Don’t Run out of Cash, Trust, or Time! We have mentioned several times that runn

Question

Don’t Run out of Cash, Trust, or Time!

We have mentioned several times that running out of cash is a bad idea. That seems obvious. But, ventures often plan to spend more that they have in the bank as they grow. That is, they plan to run out of cash, and know they will have to raise money from some source before they hit the fume date.  

When a company really runs out of cash is when it can’t convince someone that they should give the venture more resources. If there is still customer value to be created and captured, companies can usually get access to money, unless there is some financial crisis, or investors have lost faith in the management team, for whatever reason. The entrepreneurs may not like the terms of new financing but that is not the same as being unable to get capital under any terms.

Remember that our basic definition of entrepreneurship is the pursuit of opportunity beyond the resources currently controlled. Resources is a very broad term and includes everything from employees to suppliers to investors. If a key supplier cuts off a venture, that can have the same devastating impact on a venture as running out of cash. Resource suppliers are ultimately investors too. They are placing a bet on the potential success of the venture, as illustrated by the Chinese manufacturing partner at Dr. John’s.

Entrepreneurship is an exercise in building and maintaining trust. Entrepreneurial founders get kicked off the team if others lose faith in them. Ventures fail when investors and others no longer believe that backing them is a good idea.

Another piece of advice: you don’t want to try to raise money near the fume date.  

Why do you think that might be true?

Explanation / Answer

Like cash and trust, we should not run out of time as well. Entrepreneurs should plan their finances well in advance to ensure the support of best financier at a less interest rate. If they do not give importance to time and reach the fume date where the company will run out of cash, the company will not have enough time to plan and find a suitable investor. They will have to accept the available one with higher interest or the investor may demand higher percentage of shares. The entrepreneur will have to accept the terms in order to continue the operations. There are more chances of deceptions when we do things in a hurry without thinking about the consequences. Hence the company should not wait till the fume date to raise money and should do necessary research in advance. Company should approach the investors of their choice much before the fume date to convince the investors and get better offers from the investors.

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