Cash is King

There is a common notion that most start-ups fail for one of two reasons; either they are under capitalized or do not sell aggressively. In both these cases, the firm fails to raise the appropriate amount of cash needed to sustain operations. Of course all failed businesses run out of money, but some never give themselves a chance.

A firm that never gave itself was chance is Elite Technology Partners. The company was born from the technical brain trust of Blackwood Trading, and quickly conceived a product and business model based on their experience from the other firm. Their product was greatly inspired by Blackwood, but targeted a specific strategy and different distribution channel.

Elite's founders had learned from their experience at Blackwood. Certainly, they put to use the intellectual capital gained at Blackwood. They also learned from Blackwood's failed effort to market themselves successfully. In addition, the founders recognized that Blackwood's operational model was very expensive.

However, Elite underestimated the effort required to develop a product and bring it to market. Very quickly the firm fell into a chicken and egg situation. In Elite's case, they couldn't sell product because they did not have the capital to complete it. And they could not raise cash through sales because their product was not finished. Add to their situation the economic environment during 2002, where investment capital had effectively dried up. Venture capitalists were only looking at firms generating cash through sales.

In Elite's case, the lack of cash led to a series of strategies changes that sealed the fate of the company. First, a shortage of cash caused many of their best engineers to secure positions at other employers. Elite sought an investment arrangement through key prospects that would enable them to bring their product to market. But partnerships with a large investment come with restrictions. Demands of exclusive use and ownership of intellectual property made partnership deals impractical.

To raise cash, Elite sold its' talent in consulting arrangements. The consulting business was profitable and brought in enough cash to keep the operating. Unfortunately the opportunity cost of consulting was a halt to further development of Elite's product. In the end, Elite failed to complete its' product; Elite failed to complete its' product because it failed to raise the capital necessary to build the necessary technology.

I am working with an entrepreneur who is in a similar position. He is following a conscious strategy of delaying raising despite having an established relationship with investment bankers. The entrepreneur is betting that signed contracts will make the firm more attractive to investors. This may be true, but having no cash in his firm, he will have a difficult time meeting any operational commitments.

My observations of Elite Technology Partners leads me to believe that my friend has a risky strategy. Because he refuses to seek capital, he will not have a fully functional team in place when he signs his first contract. When the contract is signed he will need to complete his technology, hire staff, and seek capital within a very short timeframe. In the three to six months needed to receive private equity cash his venture could fail.

Elite Technology Partners failed because they did not raise cash for their operations. Successful entrepreneurs beg, borrow, or steal (Ok, maybe not steal) enough to give their companies inertia. A firm with inertia will attract further investment, or generate cash organically.