RENO, Nev. — “Build a better mousetrap, and the world will beat a path to your door.”
This famous quote is attributed to Ralph Waldo Emerson in the late 19th century.
Demonstrating proof of concept is the surest way I know to secure sufficient capital from investors and lenders.
I’ve been involved with scores of new endeavors. The entities still alive and thriving today all shared common characteristics. The founders had a clear vision, and they developed a thoughtful capital formation plan for the “genesis” period (first 180 days) of their firm.
Critically, success was gained on a small scale first — beta testing. Oftentimes the founders started from the proverbial garage and only had access to a “shoestring” budget for initial start-up capital. The resulting success allowed the entrepreneur to pursue one of two paths:
- Reinvest profits for slow and steady growth
Organically sourced capital is less risky and demonstrates character, resilience and self-reliance. All are attributes future investors and creditors will admire and reward.
This limits the amount of capital one can access for rapid growth. The ability to rapidly increase the scale of one’s operations is often the difference between success and failure. Firms with cash to invest have a critical advantage.
Modern economic theory discusses the “exploitation curve”: a novel idea or innovation has a shelf life by which to maximize profits.
The principle applied: your better mousetrap must achieve maximum earning capacity rapidly before competition and innovation inevitably dilute future earnings.
- Solicit external sources of capital
Financial analysis of nascent enterprise activity and/or pro forma financial projections may be sufficient to secure the monies you require to achieve rapid growth and success.
All lenders and investors will utilize some proprietary formula by which they’ll analyze revenues, and margins over a specified time frame to determine the merit of an investment in your enterprise (e.g., some alternative on-line lenders require at least six months of financials and minimum revenues of $10,000/month before they’ll consider your application — terms vary.)
Prudent executives pursue both pathways simultaneously. Hope for the best; plan for the worst.
BRIDGE BUILDING BUSINESS
Frequently I encounter courageous and passionate entrepreneurs with a dream: They are always running frantically … striving to achieve sufficient velocity … they jump off the proverbial ledge reaching for the other side.
Why not use a bridge, instead? Here are three things to keep in mind:
- Financial Freedom:
“Always seek money from a banker when you don’t need it; they never lend to the desperate.” Before I started my first business, I visited my local banker. He happily approved me for two credit lines — I was employed and low risk.
I also saved enough money to cover my expenses for 90 days. I had a plan: If I did not achieve certain revenue benchmarks by certain dates (proving the concept), then I wanted options before I did serious financial harm.
I never had to use the bank credit lines, but knowing they were there was comforting. Confident and fearless I avoided the sleep-depriving stress of cash flow concerns.
- Apprenticeship, aka “know before you go”:
Examples: Work as an entry-level worker in your industry. Work for a large competitor in an industry you plan to reform or disrupt — learn from inside the beast.
Volunteer: I started a mortgage company, but first I volunteered with a local housing advocacy group in my city. The experience allowed me firsthand access to the prerequisite basic skills, industry methods and best practices. I learned both how to and how not to do it.
The insights into the dynamic of the marketplace allowed me to develop my unique value proposition. I developed critical relationships in the industry, which turbo-charged my ability to access capital.
When I formally opened my doors, I was established with a strong foundation. The preparation and knowledge gained allowed my firm to enjoy immediate success.
- Fill the pipeline before you open the valve:
Before I officially opened many of my new endeavors, I already had clients, contracts, and cash. I had a plan.
Often, 60 to 90 days before we were to officially open for business, we were able to secure initial commitments for transactions. There is nothing more daunting than throwing a big party — and no one attends, right?
Create a virtuous cycle: an enterprise that is prospering attracts more customers — success brings credibility and thus more success.
THE FIVE C’S OF LENDING
How does this apply to capital and its various sources you ask? All “creditors” will consciously or unconsciously follow the “Five C’s of Lending”:
- Character: How well do I know this person or enterprise? Are they trustworthy, reliable, and of good moral character? When facing adversity will they take the easy way out?
- Credit: A corporate and banking algorithmic measure of your character. Do you pay your bills on time? If so, then your FICO and Dunn & Bradstreet scores will be worthy of capital. Credit ratings are critical to access capital — capital is the lifeblood of business success.
- Cash: How much liquid reserve do you have available and how much are you willing to commit to the enterprise? Cash-on-hand demonstrates thrift, foresight and sound financial management. Lack of cash warns prospective capital sources you may not be a good investment.
- Collateral: What other assets do you own which might serve as additional assurance of your good faith? Assets: real estate, stocks, precious metals, inventory, invoices, contracts, etc.
- Capacity: What is your ability to repay the loan? Lenders will consider both the business cash flow as well as the personal resources of the business owner. After all expenses are paid, the profit left must be more than sufficient to pay the monthly obligation. No sales? No capital.
Now, put yourself in the shoes of your prospective source of funding. How would you rate your profile based on the “5 C’s” above?
Where you are found lacking, I suggest you focus on improving. Consider using the three bridge building tactics before you leap. Bottom line: Would you lend to you?
Sean McCarthy a Focal Point Coach and president of Sean McCarthy Business Coaching in Reno. Visit seanmccarthycoaching.com to learn more.
