The Growth Dilemma

Determining Your Entrepreneurial Type to Find Your Financing Comfort Zone

Ami Kassar

• Publisher: An Inc. Original
• Year: 2018
• Print ISBN: 9781632991621
• eBook ISBN: 9781632991638
• Topic: Negocios y empresa
• Subtopic: Emprendimiento

Where are you in your business journey? Most entrepreneurs are looking for ways to push their companies to grow and get bigger. But they struggle with decisions about how big they want to become, how much money to keep investing in their company, and how to even go about it. They want more, but they’re not sure how to think about the problems, obligations, and risk that come with growth. This is the growth dilemma. In The Growth Dilemma, Ami Kassar, author and nationally renowned expert on access to capital for entrepreneurs, shows you how to sort through your choices to build your business to the size and complexity that makes the most sense for you. He’ll walk you through exercises that help you: • Answer the crucial million-dollar question
• Figure out what entrepreneurial stage you’re in
• Determine your personal risk profile
• Identify your own growth aspirations ?Knowing these parts of your puzzle will not only influence how you think about your growth dilemma but also allow you to discover your financing comfort zone. Through the profiles of fifteen real entrepreneurs and companies, you’ll also be able to see, throughout the book, examples of how different financing decisions affect every kind of business. As you apply the strategies you learn, you’ll find the financing structure that will help you reach your goals.

CHAPTER 1

The Million-Dollar Question

The first step in finding your financing comfort zone is to stop what you are doing and answer a challenging question.

Are you investing enough in your business? Does your business have enough capital to keep moving forward? Sometimes we need a tough question to shake up our thinking and challenge our routines.

Imagine that I presented you with a gift of $1 million. The one rule about the gift is that you cannot use it to buy a new house or a fancy car. You must invest it in your business or the mutual fund of your choice.

How would you divide the money, and what return would you expect from each investment?

HOW WOULD YOU INVEST YOUR NEXT $1 MILLION?

Step 1—How much $ will I invest in:

$	My Business
$	Mutual Fund

Step 2—Expected return from investment:

%	My Business
%	Mutual Fund

How you answer the question says a lot about how you feel about your business and whether you would try to expand if you had access to additional capital. Your response also speaks to what stage of life you are in, and whether you feel you can—and whether it’s important to—diversify some of your risks and invest in things outside your business.

What return would you expect from your investment in the business and mutual fund? And what would you do with the money you put into your company? You might use it for additional sales staff, product development, acquisition, equipment, advertising, and so on.

If you expect a handsome return on your business investment and you have the option to raise equity or debt to make it happen, why aren’t you doing it?

Asking yourself the million-dollar question is important for several reasons. If you’re currently building and running a business, there are three things you can do with your next available dollar: You can spend it on something fun, you can reinvest it in your business, or—when you can afford to—you can take some chips off the table and diversify your risk. Often, we do not make these decisions thoughtfully and methodically.

You may be thinking about reinvesting in your business only through cash flow. If the returns are substantial and you are bullish on the prospects, adding debt (or perhaps equity) to your balance sheet may well be worth it.

ARE THESE DECISIONS EMOTIONAL OR RATIONAL?

While it’s easy to create spreadsheets and models to make these decisions, the reality is that emotional components also enter into our thinking about money and risk.

Let me share an example.

Years ago, I had a client who ran a commercial cleaning company. We offered him a ten-year Small Business Administration (SBA) loan at a 6 percent interest rate that required a lien on his house. The other option was a one-year term loan at 36 percent without a lien on his house. He chose the latter. He had a past personal experience that led him to decide that, come hell or high water, he wasn’t going to put a lien on his house.

Unfortunately, the short-term debt he chose caught up with him, and years later his business was in serious trouble. My client let the memory of a past event completely cloud the present in a way that ultimately harmed his business. Think about your prior experiences and how they influence the way you currently think about money and risk.

I know that having to watch the company where I’d worked for a decade completely blow up, with a thousand people losing their jobs, impacted how I think about risk and leverage. I am much happier letting my company grow slowly and organically, although I certainly risked everything to get it off the ground.

How do your past experiences impact the way you think about your million-dollar decision?

PROFILE: ‘COREPHP’

As you can imagine, entrepreneurs answer the million-dollar question in many different ways—often with more emotion than a rational method. Michael Pignataro has, in my opinion, the most methodical answer to the million-dollar question of any entrepreneur profiled in this book.

As someone who once worked as a professional illusionist, Michael Pignataro knows how quickly money—among other things—can disappear. But that’s not why, if he were given $1 million he could divide in any proportion between ‘corePHP,’ which he co-owns with his identical twin, Steven, and a mutual fund, he would only put 80 percent in ‘corePHP.’

In 2001, Michael’s twin founded the software development company ‘corePHP,’ which was originally based in Battle Creek, Michigan, and now also has an office in São Paulo, Brazil. As its name suggests, its initial focus was the PHP programming language, which it originally used to create custom content-management systems. Prior to ‘corePHP,’ Steven Pignataro had helped develop two open-source content-management systems: Mambo and one of its successors, Joomla!, which ‘corePHP’ still uses in web development.

Before they became business partners, Steven and Michael were performing as illusionists doing large-scale magic shows—until demand for the shows dropped off dramatically before the 2008 economic crash, causing them to cancel a tour while in the middle of it.

After getting off the road, Steven made ‘corePHP’ a limited liability company (LLC) with a business partner, and Michael went to work for a credit union. But when Steven wanted to ramp up the growth of ‘corePHP’ and his partner didn’t, Michael borrowed money and bought out the partner.

Since then, ‘corePHP’ has developed an e-commerce platform for businesses called paGO Commerce. The company offers the platform for free, but users pay a small percentage on all customer transactions they conduct on it. Additionally, ‘corePHP’ offers development and marketing services to their paGo business clients and other businesses.

Michael said that after a few years of putting all his potential investment money into ‘corePHP,’ he wants to get back to the rule he’s followed over the years, putting 80 percent of his available money into the business and 20 percent into other investments.

Although he would use the mutual fund for security, Michael would expect his investment in ‘corePHP’ to generate a return about 10 percent higher than the return generated by the mutual fund. The reason, he said, is that he expects that he’d be more focused on growing ‘corePHP’ than the managers of the mutual fund would be on growing the fund.

Michael said ‘corePHP’ is in the process of forming a joint venture to take paGO from being just an e-commerce platform to being a sales and marketing tool that will help its users increase their revenue. He expected ‘corePHP’ to have 2016 revenue of $1.2 million if it landed a couple of jobs that were pending when I interviewed him, and $1 million to $1.1 million if it didn’t. He also expected the company to be profitable.

His plans for the hypothetical $800,000 he’d invest in ‘corePHP’? His first priority would be boosting its marketing and sales efforts. His second priority would be to continue developing and enhancing paGO so that it not only exceeds the demands of current ‘corePHP’ customers but ultimately reshapes the market for e-commerce platforms. The money would give ‘corePHP’ “the ability to scale faster than we’re scaling right now.”

On the other hand, when asked if he’d want to borrow $1 million at 6 percent interest, Michael said he probably wouldn’t want the entire amount. His reason? He’d want to make sure the company could start paying back the loan right away, which it might not be able to do because of the revenue lag involved with paGO. ‘corePHP’ doesn’t get money when businesses sign up to use the platform; it only profits when those businesses’ customers start buying on the platform. Thus, it could run a marketing campaign that succeeded in bringing a lot of companies onto paGO without seeing much revenue from the effort for a few months. “When you’re dealing with e-commerce, there’s a ramp-up when users come on board.”

REFLECTION

Unlike most entrepreneurs I’ve met and worked with, Michael has a methodical formula for deciding how much money to keep in and take out.

Do you have such a formula? If you don’t, it’s something to seriously consider.

CHAPTER 2

100 Percenters vs. Safety Netters

The entrepreneurs profiled in this book fit into one of two categories—100 percenters and safety netters.

The 100 percenters are those entrepreneurs who, when offered $1 million (whether as a gift or at a 6 percent interest rate) said they would, without hesitation, plunk it all down on their business.

The safety netters, on the other hand, were a bit more cautious. While they said they would invest most of the $1 million into their businesses, they all pledged to hold back varying amounts as a reserve.

But which approach is the right one?

Ultimately, you can make an argument that either approach is correct. It all depends upon intestinal fortitude, confidence, and personal preference.

It makes sense that many entrepreneurs fall into the 100 percenters category. To be an entrepreneur, you have to dream big, be willing to take risks, and have a high degree of confidence both in yourself and your business.

Here’s a golf analogy that can shed light on this. Say you’re on the green, about fifteen feet from the hole.

A cautious golfer might tap the ball too lightly which, in turn, means it cannot reach the cup.

A bold golfer will hit the ball harder. It may not go in—and it may go past the hole—but at least there’s a chance it will go in.

In other words, if you aren’t willing to take a risk (that the ball goes past the cup), there’s no chance you can succeed (sink the putt).

Put many entrepreneurs on the golf course, and it’s safe to say their putts aren’t coming up short.

The confidence that 100 percenters express is appealing to some lenders, who want potential clients to believe in their businesses. That’s the kind of mindset lenders can get behind.

Now let’s look at the safety netters.

Obviously, there are some sound reasons for being at least somewhat cautious. An entrepreneur who would only invest $800,000 of the $1 million from our example, leaving a $200,000 cushion, is far from gun-shy.

An entrepreneur might have all the confidence in the world in their business, but they c...

Table of contents

• Cover Page
• Title
• Copyright
• Dedication
• Contents
• Foreword
• A Tale of Three FishPreneurs
• Introduction
• Chapter 1: The Million-Dollar Question
• Chapter 2: 100 Percenters vs. Safety Netters
• Chapter 3: What Does Money Have to Do with It?
• Chapter 4: Are You a Tortoise or a Hare?
• Chapter 5: Where Are You in Your Business Journey?
• Chapter 6: What Is Your Risk Tolerance?
• Chapter 7: What Are Your Growth Aspirations?
• Chapter 8: Should You Get a Loan to Grow?
• Chapter 9: Valuable Lessons in the Hunt for Money
• Chapter 10: Family Business/Partnerships
• Conclusion: Finding Your Financing Comfort Zone
• Acknowledgments
• Index
• About the Author