If there’s one person who embodies the idea of ‘entrepreneur,’ it’s Elon Musk.
He has been responsible for the development of a large number of high-profile technology companies, which include Zip2, X.com (later merged with Confinity to form PayPal), SpaceX, SolarCity, Tesla and many others.
What’s remarkable about Musk is the way he funded his start-ups, especially SpaceX and Tesla. While he has relied on external funding, he nonetheless had to face many setbacks that almost brought his companies to an early end.
As an entrepreneur, Musk can teach you a great deal about how to get funding for your start-up. Here are the three most important learnings you can get from his experience.
Convince investors with your commitment
The mid-nineties remind us of an era of unprecedented economic growth and a feeling of prosperity toward the country’s future, something that stands in sharp contrast with our present.
The context in which Musk raised venture capital to fund his first start-up represents another drastic difference compared to the present. In 1995, there was slightly over $8 billion available in the global VC market, a small piece of the current $155 billion that was raised last year.
In that same year, Musk launched his first start-up, Global Link Information Network (which eventually got rebranded as Zip2), a company that provided directions across the San Francisco Bay Area. According to Ashlee Vance, author of Musk’s biography Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, his beginnings were humble. Musk, his brother Kimbal, and a small sales team initially pitched the new company door to door.
For the first few months of operations, Musk couldn’t rely on the large pool of available VC funding, or the experience or connections he has today. The only strategic advantages that set him apart were his passion and commitment.
Due to their lack of funding, Musk and his brother had to live on the little money they had, sleeping on futons at their office and using the showers of the YMCA that was located a few blocks away. To convince their investors, Musk and his brother relied on a creative trick: They built an elaborate casement around the computer that worked as Zip2’s server and put it on a large, wheeled base that made it look like “a mini-supercomputer.”
This trick, together with the frugality in which the Musk brothers lived, helped them become profitable soon. Their early profitability helped them raise money from a small group of angel investors, which would eventually lead to a $3 million investment from Mohr Davidow Ventures, and finally, a $307 million acquisition by Compaq.
Due to their lack of funding, Elon Musk and his brother had to live on the little money they had, sleeping on futons at their office and using the showers of the YMCA that was located a few blocks away.
The passion and commitment Musk showed goes beyond the funny tricks and futon nights. Musk didn’t waste the $22 million he got from Zip2’s sale on expensive cars and luxurious mansions. He reinvested — and risked — everything to build his second company, X.com, which would lead to PayPal. The sale of PayPal to eBay netted Musk $180 million, which he then used to fund SpaceX, Tesla and SolarCity.
If there’s one thing the beginnings of Musk’s journey show, it’s that he’s the kind of entrepreneur who works for the long run. When he’s involved with a company, he goes all in. He invests everything he has, putting all his energies into building them.
It’s hard for a venture capitalist to reject an entrepreneur with such a hard-working spirit. You don’t need to shower in a YMCA to show the sacrifice you are willing to make for your company (unless you are truly broke, like the Musk brothers were back then). Rather, you need to show you live and breathe your company, and that you are willing to do anything to make your vision happen.
Don’t give up control too soon
A hard fact about the tech world is that few start-ups get to grow to billions of dollars in valuation without any VC funding. This leads to dilution of equity and loss of control of the company.
Most start-up founders need to live with that situation, and many get to keep control, thanks to the high trust VCs have for the founder and executive team. The case of Mark Zuckerberg, who owned 28.4% of Facebook‘s shares at the time of its IPO, is a good example of this.
Yet, in some other cases, founders lose excessive control too soon, leaving them powerless against the more professional and experienced VCs. This is something Musk learnt early in his career.
Musk’s career in Zip2 had an abrupt and sad ending: The first funding round deeply diluted his equity, which left him powerless after his board of directors decided to bring on a new CEO and make Musk the CTO. While Musk was still on the executive team, he couldn’t tolerate the lack of control and the way the new CEO, Rich Sorkin, ran the company.
Musk met a similar fate with his second start-up, X.com. After Musk merged X.com with one of its competitors, Confinity, he ended up being the CEO of the new company, PayPal. Unfortunately, he was ousted from the CEO position after a rather trivial fight over the technology platform PayPal used.
The lack of control he had over his two companies had a significant impact on his future ventures. Nowadays, Musk prefers to start by investing as much money as he can, making sure he always has the upper hand in his company’s decisions. His obsession over equity control explains why, while he was going through Tesla’s funding, he maintained his ownership percentage.
The lessons are clear: Before you focus on raising as much money as you can, remember to keep some equity of your own (particularly if you are an inexperienced CEO). If you care about your company’s vision, you need to make sure you can carry it out. It’s hard to achieve such a feat if you hold little voting control over your company. Becoming profitable as early as possible can help you overcome this issue, especially if you get creative.
Elon Musk didn’t waste the $22 million he got from Zip2’s sale on expensive cars and luxurious mansions. He reinvested — and risked — everything to build his second company, X.com, which would lead to PayPal.
Lack of resources isn’t something that sits well with Musk. He has been willing to do whatever he has to do to have his companies prosper. What’s remarkable about Musk is that whenever he’s got all the odds against him, he turns the situation around by being resourceful.
To help you understand what I mean by this, let’s take a look at what he did with his latest venture, The Boring Company. Despite the fact he funded the company with his own money (as usual), the mission to build underground tunnels seems like an expensive task, making the company strapped for cash.
To raise money for the company, Musk decided to sell expensive flamethrowers at $500 each, which helped him raise over $10 million in just a few days. Instead of spending a long time raising money with the help of VCs (which would have diluted his ownership), he took one of his most significant advantages — his personal brand — and used it to make money for his start-up.
Being resourceful is an attitude shared by almost all successful tech entrepreneurs, as in the case of the founders of Airbnb. According to Leigh Gallagher, author of the book The Airbnb Story, when the founders were on the verge of bankruptcy, they decided to sell cereal prior to 2008’s Presidential election. Thanks to their PR-fueled campaign, not only were they able to extend the life of the company (which today is worth $31 billion), they were able to get accepted into Y Combinator, the famous tech accelerator, which would lead to their first funding round and the growth of the company. As Paul Graham, the co-founder of Y Combinator said, “If you can convince people to pay $40 for a $4 box of cereal, you can probably convince people to sleep in other people’s airbeds.”
The lesson you can learn from Musk is that if you lack funding (or any other thing that is essential to the existence of your company), it’s your job to do whatever it takes to get it. Life isn’t fair for risk-averse entrepreneurs, yet Musk has been able to make his companies work by getting creative, thinking on his feet and showing commitment right from the start.
What Can A Business Loan Be Used For?
Read on below for what you can use these loans for.
Sometimes in the business world, you might need a financial helping hand. This is especially true if you are starting out as a business owner or building your business from where it already is. This is where business finance can be highly useful because you can use it for any number of issues that your business might be facing.
When you apply for any business loans you should know what you want to use the money for. For example, asset financing is used to lease, hire or purchase new equipment or vehicles for your business.
Small business loans can be used to boost your business funds or for purchasing new premises. Interested in applying for business finance? Read on below for what you can use these loans for.
You can purchase inventory
If you sell products, the chances are that your cash flow can often be dictated by having to restock your shelves. But if you have a business loan, you can purchase more inventory to replenish your stock and stay in operation throughout the year.
Purchasing new inventory during seasonal dips, such as selling out of items during the festive season, can become expensive. This is where finance can come in handy. You can have the funds deposited into your company bank account and use it solely for restocking your shelves, allowing better management of accounts during these trying times. It is not a long term solution, however, to use a loan to purchase inventory can be helpful for small businesses just starting out.
You can upgrade equipment
Having outdated equipment will put you at a significant disadvantage to your competitors. This can be remedied by taking out business asset finance in order to upgrade your current equipment. You can lease, hire or even purchase everything you need to maintain your original business plan.
For example, a transport or logistics company can use this finance to improve their fleet, to upgrade their current trucks, or to provide new technology to drivers to help them navigate the South African roads. If you are a boutique design agency, you can use your loan to purchase new computers with the latest software so that your staff is always on the cutting edge of all trends. On your loan application, be sure to list what you plan on using the money for so that you have accurate estimations of your interest rates.
Keep your office operational
Keeping your office operational means that you need to pay for day-to-day expenses. This can include anything from replacing an old coffee machine so your staff stays caffeinated to paying the utility bills so that your office does not go dark when you need electricity the most.
This could be seen as starting capital for small business owners, which you can then supplement with more income or repay once your business starts to earn more and become successful. You could create a list of all of your needs, such as paying lights and water bills or fixing kitchen equipment and look for those that you need to focus on the most. For example, your staff could bring their own lunches into the office in case you need to replace the fridge or you could strike a deal with a nearby coffee shop to save yourself from spending unnecessarily on expensive coffee equipment.
You can boost your marketing budget
Marketing is not easy to understand for everyone. While you might have a brilliant business mind, your aptitude for selling and marketing your company might not be your strong suit. This can be helped by investing a business loan into a marketing company for your strategy, which can help build awareness about your business and make it a success.
You will have improved brand visibility and can reach customers in new and exciting ways. And you will also see a significant return on investment when reports and analytics come in showing your business’s performance. Marketing is an integral part of building a flourishing business, so using your loan for this purpose would not be a waste. Be sure to speak to your lender about whether this is an acceptable use of your business finance and what the interest rates would be.
A business loan can be a sound investment, especially if you consider what it can be used for. You could look into purchasing new inventory for your shelves during a busy shopping period, or upgrade your machinery for your next big project. You can use the money to keep your day-to-day expenses from becoming overwhelming or boost your marketing budget so you can reach customers and build your business.
Does Your Business Really Need Funding?
Strategy, risks, and opportunities.
Businesses need capital to grow, and most small enterprises rely on external funding to meet this requirement. While accessing funding can be challenging for entrepreneurs, taking on the financial commitments of a loan should never be taken lightly. Many small businesses fail because repayment conditions are so onerous they impact cash flow, and business owners end up blacklisted, which dampens their future prospects.
First, ask yourself some hard questions
Before you decide to apply for that loan, cash advance or capital injection, make sure that your business really needs funding. Critically evaluate your business. Consider that you’ll ultimately need to give something back for that funding – an equity stake, or interest payments.
Determine how much the extra funding is worth to you, and what would happen to your business if you couldn’t get it.
Define your goals
The type of funding you need (and how you validate it in the application) is dependent on your short- and long-term goals. If you’re not currently on track to achieving your business objectives, determine what stumbling blocks or pain points are holding you back. Ultimately, you should be certain that the capital will help you achieve your objectives.
Evaluate your financial pain points
Next, determine which of the identified obstacles can be overcome with extra money. While most could, a loan may not be the answer. Entrepreneurs often use financing to temporarily plug holes, instead of fixing them. Without addressing the root cause of the issue, the business will continue to struggle, while also dealing with the extra debt.
It is also important to consider the nature of your requirements, and the impact this will have on finances. For instance, using a loan to hire more staff requires upfront funds before additional revenue can be generated. The same applies to sales and marketing initiatives.
Expanding your footprint as part of a strategic plan to grow your business also requires funding, but these are usually long-term loans that take more time to pay back. A thorough evaluation is needed to determine the potential return on investment and compare it to other opportunities.
Evaluate if the strategic benefits will outweigh the mid-term cash flow risks.
Consider your options
Before making any financial commitment, first look for ways to optimise your operation to realise cost efficiencies within the business that can free up working capital to fund the fix.
If you determine that funding will address your pain points, by boosting inventory ahead of a seasonal spike, for example, consider vendor financing or supplier credit options before securing financing from a bank.
If you need to expand the business, look for ways to lower the associated costs. For example, franchising a new location to a competent partner can relieve you of some of the financial burden. A product-based business could perhaps generate extra income by selling via online channels, or through distributors or other retailers instead of a new store.
However, should you choose to proceed, before you sign any loan or credit agreement, make sure you consider all possible scenarios:
- How long will it take before your investment starts covering the costs of your loan?
- How will you manage repayments if your forecasted growth doesn’t materialise?
- How can you pivot to reallocate resources if your plan is not working out as initially intended?
The bottom line
Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide capital is necessary to reach your goals, and you’re willing to take on the responsibility, carefully consider the type of funding that is best for your particular type of business and your specific needs.
How Investors Choose Who To Invest In
Why entrepreneurs tend to focus on the wrong things when pitching to investors, and what investors are really evaluating instead.
The hypothesis of my book Lose the Business Plan was that great businesses are not determined by Excel spreadsheets and the all too predictable J-curve, but rather by the entrepreneur or entrepreneurial team and their ability to see opportunity, navigate obstacles and make things happen.
The truth is that entrepreneurs focus on the wrong side of the coin when meeting with an investor. They focus on the deep detail of the business plan and concentrate on justifying assumptions, predicting and overcoming objections, and emphasising market potential. Yet it’s my experience that the real decision on whether or not to invest in a company is more heavily weighted towards the entrepreneur or team rather than the business plan itself.
Once the ‘numbers’ stack (in other words, the business model makes sense) and the risks have been considered and appropriately mitigated, then the real decision-making can begin. The final decision comes down to four important characteristics of the entrepreneur himself or herself.
1. Is she honest?
You may have the best business plan in the world and you may have mitigated every possible risk but, if you are not someone the investor can trust, no deal will be made. I find that entrepreneurs often underestimate the importance of their reputations and, in today’s connected world, it’s so quick and easy to reference someone’s character.
Entrepreneurs who think about the short game and make morally questionable decisions for the prospect of quick profits generally find themselves in an ever-diminishing circle of people who will do deals with them. Your reputation is everything and you should guard it at all costs.
2. Does she work hard?
I am still not resolved around the cliché that you should work smart and not hard. (Perhaps I missed the memo or was asleep during the lecture that demonstrated how this is possible.)
In a world that is changing at an astonishing rate, in an economy that is becoming more and more competitive and in a business environment that is becoming ever more complex, it’s hard work to remain relevant and ahead of the curve for any extended period of time. Every quarter sees a new trajectory that needs to be investigated and navigated. In my opinion, this requires not just smart work but hard work, too.
It’s certainly true that investors like to invest in entrepreneurs who will take their investment seriously, who take their businesses seriously, and who are on top of their games.
3. Is she smart?
Smart does not always mean book smart but it definitely means street smart. It means having the ability to read a room, to see an opportunity, to learn new skills quickly and also being able to apply new learning’s to the business.
Investors look for investees who show agility when adapting to feedback from the market, from their competitors, from their staff and more.
4. Is she ambitious?
Investors do not like investing in ‘mom and pop’ operations. They seek the highest return on investment and that comes from businesses that can scale profitably. Scale is always relative to the investor’s perspective and not your own.
An investor with a couple of hundred thousand rand to invest will have very different expectations of the size of business he or she would like to invest in compared to another investor who has tens of millions of dollars. It’s important for the entrepreneur to authentically resonate with the level of ambition of their prospective investor, and be able to express that ambition through a coherent and cogent vision, as well as a plan to achieve that vision.
Remember, no one starts out as the ideal investee. It’s something that is built up over time and requires constant maintenance and curatorship. It’s essential to continually work on your reputation, to ensure that you are up to date with your industry, and to reassess your level of competence in your market. This is the only way to make sure you become and remain an ideal investee to a potential investor.
Read next: The Investor Sourcing Guide