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CASH IS STILL KING

Cash, whether your own or someone else’s, is still king when it comes to

operating a business. Some research reports that as much as 70% of new

business ventures fail within the first two years. And many of those are due to

lack of capital.

Understanding where those funds should, and should not, come from is critical

during the various stages of growth in your company. Obtaining and using capital

can either be a hindrance or a spring board to greater growth in your business.

On the following page is a “typical” timeline for where capital should be coming

from. Keep in mind that there are a variety of scenarios in which cash may be

obtained differently. The idea here is to give you a basic understanding, not get

you to become an expert.

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A “TYPICAL” TIMELINE

F.F.F.

Angel investors

Venture capitalists

Lenders

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significant milestones in the form of

revenue or other achievements

DEFINING EACH GROUP

1st group – F.F.F

This refers to founders, family, and friends. Too often I speak with new

entrepreneurs starting out on an endeavor that think they can jump right

past this group straight to investors. Think of it this way. If you and those

close to you will not invest in your idea, why should someone that you

haven’t even met?

At this stage of the business there is usually little more than an idea and

the basis of a business.

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DEFINING EACH GROUP (CONT.)

2nd group – Angel investors

Angel investors are typical well to do individuals who invest in early stage

businesses in the hopes of a greater than normal rate of return. Typically

they have a minimum net worth of 1MM.

At this stage of the business there is either zero or very little revenue.

The business is most likely not cash flow positive to date. The idea itself

has been fleshed out and the company has all of it’s legal documents in

order.

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DEFINING EACH GROUP (CONT.)

3rd group – Venture capitalists

“VCs” are institutional investors that pull together funds from other

investors and manage the investment process. They generally have a

portfolio of companies that they have invested in, and often have an

appetite for certain industries.

By now the company has accomplished a variety of achievements

and milestones. Revenue streams have been identified and are proven.

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DEFINING EACH GROUP (CONT.)

4th group – Lenders

Good examples are banks and other traditional financial institutions.

The company has a track record at this stage and has been in business for

at least two years. Revenue is strong enough that the company can

support it’s own growth through positive cash flow. This does not imply

that the company does not need capital via loans, only that it’s cash flow

can service the debt without outside help.

Let’s take a look at the timeline with our new understanding and talk about the

difference between investors and lenders. Again, this is only meant to give you a

base knowledge.

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A “TYPICAL” TIMELINE

F.F.F.

Angel investors

Venture capitalists

Lenders Futuristic Historical

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significant milestones in the form of

revenue or other achievements

FUTURISTIC VERSUS HISTORICAL

So what do I mean by futuristic and historical? It’s a bit of a generality, however

the first two groups (F.F.F and angel investors) put the vast amount of focus on

what you say you will accomplish in the future. Things like business plans (or

“decks” as investors call them) and financial projections are used to gauge

potential success.

Side note – the old idea of doctoral thesis sized business plans is dead. If you

intend to start a business the best thing to do is to build a “deck”.

Venture capitalists and lenders are however looking at what you have

accomplished. Revenue is often a good gauge, but depending on your industry

there are others. Startups in the tech industry are often investable without any

revenue. Instead their membership size acts as the test.

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RIDING THE RAISE

Being an entrepreneur is not for everyone. While many people dream about

starting their own business, the reality is that very few actually succeed. I recently

heard that the average revenue for the self employed is about $6,000 a year.

While this number is probably skewed by part-timers and home based

businesses, it doesn’t paint a pretty picture. Dreams aside, entrepreneurship is a

tough ride. But understanding how to “ride the raise” is a step in the right

direction.

Jonathan Mills Patrick

JPC Enterprises

jmp@jonathanmillspatrick.com

P.S. Feel free to email any questions to me at the email address above.

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