To finance or not to finance?

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It is often said that in order for an economy to grow, we need small business and more entrepreneurs. I couldn’t agree more. This is usually followed by the statement that, in order to develop these new businesses, we need to make finance available. Now this is where I disagree.

History is littered with wonderful tales of success from humble beginnings, and I am yet to see a great business start off with a huge helping of cash. Most of the iconic and large businesses in the world have succeeded because their business idea was great, or their management was superb, or because a better mouse-trap had been invented – they did not succeed because someone threw millions at them to start the business.

My opinion is based on self-experience. I have started two “serious” businesses since I opted out of an unfulfilling (but financially rewarding) career as a stock broker. The first business was relatively well funded by a serious financial partner, along with my life savings. The second business was started in desperation after I lost everything in the first venture!

SO WHAT WAS DIFFERENT?
We ticked all the right boxes in the first business: a great idea, a ready market and sound systems. The problem lay with management, i.e., ME. I knew that I had sufficient capital to run the business for a year or two without making money, and seeing as it was a trading business, we could even afford to take losses without shutting doors.

But before you could say “provisional liquidation”, we had to shut our doors as our risk model was wrong and we had no idea how to turn this potentially wonderful business into the money making machine that it could have been. Yes, we had a lot of bad luck (a story for another time), but if we knew we needed to turn a profit from day one, we would have run a far tighter ship and life could have been different for us all.

The second business was started in desperation after the financial fallout of the first one. I had three little mouths to feed and I had nothing. So I entered into the crowded business space of an industry totally unfamiliar to me to offer a product that had low barriers to entry. Failure was NOT an option! Never in my life have I have ever been so desperate, or put so much energy and time into something than with this second business. It’s never fun to operate under such pressure, but I found that it has a focusing effect on the mind.

There are two areas I believe add weight to my argument: capital intensive industries and the internet boom.

AGAIN, WE WILL GO BACK TO OUR KNOW-IT-ALL FRIEND, HISTORY!
State owned entities are renowned for burning through tax payers’ money, while global giants in the oil and mining industry build up their capacity to manage their own money without any assistance. The reason being is that when these private giants started out, they learned to trade profitably from the start and only later did they turn to finance. Running profitably is woven into these companies DNA and even decades later, they still will not transact unless it is for a profit motive.

In the case of the internet start-ups or dot-com bubble, we can see that one should wait for the management of the business to prove that they understand market forces and can manage their money. Google only started to see the greenbacks once they had lashed together a couple of their own computers to offer a decent search experience. Investors only started to “Like” Facebook once they had signed up 500,000 users.

However, back in the ‘90s, an “entrepreneur” only needed an engaging business plan to attract their suitors. But that was “then” (and it failed) and this is “now”. People want you to show them the money before they get involved.

THIS ARTICLE WAS WRITTEN BY: MIKE SHAM
Mike Sham is the owner of Vibrant Media as well as a speaker at the first ever Suits & Sneakers event which took place on 23 July, 2015. You can follow him on Twitter!

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Mark is an entrepreneur, writer and speaker. He is the founder and CEO of Suits & Sneakers and also founder of the Impello incubation hub. Mark loves to travel the world and is hell bent on disrupting education for people of all ages.