Whether you’re starting a lemonade stand or a global network equipment manufacturer, your business will need funding. To expand a business, you will need even more funding. And, if for any reason you have to close the business, the cost of closing it will be extraordinary.
Startup costs begin with the investment of the entrepreneur’s time. That time comes with a real financial cost. Rather than starting a business, the entrepreneur could be employed and earning a living. The lost income is the first investment in the business.
Successful entrepreneurs I’ve interviewed have averaged 3 years before they were making an income equal to that of their last jobs. In my personal experience, my income dragged behind my employment earning opportunity until I sold a business a decade later. During that time, I paid employees more than I paid myself in order to provide incentives. While one of them sent kids to private schools and joined a country club, I continued to send my kids to public schools and get my exercise walking the dog. When all goes well, this financial investment pays off.
Self-funders have to turn a profit quickly, and are likely to be in a business where product development costs are low and market opportunity is crystal clear. Many of them start as solo-preneurs working from their homes in the evenings and weekends, using the “banks of Visa and American Express” to fund their businesses.
Small, self-funded businesses still need a line of credit. The recurring advice from entrepreneurs is to get bank loans or a line of credit, when you don’t need it. You don’t have to use it if you don’t need it. If you do need it, the chances of getting it decline dramatically.
Next, there is the cash required to build a business. Perhaps it is the cost of legal or accounting advice. Or, it’s the cost of equipment to build the technology or bake the pies. Then there are the rent and salaries to be paid. This cash comes from the savings account, the retirement account, some type of credit account, or family and friends. This type of investment is even more important than the lost income because the investment is cash, post tax income, and represents the security of your retirement, your credit score, and in many cases your home equity. In addition, you risk relationships with family and friends if the business is not successful.
Eventually, the business may need an infusion of investment beyond your available resources. That can mean Angel Investors or Venture Capital. This gives the entrepreneur the opportunity to have plenty of cash to buy needed equipment, hire the necessary people, manufacture the needed supplies for retailers, and pay people through the growth of the business. These options also mean giving up some percent of your business to the investors. The more cash you need, the more you give up, and the less control you will have over the business.
Several entrepreneurs I interviewed not only lost control of their companies to investors, but also lost their jobs as CEOs. The investors want an experienced CEO to manage the company and protect their investment. They also want to see a return on their investment within their own timeframe. Even if you can grow the business 100% over and over and reach profitability within a few years, many investors will be unimpressed. They are looking for a big enough and fast enough return on investment. If the return isn’t there, they have to move on, which means modifying, selling or closing the business.
New funding options are growing, such as Crowd Funding. As always, entrepreneurs are inventing new ways to solve old problems!
All the best!