Fri Jun 11 16:01:29 CST 2004
What would it be like, being a dollar in your business (or your life)?
Would you find it a social place to be, where other dollars keep arriving to join you each day? Would you feel well looked after and treated with respect? Or are you lonely, with not many other dollars to keep you company? Do dollars who drop by seem to leave again in a hurry? Do you feel misunderstood? Unappreciated?
If your business (or your life) was a Gathering Place for Dollars, how would you describe it? Would it be New York Central Station with dollars coming and going by the hour and at the end of the day it's empty again? Would it be a well managed Country Club where membership grows daily? Would it be a failing retirement home, where no dollars come by choice and the ones forced in would rather be somewhere else? Or is it a construction site with a big red sign at the gate: "Danger! Keep Out!"
A common belief is that the way to start a business is to gather a management team, write a business plan, define your exit strategy, raise capital, and then start operations. Many of us get a great idea, skip the first three steps, go look for capital, and after dreaming of the millions we will make, can't raise the money to get going or keep going.
This "traditional" entrepreneur model has really only been around for the last 12 years. It was made popular by the media following the entire dotcom, IPO, Venture Capital phenomenon. It wasn't how Bill Gates got started, or Sam Walton, or George Soros, or Michael Dell, or Richard Branson, or Warren Buffet.
In fact, there isn't one single person in the top 10 richest people in the world who wrote their business plan and raised financing BEFORE they got to their first million.
So how did they get started? They started by delivering value to the market, and using cash flow as the indicator as to whether they were on track or not. They collected cash from the market wherever they were delivering the most value. Cash always flows in the opposite direction to value : it has no choice, in the same way that water has no choice but to follow gravity.
When you are raising capital you are not buying money. You are buying time. I was at dinner with a 45 year old CEO who was trying to raise $4 million for a business that was still unproven. He had been working on this for 8 months with limited success, and justified the need for $4m with a plan that showed they would need to spend that much before they became cash flow positive.
Not only was this an expensive approach, it was also a high risk one, as they would have spent most of the money before the business had proven itself : or not. Over dinner, we worked out a way that he could get started in his business, make it proven, and have the cash flow so he wouldn't need to raise the $4 million. We used each of the three ways below:
3 WAYS TO INCREASE CASH FLOW FROM THE MARKET
If you have a great idea or business that you think is restricted by cash, it isnot. Use the lack of cash flow as a clue that the dollars donot want to show up yet. For a start, here are three effective ways to finance your business : from the market - which gives you cash and feedback on your business at the same time:
1. From Customers
If your product really is so great, customers will pay for it before it has been delivered. Bill Gates collected cash from customers for software he hadn't even developed yet. Richard Branson was attracted to the airline industry when he saw the cash model, where passengers paid for tickets in advance : often three to six months in advance - while oil companies would give six months credit for fuel and the purchase of new planes could be financed and paid over many years.
If customers are willing to commit to the product in advance, you can raise cash from this commitment by:
a. Giving them a discount for upfront payment of your product
b. Creating a "Pioneer Customer" category which includes preferential rates and privileges in return for upfront payment
c. Collecting soft commitments from potential customers through a signed letter of intent, which you can then use to raise financing from the bank or investors
If no customer is willing to commit in any of these ways, well that's a sign your product or service isn't as good as you think it is, and you better go back and rework it before going any further. If dollars aren't going to come to you now, they won't be coming to you later either.
2. From Suppliers
Depending on your idea, at the start your biggest costs will be in production and marketing (unless you have already committed to a penthouse office and 50 overpaid staff to oversee your future empire). Michael Dell negotiated with suppliers to ensure he only paid for components after getting paid for his PCs. Sam Walton negotiated extended credit terms for all his goods when he got started. Only later, when profit became the driver instead of cash, did he reverse this and pay more promptly in return for lower costs. (Every business switches from cash to profit driver once the value it is delivering is established in the market. Until you have cash flow, profit is academic.)
You can improve your cash flow with suppliers by:
a. Paying a premium for supplies in return for 6 to 9 months credit. Established companies will be happy to book in higher profits even if they have to wait longer to get paid
b. Commit to a one, two or three year exclusive contract with a supplier in return for longer credit terms. Often suppliers will be happy to give better terms if they know future business is assured.
c. Getting sample products for free to kick start your sales to customers
If suppliers are not willing to support you, it's because you don't yet have a business model they understand or have confidence in. If the people who will make immediate dollars by supporting you won't support you, you can't expect an outside investor to either.
3. From Vested Interests
This is anyone in the market who will benefit indirectly from your business existing. Anita Roddick negotiated great terms with shopping centres by arguing they needed her more than she needed them. The entire business model of low cost airlines such as Easyjet and Ryanair is based on million dollar subsidies from airports and country states in return for them guaranteeing a certain number of tourists. When I launched a publication business in London, I went to competitors first to see if they wanted to partner with me. One helped fund the business just to get part ownership in a potential threat. Vested interests don't even worry if you're profitable or not - they benefit indirectly just by being involved in your company's existence.
SMART DOLLARS vs DUMB DOLLARS
"I have enough money to last me the rest of my life, unless I buy something."
- Jackie Mason (photo below)
Too often, entrepreneurs will fund their great idea by borrowing from friends and family, trying to raise funding from investors or, failing that, invest all their own money : and time, into the project themselves. The big error in this is simply that each dollar that you collect like this isn't telling you anything. The dollars from investors (unless they are in your target market) are "dumb dollars". They talk a foreign language, and don't tell you anything about whether your business, product or service is of any value. Dumb dollars give you a false sense of security.
I have seen at least seven entrepreneurs I know personally in the last three months - yes I'm counting - who have claimed victory after raising capital and setting up their operations, only to see the money disappear because their business had yet to deliver value to the market (You know who you are! AND every one of you has played the Butterfly Game!)
Dollars from the market are a different story. Dollars from the market are "smart dollars". The process itself of raising financing from customers, suppliers and vested interests tells you if you're on track. If the dollars already in the market get attracted to you, you know you're onto a good thing. If they don't, you have time to keep fine tuning and improving your value with each potential customer or supplier until they see enough value to want to support you.
When you finance your business with smart dollars, your learning from attracting every dollar of extra cash flow outweighs the value of the dollar itself.
Smart dollars are social. They stick together. If you start attracting smart dollars, they will attract more smart dollars. If they see no reason to stay, they will notice the time and leave politely : AND they will take the dumb dollars with them.
If your business (or your life) was a Country for Dollars, how would you describe it? Do you look after your citizens? Import foreign talent? Do you attract new citizen dollars? Or do all the new dollars that you want to ship in speak a foreign language? And after every dollar has chosen whether to stay or to go and the work is done, will your citizens' night life be a Dollar Paradise, or a Lonely Dollar Club?