Keeping the cash flowing without passing the buck

Keeping the cash flowing without passing the buck
Completely obvious thing business people still manage to forget, #92: Cash is the lifeblood of innovation and any new business

Completely obvious thing business people somehow still manage to forget #92: Cash is the lifeblood of innovation and any new business. Without it, even really exciting things stop happening.

How soon you will need a really serious wonga injection depends on what you are making. In the high-tech world of billion-dollar apps, you may just need a laptop and a year’s supply of instant noodles. If you are engineering something, you may need enough for a workshop and some grease monkeys. If you are developing the next fighter jet, you might need to start shifting cocaine through a deniable third party to pay all the bribes.

Serious investment buys you time to develop and market the thing properly, or more resources to claim your space in the marketplace faster. Without enough money, you might feel pressured to go out half-cocked, which is like jumping out of a plane then trying to knit a yourself a parachute on the way down. Brett Walters, head of working capital services and asset finance for BNZ, has been left to pick up the pieces before.

“I have seen a couple of these not go well because they have signed contracts before they are ready,” he says. “People get a good idea, go to a trade show and get some orders, and then start trying to work out how to fill them, which is never a good idea.”

You want to socialise the idea and validate it using your startup investment money, then start looking for the capital. You might think the tail end of the worst economic meltdown since hobnail boots were fashionable is not the best time to go out asking for big bucks to grow a business. But Walters reckons you should never waste a good crisis.

“My view is that there is always a good time for innovation,” he says. “With the recent reports of increased economic activity, now is a really good time. Get in now; because otherwise by the time you think it is a good time, you could have missed out.”

Getting the sort of cash that creates a going concern is all about credibility, and Walters reckons this is about getting good advice, doing your homework and then following through on your obligations.

Getting good advisors is vital. You may delude yourself that your idea is so ‘next gen’ that the old folks won’t be hip to it, but getting some grey hair in the boardroom is a must, as experience is everything. Find people who have successfully commercialised innovation before. They know what to do and what not to do. Their presence alone will make potential investors much more comfortable than staring at your pimply noggin, and comfortable people are more likely to part with their money.

“I spoke to a company the other day, and the CEO sounded young,” says Walters. “But looking at their Companies Office details and doing some other research I know there are some serious investors behind that firm. They have good advice and now have a large deposit in their account. Whenever you invest in a new idea you are taking an educated punt, but at least this way you know you are in good company.”

But you can also get a long way with a good idea, because even for bank managers these days, it’s not just about crunching numbers.

“Personally I believe it could be about 60/40 with 40 percent being about the idea,” says Walters. “As a banker if you get excited about the idea it will motivate you to push through the approval processes.”

But you also need to have done your homework. As entrepreneurs are by nature risk-takers, it can be a very good idea to team them up with somebody who does detail and execution, and maybe even leave the mad inventor in his lab for as many of the money meetings as possible.

Borrowing money means you are going to go into debt, as a business, and probably personally. If you are working within a big business you can be sure any money you burn up will weigh heavily on your reputation and future prospects. A savvy bank will not let you take ridiculous amounts, even if you think you have just invented a time-travel device. With new business, Walters reckons banks are tolerant to the odd speed wobble in the first couple of years.

“Some startups have a ‘the world owes me a living’ attitude. I think if you walk in to an investor with that, you’re going to be shown the door”
Brett Walters

Working capital services and asset finance, BNZ

“This is because in the early days, startups are likely to have a debtor concentration risk,” he explains. “Most startups get one client and start filling their orders, then start looking for more clients.” If they lose a big client, the wheels nearly fall off. This is less likely if that client is a major company as they are more stable, and the product isn’t fashionable or seasonal, where the customer base could walk at any time.

At this point, when you have the idea close to a marketable stage, angel investors are easier to attract. The hitch is that they may want a huge chunk of a fledgling business, and they want their money back sometime in the next five years.

“Angel investors are often the kind of people that can absorb small losses,” says Walters. “It is the idea and the person most people invest in. They are prepared to wait a couple of years before seeing a return, afterwards they will want to know what the return schedule might be, or what their exit strategy might be.”

Once you have the cash …

… the work really begins. Whoever writes the cheque, your relationship with them is going to be critical to your success. It’s a relationship based on trust and communication. Investors are well aware that ideas people have lots of ideas and may move on to a new one at a moment’s notice. They need to be sure that when they give you money to develop product A that you are using it for that, not to buy a Maserati, or, more likely, to develop product B, which you now think is much better.

“Some startups have a ‘the world owes me a living’ attitude. I think if you walk in to an investor with that, you’re going to be shown the door,” says Walters.

If you didn’t have a boss before, you do now. Your job is to fulfil your obligations, do what you say you are going to do and keep communicating. It is a question of professional discipline: people want to keep in touch with what their money is being spent on and how things are going.

“Business in theory is easy; it’s cash in and cash out,” says Walters. “You just have to make sure there is more cash coming in than going out. The tricky part is fully understanding that and making it your focus.”

If the bucks stop

If you do crash, it is unlikely to be when you completely run out of money, as it’s not your money anyway and savvy investors will not let it go that far.

“If the numbers are not as promised and there is really no valid reason for that, the plug can be pulled on the business,” says Walters. “If the banks find that arrangements made have not been met and, despite all the passion and drive of the owners, the results are not being shown, it might be all over. This is always a last resort ”

The good news is the longer you stay on the horse, the smoother the ride.

“It’s a relationship that deepens,” says Walters. “The longer it goes on and the more trust is developed, the easier things are.”

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