Three Questions for Entrepreneurs

The other day I was meeting with the leadership team of a startup company brimming with transformational potential. The team had made tremendous progress in a year, going from an idea on a piece of paper to a fully functioning business earning real revenue.

Of course, any new venture is fragile. While revenues are growing, the company hasn't yet hit breakeven. Its current projections suggest that point is still at least six months away. The company has some cash in the bank, but recently began looking for further external investment to help ensure it remains solvent.

Our discussion went something like this:

Me: "So, how important is it that you get external funding?"

Team: "It's important, but not critical because we have cash in the bank."

Scott: "How much?"

Team: "A few hundred thousand dollars"

Scott: "What are your current spending projections?"
(I hear a shuffling of paper...)

Team: "30 to 50 thousand a month."

Scott: "Well, that seems pretty urgent to me. You have about six months of life left."

One of the first lessons taught to me by my Harvard Business School finance professor sticks with me to this day: The only reason a business fails is that it runs out of cash. As such, the first question every entrepreneur should be able to answer in a second is, "How many days do I have to live?" That helps the entrepreneur think about how to manage their costs and their funding strategy.

The second question I look for an immediate response to is, "Why are you doing this?" Starting up new businesses is incredibly hard. Most fail. The ones that succeed require hard work and constant attention. An entrepreneur who doesn't have a good answer to this question is unlikely to succeed — and is certainly unlikely to raise external capital.

Fortunately, the team I was guiding could answer this question easily. They believed their approach could fundamentally change the category and dramatically improve the lives of their consumers. The early data supported their view.

Finally, I always want an entrepreneur to tell me the two critical things they are working on at any given time. Of course, any new venture will have dozens of areas that need attention on a daily basis. But a good entrepreneur can step back and highlight the two things they are really hoping to learn during a set time period. These aren't always the fires burning brightest. Ideally, they relate to the biggest unknowns in the hypothesized business model.

Time will tell if the team I was working with will succeed. But by focusing on how long they have to live, why the hard work is worth it, and what the most critical issues are, I know they will maximize their odds of success.