RAISE MORE MONEY THAN YOU THINK YOU WILL NEED
This section expands upon a principle I shared near the end of Chapter Five, one that directly impacts your available runway and deserves emphasis. Human beings have always been poor predictors of the future. Highly passionate entrepreneurs represent a special case of this phenomenon, routinely favoring rose-colored views of the new venture path, especially when it comes to estimating capital needs. One of the simplest, most important strategies for ensuring that you make it through your earliest phase is to secure more than adequate funding to get your venture to the point where it is self-sustaining.
Even though J. C. Faulkner entered his startup launch with a highly refined understanding of his target market and a well-tuned business plan, he took no chances when it came to funding. “My philosophy,” he says, “was that you should raise two-and-a-half times more money than you think you’ll ever need in the worst case scenario. This was based on great advice from my dad, who saw a lot of businesses succeed and fail as an accountant.” Accordingly, the D1 business plan projected that the company would spend about $800,000 before becoming profitable, so J. C. secured access to $2.5 million before taking his idea to market. About one-fourth of this was in the form of his own career savings, while some money came from private investors (friends and business associates who trusted J. C. and knew his track record in the industry) and the rest came from loans and lines of credit, none of which he tapped.
Although having access to these funds cost him more in terms of interest and ownership, J. C. considered it well worth the price. “It was like paying an insurance premium. It cost a bit more but provided a safety net. Money was one less thing I had to worry about,” he says. “A lot of potentially good companies have died because they ran out of money. I looked at the things that could kill us, and I could control this one.” Moreover, he avoided the constraints that often come with outside investors by setting clear expectations with his investor group. He promised them a healthy return on their money on the condition that they would have no control over how he developed and managed the venture.
Some entrepreneurs and academics warn against the dangers of overfunding an early-stage business, arguing that too much capital can cause an entrepreneur to lose touch with market forces or become inflexible or undisciplined. My experience is that these dangers operate independently of a venture’s funding situation, biting poorly funded and well-funded businesses alike, and they are driven mostly by factors such as the founder’s preparation, personality, and expertise. In J. C. Faulkner’s case, the extra funding heightened his ability to focus and respond intelligently to market forces. “The fact that we had more money than we needed meant that we could go faster if we wanted, or we could slow things down,” he said, “depending on what the markets were doing.”
Bob Tucker, J. C. Faulkner’s attorney, believes that the principle of ample funding generalizes well to the many business owners with whom he has worked over the years. “I have advised dozens of different businesses to go borrow money,” he says. “If your business plan indicates you’re going to need a good bit of money down the road, go right now, even if it costs you more in interest to do so, because you don’t know what lies between here and there. It’s worth having the powder in the keg, because the consequence of not borrowing now may be that your business plan won’t get a chance because of future developments of some kind.”
