17 tips for entrepreneurs

Sound advice from Alan Knott-Craig (Jr), with a caveat.

Earlier on Tuesday Alan Knott-Craig (junior) took to Twitter with 17 tips for entrepreneurs looking to raise funding. While the tips themselves were solid, there is a caveat I would like to raise here.

But first, here are the tips that he posted:

1. There are three criteria for raising money: 1. Raise it before you need it. 2. Have a working product. 3. Have a business model from day one.

2. How much should you raise? The rule of thumb is to multiply your estimated cost by four.

3. Calculate the cost of development/manufacture, ie: R250. Double it for marketing & sales costs, ie: R500. Double it again, ie: R1 000.

4. How do you raise money? Activate your network. Don’t act desperate. Start with family and friends.

5. Let people know you’re raising money. Of course its embarrassing if you fail, because everyone knows that you tried.

6. If you’re not comfortable with making a fool of yourself, you’re not ready to start your own business.

7. Don’t be desperate. Desperation, like fear, can be sensed a mile away.

8. If you can’t ask your family, you don’t really believe in your idea. The thought of an awkward family Christmas is a wonderful litmus test.

9. Banks and rich people don’t hand out money easily. That’s why they have money.

10. Intelligent startup investors don’t invest in business plans and spreadsheets.

11. A business plan is what is required when your startup cracks the code, becomes a real business and needs to replicate a winning model.

12. A startup’s life comprises frantically trying to find a value proposition that gains traction in the market.

13. Until the code is cracked, business plans are a waste of time.

14. Being asked to draw up a business plan is like being asked to go and boil water whilst your wife gives birth.

15. The value of a business plan is in the process, not the result. Thinking through a SWOT analysis has saved many a futile effort. [strengths, weaknesses, opportunities and threats]

16. Outside of Silicon Valley, working capital can’t be funded by raising money. Working capital is funded by revenue. You need revenue.

17. People invest in dreams. Sell your dream. If no one buys, either it’s a crap dream or you can’t sell it.

For me, the most important of those lines is number 16: You are not going to raise funds to cover your working capital. You need revenue to fund your business – accept that and become 100% focused on creating revenue.

Where I take issue is points 10 through 14 – with point 15 (I think) cancelling out the previous four points .

Yes, there are a lot of people who will ‘invest’ on a whim because they like your energy, personality or face but the reality is that most savvy investors are going to drill you on the question of how and when you are going to hit revenue. If you cannot explain this to them, they will not back you. The ‘startup’ life is a myth based on the hero stories we read out of Silicon Valley which has enjoyed boom years in the dot-com bubble and then again enjoyed a flood of easy money in the QE (quantitative easing) bubble we’re currently living in. In 1999 liquidity and capital got sucked out and already we are seeing signs that liquidity is starting to be pulled out of the sector again.

A local business incubator has a fascinating test for the entrepreneurs that it takes on. The guy who runs the programme (depending on his mood) makes the entrepreneur stand on a table for a day until he or she can narrow down exactly how his business is going to make money. How does he or she overcome the cost of financing and deliver a return for the shareholders – whether it is a sole proprietorship or a company with multiple shareholders. Sometimes this process takes all day because the entrepreneur flits from idea to idea and from business model to business model. At the end of the day, when the entrepreneur steps off that table they know exactly what business model they are following.

This approach of “a startup’s life comprises frantically trying to find a value proposition that gains traction in the market” is flawed and is a big part of why would-be entrepreneurs cry that the local angel investor or venture capital players don’t support their idea. Of course they are not going to put money into something where they can’t see where their return is going to come from.

Financial advisor Stuart Kantor tweeted the following on Tuesday morning:

He is spot on – management isn’t something you apply after you have built a concept. Management is something which is there from the word ‘go,’ assessing the quickest way for a business to generate revenue to support its working capital.



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