Now that we have discussed outgrowing your business model, it’s time to get down to business and talk about what really causes a business to flourish or flop: capital.
Most companies enter into No Man’s Land without having the capital to leave it. If, and when, they fail, “undercapitalization” is seen as the cause. However, it’s important to note that undercapitalization is only a symptom, rather than the root cause. The true cause is the company’s inability to raise capital because it is perceived as too risky.
In order to raise money, companies must focus on reducing their risk, both perceived and real, by addressing the issues that accompany market misalignment, outgrowing your management and outgrowing your business model. Even with the appropriate measures in place, transition through No Man’s Land is difficult because of institutional barriers that exist in the capital markets, such as a lack of experience among investors regarding sustainability, inefficient communication, and limited human capacity. Although it may be a bumpy journey – hold tight, because you can make it through!
Capital shortfalls are one of the most frustrating and terrifying issues that companies face in No Man’s Land. These shortfalls frequently emerge just as the company is gearing up to grow through No Man’s Land, leaving entrepreneurs in the position of poker players who hold unbeatable hands, yet no longer have any chips to bet. Having a successful business but not having the capital to keep it going is downright scary and can bring the company down, along with the entrepreneur.
Why do growing companies run into money troubles? One of the biggest problems is the confusion of financing. Leaders of growing companies generally underestimate the capital their companies will require to emerge from No Man’s Land. They often fail to realize that growth itself fuels a need for capital!
So what should an entrepreneur do when they realize they are short on capital? Unfortunately, there is no magic trick to navigate and overcome this capital gap. Most entrepreneurs are left in crisis, trying to dig up capital any way they can.
A rule of thumb for financial navigation is that the key to raising money is reducing the real and perceived risk of a company. This rule is important because leaders and equity investors approach the funding decision for a company from the standpoint of how risky it is. These investors don’t care about the upside of the business; they want to understand and be assured they will get their money back. It is important for a company to prove that it can escape from No Man’s Land.
How does a business do this?
- Market Realignment
- Get the right people in the right positions
- Develop a profitable business model
Most entrepreneurs view money as the problem rather than a symptom of other problems. Yes, money is essential to success; however, it is not the main focus. Entrepreneurs have to deal with the other three Ms—market, management and model to bring the business operations onto solid ground in order to go for the money! By focusing on money and not dealing with the other three Ms, you are actually focusing on the symptoms, not the underlying cause.
We have learned that risk will influence an investor’s decision. Here are some questions to ask yourself about your company’s risk:
- Are there any risks in the business that can be eliminated with money?
- Knowing all that you know about the business, would you buy it?
- What kind of money do you really need to grow the business?
- Are you ready for outside equity and to put your business in the hands of others in order to be successful?
The solution is for everyone involved in the business to come together and act as partners, and to assess what is best for the business during this transition period stage of No Man’s Land.