground or to take it to a new level. The distinguishing element, however, is that angels invest in you, the person, because they are your friends, relatives and people who know you and believe in what you can do and are willing to fund your dream. VCs fund the business because they see the opportunity that you have presented to them. Angels are more forgiving and less inquisitive about the business and its nitty-gritties. Even if your idea is as bogus as they come, there is an angel who will say that they believe you can make it succeed. A VC will tell you off and they return the cheque book into their pockets until the next time they hear from you with a better idea. The process of choosing whether to go with a VC or an angel investor is neither rocket science nor a walk in the park, but it is a topic of discussion on the Esteemed Blog, hence we will not cover it here. Our topic of discussion here, is how we handle the resources that are put in our business by whoever sees it as a worthy investment.
Don’t get it if you don’t need it
A VC or an angel doesn’t step in to fund your dream because they have nothing else to do with the money. In return, you shouldn’t ask for it if you don’t need it. In consulting for some of our clients, we come across well prepared business plans which lose their great appeal once we go through the financials with a fine tooth-comb.
Here is an example; a quick food proposal to supply fresh food by use of motorcycles is drawn up and the financials include some money to purchase a small 1-ton truck and a small personal car. On further discussions with the entrepreneur, she says that she needs the small car for use when going to meetings with potential customers and suppliers and it will help her support the business more efficiently.
On further exploration where we are tying in the financials with the business model, target customers and entire operations, it is soon clear that the business can well do without the personal car at that point and the truck can be easily substituted with a modified half ton pick up which will overall cost less.
Remember this when you are pitching for capital: The investor has worked hard to get the money you are asking them to give you. If you don’t need it, don’t ask for it.
Use it for its intended purpose
Anything whose purpose is not known stands to be abused or misused. This is a paraphrase of a principle teaching of the late Dr. Myles Munroe. I would dare add a statement and say that where discipline is not applied to the management of something, its misuse and abuse is also inevitable. When an investor trusts you to execute on the plan you shared by giving you the investment capital of his time, money and other resources, valiantly fight against the temptation to veer off the script you gave. If you said the money will go into buying equipment, let it buy the equipment.
Don’t divert funds to fund a superfluous lifestyle. To restate a share by one Mr. David P. Mavia, money amplifies what is lodged within the heart. Without money, many at times, the mind is very clear on what needs to be done and achieved with the money; until it comes into the vicinity and every deliberation is now assessed through the veil of the money at hand.
Another truth that is shared often by Mr. Mavia is that you have not multiplied money until you have it in a factor of 2. Financial success cannot be attained by addition, subtraction or division. It is achieved through multiplication of what is available. Investors smile generously when they see the money they pumped into the business is growing
in multiples and it is very likely that in such scenarios, they will take you seriously when you go back to them (which is unlikely if you are doing things right) for additional capital. Unlikely because a good entrepreneur will reinvest the multiplied fruit rather than use it for recurrent and/ or unprofitable expenditure. Shark Tank’s (an NBC program featuring entrepreneurs and investors) Kevin O’Leary has been quoted saying “Money is my military, each dollar a soldier. I never send my money into battle unprepared and undefended. I send it to conquer and take currency prisoner and bring it back to me.” While his approach to money is quite radical, Kevin highlights a very key component about money. Used in the right way, it can work for you in multiples and win you many battles in the business world.
Accountability allows you to be transparent to the investors and others who are helping you drive your venture/ idea or business forward.
It allows you to know how the capital is being utilized and where to change. It also allows you the special place of showing that you have integrity and can be trusted to not only manage resources but also the relationships that are tied with your business.
Mr. O’Leary has also expressed it before that, “The ultimate truth about money is that even though it doesn’t care about me or you, to make money requires us to care deeply about it.” Accountability doesn’t require a degree in finance management or certification in accounting, but it does require one to be business savvy, knowledgeable about assets and liabilities, risk conscious, have integrity and know the place of debt in business. The reward for accountability is not success, but rather more responsibility and more resources being entrusted to you.
Put first things first
When setting up a business or getting into expansion mode, an entrepreneur, should never sacrifice what is important to the vision/ mission of the business/ venture. I suppose in the order of presentation, this element should have come first, but its placement does not demean its importance. Goethe says, “Things which matter most must never be at the mercy of things which matter least.” As you invite angels and VCs into the business, you must not lose sight of the whys and hows of your business. If you quit your job to start a business, you can’t lose sight of the fact that you don’t know all the ropes and that means you will need help. Losing sight of your need for help will cause you to be selfish and you will not hire the right people. In the book, “The 7 habits of Highly Effective People”, Stephen Covey highlights seven habits for effectiveness: Proactivity, Beginning with the end in mind, putting first things first, thinking win-win, seeking first to understand then to be understood, building and maintaining synergies and finally sharpening the saw.
As an aside, the book is a great read for being effective as an individual, a family or as a business unit. Applied to the subject at hand, it is important to highlight that you should never trade your key principles of good business for money.
As you evaluate your investment options for setting up or expanding your business, don’t get into unnecessary debt. At the right time, the funding needed for your business will be fulfilled, but it needs to find you, with the right attitude and framework of mind.
For more insights on money and business, we recommend the book “Cold Hard Truth: On Business, Money & Life” by Kevin O’Leary