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Taking Funds NOW or LATER

Taking Funds NOW or LATER

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Published by Shridhar Lolla
Business is a system, comprising a number of interdependent building blocks, which together determine its performance. In an interdependent system, the weakest link determines the performance of the system. Depending upon stage of each business, one of these blocks could constraint (and therefore determine) its progress. It, therefore behooves on the entrepreneur to focus on the weakest link at any time.

However, our experience of working with startups as well as early stage business shows a dangerous trend. Irrespective of the state of the business, a vast majority of entrepreneurs is driven to almost a cult belief that funds (finance) is the key constraint of the business, which in reality is not always true. Our study reveals that in majority of the cases, something other than finance become the constraint or the business still would have a long enough time by when finance could become a constraint. As a result of this cult trend entrepreneurs loose focus of their business and instead of focusing on the real constraint, are forced to drive their business by solely financial considerations.

Actually, startup ecosystem has come up a long way in India and entrepreneurship is increasingly being considered as an alternative career by youngsters. Even during the financial crisis of 2008, entrepreneurship only grew p. Also, the startup space has never been so flush with funds as it is now. Investors are literally walking around with checks in their pockets, in a hurry to invest. Given that there is already a wrong perception built that funding is the key constraint of new business, neuentrepreneurs often face dilemma about timing of funds.

This case study presents one such case and the direction to come out of this serious conflict. The basis of solving conflicts, as always has been, stick to the fundamental of business; and in this case let your business tell you if its requires funds NOW. Do not take funds, just because it is available.
Business is a system, comprising a number of interdependent building blocks, which together determine its performance. In an interdependent system, the weakest link determines the performance of the system. Depending upon stage of each business, one of these blocks could constraint (and therefore determine) its progress. It, therefore behooves on the entrepreneur to focus on the weakest link at any time.

However, our experience of working with startups as well as early stage business shows a dangerous trend. Irrespective of the state of the business, a vast majority of entrepreneurs is driven to almost a cult belief that funds (finance) is the key constraint of the business, which in reality is not always true. Our study reveals that in majority of the cases, something other than finance become the constraint or the business still would have a long enough time by when finance could become a constraint. As a result of this cult trend entrepreneurs loose focus of their business and instead of focusing on the real constraint, are forced to drive their business by solely financial considerations.

Actually, startup ecosystem has come up a long way in India and entrepreneurship is increasingly being considered as an alternative career by youngsters. Even during the financial crisis of 2008, entrepreneurship only grew p. Also, the startup space has never been so flush with funds as it is now. Investors are literally walking around with checks in their pockets, in a hurry to invest. Given that there is already a wrong perception built that funding is the key constraint of new business, neuentrepreneurs often face dilemma about timing of funds.

This case study presents one such case and the direction to come out of this serious conflict. The basis of solving conflicts, as always has been, stick to the fundamental of business; and in this case let your business tell you if its requires funds NOW. Do not take funds, just because it is available.

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Published by: Shridhar Lolla on Feb 26, 2011
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Copyright © 2010, CVMark Consulting, All rights reserved.
 
1
Taking funds NOW or LATER
Dr. Shridhar LollaCVMark Consultinglolla@cvmark.com Draft 1.0Mar 2011,Bangalore, INDIA (This caselet belongs to ‘respecting the business’ series of CVMark. It is based on  reallife experience at AdON- an advertising space orchestrating firm; and several otherstartup companies ) Key words:
entrepreneur, startups, entrepreneurship, investment, funding,  business rules, businessfundamentals,  built to last, capacity building, entrepreneurial behavior, first generation entrepreneur,neu-entrepreneurs, value system, culture, focusing behavior 
 Definition: Prime Rule (
n
)= Non negotiable rulesPrime Rule #700: In a majority of cases, the building block which would determineperformance of the business may not be finance. And hence, obtaining investment whenthe business does not demand it, will not improve performance of the business. On thecontrary, it has dangerous potential to misdirect the business. This is a sequel to following caselets: 0. The Saga of  Startups1. When sales Staff quit, Clients switch over2. Sales is the prime responsibility of entrepreneurs3. Not Succumbing to Pricing Pressure4. Entrepreneur Agrees to do Sales5.Temptation of taking large orders6.Pitching Business Idea within 3 minutes7. Startup Carnival  ________________________________________________________________________  Business is a system, comprising a number of  interdependent building blocks, whichtogether determine its performance. In an interdependent system, the weakest link determines the performance of the system. Depending upon stage of each business, oneof these blocks could constrain (and therefore determine) its progress. It, thereforebehooves on the entrepreneur to focus on  the weakest link at any time. However, our experience of working with startups as well as early stage businessesshows a dangerous trend. Irrespective of the state of the business, a vast majority of 
 
Copyright © 2010, CVMark Consulting, All rights reserved.
 
2
entrepreneurs is driven to almost a cult belief that funds (finance) is the key constraint of the business. Our study reveals that in majority of the cases, something other than financebecomes the constraint or the business still would have a long enough time by whenfinance could become a constraint. As a result of this cult trend entrepreneurs loose focusof their business and instead of  focusing on the real constraint, are forced to drive theirbusiness by solely financial considerations. Actually, startup ecosystem has come up a long way  in India and entrepreneurship isincreasingly being considered as an alternative career by youngsters. Even during thefinancial crisis of 2008, entrepreneurship only grew up. Also, the startup space has neverbeen so flush with funds as it is now. Investors are literally walking around with checksin their pockets, in a hurry to invest. Given that there is already a wrong perception builtof funds being the key constraint of new businesses,
neu
entrepreneurs often face dilemmaabout timing of funds. This case study presents one such case and the direction to come out of this seriousconflict. The basis of solving conflicts, as always has been, stick to the fundamental of business; and in this case let your business tell you if its requires funds NOW. Do nottake funds, just because it is available.________________________________________________________________________  Shiva is already into his start-up for over 2 quarters. Seeing potential of his business, agroup of known Friends (traditional investors) approached him to fund his venture. Theinvestors want to disburse the funds immediately. Shiva feels that he needs to work on hisbusiness plan a bit more before committing to funds. He wants investors to wait forsometime, but they do not want to wait. Shiva is in a great dilemma with regard to investment. He needs to decide between‘taking funds now’ and ‘taking funds later’. This is a classical dilemma, often faced byentrepreneurs. Also, he needed not to unduly hurt his friendship. When he talked to his peer group, over 50% prompted him to take funds immediately bysaying, “in startups, funds are always in shortage and should never refuse incomingfunds”. However, the other half, cautioned him to do a clear estimation of his needs andhow much stakes he is willing to dilute. This only made his conflict tougher.  Option-1:Taking funds now: Shiva can readily take the funds and ramp up his operation. There is also pressure fromthe investor to take it NOW otherwise, it may not be available later as they could invest itsome where else. 
 
Copyright © 2010, CVMark Consulting, All rights reserved.
 
3
He thought that he must take funds if  He needs funds NOW.He foresees difficulty in getting funds later.He knows exactly how to deploy the funds. (very clear business plan)He is sure of  rate of growth of his business, so that he is able to give reasonablereturns on funds. (this is an ‘investment’ and not a friendly ‘help’, although at themoment his friends behave as friends)Funds are available at dirt cheap price.He does not want to harm his friendship.  Option-2:Taking funds later: Shiva is yet to get a clarity on his ideas and yet to have a clear assessment of his fundsrequirements. It is quite possible that once he is clear about the business plan, he will bein a better position to know the need of funds and accordingly can support his plan.  Anyintake of funds now, may force him to tweak his business to utilize funds. It may alsolimit his future funds flow and throttle potential of his business (plan). Once heunderstands the business model properly, he can then make the right decision. In factknowing his business better, he can also value his effort better. He thought that he must take funds later, so that: In the near term he does not need substantial funds.He will have right assessment of funds requirements.He will have right assessment of his valuation.He will take decision objectively and not emotionally.He could offer better returns to investors.He must protect his relationship with his friend NOW as well as in FUTURE.  Boundary conditions: There is a boundary condition for taking funds. As far as possible, in these days ,
fundsof substantial value
must be taken from smart investors. Smart investors are the one whowill add value to your business by understanding and supporting your cause for thebusiness and strengthen your decision making abilities. For an early stage business seeking substantial funds, pure financial investor could beavoided, unless the business is in distress. Financial investors of substantial funds has thesole goal of earning money. Often, their lack of understanding the entrepreneur’s angle of business, may lead to conflicts and throttles ones passion and freedom to build business.And the neu-entrepreneur may not be in a position to deal with such conflicting situation. 

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