“So what you’re telling me is that we have never made money?”
This was an actual statement from an actual entrepreneur that was not happy with our conversation. Everything I was saying was not making sense to an entrepreneur that had money in the bank, a house, cars and investments all paid for by his business. The problem was his business had never actually made any money. The business owed more to creditors that it was expecting to receive from customers and had negative equity on its balance sheet. Basically, all the personal wealth that this entrepreneur had was from the creditors in his business including the government, vendors and his bank. Cash flow does not mean profit and this entrepreneur was about to discover how big a hole he had dug.
It’s not unusual for an entrepreneur to remind me that they are not experts at financial “stuff” and simply know their product or service really well. The brave and confident ones tell me that they may not even know their product or service really well but that they can sell. Whatever the case may be I have discovered there is really only one formula that matters when it comes to business:
This question seems to be a conversation piece that is coming up a lot in recent meetings with entrepreneurs. It’s a funny question because most entrepreneurs think they are building a business but spend their days working in their business in an actual role that they could hire out. By working in the business as an employee, the owner of a business is not being paid for the risks being taken and there is no real value being created. Generally speaking, employers look to leverage the cost of an employee to produce a return. For example, if your business pays an employee $1 you would expect to earn back the $1 plus some amount of profit to compensate you for the risk you assume running the business. The risks you assume should line up with the value you believe you can build. If your product or service is priced right and you have a stable customer base, then a business owner should be able to generate money and value without needing to do any of the work themselves. So why do business owners get stuck being employees?
I spend lots of time thinking about the economy and read a story that again talked about the same topics I have seen for almost a decade:
Low interest rates and flat economies
In the greater world around us improvements generally seem to be marginal at best. No one country is really changing our world and the number of entrepreneurs pursuing true innovation seems to be a limited group.
I have a friend who is pursuing a new direction with his business and was looking for some advice. His existing business has been operating for many years and he has been boot-strapping his new venture. It looks like he was able to get validation for the idea and even has a few paying customers. He has used the cash from his operating business to bootstrap this new venture and it looks like he really has a shot at bringing a very innovative (and disruptive) solution to market. His challenge is to figure out when he should seek financing to support the opportunity. He could probably continue to nurture the business along and do well however to really capitalize on the opportunity he needs to pre-pay the expenses that come along with capturing a market.
That would be Marc Andreessen, Fred Wilson and Bill Gurley (if you don’t know who they are Google them). As venture capitalists’ they are seeing an environment amongst technology companies who have raised money and are burning through it because they have no understanding that money doesn’t grow on trees. While I am not in the venture capital business I see an amazing comparison to in my every day activities.