Entrepreneurs and cost of capital

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Who does not have an idea? About something, about anything. It is not ideas what the world lacks. It is the ability to make them real, meaningful, and sustainable.

– Now we come to raising money, don’t we?

– Well, yes. If you do not have any money to commit to your project you will need to look for it somewhere else. But beware where you are going to get it. Why? There are business angels, and VCs, and individual investors. So not so difficult, is it? If you are not committing a big chunk of money yourself, you have to understand that others will not just give their money away for free. I mean, not just waiting and hoping for future benefits whenever, if ever, these happen to materialize. You will be managing other people’s money, usually without you having previous experience of managing third parties wealth. So, they (the investors, the money owners) are going to be watching you closely, as closely as possible, and sometimes that will annoy you, or you will consider they are interfering with your business ideas or your business plans.

– What??? Why should they interfere if what I want is also to earn money as soon as possible as much as possible and that is good for all of us?

– Well, because you are just risking time, and they risk time and money. And for money time means additional money (interests they could be earning by investing somewhere else) or losing money. So, they are not just investing the money they disburse and put into your (?) project, but also what is called the opportunity-cost, that is the extra money they are not getting by investing that same money in a safer investment.

– But they are going to make much more, as soon as we succeed and we have a big investor offering to buy “my” project. So, it may be a short term risk but much more profitable long term.  

– OK, please define “short term” and “long term” related to your project, and please think that the market is also moving, and as soon as your project is known there will be others also trying to enter that same market.

Maybe, but I will already be there!

– Yes, but you may have spent lots of money until you get your business model and product or service right, and the others will learn from you and go straight to the finish line, or at least to level 30, they will not start in box 1. And costs of failure are also costs of capital.

– Then, why are there so many investors out there willing to use their money in projects like mine? Investing in entrepreneurs?

– That is a good question. It should not be happening that way, unless there was a market failure, that it is exactly what is happening right now. We are just coming out of a big crisis and financial markets interventions, and financial retribution is not too high right now. 

– That is why the “opportunity cost” is not high, so they are risking almost just what they put in your project, and have the time to be closely monitoring.But remember that those with the capacity of investing, do not usually have the experience of having built a company from scratch. They may have been top executives, so they had lots of resources of all kinds at their disposal, and especially they also had bright people by their side. So they have never been in your shoes either, and are used to succeeding in their endeavours. For them failure is not an option, and they do not want to start learning about it now. They want money, more money, or at least their money back. Your project is not a charity!

And they are co-leading with you what you call “your” project, but do not forget that the role of the leader is not to know all the answers but to create the environment to go from variability to success.