LinkedIn Answers: In today's market environment should startups take as much cash or stay lean?

Week after week, we highlight questions from LinkedIn Answers on the blog; featured questions from Kara Swisher to Barack Obama. Continuing in the same vein, this week we have a question from Jon Burke, Internet media entrepreneur, on the state of startups and small businesses these days. The question is:


Answer Jon's question

The answers are streaming in. We have 124 LinkedIn Answers thus far and here are a few thought-provoking ones:

Sanford Barr | STIRR Network Co-Founder, Entrepreneur

The sip cash model assumes that the investment market stays fluid. If things get tight like 2002-2004. Right now there are perhaps too many investors chasing too few good deals, so cash is relatively cheap.

Raising cash is also a distraction. James Currier also has a point about "Hitting It Hard" and not wasting time raising money when execution is more important. The video is up on the STIRR news blog.

Ed Buckingham | Business Manager and Marketing Specialist

I fall into the "little cash" camp. There are many internet startups that require little more than a couple cheap computers and a decent server hosting service, nothing more. I couldn't have said it better, take what little cash you need to grow organically on customer revenue and that's it.

If, for reasons not mentioned here, you need a large cash infusion to get started, give considerable thought to your exit strategy. How will you compensate your investors (Angels, VCs, friends, etc.) and when? Are you going the M&A or the IPO route? Will this cash go to SG&A or to compensate an algorithm-wielding scientist?

Lastly and perhaps most important is your startup idea defensible? Can you create large entry barriers against your competition? For how long? Will you have competition? (This is both good and bad.) All of this should impact your decision whether or not to seek out cash.

Danny Robinson | Founder, CEO at Strutta

There are three factors to be considered before answering this for your situation.

1) It's not an issue of cash, it's more an issue of dilution and control. If I could raise $20M for 5% of a startup right now, I'd obviously do it. But, it should be clear that giving up control early is always a mistake.

2) If you had the financial discipline, it reduces risk to take more cash, if you don't have that skill, then taking less cash reduces risk. Be honest with your yourself, know your weaknesses. Ask your wife/husband if she/he thinks you know how to spend money wisely. Spouses usually know the answer better than you.

3) It depends on the cash needs of the business. Some businesses don't need a ton of capital, some can borrow against receivables earlier than others. Run the projections and decide that for yourself. If the business needs so much money, that you would loose control after raising your first round, then don't start that company.

Carl Weir | Banking Consultant and Mobile Media Owner

I have found over the years that an effective and appropriate prototype done as lean as possible benefits an investors decision as it shows you can think out of the box, save your pennies, show initiative and innovation. As with any investment the investor is looking at your acumen and the ability to wisely use their money.

An example of this was www.mobileadcasting.com whose product similar, but very different to www.bluecasting.com, and www.proximitymedia.com was able to build its solution for $427k, then obtain its funding, as opposed to the others whom spent upwards of $6 - $12M to the same end.

So I suggest you utilize the resources and knowledge you have at your disposal and attack on both fronts.

There you have it, a snapshot of the conversation generated by Jon Burke around the startup environment these days. If you've a relevant question in any of the LinkedIn categories that you'd like answered, let us know and we'll feature it in our weekly blog series on LinkedIn Answers.

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