I have said it a million times since learning the lesson myself in a failed entrepreneurial effort a couple of years ago, the CEO of any entrepreneurial venture must understand the importance of managing cash flows and how to use cash flow analysis for the strategic growth of the company.
Trust me, I am all into the Six Sigma approach of throwing a couple of innovators together, rolling out a v1 product as quickly as possible, and slowly scaling the company from hobby phase to a successful business. That is the new world of entrepreneurship. As costs to get tech businesses launched have drastically decreased over the last few years, $100k has become the new $1MM in capital funding (to steal a line from Kristian Andersen). It seems rational that the lower capital funding should cause business owners to be more efficient in their cash flow analysis, but my observation has been otherwise. With lower dollar investments, private equity investors often don’t require the level of businesses sophistication from the management team. Entrepreneurs are held to lower standards and are less accountable to investors. The lower dollars have actually allowed entrepreneurs to focus less on managing finances. This is a trend that needs to stop.
I see around 150 new business concepts every year (about 3 a week). Some of these are coming to me as potential clients, some from angel investor groups I represent or belong to, and others as companies I am asked to partner in. Most models have thought through the market opportunity – they feel the problem, they recognize how to solve it, and they identify who will buy their solution; But most models fail to adequately address the “sources and uses” of funds required to get the company to profitability and how they will manage “uses” as the business grows.
Entrepreneurial ventures need to be nimble – be able to pivot on the market opportunity as they scale. I believe the businesses that are best able to pivot have a great handle on their capital strategy – and there is a CEO who understands how to use that strategy to best grow the company.
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See also:
Funding Law - Know Your IRR
The Sources and Uses Statement
Funding Law - Know Your Numbers
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Alerding Castor Hewitt, LLP is a law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.
Trust me, I am all into the Six Sigma approach of throwing a couple of innovators together, rolling out a v1 product as quickly as possible, and slowly scaling the company from hobby phase to a successful business. That is the new world of entrepreneurship. As costs to get tech businesses launched have drastically decreased over the last few years, $100k has become the new $1MM in capital funding (to steal a line from Kristian Andersen). It seems rational that the lower capital funding should cause business owners to be more efficient in their cash flow analysis, but my observation has been otherwise. With lower dollar investments, private equity investors often don’t require the level of businesses sophistication from the management team. Entrepreneurs are held to lower standards and are less accountable to investors. The lower dollars have actually allowed entrepreneurs to focus less on managing finances. This is a trend that needs to stop.
I see around 150 new business concepts every year (about 3 a week). Some of these are coming to me as potential clients, some from angel investor groups I represent or belong to, and others as companies I am asked to partner in. Most models have thought through the market opportunity – they feel the problem, they recognize how to solve it, and they identify who will buy their solution; But most models fail to adequately address the “sources and uses” of funds required to get the company to profitability and how they will manage “uses” as the business grows.
Entrepreneurial ventures need to be nimble – be able to pivot on the market opportunity as they scale. I believe the businesses that are best able to pivot have a great handle on their capital strategy – and there is a CEO who understands how to use that strategy to best grow the company.
~~~~~~~
See also:
Funding Law - Know Your IRR
The Sources and Uses Statement
Funding Law - Know Your Numbers
~~~~~~
Alerding Castor Hewitt, LLP is a law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.
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