When you take a course in thermodynamics, one of the first things you learn is the concept of ideal state. Ideal state is when you make certain assumptions, regarding an energy model, as the ideal conditions for reference. I'm not giving a thermo lesson today because I'd rather talk about the greatest startup fantasy of all—the ideal fantasy of negapital.
When you have invested into as many entrepreneurs as I have, you see a pattern regarding negapital. Entrepreneurs come to investors for capital to grow their businesses, but most of them wish they hadn’t. The real entrepreneur truth is that they wish they could have financed the entire startup venture on their own dime — without any outside investment dollars.
After funding and observing more than 25 entrepreneurs, less than 20% of entrepreneurs are happy to take someone else’s money. The reason is simple … they don’t want to be diluted. I am going to speak from both sides of my mouth as entrepreneur and investor — I don’t like being diluted either. When I make a decision to invest into a startup, the dilution negotiation game is my least favorite process. But it has to be done because the math behind getting an ROI has to work out too. I can’t invest money into a startup if I don’t have the potential to get a huge ROI. Many entrepreneurs and investors try to make rocket science out of the valuation game, but it comes down to the mathematics of risk. If your startup is in the pre-revenue stage, I can’t give you a huge valuation simply for a great idea.
I speak from both sides of the equation. We are launching a startup and I turned down investment dollars because the risk for the investor was too high, from my perspective. That’s the danger of having a split entrepreneur–investor personality like mine. Because I understand the risks of the startup, I would rather focus on funding it myself without getting outside investors. Hey — that’s kind of like my grandpa's way of thinking. So, for this particular stealth startup, I decided to self-fund and try to achieve the ultimate fantasy of negapital.
In America, it’s easy to start a business with no capital. That’s been done by millions of entrepreneurs. The real entrepreneur game of negapital starts when you try to start and grow your startup with zero capital. This is what negapital is all about.
The ideal state for an entrepreneur is to start a company with negative capital. What I mean by that is that you generate revenues upfront without any costs upfront. Wow. Can you imagine if you could pull this off as an entrepreneur?
There are other funding ways. Silicon Valley startup model has a lot of power to the process. Startups are continuously learning to reduce their startup costs while allowing the market to validate their worth. If startups in Silicon Valley need seed capital, there are plenty of angels to come into the investment game. Once validated, whether self-funded or angel funded, most startups focus on shifting their startup into growth mode by being funded by venture capitalists.
But what if you could purse the ultimate startup funding ideal state of growing your company without any venture capital or outside money at all? What if you could self-fund your startup all the way from the beginning until it goes IPO or Googlio? Is this possible?
I am not against being funded by outside money, angels or VCs but I am launching one of the startups through negapital because I don’t want to be diluted one iota. Any stock issued will be to employees and advisors only. Now that’s capitalism in its highest form.
Negapital might seem like an ideal entrepreneur fantasy but I know of few entrepreneurs that have actually achieved this type of a dream. They laughed all the way to the bank and kept most of the money.
What are some ways you've started a business with little or no capital? Tell us in the comments below.
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Damir Perge, author of Entrepreneur Myths: The Startup Reality, is the founder of entrepreneurdex, a startup studio using complexity science to fund, launch, accelerate and scale startups and growing businesses.
An entrepreneur and investor, with more than 25 years experience, he's worked with ventures in the technology, internet, media and publishing, entertainment, energy, and manufacturing sectors raising more than $300 million in capital for various companies and investing more than $50 million into startup and emerging ventures. He's sat on the boards of 11 companies, served as editor-in-chief of Futuredex, a private equity magazine. Follow Damir on Google+