Entrepreneurs without money (XI): The measure of your success is not revenues, but positive free cash flows.
Good morning. Wishing you a beautiful August week. Autumn is just so near. So happy about that. It is time for a pumpkin latte!
Today we will continue with the saga: Entrepreneurs without Money. Today we will finish with the sub-theme of how entrepreneurs are financed through the different stages of their businesses’ evolution (who invests in them, what type of financing is available, where do they find the money, and why do they ask for money). In my last publication, we wrote about the Valley of Death (VoD) stages: Pre-seed and Seed financing phases.
Agapantos
We have tried to make a valuable contribution by trying to improve what is “popular” around the different entrepreneurship websites you will find. Let me also explain why we need to ask ourselves many times, how to analyze what is available on the internet. Many authors and researchers have contributed enormously to entrepreneurship in several topics. But sometimes, much of the information we find is only to understand the concepts or to grasp general information. If you see this phrase: “Empirical research is therefore needed to test and validate the essentially preliminary framework”, please do know the framework has not been proven, and it is better to use it cautiously. In reality, it is important to see these internet sources with a critical eye. Always go back to your textbooks. Cross-check your references and understand the intention of the author. Many academic papers are just conceptual illustrations, and empirical research has to be done to test them.
For example, I have seen this graph about the financing cycle of entrepreneurs a thousand times on the Internet. Many consulting firms of every size, bloggers, authors, e-magazines, and entrepreneurship writers are using it often. I have seen this graph being used by researchers who write academic papers. But it has a conceptual mistake. Let´s see it in detail, I have written in red my own observations:
Original Graph from The impact of corporate characteristics on the financial decisions of companies: evidence on funding decisions by Italian SMEs. 13 January 2016
If you wish to see the last slide in PDF, click here: Eliescalante Aout 2018 Entrepreneurs without money XI.
The big mistake we have made is to forget free cash flows. We started to understand the financing stages in terms of a wrong variable: Revenues and sales. We have to start using the measure of Free Cash Flows. Once you do it, the graph changes completely. And the sources of financing too.
The reason why Eleonora Escalante Strategy advises on not getting debt or external equity at pre-seed or seed phases is simple: We don´t have a business that has a clear demand yet. If your products and services are not required by clients, what is the point of getting debt and equity, if you don´t have clients?. And even if you have some clients, and revenues have started to fill your cup, the measure of your success is not revenues, but positive free cash flows.
As we published last week, during the Valley of Death, we have to test our prototypes, do commercial validations, and check our business model holistically (every single aspect has to be correct), and the product launch has to be postponed until it complies with all these aspects.
And let me tell you the key to sustainable success over time: Put God at the center of your business. The most beautiful businesses are inspired by God. The prettiest ventures are always in tune with God´s call for humanity. And these beautiful masterpieces are replicated and improved all the time. Just think about the song: “Stand by Me” by Ben E. King. In 1960, Ben E. King was inspired to update the early 20th-century gospel hymn by Charles Albert Tindley, which was based around the psalm, “Will not we fear, though the Earth be removed, and though the mountains be carried into the midst of the sea”. Fifty-eight years have passed, and this song has been recorded so many times, we think there are at least 400 versions of it, performed by many artists, including John Lennon, Prince Royce, Florence plus The Machine, Skylar-Gray, etc. The song “Stand by Me” was inspired by the Psalms, and it is so pretty, that has continued to shine over and over again, until this day.
Whenever we start beautiful businesses, the ones that go through the valley of death and rise to be successful, are the ones that are beautiful in God´s eyes. With God´s approval, everything will be all right.
Thank you!
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Disclaimer: All the presentation slides shown on this blog are prepared by Eleonora Escalante MBA-MEng. Nevertheless, all the pictures or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.
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