Chapter 3
The harsh realities of funding and finance
A more realistic strategy for e-business funding
In light of fundamental investment calculations, it becomes clear that investments in early stage, e-business ventures involve risks that are unlikely to be compensated by even the most optimistic return expectations. Without a bubble situation, where a naive speculator can sell to an even more naive speculator as equity prices increase beyond reason, investment cannot be justified.
This situation calls for a radical rethink about the funding of e-businesses that are in the early stages of development. A way has to be found where the funding body is not exposed to such high risks. Such a way is possible if we start out with the premise that an investor's capital is sacrosanct and must be preserved at all costs.
This would give an entirely different perspective to funding e-business start ups. How though, could an investor's capital be totally preserved when used in a such a high risk situation, where fast evolving technology and predatory competition make life so uncertain and unpredictable.
Let's consider the question of the preservation of the capital first. The only way capital can be preserved is to invest it in safe securities. So, let's start with this idea. Instead of putting a capital sum into an e-business venture, why not invest the money safely and then let the e-business use the returns from the safe investment to fund its cash flow while it is trying to establish profitability.
Let's take an example of an investment company with $100 million to invest and wants to use ten percent of this money to have an interest in e-commerce. We could imagine that all the money is invested safely to provide 7.2% earnings, but, ten percent of those earnings are allocated to financing the cash flow of an e-business startup.
If we take the same figures as the investment in the Californian dotcom described above, the $10 million earmarked to finance the cash flow of an e-business venture would provide $720,000 per annum of cash flow to finance the business. This works out at $60,000 per month as illustrated in figure 3.6.
Figure 3.6
A capital sum of $10 million can be invested safely to preserve the capital and the income generated from the earnings used to fund the cash flow of a start up e-business venture.
This arrangement preserves the capital base and gives control to the investors who can limit their losses at any time by terminating the cash flow injection if the e-business isn't showing signs of meeting expectations.
This dramatically changes the situation, not only for the investment company, but, also for the e-business venture. The e-business may lose the strategic advantage of having a large sum of money to play with, but, it also means that they are no longer accountable for the safety of a large sum of money. This allows for a more efficient management structure that is concerned only with developing a profitable situation – eliminating the need for the kind of costly executives that would be needed purely to safeguard the large capital base. This cash flow funding arrangement is illustrated in figure 3.7
Figure 3.7
Where a company is having its cash flow financed, any revenues generated will reduce the amount of funding needed. All being well, revenues will increase to where the company reaches a stage of overall profitability and acquires a real capital value.
Notice from figure 3.7 that the cash flow input, needed to finance the business, starts to reduce as soon as the business begins to generate its own revenue. When critical mass is reached, where the profitability can cover the outgoings, no further input from the funding company will be needed. Any further profitability will generate an income which will create a capital gain. As soon as the capitalised value of this profit exceeds the cash that has been injected into the company, then the investing company will start to make real gains.