This post is the sixth in a series onAdvanced Entrepreneurship.
Most new entrepreneurs obsess about raising cash to start their business. What they don't spend enough time thinking about is generating income.
That's not to say that fund-raising isn't important. An entrepreneur might occasionally have to raise cash to keep the business alive until it becomes self-sustaining. But fund-raising is a commodity activity. Income generation is not; it's the chance for the business to show it can do something of value profitably over the long term.
Raise money now with an eye toward generating income. To separate herself from the good entrepreneurs and become a great one, a CEO must focus her attention on finding the business model, distribution method, and consumer engagement that creates an ongoing revenue stream. She must also exhibit restraint in how she uses seed money. Great entrepreneurs limit their spending and work creatively within boundaries — perhaps even sustaining an affordable loss for a period of time — establishing a strong foundation while exploring opportunities for growth.
Take Amazon, for example. Founder Jeff Bezos's brilliance was not in recognizing this amazing internet opportunity or in raising the money to get it off the ground, but in exhibiting the patience necessary to allow it to blossom. Bezos raised billions when the stock market was overheated, then ran the company frugally until he was able to pinpoint its source of income some eight years later.
Realize you can't be certain what the future will hold.Certainly, getting the business off the ground is a prerequisite for being a successful entrepreneur — good businesspeople do their homework, create pro forma income statements, raise seed capital, and try to get a good ROI for their investors — but for great entrepreneurs this is just the beginning.
Business plans assume you can predict the future, but entrepreneurs — especially the ones who are trying to invent new products — are operating in the unknown. Great entrepreneurs realize that projections are useful for identifying assumptions, but not necessarily for projecting future realities. They consider what's available and how much they're willing to risk, and they determine how to use those resources to move toward creating an income-generating machine.
To take it a step further, the best entrepreneurs often find ways to turn their constraints into assets. For example, eBay founder Pierre Omidyar knew his full-time job would keep him from overseeing the site at all times, so he set up the site to allow users to support and rate one another. This self-maintaining feature helped make the site scaleable — and ultimately played a big role in its success.
An idea is only as good as its execution. Focusing too much energy on raising initial funds can be detrimental to entrepreneurs who use the capital to commit to long-term outflows before considering the potential for long-term inflows.
Raising large sums of money up front creates constraints by committing the entrepreneur to a certain scale and timeframe to give her investors a return. If she then overshoots and needs more funding, she dilutes her early shareholders' returns. Further, if she runs through multiple rounds of money before actually launching a product to see how it performs, she forfeits the opportunity to use market feedback to adjust her approach.
The owner of a chain of Laundromats once confided to me that he could have built a fabulously successful Laundromat if it weren't for his first central laundry facility, which was far too big. The payments for this facility burdened him to the point where all his knowledge isn't worth a hill of beans, because that initial investment is dragging the entire business down.
A far better approach would have been to create a small central facility, get some satellite laundry services up and running and profitable, then scale up the central facility based on real-world data about needed capacity.
When they must fund-raise, great entrepreneurs combine it with action. When it comes time to raise capital, great entrepreneurs are keenly aware that new capital dilutes the old. They bring in new stakeholders only when they have good reason to believe they're increasing per-share value — in real terms, not just negotiated vapor figures. If they can't ensure that's the case, they might be better off using credit cards or business lines of credit to take on minimal debt, or seek grants or supplier financing, rather than dilute their initial investors' ROI.
A truly great entrepreneur finds ways to raise money in ways that also help build the company's ecosystem. She looks for customers who are willing to invest in the company, whether in the form of partnerships, funding early development, or loaning facilities and resources. She also looks for suppliers who will give favorable payment terms.
In doing so, she raises money that will not only help get the project off the ground but also contribute to building the income-generating machine necessary for long-term success.
Stever Robbins is a serial entrepreneur, top-10 iTunes business podcaster ("The Get-it-Done Guy"), and CEO of Stever Robbins, Inc., an entrepreneurial consulting and coaching firm. He teaches at Babson College on building social capital. His first book, The Get-it-Done Guy's 9 Steps to Work Less and Do More, is coming out this September.