A general rule of thumb when starting a business is that whatever budget you come up with, you need to multiply that number by three to come up with the actual amount of money you will need to move forward.
Three times sounds like a lot, and the actual number will probably only be twice as high, but the most dangerous situation is a start-up with no money. Three times gives you the flexibility to absorb unforeseen costs and still get you to the next milestone.
During our first few months of operation we were able to keep costs way down. Not only did we have enough to cover expenses, but we had a substantial cushion to fall back on. We couldn’t believe it, and we began to think that maybe we would be able to get to profitability on seed money alone. HOW NAIVE WE WERE.
A series of blowing events happened just a few weeks later, our cushion disappeared, revenues that were just inches from our hands slipped through, and before you know it, we were stuck without money.
First of all, let me emphasize that these were the hardest days of my life as a C.E.O. It is also important for me to acknowledge that this situation was 100% my fault. I should have secured more financing to begin with. I should not have lost our revenue stream. Most importantly, I should have anticipated the possibility of loosing our revenue, and I should have begun raising money the second our cushion began to dry up.
I was faced with a few very difficult choices. Should I look to raise additional funds? Yes, but it takes time and I didn’t think I would be able to in time to save us.
Do I cut our costs? Of course, but it wouldn’t be enough.
Do I take a pay cut? Yes, absolutely.
Those were the easy questions; the hard part was quickly coming up with at least a temporary revenue stream to get us through these hard months. I am a huge proponent of focus and I hate when businesses shift their focus or take on consulting projects, but we were talking survival here, so I leveraged our expertise on the Hispanic community and decided that we would take on a consulting project. We did. We made some money. We paid rent. It was enough to get us through the day, we then raised the money we needed, and off we went back to our initial goal of building a tech company for the Hispanic community.
The big lesson I learned here is that 3 times sounds like a lot, but trust me, asking for two little is way more dangerous.
Entry filed under: Start-up.