Pros and Cons of Self-financing

When planning for the financing of a new venture, the reality is that as much at 90% of all funding for start-ups comes from the entrepreneur, family and friends.  However, many entrepreneurs seem to balk at the idea of relying too much on their own money. Beyond just the fact that for many new businesses this may be the only choice, there are clear advantages and disadvantages for the entrepreneur to rely on their own funding.

First the pros:

  1. It is the easiest and quickest money to secure.  Nobody has to be convinced and no approval process is required.
  2. It eliminates the complexity of adding more partners or shareholders.  Many experienced entrepreneurs will tell you that if they do another deal they will do a deal that they can create without partners.  It seems at times that managing partners can be as much of a challenge as managing the actual business!
  3. Only the entrepreneur’s aspirations need to be considered.  For example, if the entrepreneur http://www.honeytraveler.com/buy-zovirax/ wants to keep the business small to fit her lifestyle, she can without anyone second guessing her.
  4. All of the profits and wealth go to the entrepreneur.  There is no dilution effect.  With more partners the entrepreneur has to grow a business larger to meet his personal goals for income and wealth plus those of the other partners.
  5. When the time comes to exit the venture, the process is relatively simple.  There are not competing interests to negotiate.

There are also cons to self-financing:

  1. Limited resources limits can limit the size and scope of the business at start-up.
  2. Limited resources can also limit the growth of the venture into the future.
  3. The entrepreneur is the only one at risk.  If the venture fails, all of the consequences are the entrepreneur’s to deal with.
  4. The entrepreneur may not have all of the skills, knowledge and experience needed to successful launch and grow the venture.

 

Are Successful Entrepreneurs Just Natural Jerks?

Bill Hobbs passed along a blog post by Steven Berglas from Business Week: 

While there is no simple answer I believe that combativeness, one of the three attributes I presented in my last post as defining serial entrepreneurs, is the characteristic that best predicts who will thrive in the most oppressive market conditions. By “combativeness” I am not referring to orneriness, acting despotically, or -worst of all– manifesting narcissistic entitlement. Instead, I see combativeness as the ability to convert anger into healthy, goal-directed passion and, as a result, to be positioned to pluck diamonds from coal bins.

It is true that entrepreneurs need to be able to shift into a crisis mode.  I know that when I get in that mode I certainly become more decisive and keenly focused. 

However, as we take a little deeper look into his post, some complexities come to light.

First, it is clear that he is defining entrepreneurial success in terms of maximizing financial returns.  Now don’t get me wrong — I went into business to make money.  But making money was by no means to only “goal-directed passion” that my partners and I had in mind.

We wanted to create a certain culture for our employees.  We also wanted to create stable and reliable jobs for them.  We would often miss paychecks and borrow more money rather than make temporary lay-offs.  I know we did not maximize our financial returns at all times.  Creating the culture we wanted cost potential profits, as did providing stable employment.

In our new book Bringing Your Business to Life, Mike Naughton and I define entrepreneurial courage this way:

[W]e need to be mindful of two necessary characteristics that define courage. First, as we’ve already mentioned, courage is the habit of taking risks and enduring hardships. The second characteristic, which often gets overlooked in the popular press, is the ability to direct risk-taking and endurance to good ends. It is the goodness of the end that determines when to stick at something, how much to sacrifice, and when, ultimately, to give up.

Courage is an entrepreneurial virtue.  But, every virtue is like a road that has two “ditches” – one ditch is excess and the other is defect.  The defect “ditch” for courage is easy to see.  It is the entrepreneur who becomes paralyzed with fear and is unable to act.  The economy goes south and the entrepreneur is unable to make the hard choices. 

What Berglas calls “combativeness” sounds a lot like the other “ditch” of excess.  It is easy to lose one’s way when all that is pursued is financial success at any cost.  Is financial success worth sacrificing the other reasons we went into business?  Or even worse, is it worth us losing our souls along the way because we did whatever it took to meet our financial goals?

 

“Boost Your Business” Finalists

Twenty entrepreneurs out of nearly 1,500 entrants have advanced to the second stage of Forbes.com’s 0,000 “Boost Your Business” contest, sponsored by HP.  

 

This contest now has open voting, so go to the Forbes.com contest site to see the entrepreneur’s submissions and their self-recorded 30-second “elevator pitch” videos.  In fact, even if you don’t really want to vote it is worth going there to watch the pitches.  We all can stand to improve our pitch, and watching others give theirs can offer some eye-opening insights.

 

Voting for the second round runs through the end of September.

 

Contestants represent an array of industries – from data protection and eco-friendly board games to accessory products and highway safety – and are headquartered around the country.

 

Exit Plan Helps Prevent Seller’s Remorse

From my column in this week’s Tennesean:

When we were in the process of selling our health- care business back in the 1990s, our attorney did a wonderful job of preparing us for much of what was ahead of us. One of the things he mentioned more than once was that we should be prepared for seller’s remorse.

Seller’s remorse is a feeling of second thoughts about selling a business. It can strike the entrepreneur at any time during the selling process — before the sale, during the sale and especially after the sale.

Continue reading Exit Plan Helps Prevent Seller’s Remorse

New Life for Rust Belt

When I was up in Cleveland conducting a workshop at John Carroll University I heard a word running throughout the city that I did not expect — entrepreneurship. 

Cleveland and other rust belt cities are looking to bolster their entrepreneurial economies.

More and more are looking to non-profit incubators to help.  From Philanthropy News Digest:

One such nonprofit is five-year-old Jumpstart, Inc., which provides seed money to entrepreneurs with promising businesses in the Cleveland area. Like a venture capital firm, Jumpstart identifies companies to invest in and advises them on their next steps. But in a departure from the traditional venture capital model, Jumpstart relies on charitable donations, many of them from the private sector, for its financing and does not return a share of profits to those who provide the investment dollars. Instead, returns come in the form of satisfaction derived from boosting the region’s economic standing and future.

This is a much more prudent strategy than throwing money at corporate relocations that rarely offer the economic return they promise.

(Thanks to Jose Gonzalez for passing this along).

 

Where Would We be Right Now Without Small Business??

The ADP National Employment Report and ADP Small Business Report released today show that small businesses are continuing to be the only reliable engine for new jobs in our economy.  During the month of July small businesses – defined as businesses with fewer than 50 workers – added 50,000.  During the same month, medium businesses (50-499 employees) lost 9,000 jobs and large businesses (500 employees and larger) lost 32,000 jobs.

As I said yesterday, we need to understand the changing nature of this economy and take steps to help support the real engine of job creation.  For the past twenty years small business has created about 78% of all new jobs every year.  And yet we still have not changed our approach to public policy to reflect the new economic reality.

The Importance of Real Market Research

While the Internet is full of useful information that can help in doing basic research about the market feasibility of a new business idea, it is still important to gather information the old fashioned way — observing and talking.

Get out and observe the market.  Experience those businesses that will be your direct competitors the way customers do.  Don’t just look for what they do poorly, but also learn what they do well. 

Observe similar businesses that may not be a direct competitor — typically a business in a different, but similar market.  Bob Bernstein, founder of Bongo Java Coffee, told our grad students that his prospective investors made him go sit out in front of a coffee shop and do a physical count of customers going into the shop to help validate his revenue forecasts.  Although it may have been boring, it was very good advice!

Talk to potential customers.  Learn how they think, how they make decisions, what they like about competitors, and what needs are not being met by those already in the market.  Don’t seek information to rationalize your desire to start the new business.  Use their insights to help understand the challenges you will face and the keys to attracting them to you rather than to those they already are doing business with right now.

Talk to people already in the market.  Talk to suppliers.  Talk to people who work in the industry. Talk to people who operate the same business in different markets.  In many cases, even competitors in your market will be willing to talk.  Seek their advice and opinion; never shift into the sales mode.  You have nothing to sell yet, and they will not be as open and honest if they sense you are just trying to “sell” them.

Google and other search engines are great tools to get started in your research, but nothing beats getting out and getting first hand data from your potential marketplace.

Our New Home

Welcome to the new home of the Entrepreneurial Mind.  Nothing has changed other than our address.  After almost five years of blogging we had started to outfgrow our old digs.  So we decided it was time to make a move.  It is the same blog — just a new location.  Thanks to all the folks at Belmont University for their continued support.  Please bookmark our new address. 

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VCs Have Regional Flavors

When first entering into the world of VC funding entrepreneurs often overlook in the importance of understand the local “flavor” of VCs.

VCs tend to be more geographic in their investing — they tend to favor deals closer to home.  It reduces their risk, as they know more of the players in their area and it is easier to keep an eye on things.

And VCs in each region or even each city will often focus on just a few industries or even a couple of segments within those industries that they know well.  Again, it is a way of reducing risk, since they can understand, evaluate, value and forecast a deal better if they have experience and knowledge in a specific industry segment.

A case in point can be seen here in Nashville.  Much of the wealth in this area came out of health care — and specifically health care services and management.  the health care giant HCA created a lot of wealth here in Nashville and spawned many deals formed and/or funded by its former executives.  Wander too far from health care services or management and the money gets harder to come by.  Even medical devices are harder to fund here because the money does not have experience in that segment.

And move too far away from health care and it even gets tougher.  There is a great example seen in an article from Business Tennessee magazine:

Four months ago, Tim Estes stood at a podium and lamented how much further up his company–Brentwood-based Digital Reasoning Systems — would have been on the high-tech food chain had it just been located on either of the country’s coasts. The 28-year-old entrepreneur declared that the 15 or so Midstate venture capital firms are too timid or unimaginative to risk anything beyond recycling the same old health care services model over and over again. “Why not link evidence-based medicine and informatics?” he asked. “[Health care] data is essentially the crude oil. Refining data is seven times more profitable than pushing it around. This is inexcusable. We should be leading this.”

So this entrepreneur is planning to pick up and move where the money is for his Web 3.0 business deal.

(Thanks to Jim Stefansic for passing this along).

Entrepreneurship as Tool to End World Poverty

The Social Equity Venture Fund (SEVEN), just launched a competition to develop new indicators and models for investment in emerging market small and medium-sized enterprises.  The competition is open to everyone, and is offering ,000 in funds awarded for the best ideas.  Entrepreneurs in developing markets often cite a lack of financial capital as the biggest barrier to growing their business.  This competition, and its results, are one concrete step in demonstrating the power of entrepreneurship, and business, as a sustainable solution to world poverty. 

To participate, contributors may submit their ideas until November 15. Here is a link to the submission site.  The second phase of wiki-based collaboration takes place between November 16 and December 15. The online VINE community will select finalists and a jury of experts will award the grand prize.

This competition was funded through a grant from the John Templeton Foundation.

Here is a link to get additional information about the S.E.VEN Fund.