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Financial Literacy

Financial Literacy

Home Financial Literacy Investing 101 Challenges Facing Entrepreneurs

Challenges Facing Entrepreneurs

The key element linking all entrepreneurs is an appetite for risk. That risk comes in the form of an entrepreneur losing both his money (and other people’s money) and time (opportunity cost of doing something else). Any new business activity requires capital. In Silicon Valley, the scarce capital is intellectual, not financial, because the products and services made generally cost little money to get started, at least in the internet, new media stage. But, what if the better mousetrap the entrepreneur wanted to make was a next generation driverless tractor? He saw a hole in the market created by onerous demands of union drivers against farmers and he felt that there was a business in a robotic GPS and solar power controlled tractor. That machine of the future is expensive to build, carries, risk, and its likely that founder doesn’t have an extra $100M or so bucks laying around to just go do it.

The eventual goal in any company is to create wealth for shareholders. In the beginning, the founder owns all of the “wealth” or at least the shares in the company. Over time, that founder gives away pieces of the company in the form of shares to various flavors of investor who give him money in return for shares of his company. The challenge in high capital cost companies for the founder is the enemy of all capital backed companies: dilution. A new tractor company requires several hundred million dollars to start. By the time he is done with 11 round of financing, the founder likely owns less than 2% of the company after having started with 100%. Conversely, a company built from software (computer code) often requires a very small amount of money. That is, Yahoo! required only a little over $1M of total capital until it reached break even. It chose to take on more capital because it believed that the dilution was worth the incremental capital raised so that it could take advantage of market opportunities. eBay was about the same. The great fortunes of the internet era were made in part because the founders suffered so little dilution that at the end they had tens of billions of dollars of wealth via their large percentage ownership stakes in the companies they founded.

The Good

Entrepreneurs manage their own hours. They don’t work any one person per se. They hire and fire as they see fit and they can turn the company in the direction that interests them. But, each of these elements is rife with mitigators.

The Bad

A company trying to create the next great mobile social network is subservient to a different kind of boss. The entrepreneur doesn’t work for a person per se. She works for her customers and customers don’t fire you nicely. They simply go away. There is no guarantee of a paycheck, no guarantee the business will be around next year, no Christmas bonus if the company hasn’t earned it. This is not true of postal workers, left front door of a Taurus loaders or waitresses at a cocktail bar.

The Ugly

There is bankruptcy of course but bankruptcy is mercifully final. The bandaid is ripped off. There is pain. You’ve lost everyone’s money and your own. But, you live to go fight another fight, get another job, or if your skin is very thick, start another company. In some situations; however, the bandaid never rips fully off. You’ve taken money from venture capitalists. You missed your first year’s numbers. You are burning through money faster than you thought and one day, the board calls you in for a meeting and fires you from the company you created. Welcome to Silicon Valley!

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