Here are nine simple thoughts about entrepreneurial ventures that apply to most startups. (Things like cash flow strategy, of course, apply more or less depending on the nature and type of company.)
1. Use your business model to build an early warning system
A business model reveals how the business plans to make money. It
incorporates all of the assumptions you are making about your
business. You can easily check frequently to make sure the timing and
amount of your assumptions are accurate. Those assumptions include:
a. How much you will spend to make your product and whether this is a big investment or a vended activity;
b. How much margin you will make on each sale;
c. What price you will charge relative to others in the market;
d. What your operating expenses are;
e. Your operating income.
f. The timing of all of these activities – how long to make; how fast to get orders; the customer repeat rate, and so forth.
g. A break-even calculation that tells you how many units you must sell to have neutral (or break-even) cash flow.
From this data you can chart the amount and timing of cash
requirements. This is the central financial management skill in both
startups and growing ventures.
2. Burning the boats is sometimes, but not often, a good idea.
Every entrepreneur is faced with the choice of making do with less
or swinging for the fences. “Burning the boats,” by spending more cash
than is prudent and leaving you little or no margin for failure is very
risky. If the business model is proven and the input of cash at this
level will create real growth, fine. But it’s a rarer situation than
most of us think.
3. When seeking cash it is critical to match the source of cash to the risk associated with the investment.
Banks don’t invest; they lend money at low rates that they expect to
be repaid. Investors seek opportunities to take more (apparent) risk
and earn a higher rate of return. If you have a bankable business,
then debt is the best source of cash. An honest investor will be leery
of a situation in which the return opportunities seem much higher than
they need to be based on the risk.
4. All of the sources of cash flow should be well understood at a primary level by the entrepreneur herself.
The sustainable longterm source of cash is the customer, of course. (That customer may be the VC you hope to lead the next round, or the customer who will buy the product, depending upon the business model.) You need to know, directly, what the mind of the customer is, how well satisfied they are, what else they are considering, and if their repeat purchase rate is going up or down. Get this information yourself, not from someone else in your company. There’s no cash management substitute for firsthand information about the biggest source of cash most of us have.
5. Make everything possible an indirect cost.
There will be plenty of time to build a factory or hire more people – after your model is proven. In the meantime, wait until objective proof exists of model performance. Then, and only then, investigate ways to use capital investment to lower per unit costs.
6. To see if the dog will eat the dog food, you don't need to manufacture 10,000 cans. You only need to keep a batch and put it in front of the aforementioned canine. Saves a lot of time and money (see #5) and gets you knowledge.
7. An entrepreneur who can't sell his product risks everything - disproportionately - by turning the sales process over to someone else. It's OK to hire sales people and train them to do what you want done, but if you leave them to figure it out for themselves, you take a huge risk. The entrepreneur has to know to administer the dog food test (see #6) herself and own the knowledge that comes with it.
8. Knowledge is power. Everyone says this but not everyone acts on it. If you spend parsimoniously and pay the least for each bit of knowledge (but acquire it rapidly) you wind up in the position of being able to move fast and have money left to do it. It's a cold beer on a hot night and what's better than that?
9. Sin in haste, repent at leisure. This used to mean something else when I was in college. Now I mean that if you take money from the wrong people, or too early in your business life, you wind up with bad deals, bad partners, and bad indigestion - for years. Go slow. As your mother told you, look before you leap.