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Rolling the dice with other people's money

(MoneyWatch) Recently, I received the following e-mail:

"While I was lucky to be involved in mostly successful businesses, I have come to believe that I don't want to risk other people's money.

I understand that the first round of funding should come from friends and family, but those are the last people I want to see losing their money in a business opportunity with an uncertain outcome and one they usually don't understand in detail.

This probably exaggerated sense of responsibility has put me in a situation where I don't even consider starting businesses for which I cannot provide the necessary initial funding and which cannot self-fund growth."

This is something that thousands of entrepreneurs struggle with. A company whose business model relies on bootstrapping faces tough going, and, if it succeeds, it is a rare exception.

Growth requires capital and rapid, high growth can rarely be accomplished through the money generated by day-to-day capital.

To be risk adverse is a double-edged sword. On the one hand, you are unlikely to face financial problems with friends, family, lenders or your own hard earned capital. On the other hand, it is very difficult to start and grow a business opportunity without enough capital.

I believe that while funding from friends and family may be the easiest to obtain, it is the hardest money to owe -- especially during hard times. You must decide what both the upside and downside of seeking capital in this way means to you personally.

If you won't be able to sleep at night, then don't do it. If you believe in your vision and others trust you enough to provide you the funds to pursue it, then do your homework, proceed prudently, give it your all and roll the dice.

The two worst things that can happen to a start-up is to have either too much or too little capital. If you have too much and it is limited, you may spend it unwisely before you figure out the best way to use it. If you have too little, your earning curve may not have a chance to catch up to your learning curve.

Another good formula: Whatever you think a new division or start-up may cost, double the amount and add an additional 20% to your estimate. The same rule applies to the time needed to launch the venture.

By definition entrepreneurs are risk takers, but the best entrepreneurs are calculated risk takers.

The "BLU Opportunity Assessment" is available as a free downloadable PDF on my website www.richrussakoff.com. It is a great tool to help you decide whether you should move forward with an opportunity and to determine what it will cost to launch it in terms of people, time and money.

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