How Would You Spend $1 million

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How Would You Spend $1 Million?
By Ray Smilor, Beyster Institute Executive Director

If investors gave you $1 million to launch your company, how would you spend it? Here’s a short case, based on real entrepreneurs and a real company, to test your start-up financial acumen. Read the case and then answer the questions. Then I’ll tell you what the entrepreneurs did with the cash.

Now What Do We Do?

Lataa Andrews and Brad NiDenna were elated. They actually had a check for $1 million in their hands. This was like Christmas, their birthdays and summer vacation all rolled into one!

The college buddies had finished school just a few months earlier. They had taken three months after graduation to put together a business plan to start a watch company to serve the action sports industry—people who are mountain climbers, skateboarders, surfers and snowboarders. Then, from September to December, they had pitched their plan to business angels and venture capitalists.

The process was brutal. They talked to professors and people in the watch industry, had casual conversations with others they encountered, and networked with any and all contacts they could drum up. They had spent hours and hours on the phone and face to face trying to persuade investors to bet on them. They especially dreaded those who kept telling them “maybe” when asked to invest. Finally, a group of angels decided to give them a chance and anteed up $1 million to get them started.

It was a good thing that the money came when it did. They were broke. Faced with school loans, rent and other bills, they either had to launch the company or find other work. So when the cash came, they were chomping at the bit to get going.

Their business plan, combined with their enthusiasm, had worked well for them in generating the interest of the investors. The plan provided a persuasive overview of a very traditional industry—the watch business—and the need for fresh thinking and new products in what they said had become a rather staid and boring business. It provided a solid competitive analysis. And the financials showed an impressive upside for the investors.

The reality was that Lataa and Brad had never started or run a company before. The good news was that they had orders in hand for their watches. The bad news was that they had no watches to sell. Their plan, which was a rather high-level strategy document, had proposed the development of new types of watches, but they hadn’t manufactured any yet. They wondered what kinds of processes or procedures they should set up, and even whether they ought to pay themselves a salary. They needed money to pay the bills but also wanted to make sure the investors knew they were really committed to the venture.

As they looked appreciatively at their $1 million check, they knew that they had to figure out the best way to put the money to work or it might just all go down the drain.

Questions for Discussion

What’s the first thing that Lataa and Brad should do?
What are their most critical needs? How should they put the $1 million to work to address these needs?
Should they pay themselves a salary? Why or why not? If yes, how much?
What do you think their investors expect them to do?
What should they not do with the money?

Here’s what my friends did with the $1 million they had received from investors:

The entrepreneurs did what they said they would do in the plan and got to work. They had addressed intellectual property issues in their plan, had discussed what their respective roles would be, and were clear on how to set up the company legally. They established a good banking relationship and hired an office manager.
They first built inventory. They needed to have watches available, so the really tough discussion focused on how much inventory to purchase. As a result, they pushed hard on getting their manufacturing set up. And they worked to build their relationships with key service providers, like their banker, accountant and lawyer.
Yes. They paid themselves a salary, which was enough to pay the bills. It’s hard to focus on building a company when you’re going hungry or worrying about not being able to pay the rent. In fact, the discussion that the two entrepreneurs had about how much to pay themselves was extremely important in developing their own relationship since they learned about each other's real needs.
Their investors had a few key priorities: a) make money for them, just as the plan had promised; b) do the right thing, which meant changing the plan if that was necessary, and c) keep them informed, so the two entrepreneurs provided quarterly reports and regular phone calls to update them on progress.
First, they knew not to buy expensive leather furniture, go to Vegas or take a vacation. In other words, use the cash to build the company. Second, they did not want to “protect” the money. That is, they knew they had one shot to do this right, and they wanted to use all the money to give the company every chance to succeed. They realized that their investors did not want a return of 20 cents on the dollar because they had been too conservative in trying to make the company a success.

My two friends, in fact, built an extremely successful company and ultimately sold it to a much larger competitor. They transformed a business plan into a high growth enterprise, delighted their investors, and had a terrific ride, all because they invested that $1 million wisely.

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