Funding Strategies and Their Importance
How Much Funding Will I Need for My Business?
Depending on how big of a venture you are thinking about taking on, coupled with the funds you may or may not already have, will greatly determine which direction to go in with funding. Most likely, if you’re talking big money, upwards of seven figures, you’re probably leaning towards angel funding, venture capital money and/or investors, and that would make the most sense for big-league business. For the majority of small business startups that are only seeking out five or six figures at the most, you’ll probably be considering some sort of debt financing option. There are some first-time business owners who will either choose to exhaust the resources they already have access to first (sweat equity, personal credit cards, savings etc.), or they won’t be comfortable or familiar enough to pursue funding options. They may choose solely bootstrap funding for their plan initially.
Understanding the term “Predictable Success”
Although the bootstrapping method for a new business endeavor may have a gritty appeal and can sometimes bode great pay off, it’s still certainly a gamble. It often times can mean a death sentence for many businesses before they’re ever fully born. As mentioned in Guy Kawasaki’s, Art of Bootstrapping, “The leading cause of failure of startups is death, and death happens when you run out of money.” Without some sort of solid funding strategy, you can probably see where that may lead. For those willing to take the risk and rely solely on using existing resources and piecemeal financing, I suggest an article written by Les McKeown on how to know if bootstrapping will work for you.
For those looking to take a more comprehensive approach to getting their product or service off the ground, McKeown talks candidly and smartly in his book on how to grow whatever business proposition you have into a successful organization. He also covers the most effective ways of doing so. A key point McKeown makes early on in his book is how important funding is to a startup in the beginning stages, and what it will mean as you move onward through a business’ natural life cycle. Before we dive into some of the principles that sculpt out the Predictable Success methodology in regards to funding, it’s relevant that all prospective entrepreneurs understand the hard truths of what becomes of most startups. In March of 2014, when asked about the survival rate for new businesses, the Small Businesses Association’s Office of Advocacy answered that, “about half of all new establishments survive five years or more, and only about one-third survive 10 years or more.” McKeown, a licensed CPA, mentions as well that any current figures surely won’t include the organizations that didn’t make it long enough to get their statistics on record, so truer estimates will actually bring us closer to 80% – the percentage of businesses that perish before they ever really get started.
For anyone starting out or still considering the road to entrepreneurship, this data may be alarming and also breed some trepidation. The great news is that by doing proper due diligence before you get too far down the road (like downloading this e-book), understanding why businesses fail in the first place, and learning what it truly takes, you will make overcoming the odds more of a plausible outcome for your endeavor. Mr. McKeown – having the pleasure and, as he recollects, sometimes pain of launching over 40 businesses – shares in Predictable Success his experience and findings through a carefully calculated strategy that sets his readers up for his book’s namesake exactly – predictable success.
McKeown kicks things off in the book by explaining a basic principle, which is that every business goes through a life cycle. All businesses will move through a series of stages – seven, in particular, each with its own set of challenges – with the end goal of reaching the middle stage of the cycle, called Predictable Success.
As long as your business is alive, it will either be in, or moving into one of these seven stages, depending on whatever breakdowns or growth are happening within the organization. The genius to this model is being able to identify where your company is within the life cycle and knowing how to move closer towards Predictable Success, which McKeown explains how to do in depth. Businesses have the ability to slide back and forth between the stages, if they’ve been on the track and then fallen off, with the exception of one stage that you can’t go back or forth between if you’ve left. This is the first stage, the stage you’re probably in, or about to be in – and it’s called Early Struggle.
As McKeown describes in his chapter on Early Struggle, this is “the first stage in every new venture where you fight to achieve liftoff.” He explains that “despite it looking different for each business that has its own set of variables, the stage itself is unavoidable.” His advise: “Minimize the time you spend there.” There are three variables that McKeown says will determine the length of time that a business is in Early Struggle:
1) Easy access to funding
2) Finding a sustainable market
3) Effectively using variable 1 to attain
“It’s a race against time,” he says, “to swap dependence on externally generated cash (capital funding) with cash generated from profitable trading.” So the main goal will always be to find your sustainable market as quickly as you can, effectively using your external funding to do so. Then move out of Early Struggle just as quickly, through to the other stages of the lifecycle, all of which can be found in more detail here. Because Early Struggle is the first stage of the process and there’s no place to revert back to, this becomes the most important stage by far to surpass. If the business fails, it will die. This is where the amount of funding you’re estimating becomes a crucial component to avoid becoming part of that 80% that we talked about earlier. In this chapter, McKeown shares a story about a past business endeavor he was a part of that gave him the master license for the Pizza Hut franchise in Ireland. Midway through, he and his partner realized that they had “seriously underestimated the capital needed to acquire leases and to build restaurants,” and he remembers, “… construction had shuddered to a halt.” To avoid the pitfalls that exist within the Early Struggle stage, it’s critical to understand and not underestimate how much funding you will in fact need.