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Entrepreneurs without money (XIII). Nurturing the entrepreneurship success explained.

During your entrepreneurship journey, it is obvious that you will need to find investors, financial capital providers and debt or credit financing. Some amount of debt is not bad either when your business is growing and has started to generate positive free cash flows, but getting debt is a decision that has to be made after you have raised from the valley of death phases (pre-seed and seed capital stages). 

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Nevertheless, it is fundamental to understand that once you dilute your equity or get a loan, your firm will have two broad classes of financial claims on your assets: liabilities or equity.

debt is the slavery of thePalepu, Healy, and Bernard have conveyed that “Liabilities are defined as economic obligations that arise from the benefits received in the past, and for which the amount and timing are known with reasonable certainty. Liabilities are reflected in the financial statements when the entrepreneur incurs an obligation to another external party for which the amount and timing are measurable with reasonable certainty. Liabilities can arise in several ways:

  1. Obligations to customers that have paid in advance for products and services: these types of liabilities are termed deferred or unearned revenues.
  2. Liabilities, which arise when the company has used goods and or services in the course of its operating cycle but has to pay the suppliers of these inputs. These are called payables or accrued liabilities.
  3. Commitments to employees for unpaid wages, pensions, and other retirement benefits
  4. A firm incurs a liability when it raises  debt capital: When it has commitments to public and private providers of debt financing
  5. Obligations to federal and local governments for taxes
  6. Obligations from a court or government fines or environmental cleanup orders.”

modern-slaves-are-not-in-chains-they-are-in-debt-8425036For example, in the case of sovereign bonds, these liabilities specify the amount and timing of obligations precisely. For Example, a twenty year $300 Million bond issue, with an 8% coupon payable semi-annually, specifies that the issuer will pay the holders the US$ 300 million in twenty years, and will pay out interests of 12 Million every six months during the duration of the loan.  The country is a slave of the bond-holders. Never forget that. The country´s bondholders are basically the owners of the country. Government Debt Specialists must know how to choose the correct and right source of debt capital very well, beforehand.

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Now let´s go back to our today´s theme: from the Theory to the Practice. Let´s go to a vivid example of an entrepreneur who did not raise from the Valley of Death. It is a simple example of wrong decision making or what not to do. sewing-machine-3For a moment, imagine that we have met an entrepreneur who has been for 5 years building its business model. She has come back and forth building several scenarios, testing the ideas with the market and potential clients, she has spent on raw material, machinery, etc. She has done several prototypes of her products and visited several potential clients, who like them, but no sales have happened yet. And finally, despite that, she believes she has the right Business Model. She has not started to sell the products yet. She has not done her financial forecasting. She has not used the “free cash flows measure” because she has no idea of that concept in her mind. She has only pursued her passion and energy but has not utilized any of the strategy frameworks we have shared in this blog. She doesn´t even know how to use the business model canvas. She just followed her passion to produce and package the products pretty. But the market demand was not in her town. Her products were “overqualified” for the local demand. In consequence, she doesn´t have revenues yet, neither positive cashflows yet.

baskets and plattersAfter 5 years, the entrepreneur runs out of all her savings, friend´s alimony gifts, and her parents’ support is over. Then she decides to lend money from a bank to continue with her endeavor. The bank agrees to lend her US$40,000 dollars as a personal loan (6 years duration) with a 12% interest rate (no collateral). She still has a full-time job, and the future debt payments will be discounted from her salary. The entrepreneur is happy; she starts to pay all the unpaid wages to the employees, the payables to the suppliers and repays a friend who provided the initial loan to start her business. sewing businesses.jpgShe also pays her parents the money they lent her to start. But suddenly, something happens, let´s say there is a new law which will not allow the entrepreneur to sell her products, or there are a few new competitors who have stolen her ideas and have initiated similar businesses with the same potential clients. Alternatively, there is a government change, the new regulations have established higher standards, and her products don´t comply with those requisites. What is worst, her main potential client (an important local retailer) at the last minute decided to import the same products from China. And despite all the efforts she did, the entrepreneur has lost the whole possibility to raise from the valley of death with “that” initial business model. The business model was wrong. She is now in debt with a bank, and her initial business model has proven to be incorrect. Thank God, she did not lose her job, and she has at least a salary to honor her obligations with the bank… What if she is unemployed?

opportunity-focused-entrepreneurs1Why did she fail? Why did she request loans to start a business? Was the entrepreneurship ecosystem in her city so weak that she doesn´t have entities to knock on the doors, in order to request “non-reimbursable pampering programs”? Was she unable to design and create the correct business model because she did not have the toolkit in the first place? Probably if she had the business model canvas tool or other strategic innovation frameworks I have shared with you during the last year, after a careful analysis, she would have realized that her business was a bad idea from start or she would have changed it completely to a more feasible value proposition.  That is why it is so important to be educated or educate yourself first before starting a company, at the same time your past experience will help you to make the right decisions in advance about how to pass the Valley of Death phases. That is why it is so significant to have a good entrepreneurship ecosystem which can support entrepreneurs during the pre-seed and seed stages. Did you get it?

Stay tuned… To be continued. Thank you!bee-animated-gif-36

Source References:

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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