Dear reader, this is the forth column of four. You may find the previous three in my blog.
“After you have a solid business plan and actual market feedback on your product concepts, including revenue,” I continued, “you’ll want to think about raising capital.”
“You don’t want your company to wither on the vine before it ripens, so we’ll need to raise a round of Friends and Family money.”
“How do I do that? Just ask them for a hundred bucks each?” she asked.
“First, you need to figure out what you’re willing to give up in exchange. Are you willing to give up part of your company already? Are you willing to give up equity and report to a board yet? Or should you just consider a loan or structuring it as debt?”
“Equity. Debt. Board. Man, these are things I haven’t thought about at all,” she confessed.
“Have you heard of Old Wives’ Tales?” She nodded affirmatively. “This is one from the world of business ‘Most companies die of digestion rather than starvation,’ meaning they got a bunch of orders, hit a certain level of success, and then imploded –couldn’t produce and deliver quality at the rate the market desired. Think of all the struggle, the goodwill burned, the heartbreak of having to let people go, the taste of failure.”
She nodded, as this vision was one potentiality.
“The reasons they fail are two-fold, and unavoidable. First, they didn’t have a viable plan for scaling their growth. A plan cannot predict every possible pitfall, but it gives you a roadmap for finding your way and highlights key assets and resources you’ll need at certain levels of growth. You’ll be able to have a sense of what’s needed and can adapt more readily, more creatively with this plan. It pays to do your homework.”
I took a minute and made sure she was listening. She was, deeply.
So, I added, “the other reason is simple: money. Growth takes capital, investment; think of it as fertilizer. You have to spread it around pretty thick and generously, until it hurts, really. This is why you’ll need those Friends and Family dollars, to have something to put to work before you can either get a bank loan or raise what they call ‘more institutional money.’ Without ready capital, you can get trapped in a death spiral, a painful spot, which is why you want to plan for growth, account for it, and have money on hand when it is time to grow. I’ve had too many friends—all good people—who grew for a few years then got in over their heads, couldn’t handle their loan service or the price of production, then screech and grind until they finally close shop, still owing taxes, others. It’s a tragic end, but it is avoidable.”
Don’t focus on just the products. Write a business plan. Test market. Raise some money. Then, build with your plan as your guide. What a grand adventure.