The Process of Transformation 2
June 15, 2016
Team Blog Week 3 – A Look Into Failure and Risk
February 17, 2012

UL0003-Not So Smart Money

Entrepreneurs who could find money easily and did not have to sweat it out when looking for money to fund their projects developed an attitude that money was easy to get so it was no big deal to spend lavishly. Their attitude was based on the fact that they were burning someone else’s money and not their own money. The passion of creating a successful business slowly dampened. These entrepreneurs had no pain or pinch factor as they were not spending their own money – Mr Inderjit Singh, The Art and Science of Entrepreneurship

Like in the Dot Com days, there is an abundance of money floating around today. There are investors and incubators on every street corner. There are many who have caught on to the start up fever and want to be in the game. It is becoming way to easy for anyone to get funding. From grants to loans to venture capital, everybody is jumping on the start up wave.

It is good to see such encouragement and support for the entrepreneurial community, but this does present a bit of a problem.

Firstly, entrepreneurs are not feeling the pinch, as they are not spending their own money, so there is a lack of strong motivation to build a successful business. If your needs are satisfied on day one with the funding, then people tend to get more complacent to see things through.

Entrepreneurs should bootstrap first. Use the funds they have, or better to run the company through customer financing, building a fundamentally strong business. They should start small, test the product on a smaller market, to see if it would work, instead of pouring loads of money initially. Once the business is stable and is ready to scale up, then entrepreneurs should look at other financing options. This will help keep the risk low and the company strong in the long run. By bringing in VC money on the first day, entrepreneurs may get complacent on the business and may use the money frivolously.

Even experienced VC’s have changed their ways. They now look for start-ups with customers and a proven record (no matter how small). Common questions asked are ‘Do you have customers? Have you tested the product on the market?’

Investors are looking for products that have been market tested or better to have customers.

It is best to work on building a strong product and a fundamentally strong company. Bootstrap the company from the beginning and work on strengthening your product. Look to bring in customers, the more people interested the better.

That being said, there are times you need money for research and to get your products off the ground. Investors will be looking for someone who they will trust their money with. Someone who is mature enough, to manage the funds responsibly.

An example would be EntreCity, we are bootstrapping the business so as to build a strong business from the ground up. It is not difficult to get access to funds, but instead of pouring $5,000 into a website, we have made it for $300. This is so that we can build and test the business properly, in the market. Once we are stable, have a good amount of customers we will put that money in the right place, to scale up the business.

Looking at the Investors Table
Even though there are people ready to invest around every corner, it may not be a good idea to take monies from every Tom, Dick and Harry. There are many fake angels around, who are just there for the ride or even to steal your ideas. An investor should be able to add value to the company to make it successful, especially if they take an equity stake. Having an equity stake means that they are part owners of the company and they should help in its success as well.

VC’s are not only finance providers; they also are there to help the company. They are partners of the company, who should provide expertise, resources and networking help, in order to create a successful business. You should be very careful on choosing whom you bring into the company. These are your partners; they should be able to contribute way more than just monetary value. If all you need is cash, then approaching a bank may be a better idea.

Always do some background research on your VC;

  • How they work?
  • What are they looking for?
  • What are their past investments?
  • What is their experience?
  • Speak to past companies they have invested in and ask them how their experience was.

Working with investors (VC’s etc) is not always a dream. I was offered a spot in a local university based on the fact that I was running a business when I was 17. It was on the basis that the business will continue and that they will give me the business projects to do. The offer sounded nice, until I realized that I would have lost total control over what I wanted to do. So basically, I would not be running a business, but instead working for them.

With all the hype surrounding start-ups now, it may be easy to be carried away. There are plenty investors around to pour money into your project, it would be wise to see if you need the money in the first place. Also do you and your investors have the same goals for the business? If all are aboard the same train, then only you will be able to reach the same destination together.

Activity
Watch the Money Game Video from the Kauffman Foundation. Identify which types of funding are good for you and at what stages of your business would you need that particular funding.

Click Here to Watch.

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