(L to R) Aviv ‘Vivi’ Nivo, venture capitalist and major shareholder in Time Warner, and Robert Scully attend the annual Allen & Company Sun Valley Conference. (Photo by Drew Angerer/Getty Images)
As I noted in a previous blog, entrepreneurs pay a high cost for capital. As an entrepreneur, your cost of capital includes many aspects (some of which overlap).
- Financial cost of money that includes the target return to investors or interest rate to lenders
- Dilution cost of money that includes the portion of future wealth given to investors, which is based on the investors’ target return
- Control cost of money, which is the loss of control of the company and of the wealth generated (if any)
- Leadership cost of money, which is evidenced by the potential that you may not stay as the leader of your venture going forward, and
- Guarantee cost of money that is the cost of the personal guarantees (and personal collateral) demanded by lenders
But can you reduce your cost of capital? Here are some strategies from high-performance entrepreneurs that may help you to cut the cost of your venture’s financing.
Prepare before you launch – test your key assumptions. Many entrepreneurs make decisions based on their gut feel. But instinct can take you in the wrong direction. Instinct can be inaccurate and can often be based on greed and fear – neither is a great foundation for sound decisions. Poor decisions can result in poor financing and wasted opportunities. What I found is that highly successful entrepreneurs prioritized their key assumptions, and tested the ones that could kill their business. Jill Blashack Strahan tested her assumptions for about two years before launching Tastefully Simple – one reason why she built it into a $100 million+ company with an investment of $6,000.
Learn what you need to know. Most entrepreneurs cannot recruit a team, which is the VC-preferred method. Or they cannot recruit a highly qualified team. Or they may not want to form a team with the often inexperienced people they can attract at an early stage – especially if “team” means that you share control of your dream with the others. So it is important to know the basics before launching, especially if you don’t want to pay a high price for this lack of knowledge. The two most common skills that the very successful entrepreneurs had were sales and financial management, along with the technical skill needed for the specific business. Mark Zuckerberg knew coding, which is one reason he was able to launch his venture without seeking others to help him develop his site.
Launch and adjust. But even with the testing, reality is usually different from expectations. The best way to get real feedback is to launch, but with the ability to adjust to reality. Uber launched as a limo service but switched to its current model of disrupting the taxicab industry and became a billion-dollar company.
Finance to control. Raising money before Aha is difficult and money is expensive. Before Aha, VCs usually demand control and recruit a professional CEO. This means that entrepreneurs, who want to control their dream and the wealth it creates, need to know how to get to Aha with control and how to grow after Aha with control. Most of the billion-dollar entrepreneurs controlled their venture. To control, you need to do more with less – especially before Aha. Mark Zuckerberg got VC after Aha and controlled his venture and the wealth created.
Understand the industry. In an emerging industry, no one knows the rules to succeed. Everyone is improvising. Stay flexible until you, or someone, finds the formula. If someone else does, imitate and improve. If it is you, take-off and constantly improve. In an established industry, learn the strengths and weakness of your competitors, the unmet needs of the market, and the new trends you can ride. That’s what Kevin Plank did in athletic wear, and Hamdi Ulukaya did in Chobani.
MY TAKE: Should you learn the lessons of entrepreneurial experience without paying the cost? Unless you are perfect, or don’t mind losing, or are very lucky, you don’t have a choice.