It seems we have come full circle with the first assignment of control versus wealth. Self-funding keeps us in the driver’s seat without any back seat drivers, but for how long? How much of a cushion should you have? In personal finance, it is suggested to have at least six months of reserve for life events like job loss. When the bank I worked for downsized, I was unemployed for six months. I do not know if that is the norm because there have been many unable to recover from the job loss of the primary bread winner for longer periods. But in business, “As Professor Bill Sahlman points out, in startups, money buys time: time to experiment, to collect, and evaluate data about what worked and what did not, and to adjust the strategy and operations based on what was learned.” (Wasserman, 2012, p. 252) What does that time frame look like for your business? What is your financial strategy that will allow you to leave your current position or cause you to have to go back into to the place you dreamed to be out of for good?
I recall one of the childcare services that provided daycare for my daughter. The owner could not afford to commitment her time to building the business and therefore she went back to her full-time position at the hospital. She had a promising business, but when she was not part of the day-to-day operations, I saw a change in the service that was being provided. She had placed unqualified workers in charge and the responsibility was too much. I have seen too many times where management gives too much responsibility to an inexperienced and untrained employee and they fail. This failure creates a no win for both the client and the business owner. Of course I found another childcare provider and the business eventually closed. A business cannot run on hope, dreams and potential. She had the potential for a sound childcare service. But potential means you have not accomplished anything. It is incremental accomplishments that prove the real business owner’s success.
Consider your investment options early in the planning. Forecasting the outcomes, good and bad, will help bring a realistic picture into view whichever outcome. Wasserman points to three types of investors: family and friends, angel investors, and venture capitalist. Do you “play with fire”, potentially “run off” other investors, or give up some control? (p. 256)
I am in total agreement that family and friends should not be the first route. It speaks desperation even though it may be convenient. Then you move from close to home to a distance with an angel investor who will provide funding that will cultivate the ground for a venture capitalist. Is the angel investor a band-aid or true stitch that will heal a wound to full recovery? These are the real questions to consider because a venture capitalist will expect control and a return on the investment. The beauty securing a venture capitalist is that your start-up displays “high-potential.” (p. 267) You hit the jackpot with “financial, social and human capital at the expense of economic and control rights”, but your new partner might take the wheel. (p. 278) Control will be transferred and you need to decide early if it is worth it so you can prepare to manage it later.
“Unfortunately the vast majority of businesses do not qualify for venture capital funding. VC firms are very choosy about the businesses they invest in – according to the U.S. Small Business Administration less than .1% of businesses are funded by venture capital. Of the few that are able to obtain VC funding, almost all are firms that are past the startup stage and can demonstrate a viable product or service. .” (Ward, 2016) So we are back to the beginning with your money or that of an angel investor. Make your money count longer through assessment and investment before you take you first step vehicle.
Ward, Susan. (201, August 16). What Is a Venture Capitalist? What Every Start-Up Needs to Know About Venture Capitalists. Retrieved October 10, 2016 from https://www.thebalance.com/what-is-a-venture-capitalist-2947071
Wasserman, Noam. (2012) The Founder’s Dilemmas. Princeton, NJ: Princeton University Press.