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After almost two decades spent financing startups and early-stage ventures, it occurred to me that we use many different phrases and concepts without much deeper thought and they become part of the standard lexicon of the founders and investors they work with. Venture Capital, or VC, is more nuanced than one might first think. I started to look through the other end of the telescope and, as an investor, wanted to adopt a more founder-focused perspective to how startups are successfully funded.
“Entrepreneur + Capital” is this contemporary take on the role that VC plays in the financing and development of emerging companies. The incumbent definition of VC is to finance innovation or disruption. In this context “venture” refers to the company, and “capital” refers to the money invested.
Let’s expand the aperture of the lens through which traditional VC is viewed. This adaptation, which I call “Entrepreneur Capital,” takes a more comprehensive perspective of what resources founders need to succeed. Entrepreneur refers to the founders, management teams, AND the companies they are building; and Capital refers to resources beyond just money AND includes operational support, strategic planning, mentorship and access to talent.
Venture Capital = Companies + Money
Entrepreneur Capital = Teams & Companies + Resources & Money
This concept of Entrepreneur + Capital was actually incepted by a close friend of mine. He is the founder of an exceptional consumer products company and when working on financing together, he commented on my founder-centric approach. He noted that my personal experience as a founder helped develop a perspective that was empathetic to the challenges other founders face on a routine basis. And he was right. I knew what my colleague needed because I had been there myself. I had navigated the choppy waters of entrepreneurship and came out on the other side. To know the struggles is to know how to handle them appropriately. I often say that if you haven’t struggled to find a way to make payroll on a Friday, you haven’t truly lived as an entrepreneur.
The barrier to entry in entrepreneurship is, generally speaking, quite low. Anyone can decide to be an entrepreneur. As you read this, I’m sure you can picture at least one acquaintance that (possibly dubiously) identifies as an entrepreneur. For our purposes, it is therefore essential to expand the definition of entrepreneur. In short, “entrepreneur” is a much more meaningful term when assigned to the specific task of financing.
One person with one idea does not an entrepreneur make. A brilliant founder is essential, however, it is the team they assemble, the company and culture that matters. Do they recruit talented individuals for the right roles? Are they creating and contributing to a workplace culture that facilitates success for all? Is the assembled team the right group to scale the company?
A key concept for defining “capital” as an economic model, refers to any resource that can be monetized through labor. Human capital for example is the manpower that can be allocated to building something or delivering value in exchange for revenue or other items of value. It is therefore a resource and part of the capitalization of a company.
This applies to the role of the entrepreneur as it is their responsibility to assemble resources that can be redeployed in the pursuit of converting those resources into products or services that can be monetized. Capital can then be thought of as the required inputs in a system (your business) that are efficiently converted into revenue.
There are a variety of categories of “capital” founders should consider which they prirotize what to focus on:
Financial Capital – money and securities such as debt agreements or shares that can be converted into money at a later date.
Human Capital – in the framework of entrepreneurship this is the people who are performing the work of the business.
Intellectual Capital – the knowledge or intellectual property of the business, unusually unique to each company.
As you navigate the entrepreneurial seas, remember that capital means much more than money and money is not a solution for all problems. Your required capital may come in the form of a tactical CFO, a talented head of sales, or a mentor whose practical advice helps you steer the ship through a storm.
Entrepreneurial capital management
A primary challenge in entrepreneurship is one of making decisions without adequate resources, with imperfect information, and without the luxury of time. Remember that as a founder, you only have three resources at your disposal: time, people, and money. It is how you assemble and direct those resources that makes all the difference. For this reason, one of the most important traits we look for when assessing a team is resourcefulness. In turn, as a founder, your potential investors should bring the requisite resources, or Entrepreneur Capital, that will serve your team and company needs.
So how can you use these concepts to help you in the real-world? The first approach I recommend is to always be considerate of the resources you have on-hand and strive to deploy them in the most efficient ways possible. Cash, being the easiest example, is like oxygen to an early-stage company. I have, too often, witnessed companies burn through runway without a sufficient plan in place. Then, when faced with unforeseen obstacles, the company finds itself in a cash-constrained situation.
Almost every resource in entrepreneurship is finite, and some are far more difficult to procure and manage than others. People will likely be your most expensive resource, and arguably require the most amount of time to manage. Teams don’t show up with built-in efficiencies and proper care must be taken when building and managing a high-performance team.
In conclusion, by thinking about your resources as part of the capital in your business, you can start to draw dependencies and relationships between them. For example, raising money from an investor takes time and spending of resources in its own right before you receive the cash. Is it worth the time? Can you afford to delay other aspects of the business that require your attention? Ultimately, your calculation must consider what resources need to be spent to capitalize on your business model in the most efficient and effective way possible. Then determine how you can reinvest those resources through the systems and processes of your company to return more resources in the form of cash, and ultimately profits. It is the repetition of that process that builds greater magnitudes of value in your enterprise and significantly increases the founding team’s own entrepreneur capital.