A start-up with initial success starts spending money like a drunken sailor until the money quickly runs out and all the investors are surprised. Sound familiar? Instead of gaining initial momentum and consolidating a position, the founders put the train engine on full blast headed down the tracks without having tested the brakes or fully mapping out the route. Often in no time they spend all their dry powder and they're left wondering what happened and where do we go from here. It's easy to get excited about a project or a new venture especially when positive feedback comes in the initial rollout of the marketing effort. Entrepreneurs start to feel invincible. Sometimes egos take over preventing sensible decisions based on rational analysis, risk assessment and careful management of the cash position. They end up on a runaway train with nowhere to go but a crash at the end of the line.
I have found in my past experience that new ventures and the entrepreneurs who run them are generally pretty cautious with the planning, but the business takes a whole new level of seriousness once initial capital is in the bank account. Plans sometimes change for good reason but the budget and timing impacts are often left to the side in favour of higher priority activities. The plan was apparently good for raising the money but that was its sole purpose. Move over accountants and finance weenies…we now have to get on with the real work. You generally only get one shot at commercializing…or accelerating the train down the tracks. If you screw it up, there is usually no turning back. There's just trouble and mess ahead with a lot of effort at the end of the line to clean it up.
I am falling on my own sword here as I too have been on a runaway train a few times in some of my own entrepreneurial ventures. I subscribe to advice in a quote from Steven Denn, “You can never make the same mistake twice because the second time you make it, it's not a mistake, it's a choice.” However, I don’t always follow it myself. Shame on me. Nobody’s perfect and it’s easy to get caught up in the hype of a great story. In some past positions in my career as a CFO or controller, I have found myself in the position of being the conscience of the shareholder, holding the feet of the enthusiastic CEO by a rope (like holding on to a hot air balloon) in attempting to keep the company grounded and on track with a logical pre-planned spending. Companies need all kinds of people to make them successful. One of those types is that CEO or promoter with boundless energy and enthusiasm. If not for them, the idea would likely never have got off the ground.
As a rule, before you take someone’s (“someone’s” includes your own) money for your venture, you should have a plan for the money that in fact gets you to a finish line of commercialization…not half way to your destination. Rationing your cash flow doesn’t sound very entrepreneurial, but it is a necessity for any cash-constrained start-up venture. Better safe than sorry. Find the next lily pad to jump to. Find a spot if you can that gets you to cash flow self-sufficiency if you can and then map out a path from there. Go big or go home works well in movies or for the small minority of companies for which that strategy has succeeded. Bear in mind that somewhere between 15 – 50% of start-ups fail in the first couple of years (…the public research on this data point is all over the map). I am a financial geek, so it is my proposition that you should at least get the critical part of sufficient capital rationalization right at the outset. There are enough other risks to worry about that are out of your control. You should not need to expose yourself to full-on financial risk of runaway spending.
This is not a call out to stop being a high risk-taking entrepreneur. I merely suggest that if you are fortunate and talented enough to find money for a start-up, you should take the effort and responsibility to make it last long enough to meet the objective established for that money. I don’t see anything wrong with spending money quickly in accordance with a well thought out defined plan to reach a goal that all involved have agreed to. That is just entrepreneurs being entrepreneurs. The unforgiveable circumstance is when the money is not controlled and trickles out or is shovelled off the back of the truck in great volume without a plan …or alternatively without a corrective action plan when things significantly change.
If you are musically stuck in the 1980’s like me then here is a bonus offer. I dare you to not listen to the entire live version of AC/DC performing Rock N Roll Train (Running Right off the Tracks) (from Live at River Plate) on YouTube. I warn you though, if you are like me, the chorus “runaway train, running right off the tracks” sung by the band and the enthusiastic Argentinian crowd will rattle around in your head for days and you won’t be able to get rid of it.
A feature article by Dwayne Coben of Coben Advisory Inc. (www.coben.ca). Coben Advisory is a specialized corporate & executive advisory firm that offers services to help our clients plan, improve, grow and/or exit their businesses.