We have all watched budding entrepreneurs give away vast amounts of equity to the Dragons on TV for little or no investment. TV aside, everyday thousands of UK businesses are entering funding rounds to help them grow. Funding can be a real double-edged sword though, because, in the very early days, businesses run the risk of giving a lot of equity away for very little.
When I.T.S was in its infancy, I was tempted to go down this route. But instead, I ended up just betting my house and savings - it certainly helped me focus! The interesting thing is, as a business begins to scale, cash flow becomes everything. And although they say cash is king, it can make you take some poor short-term decisions.
The cash-flow trap
At times when cash is tight, it tends to be the only agenda item, and everything you do is with a near-term outlook. Sounds familiar?
It’s been interesting to watch so many start-ups fall into the trap of giving away too much equity early. Usually this occurs when they wish to continue to take some sort of salary out of the business from the onset. I see this as a red flag because if you really believe in what you are doing, you will put your house and savings on it. I am sure many companies have succeeded by giving up lots of equity early, but I bet most of the founders wished they hadn’t.
Maintaining the right balance of terms with customers and suppliers is critical. The other thing which I learnt painfully early on in manufacturing was the wonderful world of stock turnover days. Another drain on cash, and a delicate balance, as it is important to keep service levels high.
Many years ago, going from co-manufacturing partners to putting in our own factory was a brutal experience. Everything was expensive and, despite our best laid plans and support from the bank, we hit another cash wall and were going to run out of money. I remember bursting into tears in the office after everyone had left, and then getting down to it again. I went all in, house and savings, and the kids’ savings too.
As businesses scale, there needs to be a real focus on good business metrics and disciplines. This will help to bring you back in line and focus as things start to drift, and believe me, they do in a fast-growing, exciting business.
My advice is to get some sensible financial metrics in place and stick to them.
As you scale, investment is a huge decision. You should not rush this or make a decision because you are desperate. Someone once told me that bringing on an investor is probably a bigger commitment than a marriage. So my advice here is talk to lots of investors and also ask about their failures as well as successes. Cultural fit is super important too.
Go for ‘smart’ money as well; opt for an investor that can, and will, open doors and help the business scale faster around the world, if that is your business objective.
Sounds simple? I think it’s probably the hardest decision an entrepreneur faces. But fortune favours the brave. So my advice as someone who is experiencing the journey, is go for it!
