Burning through investment capital


With rare exception, every entrepreneur I meet is seeking capital for their startup.

I understand why.  I’ve been in their shoes a half dozen times before.  Investment capital buys opportunities and shrinks the time to grow a startup.  At least in theory.

The trouble too often comes when first-time entrepreneurs close a round of investment and feel obliged to spend that money as quickly as possible.  In the venture world, spending the money from investors is called burning capital, and too often the capital burns up like kindling without turning into the promised growth in revenues.

When guiding my fledglings through the Fledge accelerator, I put a lot of stress on planning, and at the same time, I make it clear that one thing we know about such plans are that they are wrong.  The plan says we buy a truck this month, then next month revenues go up.

With such a plan, as soon as the funding hits the bank, it gets spent on a truck.  What you are supposed to do next is track the revenues to see if they do indeed rise as projected.  If they don’t, then before blindly following the next piece of the plan, buying the next piece of equipment or hiring the next staff member, you are supposed to go back and figure out why the plan was wrong.  Adjust the plan.  Iterate.  Slow down and pay more attention to the business.

What you are not supposed to do is continue buying everything on your list of “use of funds”, 9 or 12 or 18 months later finally noticing that the revenues are not in fact matching your projections, that the cash in the bank has dwindled to almost nothing, and that all that investment capital has truly been burned, with little to nothing to show for it.

When this happens, every entrepreneur turns to me again to ask how they get more money.

When you burn through cash making no progress, the answer is that you don’t get more money.  If you prove yourself an entrepreneur who burns capital without hitting milestones, your one and only chance at raising money has been used up.  Your choices then are to give up, or to make the difficult switch to being an entrepreneur who earns their way to success.

Long story short, when you raise money, spend it slowly and carefully, treating it as if its the last unearned money you will every get.

[Image from Flickr]
By "Luni"


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