Small-Business as a Balancing Act
Are you in business to make money or to raise it?
For aspiring entrepreneurs, the answer is often a little of both. But many fall on tough times because they strike a poor balance between these two critical functions. Mind the store without corralling enough capital, and you could go broke; spend every day wooing investors, and the store falls apart.
All else being equal, it is much easier to raise money for expansion than it is to fund a new venture from scratch. The key question: how to get from the start-up phase to the expansion stage with enough capital to spare?
I won’t kid you: It’s a tough balancing act–and the stuff of myriad business-school case studies. Here’s the shorthand version of how not to go astray.
Bootstrap in the beginning. Funding a new venture on your own steam is easier said than done. But if you can keep your day job while banging out your prototype at night or on the weekends (while not running afoul of intellectual property rights, of course), then by all means do it. The tech boom is ancient history, and days of raising money when you have nothing to offer but dreams and promises are a distant memory. Sure, a few investors might bite, but you will burn a lot of time and energy looking for them. Only when you have a product that works, and you have at least a few customers clamoring for it, should you go ask Aunt Sally for a few bucks to take it to the marketplace.
Focus on profitability. Don’t build to flip. A strategic investor might come swooping in to buy your nascent, unprofitable business, but don’t count on it–especially in this risk-averse environment. Focus instead on building a sustainable business and treat the money you raise as lovingly as your spouse by keeping overhead low. Get a solid toehold in one market segment, and manage your cash by demanding faster payment in return for better service. Dominate one segment, generate some profits and then look to expand.
Finance your growth in stages. Show enough black ink, and more professional investors (angels, VCs and the like) will take you seriously. Court local venture funds for equity capital, all while leasing equipment and real estate to conserve cash. Finance in stages. Trying to raise too much at once may consume too much time–not to mention that you’ll end up diluting your ownership stake and, chances are, relinquishing operating control.
Always have a Plan B. Know that your business can survive at any point after the friends-and-family investment round–even if it means, say, focusing on even narrower niche or growing at a slower pace. Never, ever put the entire business in jeopardy. Shooting for the moon is nice–but not if you splash down in the Atlantic.