Category: Venture Capital

Getting Rich

Posted on by Steve Sammartino

The difference between investing and entrepreneurship is this:

Investing is a game designed for the accumulation of wealth.

Entrepreneurship is a game we take for the journey itself.

If we’re planning on starting a business simply to accumulate money, we’ve got it wrong. We wont enjoy it. It’s too hard. If we’re driven only by the financial rewards, we’d be better off learning to become great investors. Investing isn’t as hard. There are tried and true investing methods that civilizations have been using for millennia to generate money. If you stay the course on them it’s nearly impossible to fail.

rolls-royce.jpg

If an entrepreneur has great success the rewards can be financially significant. In fact, the biggest financial prizes are won this way. But it’s the wrong path if that’s why we take it.

Zero

Posted on by Steve Sammartino

0. The preferred capital amount for any start up business.

Try leveraging human capital instead. You can still build a global brand, you can still get scale and you can still achieve automation. You can still achieve 4.

If we had known the challenges of raising capital (yes we got it, and yes we learnt much), beforehand we may have come up a different concept.

Capital costs you time and reduce your return on investment. If your new start up doesn’t cost you anything (or very little) to get off the ground, you’ve got less to lose, and it removes financial excuses.

Consider zero, or find a way to move closer to it before you start.

Telephone Book Numbers

Posted on by Steve Sammartino

We have recently come up with a revised strategy to launch our start up business and brand. The interesting thing about the strategy is that it lives on the precipice. Which means it could really boom and change our whole proposition and propensity for success, or it could really bomb and fail. In short we have adjusted our strategy for launch. Our contingency will now be the original strategy if the new ‘phase 2’ launch fails.

This created an interesting situation with our Venture Angel (seed funder). We re-crunched the numbers, spreadsheets, profit forecasts to revise the financial story. Turns out if this thing works everyone gets real rich, real quick. We’ll sell a zillion widgets. Great.

We met with our Venture Capitalist to go through it. This is where the lesson kicks in.

He just looked towards us and said, “Whenever I see telephone numbers like that, I disregard them and sometimes, I disregard the person presenting them.”

He was very clear and measured with his response. Heavy lesson, we nearly lost him through some entrepreneurial stupidity. Let’s call it entrepreneurial exuberance. We immediatly recalibrated and just discussed the strategic implications and why it ‘could’ work. Rather than what the numbers look like if it did work.

Put simply he was focused on what would make things work, not the benefits if it did. There are still a couple of really big if’s to our revised strategy; like consumers actually embracing the concept and our ability to deliver it.

It’s fine to you think know what the financial boon looks like, but never present it. You’ll just lose credibility, like we did. Keep your dream numbers within the inner sanctum of your start up.

When you have a rather big opportunity on your hands that could really kick, break it down into components:

  • Rather than long lead P & L’s, just show Internal Product Margins.

  • Rather than spruking about how many widgets you can sell in a year, just show some launch or test market volumes.

If the venture capitalist is any good he’ll know what the upside is.

De Gearing

Posted on by Steve Sammartino

Last week I blogged about risk. Some of my detractors would have come through with the counter punch of something like “I have a family to feed and a mortgage to pay.”

As you can’t really argue with what was proposed as your true risks, I can’t argue with your real commitments. It’s all a question of gearing. What’s your life geared towards? Maybe you have a large mortgage. Maybe you have an investment property. Maybe you take an annual overseas holiday. Maybe you have a car lease.

I know you deserve nice things.

I know you work hard.

I know your job pays for all this.

I know you deserve a reward.

What is the solution? De-Gearing. You need to de-gear your life. You will never get off the treadmill unless you de-gear. Your lifestyle keeps you on the treadmill perpetually. What could you achieve if you didn’t have any debt? What if you didn’t have a mortgage? What if you sold your house banked the net proceeds, quit your job and backed yourself to make something happen in 12 months? What if you used a portion of your money to feed, clothe and house yourself / family for a year, then you focused all your energy on your start up? What if money was not an issue and you worked on something you were passionate about for 12 months? What if you or your partner quit while the other worked?

This is not a fanciful “if”. Work out your net worth if you sold out all things that cost you money every week. How much money, no freedom, would you really have? What if you de-geared your life? What interest would the freed up assets generate for you on weekly basis? $100, $200, $500? It really opens up some options. The mind boggles.

Worst case scenario, it doesn’t work. You go get a job, probably a better one with more pay. You learn more in 12 months than 12 years. You have a great story for any interview. You’re seen as a pathfinder, a leader, courageous. The type of profile companies are searching for. You live the dream for at least 12 months (1% of you life if you live till 100). You have a great pub story. Cool.Tyler Durden

It’s really a choice.

I can’t coin this any better than Tyler Durdin from Flight Club….  

“The things you own, end up owning you.”

Creative Funding

Posted on by Steve Sammartino

Here are two solid examples of people raising money creatively.

The Million Dollar Home Page and the Red Paper Clip.

http://www.milliondollarhomepage.com/

Sold each pixel for $1 each. The page become newsworthy, the idea virus spread, the site had the traffic and so people paid for the eyeballs.

http://oneredpaperclip.blogspot.com/

Created a blog and swapped his way to a house.

Google both these ideas and you’ll see the exposure they generated. We’re taking a conceptual lead from these in other areas of our start up, namely brand awareness.

Granted their raising wasn’t to fund a start up, but who says you can’t take a creative lead from these to fund yours?Keep your equity and create brand awareness of yourself and your start up surreptitiously.

 

Here’s the kicker, it has to be original thinking.  The Blue Paper Clip isn’t going to work.

The Cash Trap

Posted on by Steve Sammartino

Everyone talks about the importance of cashflow. Every start up book says, cash is lifeblood and without it you die. Cash is king – no dispute. If you are wondering why it is such an issue, so was I.

Secret revealed…

The Cash Trap:  

Definition – The gap in ‘time’ and resulting cash flow impact between paying suppliers and receiving actual payments from sales to customers. 

When starting a business you have to pay for everything up front. Everything from stationary, to product inputs to manufacturing runs. All these will need to be paid for prior to receiving services as you do not have a payment record. Put simply, suppliers are not sure you’re good for it.

 

On the flip side, when trying to get new customers, it is very hard to demand money up front. Most re-sellers have terms of trade. For example, payment net in 30 days. This creates the cash trap. In my blog entry 4, I wrote about the customer being the consumer as a must have. The ‘cash trap’ is the reason why. It reduces the impact of the cash trap. It improves cash flows by reducing the gap in time between inputs paid to revenue received. A business with very short business cycles and consumer direct interaction may even eliminate the cash trap.

Huge margins are irrelevant, until you have received the cash from the sale. In fact in a start up with a lengthy cash trap, growing too quick can be you’re worst enemy. Strong sales early, can send you broke.

Profit and solvency are not inextricably linked.