Do you need money to make money?Written by Denis Fourie
Almost all entrepreneurs believe they need money to start their business and grow it. And the truth is, YES you do!
The fact of the matter is you need money to make money, and any person telling you differently has never been an entrepreneur.
That said, the amount of money you need is really debatable, and only experienced entrepreneurs and mentors will be able to accurately determine what you really need over what timeframe.
Have you ever played SimCity?
SimCity is a computer game where you are required to build a small town and grow it into a city and eventually a metropolis. You start off with a very small amount of cash and you are required to fulfil all functions from Mayor through to health, sanitation, utilities, etc whilst growing your town into a metropolis. Starting a business is not much different to this game, as you also start of small and build it to what you require, fulfilling several functions within your business.
In this game, you can either start with the default amount of money they give you and grow your city into a metropolis over a period (usually several weeks), or you can use a cheat and load your bank account with a lot of money to build a metropolis from the onset.
In the beginning, I decided to use the cheat and load the account to its max and build a metropolis from the start. However, this brought with it lots of challenges, as I was building industries, residential and commercial areas to house a million people, spending money on zoos and amphitheatres, however my population was only 5,000 and growing very slowly, whilst problems like crime, sanitation, etc appeared everywhere in the city. It took a while for me to realise that the things the residents really needed I did not have, and by cheating, I did not go through the pains a standard user would to solve these issues and structure my city in such a way to accommodate their needs.
By starting afresh on the standard game, I was able to build my city up to a metropolis naturally whilst accommodating all the needs of my residents. Yes, several times during the game I had to take loans from lenders to grow my city and take it to the next level, but by doing that I learnt important lessons, amongst others that there is no shortcut to success and that the capital you have upfront does not dictate your success.
Business is much the same. Yes, as in the game, you also need money to start with, but you only need enough to take it to a point where you are generating profits and breaking even (often referred to by investors as Series Seed Investment). Once you have reached that point where you are ready to grow to the next level, you will likely need more cash injection (often referred to by investors as Series A Investment), and so forth.
I have seen businesses start off with millions in in seed investment, when what they required was only a couple of hundred thousand. They built fancy offices, employed dozens of staff, spent fortunes on promotional goods, and paid huge salaries, and at the end of the day they were trying to be a big company from the start thinking that by throwing in extra capital they could avoid the growth challenges small businesses are faced with. And yes it had to do with their ego too. This was a big wake-up call for this business when their operational expenses became so high in relation to actual revenues that they were running at constant losses because customers weren’t taking on their technology as fast as they had forecasted. This led to a whole host of other issues, most notably the relationship with and expectations of the investor’s return on investment. In the end when the investors brought me in to help this company, the solution was simple. Go back to the basics of a small business and understand what your prospective customers really want, cut all the unnecessary operational expenditure, and reallocate your funds at revenue generating activities.
Much like I had in the game, this business had to learn the hard way that it is not about the amount of money you can get from investors, but about the amount of money you need to take your business to profitability.
Yes, you need money to start your business. Yes, you need money to grow. But the amount you need is only as much as require to reach the next stage of your business’ lifecycle.