Golden rule of business: Increase shareholder value.
Golden rule of investing: Buy low, sell high.
Most entrepreneurs know these golden rules. To a
great extent, they are (or should be) obvious and self evident. They are
"rules" because they set the foundation for business mission
statements, goals and decisions.
There is another important golden rule that many
entrepreneurs overlook, specifically startup entrepreneurs. It was recently
driven home to me in an email from Mike Schroll, the founder of Startup.SC, a
South Carolina business incubator with which I am currently working to develop
my own startup idea. Working late one evening last week, my computer inbox
"pinged" with his single-sentence message:
"I
challenge you to achieve what you are doing with less capital."
Granted, my first reaction was that this was
obvious. Of course, all businesses should try to do more with less. But as I
started to consider my proposal in its current iteration, I did notice that I
had built a "perfect-world" scenario for my capital-raise ask, which
was significantly high. I have an ambitious goal, or BHAG, but I was treading
dangerously close to a trap that many entrepreneurs fall into.
The problem with this is that the
"perfect" amount of money is a fallacy. Indeed, if you have a unique,
revolutionary and proprietary idea, combined with the right amount of money it
stands a significantly better chance of becoming a success. But most of us do
not have this type of idea -- we just have an idea -- and investors have many
investment choices and typically want to spread their risk around to many
startups.
Ultimately, what investors want to see and what
you need to consider is the amount of money needed to achieve two goals:
1. Getting your idea to market.
2. Growing your customer base as quickly as
possible.
Because capital is scarce, startup capital that
goes to anything else will be considered wasteful. For instance:
Personnel
About the only thing that is critical for
success is personnel needed to get the startup launched. Engineers and
programmers are expensive, and they are well worth the money in terms of developing
the right minimum viable product or prototype. What should not be considered is
a founders’ lucrative salary.
Unless you are a well known and sought-after
founder (most of you are not), investors do not want valuable startup capital
going to line your pocket. Be prepared to put in time and sweat to show your
commitment, for which you will be rewarded with an investment.
Marketing and advertising
Customer acquisition cost is a key consideration
for investors. If your strategy is just to spend money on advertising for the
sake of spending money, then revisit your strategy. Approximating your return
on marketing budget is critical, and though there is no way to be exact,
demonstrating your critical thinking and understanding of its importance will
make you appear much more credible.
Overhead
Precious startup capital should not be wasted on
things such as offices, furniture, foosball tables and coffee bars, unless
these things are critical for retaining key talent. Unless you are a
sought-after founder with existing partnership with established venture
capitalists, however, be prepared to bootstrap your way through development and
launch.
Everything else
Everything else needed to get started, from
legal to accounting to utilities to janitorial, needs to be kept at an absolute
minimum. No founder is beyond sitting in a hot office or taking Clorox to the
toilet bowl. If your dollars are not going to build your product and gain
customers, then they are being wasted.
While this concept may be obvious, I personally
have spoken to countless entrepreneurs who visualize the launch of their idea
with a complete misunderstanding. Many mistakenly believe that they need a
Google-esque office, unlimited vacation days and full benefits, when in reality
a cinder block desk, Internet access and the unwavering commitment of an
ambitious entrepreneur is really all you need.
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