The key question an entrepreneur needs to answer

A key question every entrepreneur needs to answer on Day 0 is whether the business being “built to run” or being “built to flip”.

A business being “built to flip” means

•     You need an idea which is hot which people want to fund
•     You need to have Angel investors who are well connected in the Series A VC ecosystem to help you raise frequent rounds of Capital
•     You need to get to critical mass quickly. This means burning cash , so you can grow exponentially.
•     Lots of luck, as many people are attempting the same idea.
•     This is the sexy route to riches, and is the path most Angel investors like to back because they are the success stories which the media praises.

However, the business risks a sudden crash if the next round fund raise does not happen.

A business being “built to run” means you need

•     An idea that solves a real customer problem but does not need over 3-5 Cr to break even.
•     Angel investors who want to stay for the long haul and not ones who are looking for a quick flip
•     To think about steady state economics , so you don’t try to grow mindlessly . You do small experiments so you have your unit economics proven before you scale.

You build the business like you would with your savings if VC funds did not exist. This gives angel investors the confidence to write you a second and third cheque if the business is making progress , as they understand you better and also are aligned with your thought process.

Our preference is very clear. As frugal investors, we would rather invest in a business which provides real value to their customers , rather than one which is being built to flip to someone else. Yes, this is a boring route because it requires hard work and patience, so you should be prepared for the grind. Exiting by selling maybe more exciting , this does not work out well in most cases.

As an entrepreneur, you need to ask yourself – do you want to build to sell , or build to run ? Interestingly, building to run often results in a much better ability to sell , when the right buyer comes along !

Founders should not fall into the trap of pursuing a strategy that they think will get them funded – investors are fickle and unreliable. Ask yourself – how would you run your company if VC funds did not exist? Hope is a powerful emotion, but not a sound business strategy!

[This post by Dr. Anirudh Malpani appeared first on LinkedIn.]