• Money

The funding for your business should reflect what the business needs and not what you need as an individual. As startup finance is the most expensive “equity” that an entrepreneur ever raises, make sure that you raise just enough to prove your concept, not to feel safe.

Legendary Indian cricketer Sunil Gavaskar often comments that when a batsman who has just scored 100 runs comes in to bat in the next innings he needs to keep telling himself that this time round he is starting at zero! This ability to refocus and tell yourself that each-time you start something new you are at zero, no matter how much you have scored in your “previous innings,” is what separates a champion from a successful cricketer.

I believe this is what holds the key to a successful entrepreneurial career post having worked as a professional for some years of your life. Let me explain this some more. When a mid-career executive wants to start a business, amongst the many problems/dilemmas that he/she faces the biggest one probably is the battle with self-image or self-worth.

As a mid-career executive there are certain things that you’ve already started taking for granted; air travel, your office cabin.

But the biggest one is the fact that you are used to having people who “report to you” and so the necessity to do things “yourself” is low.

Further, as you are a high achiever in your company, you start seeing success as a having floor “value” (pretty much like the 100 runs a batsman made in the previous innings).

Now, when you want to start something of your own, you need to start from scratch. So it is back to the days when you started your career i.e. two-wheelers, public transport, AC train travel, small cubicles and, most importantly, executing most things yourself.

Again, as it is a startup, there is no track record of previous success (which you have in your job and could have quoted when you were applying for another job).

So, what actually happens? The reality of a startup at the bottom starts conflicting with the self-image of the person. You feel that as you have already climbed four steps in the corporate ladder you need to start at the fifth step and not at the first.

So, usually when such aspiring entrepreneurs start writing a business plan and the consequent funding requirements which follow the business plan, most of what he/she ends up putting in the Excel sheet as the fund requirement is actually the ego requirement of the person! There are two types of people here—first, those who “do not want to get their shoes dirty” and the others are those who do not have shoes on the ground. Ironically, both actually then end up walking on air!

Not wanting to get your shoes dirty
The biggest head of expense on most funding sheets is salary and with large self egos you need to have people who can execute your ideas as you cannot do it yourself. As they need to be paid market rates your funding need for salaries start sky-rocketing.

This gets disguised by elevating potential employees to ‘rock star’ status who bring skills without which you cannot do business. (I am really tempted to then say that maybe I am better off funding this person rather than you!)

If you start adding office and other costs then this excel sheet starts becoming really heavy, not with actual requirement but with your ego. Or, in this case, even laziness.

Shoes not on ground
Such people are those who feel that just because they’re professionals with 10-15 years of experience attempting an idea, less than one that generates Rs.100 crore revenue in five years is a waste of time.

Good so far, but the trick here is that with no proof of concept this person wants to raise Rs.4.5 crore or even more? If you want to reach Rs.100 crore in five years, please go ahead but first you must calculate what you need for the first crore.

Don’t take that for granted just because in your previous job you were handling a Rs.100 crore-a-year target.

What all you actually need to start a business:

1. Living allowance for yourself and your co-founder—this number should be between Rs.30,000-Rs.40,000 per person, per month (in fact, if there are two founders then certainly not more than Rs.30,000 pp). If you are a mid-career executive starting a business then this should be zero.

2. Work space costs that should not be more than Rs.10,000-Rs.15,000 per month.

3. Overall salary bills which should not be more than another Rs.40,000-Rs.50,000 per month.

4. Vendor fees (outsourced expertise) of Rs.20,000-Rs.25,000 per month.

5. Costs around travel, communication and promotion amounting to Rs.20,000-Rs.25,000 per month.

All this adds up to Rs.90,000-Rs.1.1 lakh (if you are not taking a monthly living allowance) or Rs.1.4 lakh-Rs.1.5 lakh (if you are taking an allowance).

Now, to build a funding plan, you need working capital for 18-24 months and that is an amount between Rs.15 lakh and Rs.25 lakh. This is what you need to start your business and prove your concept.

This should also take care of some of the capital expenditure although one should also try and finance most of it from debt and not actually use equity money for things for which debt is available.

With some revenue thrown in (even though you don’t break even before 24 months) you should have enough cash to run your business for 30 months or are good to go.

I happily concede that the numbers that I have given above are not cast in stone and each business has its own investment and working capital cycle.

However, the point that I am trying to make here is that as an entrepreneur, it is your job to make sure that you have drawn up a skeleton of the funding needs first and not really filled in the flesh.

As I meet more and more people during my current career as a professional seed investor, my first attempt is to understand this aspect and see which ego state (if any) the person/entrepreneur is in.

It is at these times that I understand the significance of Sunil Gavaskar’s statement, which I mentioned at the very outset of this article.

Remember, as an entrepreneur you are starting out at the zero level and no matter what your designation, lifestyle or achievement was in your previous job, it does not matter anymore in your new set up.

Plan for this as you would have done when you started your career as a rookie and, in most cases, you will not end up being disappointed. Happy starting!

©Entrepreneur July 2011 by Entrepreneur Media, Inc. All rights reserved.

Gautam Sinha is Partner, MyFirstCheque, a seed fund that writes the “first check” for Indian startups.

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business, career, entrepreneur, equity, funding, salary