Funding 101: Managing the Risk of Business Failure

In a study performed by the Startup Genome Project, it was found that only 1 in 12 businesses succeed. At Visual.ly a fantastic infographic designed by Ernesto Olivares illustrates five core areas in which startups and businesses should achieve proper balance to ensure sustainability. (See http://visual.ly/why-startups-fail )  

As capital is mentioned as one of the five critical areas, The NextWomen sat down with capital expert Pasha Baker (pictured left), Chairman and CEO of Life of a CEO Capital, a capital firm that offers lending solutions and venture capital to businesses.

Having a conversation with Pasha Baker is the equivalent of taking an accelerated MBA course for the novice entrepreneur.

Her keen sense of business acumen and years of experience working for and with well-known Fortune 500 companies have contributed to Ms. Baker's personal entrepreneurial success as well as her wealth of knowledge regarding capital, business development, and sustainability. In finance the regulatory rule of thumb that financial institutions and their advisors must adhere to is to know your customer, but an entrepreneur must apply the same rule to themselves, challenging what they know to be true about their personal attributes and motivation, their business model and the financial health of their business and personal affairs. 

Ms. Baker advises no differently. In fact, it is the guiding principle of her five major steps to funding and maintaining capital that she strongly suggests all business owners should follow. After working several years for JP Morgan Chase, from investment banking to project management for companies such as Nokia and Boeing, Pasha discovered that she truly became more passionate when she had the opportunity to work with less notable and smaller companies:

“I found out then that small businesses, 'the Mom and Pop' type of operations, did not know two things that the big companies knew: how to leverage themselves by using funding strategies; or how to access capital.” 

So how do small business owners  become successful in their own niche in the same manner that these larger companies do? Ms. Baker  suggests implementing the following strategies for funding. 

1. Start Simple

Most individuals beginning a business overcommit themselves by trying to do too much too early and all on their own. The root of most startup failures is the fact that they create a large amount of overhead and expenses before striking a profit , i.e. renting or buying large business spaces, investing in unnecessary equipment and spending a great deal on marketing collateral.

“You need to grow organically first and then seek funding,” says Ms. Baker who speaks from firsthand experience. In 2007 during the early stages when Life of a CEO Capital was forming, Ms. Baker began with a business partner. She spent approximately $50.00 USD for 1000 business cards and offered small services such as writing business plans and offering strategies for funding and marketing. Ms. Baker and her partner met clients in the “third space” coffee shops, book stores etc... before setting their sights on bricks and mortar. Then after building a customer base and extensive networking within the community they approached institutions to seek funding. According to Pasha, establishing credibility helps to “minimize the investor's and bank's risk”.  Most financial institutions and venture capitalists are hesitant to fund potential because it is an intangible and cannot be quantified. 

2. Understand your financial situation and have a basic knowledge of business principles, especially if it isn't a discipline you have studied

“I can always tell the business owners who approach me for funding who have no financial background or basic knowledge of economic principles and they are the ones who I am least likely to fund,” says Pasha Baker.

In order to determine what Life of a CEO should invest in or the type of lending products that would be beneficial to offer business owners, Ms. Baker is constantly watching the market for economic indicators. Just like the stock market adage of “buy low and sell high” is an investor’s mantra, which should be internalized by business owners and entrepreneurs. Ms. Baker recommends “taking advantage of building up your business in down markets” and “maintaining your business when markets are up”. Knowledge of the economic environment will also help a business to better understand your financial position. It will help with diagnosing the weak areas of a company’s financial state in order to create a healthy and sustainable future. Personal finances must be in order as well, because these habits will tend to carry over into the financial management of a business owner's accounting practices. 

3. Budgeting is critical to managing business finances

You should understand cash flow statements for your business, review your tax returns and be able to perform an income analysis for your business. “Managing your business finances is just like budgeting for your personal life when you balance your own accounts,” says Ms. Baker. That type of acute awareness of your company finances makes funders more confident in lending and/or investing in your endeavor because it shows responsibility, which differentiates the projects and or businesses that Ms. Baker is most likely to fund and or invest. 

4. Know what type of capital is right for your company and how much you need.    

“At Life of a CEO Capital, we offer over fifty financial products for business owners.

Not all of these are right for every business and the worst decision that any business owner could possibly make is choosing the wrong type of capital that could hurt their business and/or be detrimental to their personal financial situation," says Ms. Baker. 

Pasha also states that taking time to assess your finances will also aid in determining what and how much you need to operate - and if taking the venture capital route will enable you to negotiate the right minimums for the stake you allow investors to take in your company.

“A business owner or entrepreneur must have knowledge of what the money is needed for (usually itemized in your company's executive summary)," advises Ms. Baker.  This insight will allow business owners to manage the emotional risk of choosing a product or making a decision that is not sound for your company.

“It is not uncommon for business owners to be left without profit when taking a company public or achieving wild financial success with their product / service, all due to the fact that they gave investors far too much of an ownership stake,” cautions Pasha.

“Stay true to your numbers. Itemize your needs versus your wants and always keep those items in mind.” 

5. Check your motivation and make sure you are hearing the purpose driven voice. 

At an early age, Pasha Baker heard that “purpose driven” call to be a business woman. She   recounted the summers she spent in basketball camp where no concessions were offered. So she     took that opportunity to not only pack her own lunch and snacks but to bring additional items for her fellow campers and sell them in order to turn a profit.

Growing up and watching her mother sometimes struggle with employment was the additional inspiration for her to create a company that would provide employment opportunities for others. Pasha says, “I  knew there were other people like my mom who were turned down for jobs and I knew I had to make this better. This should be the motivation for anyone starting a business and expecting to stay in business. As I look around this room I see things that were created to make my life better. Even Steve Jobs along with his counterparts created the iPhone I am speaking on to make someone's life better and that should be a serious business owner’s main ambition.

The person who walks through the door saying that the only goal for their business is to make money will definitely be the business I will not fund or invest in at all. ”

The five strategies mentioned above are not an exhaustive list of  all that is required for avoiding failure in funding for a business, nor is it sure fire way to prevent failing as there are other inherent issues to be considered, as mentioned in the diagram mentioned at the start of the article. “All the moments that you make mistakes make you more compassionate..more empathetic,” says Pasha. This is true, for in failure we are able to learn and these learning experiences create great teaching opportunities for others who may come after us.

Learn more about Pasha Baker by visiting http://about.me/TheLifeofaCEO

Octavia Smith is an experienced and licensed securities financial services professional whose career has spanned the gamut of community development within the non-profit sector to banking as well as investment services within the finance industry. For more information about Octavia, see her profile

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