Entrepreneurs and the Capital Drain Debate

Entrepreneurs and the Capital Drain Debate

wishes and dreamsThere are two things that entrepreneurs are acutely aware of; especially as they begin their entrepreneurial journey as a fledgling startup; they are: capital and closely linked to that, the need to invest their personal funds into an insatiably money-hungry beast. There are a number of things that make this an extremely stressful time for the budding entrepreneur.

Understanding personal capital investment.

I’ve come across a number of entrepreneurs who are unwilling to invest their own funds into their start-up. They are too critical from the start and feel that the startup needs to essentially sustain itself from day one.

The opposite of that is also true. There are far too many entrepreneurs who literally bankrupt themselves as they keep throwing fistfuls of cold hard cash into their startup.

[Tweet “Every startup is a money hungry beast; feed it wisely!”]

Think of 1986’s Little Shop of Horrors (giving my age away a little there). In this analogy, the entrepreneur is Seymour and Audrey II (the plant) is your startup. Audrey II is at first content with a little drop of Seymour’s blood; but soon grows out of control and needs a constant supply of human blood to survive!

Your startup is exactly the same; the trick is in understanding that your cash injection to the business is not a permanent solution and it should not be seen that way – it’s not sustainable.

Measure and regulate your investment before your startup starts baying for your blood!

Expenditure vs Revenue.

The fact of the matter is that unless you are moving in the direction of a professional services startup — selling time; ideas and other intellectual property — there is going to be a definite cash outlay just to enable you to operate. Be it development of the product, tools of the trade, or purely marketing costs; these are the kinds of investment costs that are going to draw on your capital for a while before your business begins generating some revenue to offset the expense.

As the entrepreneur the need to know how and where you invest your finite supply of funds is critical! An expense plan is critical as a tool that let’s you see the incremental purchases or developments that you can make and when you can make them.

The temptation – especially for the impatient entrepreneur – is to invest everything at once and have “the perfect startup” to go to market with. The sad reality is that this is nothing but a myth. Entrepreneurs in startups need to go to market with their minimum viable product (MVP).

An MVP allows you to start generating some revenue which can be reinvested into the business while you are getting critical user feedback that allows you to make your startup better and more viable in the long run!

Time vs Return.

If truth be told; the majority of startup entrepreneurs are currently gainfully employed. That means that you are forced to work on your startup either in the wee small hours of the morning when life has calmed down; or over the weekends when friends and family are often forced into a backseat in order for you to realise your vision.

And there is nothing wrong with this. This is the nature of the beast. Audrey II is going to take up your time and force you to invest a heavy amount of time and money into lifting your business from obscurity.

Your task as an entrepreneur here is to understand that your time has a large opportunity cost attached to it. Essentially when you are working on your startup, you are doing it at the expense of spending that time on someone or something else. Looking at your time in this way is an excellent motivator to ensure that when you are focused on your startup; you are just that: Focused On Your Startup.

Make the time count and ensure that you  are doing the right things; invest your time as wisely as you would your funds as your time has a price.

Self-fund vs Finance.

The case for external investment; be it through crowd funding or a traditional angel investor, venture capitalist or a financial loan from your bank is a real possibility. The reality is that external investors do not invest for free; at the end of the day they want something back – over and above their initial investment. They want equity; they want profit; at a push, they will even settle for your car! But mark my words they want and will get something!

When that finance comes with skills and expertise attached; it makes the decision to secure external investment a slightly easier one. My caution here is to make sure that the investor you choose has the best interests of your startup in mind; and not just a high demand for ROI.

[Tweet “For an entrepreneur a startup is a labour of love; for an investor it’s a business decision”]

Striking the balance between investing in your startup and having your startup generating revenue is a constant struggle for entrepreneurs. There are many hurdles to overcome and many mines to dodge.

My advice is to have a good understanding of your expense projections in a way that matches them with available funds. In other words have a very good idea of what you need to spend and when you are going to spend it;  match that to what funds are guaranteed and then make definitive steps to plug the gaps from there.

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