Don’t Eat Your Seed Capital

By Fola Daniel Adelesi

Starting a business comes with great excitement and enduring sacrifices at the same time. Every business will demand some form of commitment from the owner. This may begin with the sleepless nights or several phone calls to people who might be interested in the new venture. Some email campaigns may follow and there will certainly be a few hours spent with a pen and paper (or screen and device) late into the night. Nonetheless, the business will hardly be able to kick off without one or two financial commitments.

In a number of cases, the reason business owners don’t hesitate to make all the sacrifices possible for their businesses is because they expect quick returns. It seems perfectly logical to make sacrifices so that returns can be generated speedily. Sadly, it is at this phase that some business owners make costly mistakes.

Entrepreneurs dream of the future, days of bountiful harvest from their labour, expansion and diversification from a start up into a group of companies. Amidst these beautiful images of expected returns, entrepreneurs get carried away with investing in things they don’t need right away because they plan to scale in a short time span. Some startups spend way too much on executing unproductive campaigns across mass media. Others invest in office spaces that they do not need  and sadly, many throw money into things that may be necessary for bigger ventures, but not mandatory or profitable for their startup.

These expenditures come with genuine excitement from short and long-term expectations from the business. It is normal for business owners to expect some returns from their businesses especially when they have already invested a significant amount of resources. Unfortunately, this constitutes to one of the reasons why many businesses will not survive the first five years.

 It is the golden rule not to eat your seed capital. When venturing into business, founders should note that for the business to survive, there should be no capital expenditure as soon as the business makes its first profit. This is because the venture needs to go through that incubation curve where it stabilizes and generates steady cash flow. Business owners who immediately cash out as soon as the business makes money often end up killing the business. Here are some recommendations for entrepreneurs to use their first income for:

  1. Reinvestment– It is important to put the money back into the business, especially as a startup. As an entrepreneur, the profit still belongs to you no matter how long it takes. If a business owner reinvests enough funds to give the business a good standing, the business will thrive and the entrepreneur will eventually reap the fruits of his or her labour.
  2. Expansion – Starting small is nice but there is the need to slowly expand to increase profit margins. As income streams steadily increases, the focus should be to scale up products or services, invest in infrastructure and equipment, hire employees with the relevant skill set for the job, and the list goes on.
  3. Marketing – Startups should spend some of their first income promoting their brand using offline and online marketing channels. When businesses don’t execute a marketing budget, the awareness of the brand is limited and the business is at the mercy of more aggressive competitors.

A startup’s  income  in the first 3 years of operation should be reinvested as these funds are used to expand the business. There is a tendency for entrepreneurs to think that all the money a business makes is theirs just because they started and raised funds for the business. This is a wrong assumption and it often results to the business suffering from cash flow deficit.

If you must pay yourself as an entrepreneur of a new venture, it must be justified. However, the key lesson is to wait until the business can comfortably afford such expenditure without hurting its cash flow and operations. Delayed gratification is best for the sustainability and long term success of your venture.

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