One of the blogs that I regularly stop off at is Jeff Cornwall’s The Entrepreneurial Mind. Professor Cornwall is the holder of the Jack C. Massey Chair in Entrepreneurship at Belmont University, and has both a family history and personal experience in the field. His interests cover the spectrum of entrepreneurship, although he says his present research and teaching focus is on ethics and finance for entrepreneurs.
I remember my courses on entrepreneurship as amongst the most disappointing, to me, in my program. In part, that was because the curriculum was ideological, and the students, indifferent. Pity, because it had the potential to be the most electric of all the offerings. Jeff Cornwall has a very different approach than that of my professor. If you are not familiar already with his work, I strongly urge you to stop by, and read some of his archives. His site is on the blogroll at the left.
Jeff criticises those entrepreneurs who are “consumed with raising as much money as they can, as fast as they can.” He calls this entrepreneurs on steroids. To my mind this is apt – not as delicate as Jeff, I’d call this the ‘roid rage of entrepreneurs because of the damage it can do. I have also encountered this syndrome. The fixation on establishing a vehicle as an equity play seems to be a form of delusional “get rich quick” thinking. Two cases.
A VC Alters Entrepreneurial Focus
The first was a software house launched by a quartet of engineers to develop and launch a package to manage distributed operating assets of operations with a large geographic scope. Brilliant stuff, re-deployable to a multitude of applications. The founding president was an aspiring entrepreneur, and learned his lessons at a considerable cost. The time came for 2nd tranche financing, and a Venture Capital house came in. The president stepped aside, and the new president, a VC participant, moved in. The focus stopped being the product and the needs that its clients had, and became a numbers game targeted at an IPO. As a result, there was no discipline to bring the new product to meet competitive market needs. After four major potential clients decided in favour of the competition, the writing was on the wall. Development stopped. The firm became little more than an implementor of its competitor’s products.
Equity Greed Damages Your Own Self-Interest
The second was a natural resources operation. After years of careful acquisition of leases and operating infrastructure, the operation went to the capital markets. On offer was a share series to fund expansion, and working capital. Senior shareholders were focused on their potential dilution – their capital gains upside, and slashed the size of the offering in half. They were disinterested in the actual entrepreneurial efforts in the business plan. Without the needed working capital, the operation headed for receivership inside of 12 months. When the axe fell, and the company was restructured, everyone paid the price – the shareholders, suppliers, bond holders, and employees and their families.
Entrepreneurial Motivation
Entrepreneuring is not, at heart, about the money.
A recently promoted quiz for a forthcoming book asks
“What is the most common reason why people start new businesses?”
the correct response (most common reason) is
“Because they don’t want to work for someone else”
rather than having no alternative, getting rich and working fewer hours.
Entrepreneurs’ motivations are a blend of self-management, creative impulse, drive for control, desire to create their own working environment, and belief in the future. Yes, there is certainly some aspiration for financial gain, but it is typically secondary. If money is your primary driver, starting a business is probably not your best decision.
Cash Is King
Jeff also talks about a subject I intend to address – the measure of a company. In part because of my background, I am of the view that cash IS king. I say this because bootstrapping is a critical skill for an entrepreneur, and that is often driven by cash management. I’ve never met a successful entrepreneur who did not practice bootstrapping, even while at the same time investing heavily in critical core areas. Jeff also points out the impact of free cash flow thrown off by your business as a measure for success. It is, far more so than accounting earnings. The reason for this is that small businesses do not have the access to the markets for capital replenishment to take advantage of opportunities. They need to generate much of their own reinvestment cash. So the greater part of the value of a small business is its discounted free cash flow (or as Jeff prefers, its multiple). Bear in mind that my background is primarily in operations.
Model Your Cash - A Critical Task
If, in the course of your business planning, you do not spend considerable time on your cash flows, and policies that effect cash, you are missing a very great deal. As an ex-corporate controller, I can tell you that the cashflow statements that are generated according GAAP have little in common with actual cash behaviour and management needs. That does require an ability to model your operation’s behaviour. In other words – do yourself a favour, stop by the Harbour Forum site and pick up a copy of the free small business simulation model, and get to work.
Jeff has a book coming out on bootstrapping. I look forward to it, and will let you know when it is available.
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