Starting a business requires a lot of passion, hard work and sometimes capital.
In addition it also requires some sound advice in structuring the company right from the outset, especially when outside investment is required. I’ve learnt this in my own businesses.
When we were looking to start a data aggregation and web services company back in 1999 we had 2 choices:
1) Build the technology required which would mean a longer time to market, greater investment required and more equity kept; OR
2) License proven technology from the US which would mean instant credibility, short time to market, less investment and less equity
We went with number 2 in starting Digital Motorworks in Australia in order to immediately grab business that moved us to almost instant profitability even though we gave up nearly half the company. Was it worth it? Yes, maybe.
I was watching a little bit of Shark Tank on tv the other night and a great idea came on that has merit but like most things requires a lot of things to fall into place (including the right funding).
They were asking for $500,000 for an 11% stake valuing the company at around $5m. This follows a previous investment round just 6 months earlier valuing the company at $1.5m.
For a company like this to increase in value by over 3 times in just 6 months, one or more of three things had to have occurred:
1) Revenue has sky rocketed;
2) A massive, long term contract shoring up the company has been signed; AND/OR
3) The first investment was under valuing the company or the future investments required
Unfortunately in this case it was number 3 – in their keenness to secure funds to underpin the business they didn’t think about the next round of investment that would be required. Maybe they didn’t think they’d need more money.
At carsales we get presented with lots of opportunities to invest in businesses just like this. It is great to see and hear passionate people who have put all their efforts into a dream. More often than not though, passionate founders go the other way and over value their business making a deal hard to do.
While it is great (and a prerequisite) to be passionate about what you are doing, it is very important to be able to take the blinkers off to understand the risks and future requirements as much as you do the opportunity.
The risks need to be understood and help to shape the business decisions as much as the opportunities do.