Comparing the two ways of financing a start up

Providing a company with $10 million of capital needs an experienced and professional team to handle the finances. This will greatly increase the overheads without necessarily improving a company's ability to reach profitability. Mistakes can be costly and if the company loses its way, it can easily start wasting large sums of money on inappropriate strategies while it is seeking to recover its position. This was a notable feature of the many failed dotcoms, where huge sums were spent on ineffective advertising and marketing.

With a large capital available, companies are tempted to design grandiose schemes that might be found to be fatally flawed only after most of the capital has been burned up. Again this was a common occurrence among the dotcom casualties.

Working with a limited cash flow, concentrates attention upon inputs and outputs. Any large scale project or extensive advertising and marketing would have to be financed out of earnings. This may seem restrictive, but, with so many unknowns and so much unpredictability in the world of e-business, gambling on outcomes would expose the company to risks that would not be adequately covered by the probability of gains.

If we take the company in California as an example. They have been forced to take on board a large number of chief executives. Their burn rate is so high that they are forced to go for ambitious sales targets. Perhaps it will pay off for them before their cash runs out, but, the statistical odds against their survival are high.

Far better if the team had been kept small, limited to an overhead of $60,000 a month until success brought them profitability and gave them the cash flow to expand through their earned income. Then their target would have been to produce a revenue better than $720,000 per annum rather than the $5 million they were being forced to aim for when I visited the company.

Maybe they could argue that they would have a better chance of achieving a revenue of $5 million a year with a large staff and greater overheads than a more compact organisation could achieve a revenue of $720,000 per annum. This brings us to the question of efficiency. E-business is not only about having great ideas: more importantly, it is about increased efficiency. In other words it is about reducing the cost of getting something done. This must be the overriding consideration at the heart of all e-business strategies.

The speed with which people and businesses can learn about more efficient ways to satisfy needs make it imperative for e-businesses to be able to respond, change and adapt. This can be taken to mean that the e-business will be in a continuous process of dynamic change as cheaper, more efficient ways to achieve goals emerge. This can be done more efficiently with a small group that is not encumbered by a top heavy management structure.

Many companies rely on patents and intellectual rights to safeguard them against competition. However, the idea that a company can rely on patents in technology and business procedures is a fool's paradise in a rapidly evolving environment where new technological breakthroughs are occurring all the time. In a provocative article in New Scientist, 20th January 2001, Robert Matthews described the work of John Koza at Stanford University who is using genetic algorithms to not only evolve solutions to difficult design problems but also to evolve better ways to think about solving them.

The principle of using genetic algorithms for design solutions is to break up all previous solutions into components. Then, from the results achieved by these previous solutions, choose the best and combine their various components in different ways. These hybrid solutions are then tested and the components of the best of these are recombined yet again. This process is continuously repeated until a superior product emerges. In numerous instances, in various different companies in various different industries this technique is regularly delivering solutions to problems that are surpassing anything that humans have come up with before.

This is the way biological evolution works, where superior genes of successful organisms are selected for and recombined in different individuals. This has been the driving force behind all industrial and technological progress, as people take the best ideas of what others have done to come up with superior solutions.

This is happening all the time in the environment of e-business where the best of some ideas are combined with the best of others for a business to leap ahead of its competition. The Internet and the Web thus provide a vast environment where genetic algorithms are unconsciously being used by millions of people in their competition with each other to produce superior e-business solutions.

Of particular interest in Robert Matthew's article was his warning to inventors that they will no longer be protected by their patents as genetic algorithm design techniques become more widespread. Normally, a designer will check with patents to make sure any design they come up with does not include features that have been patented by somebody else. For a genetic algorithm this is not a problem because details of patented ideas can be programmed into the selection process so that they are not included in selected solutions which are used to breed new ideas. In other words, genetic algorithms skirt round patented ideas and seek superior solutions that make these patented ideas redundant.

Now it may be stretching the imagination somewhat to imagine contrived genetic algorithms being designed to do this on any large sale just yet, but, if one looks at the millions of people involved in e-business, each looking at each others best ideas and combining them with their own in a multitude of different ways, it becomes obvious that the whole evolution of the Internet environment consists of a vast number of genetic algorithms at work: seeking more and more efficient solutions to problems and by passing any patents that stand in the way.

It is this picture that any person involved in e-business has to have in mind. It is the picture the business angels, venture capitalists and investors have to think about when they think about backing any particular venture based upon what seems like a good idea.

The fact is that e-business is a dynamic environment, where survival and success can only be achieved through being able to continuously change and adapt. For this, ideas are very secondary, what is more important is people: people who are able to use the Internet to make contact with others to share information and knowledge and to collaborate and combine.

So, my advice to anyone wanting to invest in e-business is to look beyond ideas and knowledge and to concentrate upon the super individuals who have developed superior abilities and technique of communication. As is so often true in business: it isn't what you know, but, who you know that counts.