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.

Funding Follow-up

A commentor on my previous posting asked where he/she might find information on how to raise capital for their business. There are a number of books and online resources available. A Google search will turn up many references. Most of these focus on the "how-to" aspects of the process. Of couse this is important to know. However, with this blog I want to focus more on insights and strategies.

One useful reference is a publication that I wrote on the process of product commercialization. It has a section on financing your business. You can access it on the Web at http://www.pasbdc.org/what/consulting/dev/02.asp Select "Technology Commercialization Resources, then "New Product Commercialization Guide."

Funding is Like Fishing

If you ever want to develop your invention into a profitable business, you will probably need to seek funding from outside investors. Most banks simply will not loan for purposes of trying to develop and market an invention.

When you seek outside investment, you need to have the right frame of mind and approach the process with the realization that you are basically "fishing" for investments.

Those who have ever gone fly-fishing (or watched the movie A River Runs Through It) understand that fishing works like this:

You try to find the best fishing hole and the best fly to use there. The fly should "match the hatch," which means it should imitate the items that the fish in that hole are currently feeding on. Of course, this means you must first determine what the fish in that hole are feeding on!

Next, you cast your fly to a likely looking spot. As your fly drifts downstream, you need to make constant adjustments so that it moves along with the current as naturally as possible (referred to in fly-fishing circles as the "presentation"), thus increasing the likelihood that a fish will bite.

The large majority of the time the fly floats to the end of its drift without any fish taking the bait. Occasionally a fish swims up to take a look. But often it sees something suspicious in your presentation and darts immediately away.

Sometimes a fish strikes at the fly but does not get hooked. Usually, when this happens, you make another drift past that fish. Sometimes a fish gets hooked, and it feels like a big one, but it gets off within seconds. Sometimes you hook one and bring it into your net, but it's a small one.

Sometimes you get very excited because you have obviously hooked a very big fish. You play it for a seeming eternity with great skill so that it does not break off and get away. You're completely exhausted from the epic battle. But when you get it into your net and examine it, it turns out to be a carp, not that lunker brown trout that would be so delectable in your frying pan.

But occasionally-- very occasionally-- you hook that big fish, bring it in, take it home, fry it up, and it tastes absolutely delicious!

Of course, in this example, the fish is the funding.

If you don't know how to fish, you will probably be ineffective. If you don't have the equipment or the patience of a good fisherman, you will probably be ineffective. Especially, you must have the perseverance and the fortitude to go out there, rain or shine, and flail away at that fishing hole!