Monthly Archives: April 2014

The Only Thing That Matters

When you are building a company, it is easy to be overwhelmed by the number of things that have to be done just to keep your company running. Between accounting, paying bills, signing contracts, financial planning and payroll you might find yourself spending half of your time just on operations. If you have never done these kinds of things before you might spend all of your time learning and doing them until you get proficient. It can be fun to learn and makes your new business seem like a real business.

The problem is that none of it matters.

At all.

Not even a little.

No company has ever been acquired because it paid all its bills on time, had flawlessly accounting ledger, perfect financial planning or impeccable contracts. Those are just the table stakes to play the game.

Absolutely the only thing that matters to your new company is whatever makes you different. That difference is what separates you from the competition and makes you stand out as a better solution. That difference makes you better. It is your competitive advantage (See Never Play Fair) and it underlies everything from your sales pitch to your strategy. If you do raise investment or get acquired, it will be because of that difference.

You should spend 100% of your time investing in your differentiation. Make it better. Make it obvious how you are different. Think of it like a wedge that you are using to split the market wide open and keep hitting it. Be relentless and focused on winning through your differentiation.

This extends to “feature parity” as well. If you look across all your competition and create a feature comparison matrix (See Only the Paranoid Survive), there will be a lot of features everyone else has that you lack. You could spend your time adding those features to get even with the competition, but what does that get you? If you look exactly like them why would anyone choose you? You should understand those gaps but invest in your differentiation.

What about all those operations that your company needs to run? Outsource. Pay people to do them for you. Don’t think of it as a cost, think of it as an investment. Every hour you pay for them to review contracts, pay your bills or run payrolls is an hour you can invest in your company’s differentiation. You are buying time, which is a rare commodity for start up companies, and investing it in the only thing that matters.

If you succeed, your differentiation will be so clear that it will be easy to create marketing materials, sales pitches and investor presentations. That differentiation will be how you recruit employees, close partnerships and build value. The message of your company will be told through your differentiation because that will be the story of why you are the best in the market.

Even if you pay your bills late.

Financing: A Tale of Three Companies

Image licensed under creative commons by Fornax, 2010.

If you want to start a company you might wonder where you will get the money your new business requires. The good news is that you have many options, as long as your business plan is sound and the market opportunity is big.

But, before we get to that, don’t confuse the money your business requires with the money you require to maintain your lifestyle – investors will not invest in you so you can pay your mortgage or make your car payments. Investors invest in your company to get a return so if you want to raise some capital you need to present them with a good investment opportunity that is likely to provide a return. It’s up to you to figure out how to cover your lifestyle expenses until you can pay yourself a decent salary, either through your savings or secondary income.

Assuming you have your personal expenses covered, a good business plan and your investment has a potential of return, there are many ways to raise capital for a business and we will cover three of them here. For these examples, let’s assume that you think that the market for umbrellas is going to expand quickly over the next few years due to global warming. Here, then, are the tales of three businesses started to take advantage of the upcoming umbrella explosion and how they might finance themselves:

1. Cash Flow Financing: The Umbrella Store

You decide to start an umbrella store, where people can choose from dozens of different models of umbrellas (either a physical store or online or both). The start up costs only include purchasing some initial inventory and setting up your store, but you are confident that sales can cover that cost. If you do well you might open up other stores, but you will wait for the market to demonstrate demand.

The best option is to finance the company yourself via cash generated from sales at your store. You will put up the initial money from your savings and the more umbrellas you sell, the more you will buy to increase your inventory. It might take a while but you think you can build up a healthy store that can support you and potentially a few employees.

Quick summary of your umbrella store:
Start up costs: $10,000
Estimated Annual Revenue: $150,000
Investors: You

In general, cash flow financing is a good idea if:

  • Your business will start generating revenue on day one.
  • Your start up costs are low.
  • You want to maintain complete control of your business.
  • You are not sure what form your business will take.

Cash flow financing is a bad idea if:

  • You can’t afford to provide the initial capital for the company yourself.
  • Your business needs to grow quickly to take advantage of a market opportunity.

Examples of the kinds of businesses funded via cash flows are consulting businesses, services businesses and small stores.

2. Crowd-sourced Financing: Umbrella 2.0

You design a new kind of umbrella, something the world has never seen before but is definitely better than all of the other umbrellas on the market. The cost of manufacturing the first batch will be significant because of the cost of setting up manufacturing, but after that you can easily grow the business based on sales revenue.

The best option is to crowd-fund your company by raising a little money from a large number of people. Using platforms like Kickstarter or AngelList, you can quickly find a large number of people who believe in your vision for a new umbrella and are willing to back you. In some cases, like with Kickstarter, you are pre-selling the product while in other cases, like with AngelList, you are giving them a small ownership in your company. If your start up costs are not very large, you can just raise funding from just your friends and family without needing to recruit investors that you don’t know.

Quick summary of your new umbrella product business:
Start up costs: $100,000
Estimated Annual Revenue: $1,500,000
Investors: Friends, family and/or strangers on crowd funding platforms

In general, crowd funding is a good idea if:

  • You require a large amount of startup cash but will be cash flow positive afterwards.
  • Your product will appeal to a wide range of people.
  • Your business will grow slowly.

Crowd funding is a bad idea if:

  • The amount of start up cash you need is very small or very, very large.
  • Your product is complex and will take many years to create.
  • Your business needs to grow very fast to take advantage of a market opportunity.

Examples of the kinds of businesses funded via crowd funding are new consumer products and non-profits (charities).

3. Venture Capital Financing: Build Your Own Umbrella

You want to build an online marketplace for people to design their own umbrellas and then have manufacturers build them on their behalf. The potential of the business is huge, but it will take a few years to grow the marketplace to break even and you don’t have a large window of opportunity so you need to move fast.

The best option is to raise venture financing. Venture capitalists and angel investors invest large amounts of money in high-growth companies with the expectation of a 10x return in under 10 years. The risk is high since your company needs to be extremely successful, but the reward is very high as well.

Quick summary of your umbrella marketplace business:
Start up costs: $1,000,000
Estimated Annual Revenue: $150,000,000
Investors: Venture capitalists and Angel investors

In general, venture capital financing is a good idea if:

  • You require a large amount of time and cash to build your business.
  • You expect your business to grow very fast (double every 3 months).
  • You need to spend ahead of revenue to fund your growth.
  • Your market opportunity is vast.

Venture capital financing is a bad idea if:

  • Your business will grow slowly.
  • Your market is small.
  • Your capital needs are small.

Examples of the kinds of businesses funded via venture capital are software-as-a-service companies, new drug manufacturers and new chip design companies.

So, what’s your best option?

Hopefully it is clear at this point that the best option for your business depends a lot on what your business is, how fast it will grow and how big it might become. Choosing the right option can be critical to your success or instrumental in your failure. Trying to fund a high-growth company on cash flows can starve your business since you will move too slowly and miss the market opportunity, but raising venture capital for a slow growth company can lead to unhappy investors and poor results for founders.

In many cases companies will combine strategies for the best outcome. For example, you might crowd fund your company to get started only to later raise venture capital financing when you start growing quickly. Or, you might grow using cash flow until you have a big opportunity for expansion and use crowd funding to take advantage of that opportunity.

There are, of course, other options than those listed here, including bank loans, and depending on where you are based those options may be most accessible. Network within your local community to understand the most common options.

Think about your business and what makes the most sense for financing options. But remember that investors are investing in your business, not your mortgage, so be sure to show them why their money will result in a big return.