Business owners, would you ask someone for fuel money if your car wasn’t built yet? Oh, and would you start driving without a map and no idea where you were going? These may seem like stupid questions, but if you replace “car” with “company” and “fuel money” with “funding,” then you have the exact type of behavior that a lot of start-up owners are displaying right now.
In this article, I’m going to cover where a lot of entrepreneurs take wrong turns while seeking funding for start-ups.
Let’s use a simple car as a metaphor.
Every car needs to be engineered to suit the manner in which it will be driven, right? For example, it needs an engine that suits the size and purpose of the car. It also needs fuel to operate. Finally, the car needs a driver, and the driver needs a map.
When you and a group of people are forming a start-up, your company is like a car that’s being built. You’ll need to bring together all of the items in the paragraph above: a solid core concept to power it, funding to fuel it, a management team to drive it, and a business plan to map your course.
Now, your crew might finish the car yourselves, or you might have to hire someone to else to help, either paying him directly or letting him own a piece of the car—meaning distributing equity in the company. Either way, when you finish up, you’ll have a new challenge ahead of you: buying fuel to either test the car or start your journey.
Funding is to start-ups what fuel is to cars.
When you build a company or new product, meaning a prototype, you’re going to need operating cash to actually run it, just like you need fuel to operate a car. Operating cash, also known as operating capital or working capital, refers to the cash you need to start running the company you built. You can build a whole company out of sweat equity, but you can’t operate the company without cash.
Trust me on this one. I’ve created six companies so far and am continually creating new ones, with an average of two new companies per year. I know for a fact you can build a company without cash, but you can’t operate it without cash.
Anyone got fuel money?
So, sooner or later, you’ll need to seek more funding for your start-up, just like you need to keep buying fuel throughout a journey to keep your car going.
Now, you might need to buy more fuel because the engine you built consumes a lot—in the context of a company, that means your company is inefficient and isn’t using money effectively. Or, it could be because where you are now is still so far away from your goal that you need more fuel to reach the destination, maybe because you took a wrong turn. For a start-up, that would mean you didn’t plan your company’s path to success well enough. Another possibility is that your car has a leak, which translates to uncontrolled expenses in a business setting.
In any case, since you need fuel money, you’re going to visit the guys that can provide it: investors.
Picking travel buddies (AKA: investors).
When you choose travel buddies, you (hopefully) don’t pick just anyone with fuel money, but people who match up with your own plans for the trip. Would you like someone to just give you money and not tag along on your journey? Or, would you prefer a travel buddy who follows you in his own car? Maybe you’d prefer someone to ride with you the entire way, checking the map every few miles and keeping you on track?
Deciding the kind of travel partner you want is an important decision you need to make early on. In a business setting, after your investors give you fuel money, they will become your new travel partners.
Now, when an investor buys you fuel, he might just give you the money. Or, he might say, “Here’s the fuel money—I’ll drive my own car and meet you at the end point.” Another possibility is that he’ll say, “Here’s the fuel, and I also want to ride with you guys so we can overcome all the obstacles together.”
The point is that different investors are interested in different levels of involvement with start-ups, from handing over fuel money to riding up front, and that’s something you have to consider when you ask for working capital. You’re in charge, so pick the travel buddies that suit you.
Don’t ask for fuel money if your car isn’t built yet!
If your car isn’t built yet or you don’t have the right engine, buying fuel should be the least of your concerns. When you bring investors in to fuel your start-up, consider why you actually need the money.
Do you just need money to buy fuel for a car that has already been tested and proven to work so you can drive it from point A to point B? Or, do you need money to fix the car or continue building it? This is really important!
Young entrepreneurs get often confused about why they need money and end up saying things like “We need the money to operate,” when they actually need money for the wrong reasons—like fixing the car. If you just built the car and it’s already broken, that means you built it wrong, meaning there are serious problems with your business model. Another reason you might need money is because the car is taking longer to build and costing more than you planned for, another business planning issue that needs to be addressed before seeking additional funding.
Building a car with the right specs and getting fuel for it isn’t the whole battle, either.
Even if you build a car with the right engine and get enough fuel money to fill up the tank, that’s only half the battle. You could have the best car in the world, one that’s built for the environment you’re going to drive it in and suited for the purpose for which it was built, but still run into problems along your journey.
For example, if you have all the fuel you need, but your car doesn’t run efficiently, the fuel will burn so fast that you’ll always be running near empty. You’ll be the company with great funding that’s still always broke. You can keep burning through the fuel and asking investors for more fuel money, but you’re still not going to make progress.
If you don’t have a good driver, you just might crash.
I see this in start-ups all the time: they have the wrong people operating the company. The fact is the people who build the car need a different skill set than the people who drive the car.
There are a lot of start-ups that I see driving in circles because the people who built it don’t know how to drive it, or if they do know, they don’t have a map and have no idea where they’re going. If you drive a car without a map or run a business without a business plan, it doesn’t matter how much fuel you have.
Bottom line: get your ride in shape before asking for fuel money.
It doesn’t matter if you have all the cash in the world available to operate your company if you don’t have the right management team, the right goals, and the right plan, because you will not succeed without these elements. This is just like having an ocean of fuel available for a car with no driver, no destination, and no road map—it won’t help.
So, before you invite investors to check out your company, make sure your company is operating well. This means having the right product or service, having the right people available to run the company, knowing exactly where you’re going, and knowing exactly how you’re going to get there.
That’s the right time to go and ask investors to fuel your operations. Otherwise, you might as well be splashing buckets of fuel on a junkyard car.
So, are you ready to fuel up?
If your car is ready to fuel up, submit your business plan through the easy online form on my main site and let’s get this road trip started.