Why You Need More Money Than You Think

It is very difficult for you, as an entrepreneur, to predict how much money you will need to start a company and fund it until it generates enough cash to be self-sustaining (cash-flow positive). The obvious problem is that you are predicting the future, which is basically impossible. When weather forecasters predict the future, they look at certain indicators. The key is knowing which indicators matter and to what degree.

Inexperienced entrepreneurs usually look at the wrong indicators when attempting to predict how long it will take them to sell enough product to sustain their company. In particular, they look at the market need for their product in making this judgment and little else.

The market's need for your new product-- or lack thereof-- will almost certainly not be the primary factor in determining when you will achieve self-sustaining status and be able to stop raising capital. This is extremely crucial to understand, because if you do not achieve positive cash flow as planned and then have to go out for more capital, you will be doing so as "damaged goods."

I guarantee you that this will put you in a very tough situation.

So, you ask, what are the indicators that I should look at. The answer is: I don't know, and neither does anybody else. Again, this is because it is predicting the future.

However, I can impart some wisdom that helps you deal with this enigma and succeed in spite of it. This wisdom comes from personal experience, reading many case studies, and watching many entrepreneurs go through the process.

Here's the gist of it: Nothing ever goes according to plan.

You lay out these nice plans for when things will happen: first prototype delivered; patents issued; capital infusions received; quality commercial product produced, and you attach projected dates for each to occur. Each event directly affects time to cash-flow-positive, but these interdependent events never fall neatly like a row of lined-up dominoes.

There is a problem, and it's name is "Murphy." Murphy's law, that is.

Most entrepreneurs never get the chance to test the market demand for their product within the expected time frame because something goes wrong that gums up the process before they get there.

For one person it will be that his vendor missed delivery dates; for another person it will be that the vendor delivered on time, but the product was poor. For another, a capital infusion does not come in in the amount expected or at the promised time. Perhaps-- heaven forbid-- the entrepreneur or another key employee becomes ill or has an accident. Maybe that salesperson or rep group that you hired, in whom you had great confidence, turns out to be inept or ineffective.

Perhaps an employee embezzles money. Perhaps...

The list of possibilities goes on and on and on, and that is crux of the problem. You can't possibly avoid every single one of them.

The key, then, is to know this and plan for it. The way to survive these events is to have a cash cushion to take you through them to your (delayed) cash-flow-positive position.

One way you do this by finding initial investors with "deep pockets" and being up-front with them that you will be coming back to them for further funding. Another way is to put your sales projections much farther out into the future than your tidy little everything-will-be-just-peachy plans predict.