Applied Entrepreneurship

• Business Plans/ideas are never fully funded to a cash flow breakeven point. Early stage ventures are assigned milestones from one stage of funding to the next and are offered subsequent funding when they meet those milestones. The value of a company could also go up between subsequent rounds if they meet those milestones. If a venture fails to do so, it might be liquidated, merged or financed again (if it continues to be perceived as an attractive bet)
• Businesses don’t get funded to a cash flow breakeven point for 3 primary reasons – a) The risk at the start is too high for investors; b) Investors like to see dynamic business plans, ones that afford them flexibility (especially the opportunity to fix issues midway through or somewhere down the line) and multiple incentives and so they don’t like to commit all the capital up front; c) The entrepreneur will have very little ownership of her company if the investor is willing to fund the entire development in one go

Stepping stones (explained with the help of an audio-video store business with plan to open 300 stores):

1. Setting up supply chain, building customer base, offering superior customer service, staffing model – essentially proving unit economics or the viability of a single store

2. Proving repeatability of the model (in this case making a group of stores work) – professionalizing and the service and managing multi-location logistics

3. Proving scalability (managing 300 stores) – more capital can be committed at this stage due to low risk

Getting to the first stepping stone involves trial and error and this is important for assumptions to be tested and milestones to be established on the way to achieving the first stepping stone. Thus the first investment often involves just the cost of testing out these assumptions/issues to prove that the concept is viable and to cover the risk of funding these experiments.

On paper, investors have a broad set of rights as spelled out in the shareholders’ agreement. However, in reality, once the entrepreneurs have the money they can do pretty much whatever they want with it, short of fraud or rank incompetence. That said, investors regain leverage when the next round of funding comes up and they can enforce changes such ousting a non-performing CEO, reducing the cost base or adjusting strategy in exchange for infusing fresh capital.