Forums: Discussions for entrepreneurs and small business.

I recently visited a post that was looking for the top reasons businesses fail.  At the top of that list was inadequate funding.  I would like to start a conversation about that topic alone.  Why do entrepreneurs under fund?  Do you think it is investors’ or banker’s fault, or do you think it is the fault of the entrepreneur.  My experience is that most entrepreneurs view asking for capital injection or loans view it the same as asking their parents for a loan – thereby asking for the minimum amount they think is possible to complete their project.  My experience is that banks, investors, and entrepreneurs would find the conservative path to be the one that provides adequate funding plus a buffer – so why do so many entrepreneurs think the conservative path is to request such a low standard for funding and why do banks and investors approve it?  I blame it all on the entrepreneur for asking for too little because my experience with banks and investors tells me that they would much rather take more risk to see a project through than to see a project start…  I would just like feedback as too why so many people in my opinion purposely under fund… I don’t understand it, but I deal with it every day…

 

Startup Help

I think the main driver, so to speak, is that most entrepreneurs are underfunded not because they are taking a conservative path when asking for money, but being too optimistic as how successful the initial launch of the product or service will be.

 

If the projections are a “hockey stick” then of course the cash requirements will be low. More often than not, the high sales projections are a result of the entrepreneur’s passion for the project, i.e., “…this is such a great product/idea, how can it fail?”

Ed Baloga, CPA / MBA
Principal CFO
Baloga Associates
ebaloga@baloga-associates.com
www.twitter.com/edbaloga

I would say usual reason for underfunding is too optimistic assesment of costs and expenses, fear that if project look too expensive or not enough profitable, funding would not be approved, being too close to idea to be able to clearly see its possible faults or weakneses, underestimating concurent companies and their products and not enough knowledge of economy.

I was being told by one experienced financial expert that anyone starting business should behave like his business would not start bringing any profit for six months or full year, and tally all expenses of what we call (losely translated) >>cold run<<, which is similar to car engine starting in middle of winter at low temperatures. One has to start engine and let it run for some time to get warm before start driving, else there would be problems.

So, enterpreneur has to remember that company cost even when it is not working, since rent has to be paid, people has to get salaries, and so on.  Business cannot start untill all is ready and set for it, and for this there has to be time, specially for something new that require training of employees, equipment to be bought, furniture chosen and supplied and so on.

Now, after having all this expenses  on the list, 30% has to be added for unforeseen contingencies, 20% for holidays and following hangovers, 20% for sick leaves and so on....

Then, having it all calculated, one must multiply this amount by 3.

So underestimation of costs is main reason, and sometimes costs are deliberately left out from profit calculations to make profit look bigger, and usually because of need for advertisement, new product introductory prices and other reasons, there is no profit at all, which is actually good results, as if some costs are being left out deliberately in calculations, they cannot be avoided in reality, so there can be loss instead of profit........

Next reason is underestimation of competition companies, if such exist.

Concurent companies are already on the market and they have their buyers that upstart want to get on his side, usualy by lowering prices for introductory period.

Yeah, right!

Concurent companies have paid back their machines for production or other production costs, are getting quantiy rabbats and super rabbats from supliers, so they can lower their prices down to cost of materials and workmanship, and upstart is losing money if he try to underbid them. Now, older companied can do it as long as necesary for upstart to lose all money and vanish from market, and that is what they usually do, as this is simple economy.

Therefore, any new product manufacturer has to have that much cheaper product, (and if possible also of superior quality, as buyers are creatures of habits and would continue to buy what they were buying for years or all their life) so he can sell it so cheap to just cover his production prices, and so go under production prices of concurent companies.

Still game is not decided by far, since older companies are also wealthier, and they can even sell at half their production price much longer than upstart can exist without at least recovering costs from products produced, and it cannot be recovered untill product is sold......

Therefore, cash reserves become depleted since such turn of events was not anticipated and then it may look that underfunding is culprit for failure.

Therefore, unless one has big backing and perfect inexpensive product, it is better to sell idea to existing company and receive royalty without loses and batles.

But there is one other reason for seemingly underfunded production, and this is unexpected sucess, where new company receive 100 times more orders than anticipated and have no capacity to produce it in reasonable time, even if it start building additional production lines at once.

Therefore, to conclude, maybe 20% of cases are deliberately underfunded either by hiding cost to make product look more profitable, or from fear that too big request for fiunding would be turned down, which stems from wrong perception of Investors. They tend to invest as much as possible, simply because money that is not in use do not bring any profit. That being so, they would (IMHO) rather accept smaller profit without much risk then high profit with possible high rate of failure.........

My problem is that my projects are extremely profitable, and this usually met suspicion that I somewhat forged facts so it would look more profitable than it is.....

If material I use for production is free, how can I avoid geting high profit if production costs are small? Even doubling or tripling costs can deduct few percentages off profit, and even if I calculate that because of introduction of such cheap product market prices would fall in half and if I have to give 50% rabat to company selling it, still I could end with profit in size of few hundred percents where investors are suspicious of anything bigger than 10%............

Case in question are my inventions, Wind and Solar Power Stations that could produce electricity at cost of 10$ per MWh, while market price at its lowest level is 200$ in US, if my informations are correct. So if market price fall to 100$ and if one has to sell electricity to Grid company at half market price, then still earning is 50$ from which 10$ is production cost, therefore profit is 400%.........

So, kindly tell me how to get funding for my inventions, when everybody want me to build prototype or pilot instalation, and I need funding for making optimal engineering blueprints, which would enable factories to produce prototype or pilot instalation?

In this case it is easy to reach minimum of 500 000 by including prototype production costs in expenses, but for starting production maybe even 100 millions of Euro would not be enough (in case of roboticized factory, for instance), but it may also be too much as my technology has to be cheap to produce cheap products that would then produce cheap electricity. Unfortunately, some investors START with 100 millions and would not fund anything below it :-((

Nevertheless, I could handle this, but then we are again at start, since what I have in hand is not enough for such investors, they ask for >>Proof of Concept<<......

So, either I have to ask few millions instead of 50 000 Euro I actually need, which I can do by including some 3D printed scaled down models, but that then would not be enough to start production if real instalation manufacturing cost few millions without cost of tools for mass production that are supposed to make parts........

What shall I do then? Plan costly testing to destruction to build up expenses and then use this money to start production instead AFTER which I could have some cheap instalations that would not be big loss if destroyed to prove durability of product?

It is not in my nature to falsify data or lie, so what is exit here?

I have to submit first something that needs only calculations (as in financing) to be easily proven to work, but I would have to use data that are estimated, about units not yet constructed, because there is no funding.........

I have something like this, a financing model for production of factories and instalations that process agricultural waste, but here again base material is free and profit is unbelievably high, over 67790% in ten years, or average 6799% per year, if my financing plan is used to produce such instalations and factories, and that just assuming that one object can pay itself back in 11 months, where 1 month is spent on building it......... How much would result be if REAL profit  366.67% per year is used, I dont want to calculate since I would need very wide piece of paper to print it all in money figures........

So, what to do?

It is unbelievable, but I can prove it, yet nobody give me chance to do it..........

You can contact me on my PM, of course, if You like my expertise on underfunding and are curious about my calculations, or inventions........

Regards from Croatia, homeland of one of greatest inventors, Engineer Nikola Tesla!

Marijan  Pollak,  IT SA/SE 1st. Class, Instructor and Team Leader (retired)

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