Reflection Four

In this reflection, let’s focus on two more strategies that Rao says finance-smart entrepreneurs use: focusing on cash flow till Aha (when a venture’s potential and/or leadership skills are evident) and financing appropriately to the stage.

Rao explains focusing on cash flow till Aha comes with Aha stages:

Pre-Aha Stage: money comes mostly from family and friends

Opportunity-Aha Stage: advantage of your product, service, or technology becomes evident, but still working on the business strategy that fits and still needing to prove yourself

Business-Aha Stage: you’ve found the right business strategy and so your business is taking off with more momentum; investors are more interested in funding your business

Leadership-Aha Stage:  your business’s potential and your leadership are evident; now easier to obtain VCs

As mentioned several times in Rao’s book, Rao emphasizes delaying or avoiding VC.  In order to do this, finance-smart entrepreneurs he says, need to know how to finance by stage.

Rao mentions four key stages in the life of a high-growth venture:

R&D stage: this developmental stage is the most difficult and expensive to finance; in fact, investors may want a return of 100% per year at this stage

Seed/Start Up Stage: product ready for sale/R&D has been done; business plan developing

Emerging Stage: sales with losses and negative cash flow; cash is needed to fund losses and growing need for assets; customers are now present so investors have a way to analyze market acceptance, satisfactions, growth rates; risk is lower at this stage; potential is more evident

Growth Stage: venture growing/profitable, although may still have negative cash-flow if growing at very high rates

Because of the difficulty to get VC before Aha, finance-smart entrepreneurs must know options of how to get financing to get to Aha without VC.  Rao lists several options and I want to highlight a few:

*focusing on cash flow by cutting expenses that don’t lead to an immediate cash flow

*using VC sources that don’t demand control

*seeking scalable debt (debt that can be repaid from cash flow; continues to be available as business grows

*using capital raised with care and caution

In tune with financial options, Rao mentions what he says is a key source of most billion-dollar entrepreneurs: *self-funding business strategy where they got paid before they had to pay.  This makes complete sense!  This led me to want to find out more on such a topic.  When I researched this, I found some techniques to help fund a business (Jha 2024).  One of those techniques is customer revenue (generating revenue through sales and/or subscriptions and then reinvesting that revenue back into the business).  Jha also described some key factors that help bootstrapped startup businesses become successful (Jha 2024).  Here are a few that stood out to me:

*strong focus on profitability (early on)

*customer-centric (customers’ needs met, building strong brand reputation)

*passionate teams (dedicated and driven to build the business)

Have you had experience with bootstrapping?  If so, did you find it was in your favor?

Stay tuned to find out more in the next reflection on Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital.

 

References:

Jha, P. (2024). The Effectiveness of Bootstrapping as a Financing Strategy for Startups:  A Critical Analysis. ResearchGate. https://www.researchgate.net/publication/381435149_The_Effectiveness_of_Bootstrapping_as_a_Financing_Strategy_for_Startups_A_Critical_Analysis?__cf_chl_tk=J5IDEuBEbbS15OBqzNEa52o8TKRa2VH8nJgpvDYzxVc-1749141675-1.0.1.1-3_49EUTVCmZF_0FvE3of88_YBO88BL72ErZbM6TITgE

Rao, D. (2020). Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital. FIU Business Press, Mango Publishing Group.