Reflection Eight
In Chapters 13 and 14, Rao expands on two more strategies that finance-smart entrepreneurs use: using VC intelligently and developing the right capital structure.
To use VCs intelligently, Rao says to do the following:
*be in the right emerging industry
*have the proven potential
*know the right timing
He describes VCs in these ways:
*very selective (seek “home runs” in emerging industries, prefer ventures with attractive exit options)
*seek control
*prefer professional managers who replace entrepreneurs (Rao emphasizes to continuously learn what you need to grow to the next stage so you can stay in control of your venture)
*seek preference over entrepreneurs (may get a multiple of their investments before anyone else gets any money)
* “cull the heard” (proportion of funding increases as stage develops—seed stage–2-4% of VC funds invested, early stage–goes to 20%, expansion stage—goes to 30%, later stage-goes to 40%
A key note is that approximately 1% of VC funded ventures become “home runs”. Very few entrepreneurs benefit from VCs. Those that delay VC (financially smart start), get VC after they’ve proven the venture’s potential and their leadership skills. Keep in mind it IS possible to build a billion-dollar company without VC. And those that avoid VC (financially smart), remain in control and keep the largest of the wealth created, therefore avoiding dilution.
In order to develop the right capital structure, entrepreneurs need to find the right financing at the right stage. As mentioned in earlier reflections, Rao describes the process of linking business and finance strategies:
*know how your business skills can influence business strategy
*know how your business strategy can influence your finance strategy
*know how your finance strategy influences your business success and personal wealth
Billion-dollar entrepreneurs grow with control by structuring in the following ways:
*structure for capital efficiency (“capital efficient backbone”—helps develop growth opportunity, competitive business strategy, controlled finance strategy, and real-time take off)
*structure for uncertainty (be flexible)
*structure for control (maximize internal cash flow)
*structure for self-funded working capital (get paid by customers before paying vendors, reduce or eliminate inventory and accounts receivable, avoid losses); sell directly to consumers
*structure to avoid owning fixed assets
*structure by type of need (depends on strategy, structure, business stage)
*structure by source (equity, debt, government sources, internal cash flow)
*structure with the right instruments (equity, debt, hybrid instruments)
*structure by stage
*structure with the right process –use a finance-smart process:
*evaluate a new business idea, develop strategy and financial projections, write a
business plan, evaluate financial needs
*assess financial viable sources, requirements and costs, potential loss of control
*grow with reduced needs
*develop new business plan and financial projections
*assess financing options again, repreat
Looking a little closer into direct-to-consumer (DTC), Roma, (2023), defines DTC as a business model where companies sell directly to customers, escaping traditional intermediaries. DTC, Roma explains, offers direct customer relationships, personalized marketing, quality control, and streamlined brand experiences. Do you use DTC? If not, would you consider it? Why or why not?
References:
Rao, D. (2020). Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital. FIU Business Press, Mango Publishing Group.
Roma, D. (2023). Rewriting Retail: The Rise of DTC Brands. We Are Brain. https://wearebrain.com/blog/the-rise-of-direct-to-consumer-dtc-brands/