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When Startup Capital Kills Your Business

Why having startup capital may not be in your favor.

By Don Harkey

Apr 04 2017 at 3:20 a.m.

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I am currently serving on the advisory board for Biz 417 with some amazing area business leaders, including Jack Stack, CEO of Springfield Remanufacturing Company and author of The Great Game of Business. Jack was talking about how only 15 percent of startups who secure angel investors succeed. He commented that he sometimes believes that the startup capital actually hurts some startups.

I totally agree.

When I started my business, I was still working for 3M and wanted to dabble in consulting. After landing a couple of clients, I discovered that I loved the business of helping to support leaders and decided to leave my 10-year career as an engineer. Recognizing that it would take me a little time to get the business going (note: It took longer than I thought), I pursued part-time work with a local engineering firm. The plan was to ramp down the engineering consulting as I ramped up the business consulting.

I found myself more consumed by the engineering consulting than I thought. I was working for a great firm with a great team and getting new business was harder than I thought. I found myself having to decide between uncertain networking events to build my business and working on engineering jobs that were paying the bills. I wasn't making a lot of progress on the business. Fortunately, fate intervened in the form of the Great Recession. The engineering work slowed down, and I was forced to focus on my consulting business. 

The only assets I had to get things going was a line of credit on our home and my 401(k). Every time I had to take money out to pay the bills, I felt like a failure. Because of this, I was very focused on being smart with the money I did spend. I created my own website. I learned to do my own marketing. I even did my own bookkeeping and invoicing at first. I created my own business cards. I can remember thinking hard about whether I should spend extra money for a premium LinkedIn membership. I was frugal and careful. Most importantly, I was focused on starting a business that paid me something. 

It took a few years (and lots of withdrawals from my line of credit and my 401(k)) to get things balanced to where we could live on my consulting income, but this “core of profitability” ended up serving me very well. I learned what was important and what wasn't important and used my resources wisely. 

If someone had invested $50 thousand in the company when I first started, I would have badly misspent the funds on things that weren't important for a business. In short, getting a flood of funding up front when you know the least about how to run your business is not always the healthiest thing to do. I see business startups with professional graphics, modern offices with art on the walls and great furniture, and as Jack commented, “water features in the lobbies” and later see that the business folded, wasting investor dollars.

If you are thinking about starting up a business, my advice is to be thrifty, even if you are working with other people's money. Focus on spending your resources on the critical components you need to build up your business. Make sure early on that you are committed to making a profit.

If you are thinking about investing in a business, make sure that the startup is smart about their money. Ask lots of questions about how they will use the startup funds. Listen for signs that the business owner is not taking ownership in your funds. If they are complaining that they can't be creative without having a glass paneled conference room with high technology, run away.

Starting a business is like being dropped on the top of Mount Everest above the “kill zone.” You don't have enough oxygen to survive on your own, so you need to climb down before you run out. Using up your oxygen on the top of the mountain before you climb down is a sure way to die.