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STRATEGY

Before Raising Capital, Find Your Spark

Most successful businesses are built from a proprietary asset, not just an idea.Until that spark is in place, outside investment is a risky proposition.

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The essence of building a business is creating something from nothing. But in reality, every business starts from something and results in something more ... hopefully a lot more.

Among the high-ambition business builders we talk to, we find a common misconception that good ideas by themselves attract money. Sure, there are VCs in Silicon Valley looking for the next Facebook, but in general they are placing their bets on individuals, teams, and track records, rather than simply ideas. This is a basic fundamental of finance: Why should someone invest in your risky business venture instead of placing safer bets somewhere else?

We've written previously about the lack of value in ideas (see Why Your Idea Isn't Worth Anything and Why You're Not Entitled to Your Idea). The vast majority of start-up businesses, even those that raise funding, are built from something proprietary: a reputation among a base of customers, a unique skill or expertise, a valuable asset such as a truck fleet or a desired location, or even someone's time and effort--sweat equity to build the business.

Examples are everywhere. Facebook was based on access to a captive network of Harvard students (the original users were required to have a Harvard.edu e-mail address). Apple was built when Steve Wozniak spent his time tinkering with early PCs and Steve Jobs commercialized his work. One of the companies we work with, Phin and Phebes Ice Cream, was built through the creativity and inventiveness of the founders, who created some amazing ice cream flavors. Our own business was built through the reputation and skills we built in a prior job that we leveraged with our first clients to establish an early track record.

Each of these businesses used these early sparks to ignite value. They all received capital infusions only after they had built a unique foundation for growth.

We almost always discourage businesses from raising outside capital until the conditions are perfect. A proprietary source of capital, such as your own savings or the profits from another business, should be used almost as sparingly. Most businesses can benefit from building their strategic assets first and only employing capital once a core business model can be scaled. Until then, it's important to identify your spark, and leverage it into a viable business.

What sparks did you use to start a business? When have you sourced capital to fuel the fire? Share your thoughts with us at karlandbill@avondalestrategicpartners.com.

Last updated: May 16, 2013

KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.
@karlstark




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