Forgot business plans, Powerpoint presentations, and elevator pitches. Investors don't care. What they care about is entrepreneurs who know how to create cash flow out of thin air.
Here's how the elite entrepreneurs establish credibility with investors.
The Cash Float
Savvy entrepreneurs create “cash floats” to launch and grow businesses when cash is tight. Look closely at companies large and small and you will see cash floats in use almost everywhere. The Internet has made them one of the most popular financing tactics.
One of the greatest American industrial companies was launched using an early variation of the cash float financing technique. I'm referring to the Ford Motor Company.
Back in 1902 Henry Ford had a vision for a new car company which would cater to the mass market customer, while the competition chased the wealthy hobbyist. However, Ford did not have access to the necessary capital for building a factory. Moreover, he did not have a management team of industry "stars" who could attract money.
Looking at his situation objectively, one could not help concluding that he was "dead in the water" from the get-go. A classic Sitting Duck situation if ever there was one. But this did not stop Ford? As someone once said, "Reality is something you must rise above."
So Ford formulated a business model which could make his dream of a motor company come to fruition without a lot of money—that is, his money. His model relied on using a cash float to finance his startup.
Here's how he did it:
- Ford raised a nominal sum of money from friends for initial working capital purposes knowing that a manufacturing company cannot be started from thin air. Moreover, he needed to show to that he had some "skin" in the game in order to be taken seriously. The next best "skin", if you don't have any of your own, is that of your friends. Outside parties know that it’s human nature to fight hard not to lose your friends' savings.
- He also used his selling skills to quickly build a network of dealers who wanted to carry a low-priced automobile for the mass market. In return for the privilege of becoming dealers for this new car, they had to agree to pay cash on delivery for each car. This was the first half of creating a cash float.
- Ford then negotiated 30-day or longer payment periods with his suppliers meaning that he received the parts he needed to build his cars without having to pay for them until 30 or more days later. This was the second half of creating his cash float.
In other words, he would receive the $500 worth of parts needed to build a car "for free". He'd build the car and immediately sell it to a dealer for $1000 in cash. Then he had the $1000 in cash to pay the expenses which couldn’t be delayed, such as overhead and payroll, and finally the parts suppliers four weeks later. Of course, the left over profit was reinvested continuously to grow the company.
Today, the “cash float” financing method has become even better. If Ford was starting his company now, he could collect payment from the customer upfront via the Internet before even building the car rather than having to wait for his cash when delivery was finally made. This type of cash flow model would have further reduced the investor capital he would have needed to start the company.
The lesson here for startups chasing venture capital or angel investor money is that nothing beats being able to show that you have already created some positive cashflow. Once you have cashflow watch the investors court you.
Entrepreneurs who devise startup strategies which enable them to focus on generating sales in the first months, rather than on pursuing investment dollars, tend to do far better over the long run.
All Copyrights 1995-2007 Peter Ireland
The Smart Startup Guide drills into the details of creative financing for startups, including use of the cash float. Learn how to create cash flow out of thin air like the pros.