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The New Economy

First-time entrepreneurs' biggest mistake? Lack of capital.

Many entrepreneurs fail because they can't get funding for their great idea. Here's a solution.

By Dave LavinskyContributor / October 26, 2012

Teaching Fellow Lauren Carvalho (left) and Shareen Asmat (center) check out Dee Charlemagne's project at the CS50 tech fair at Harvard University in 2010. Entrepreneurs with great ideas often fall short because they can't attract the capital they need to grow their business.

Courtesy of Rose Lincoln/Harvard University News Office/File

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Like everyone else, entrepreneurs make lots of mistakes. They don’t market themselves and their companies as well as they should. They fail to hire the right people and motivate those on the payroll. And they are notoriously poor at assessing their costs and their break-even point.

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But the biggest mistake that entrepreneurs, particularly first-time ones, make precedes all this. It comes before they earn their first dollar and have to really worry about marketing, human resources, and financial management. And this mistake is starting a business that requires significant start-up capital.

The reality is that most entrepreneurial ventures fail before they even get off the ground because they fail to raise their initial funding. Fewer than 1 in 10 get “angel funding” from someone wishing to help out. According to estimates, fewer than 1 in 100 advance to venture capital.

And that’s unfortunate. Entrepreneurs have a great idea. They get rejected by angel investors, venture capitalist, and/or banks. As a result, they give up and their venture never materializes.

But there is a solution. Start a business that requires as little money as possible and allows you to start generating revenues as quickly as possible. Raising small amounts of money, for example via a credit card, is extremely easy. Once you start generating revenues, two things happen. First, you have money you can reinvest in your business to grow it. Second, investors are much more likely to fund you since you have proven you can execute and that customers will buy what you are creating.

Clearly, you may have to get creative here, because the business you ultimately want to build may absolutely require outside funding. If so, brainstorm other low-cost business ideas (such as providing consulting) that would serve the same customers as your ultimate business. In doing so, you can gain connections to these customers. These same customers may help fund the company that you truly want to build. And by serving them now, you’ll better understand their wants and needs, which will help you succeed in your current and ultimate business.

– Dave Lavinsky is president of Growthink, a Los Angeles-based consulting firm that since 1999 has helped more than 500,000 entrepreneurs develop business plans, raise funding, and grow their businesses.

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