Common Mistakes Made By Beginning Entrepreneurs: Over-Estimating Money Needs

Many first-time entrepreneurs with only an idea ask me how to raise hundreds of thousands of dollars. Bad idea! Most of the time, the real problem is not money, it’s the way you’re thinking about your business.

Contrary to popular thought, entrepreneurs don’t enjoy taking lots of risk. Great entrepreneurs minimize risk as much as possible. I’m assuming you want to be a great entrepreneur. Right?

When you’re just starting your business, your idea is essentially a bunch of assumptions (ie – If I do x, then so-and-so will do y). Most of these assumptions will be wrong. Even successful experienced entrepreneurs will have many incorrect assumptions about their business idea.

With that in mind, a few questions should come up for you:

1. What assumptions are critical to your idea working?
2. What’s the best way to test those assumptions to find what actually does work?
3. How much will it cost to actually test these assumptions (time and money)?

It does NOT make sense to test all of these at once. You should start with the most critical assumptions first. As you prove assumptions, you not only reduce your personal risk, but those of potential future investors.

For example, let’s say you want to start a restaurant. Let’s say your assumption is that you grandma’s recipe will keep people coming and will create word-of-mouth. Well, you don’t need to have a restaurant to test how effective the recipes are. You could sell the finished product to multiple restaurants. You could sell it online. You could provide catering. All of a sudden, you need VERY little money to get started. Meanwhile, you’re proving your critical assumption, you’re building a fan base, and you’re improving your odds of bringing on great partners and funders.

When we wanted to start the Extreme Entrepreneurship Tour, we didn’t run out and purchase an expensive tour bus and spend $10,000 to wrap it. First, we created a basic web site and a powerpoint sales presentation. Then we spent a whole year signing up ten schools and getting paid upfront. Only then did we make most of the startup investments in the business.

The best way to fund your business initially is through your customers. You don’t have to pay them back. You don’t have to give up a percentage of your company. Finally, you prove that your product/service is valuable. Contrary, to popular thought, customers are willing to pre-order products/services if presented correctly!

For more on this process, read up on customer development.