Before you start that business

January is a month of new beginnings, the first month of the now infamous ‘New Year Resolutions’ when the zeal for change is still burning. Studies have shown that the top two of most resolutions have to do with finances, health, and fitness (especially the weight loss variety). Many folks launch new ventures in the first quarter of the New Year.

With crashing money market rates crash and a bearish stock market, many are seeking higher returns investment outlets for their money. Typically, when the stock market crashes, investors flee for safety in the money market, and as the stock market booms, they move their funds back in the market. In the event whereby both markets are down, the tendency is to flee to the real estate market, invest in or start a business.

Thou shall not liquidate your reserves

If you are familiar with asset allocation and the elements of a solid financial foundation, you will notice that each element plays a different role. I often use football as an illustration. Your savings or reserve is the security element. The CBN is rolling out directives with bewildering rapidity because our reserve (savings) is down and like football, our defense is porous. Your savings is a defensive mechanism, not a tool to become rich. I am not sure if a coach will ask the goalkeeper and central defense to move to the opponent’s half of the field simply because the team is desperate to score.

When money market rates crash, there is the temptation to move your goalkeeper and defense forward (move your money to high-risk high-return investments) in the quest to boost your cash flow. That stunt may work, but if it backfires, you are worse off (the opponent scores). Saving money will not make you rich. It can if you save and reinvest consistently and persistently for decades. It is a slow way of getting rich, and very few have the discipline and fortitude to bear the prolonged belt-tightening and scraping of the bottom of the barrel. One danger with this method of getting rich is that you may develop a lack or poverty mentality along the way, and rather than enjoy life, become miserable forever hunting for the cheapest, the discounted, and the bottom of the range.

Are you looking for a shortcut to access capital?

The fastest way to become rich, create jobs and boost the economy is to own a successful business. A lot has been written about how to start a business and more will still be written as the business landscape evolves. I have watched businesses start and crash. I have loaned money to many to start a business without getting my money back or the business going the distance. If I was a bank, I would have gone out of business. That is the situation with most of us.

Apart from the fact that we are not equipped to analyze risk, we allow emotions to get in the way. We want to help. Looking back, I see that virtually none of the people I tried to help by giving them money to start a business has been helped. They were grateful quite alright, thanked me profusely, and prayed for me, my family, and generations yet unborn (feels really good, doesn’t it?). Fast forward a few years down the line; the money and the business are gone. What went wrong? Why do people come to us that have limited resources rather than go to a bank which has more than enough and is looking for who to loan money to? Why do people who want to start a business run away from banks?

Going through banks is too much ‘trouble’. They cannot withstand the scrutiny and the rigor of the process. They don’t have what banks are looking for – proof that their concept works. They know it will work. They have done all they need to do. All that is left is funding. Banks are ‘shylocks’ hence they are coming to you who will understand. Is that true? If yes, how come many businesses with start-up capital kiss the dust? Is it because the founders did not have enough faith and hope?

There is a saying that the worst thing to happen to you in Vegas is to win. Why? Because you think you are smart and will want to win again. When you start to lose, you start throwing good money after bad, trying to win back what you lost. Many ‘win’ to the point that they walk away from the table without their valuables and a pile of debt. The worst thing that may happen to you if you want to start a business for the first time is to have the money to do it.

You will simply bypass the process and rush to open the doors. Since you have the money, why bother going through the hassles? Just get down to business. There is no need to test your assumptions. Consequently, rather than fail at the concept stage, you fail where it hurts most when a lot of money, time, and resources have been sunk in only to learn one lesson – your assumptions were wrong. You took the much more expensive route to learn the lesson.

Proof of Concept

If you are to access a grant, you will be asked for a proof of concept. Proof of concept (POC) is documented evidence that a potential product or service can be successful. Venture capitalists, banks, etc have other names for it, but it means the same thing – prove that your concept actually works. For someone who has no track record of running successful businesses, the theory, projections, market research, etc are brilliant, but you need to prove that it actually works.

They need a field-tested prototype. They need actual numbers. They need to see the cash flow. Like the popular phrase from the 1996 film ‘Jerry Maguire’ – show me the money! If you can show investors and banks the money, they will be begging for a piece of the action. They are desperate for good investments to put their money into, especially in today’s Nigeria where the days of armchair banking are gradually drawing to a close.

The challenge we have is that we believe start-up capital is the issue. Rather than save up seed capital to prove our concept on a small scale, we are looking for big money to test our assumptions with. We rush to battle with a bundle of untested assumptions. There is no business founder who does not believe his business will succeed. This belief becomes fatal financially, when there is money to back up the untested assumption (like winning in Vegas). Until your assumptions are field tested, they remain assumptions unless you are spiritually guided.

Anybody who puts money on it, including your good self is gambling. Your hard-earned money is too precious to put into an idea that has not been tested. Don’t get too emotionally invested in your business idea. Do your homework properly. Don’t run from banks. They have experts ready to help. Even if you don’t take the loan, you have a lot to learn going through the process. So before you start that business, one last check before you pump in money – have you field-tested your assumptions?