Crunch the numbers
Chen did have a lot of enthusiasm for his project, but he didn’t get to nearly a half-billion dollars in revenue by making foolish decisions or decisions based only on his heart. One of the first questions he always asks himself when considering a new venture is how much he can afford to spend, or lose, on the new idea.
“Don’t assume right away that you’ll be profitable,” Chen says. “What kind of expense will you have? How much money will you need and how long will it last? How long can you continue operations? My rule of thumb is I want to have money to sustain it for at least two years. I want to be in a position where without any new money, I can last for two years. So it’s crunching the numbers. How much do I need so I can last for two years? You know your burn rate. How much money do you have?”
Whatever money you think you’ll need to start this new venture, Chen says you’ll want to have even more in your reserve in order to feel comfortable. This is also a good strategy in the instance of a venture that has a small window that leaves you with only a short time to capture the market.
“If you said, ‘Yeah, I have a financial backup, I want to speed up,’ you can dump more money in and speed up the process,” Chen says. “If you don’t have enough money, then you just have to figure out, ‘OK, how much time will allow me to (capture the market)?’”
In addition to crunching the numbers in terms of cash on hand, you’re also looking at infrastructure in terms of what you already have and what you would need to go out and buy.
“What can you leverage from your current business?” Chen says. “If you cannot leverage anything, what will it cost? What will it require you to invest? What kind of investment level can you handle? Pick how long. If you say, ‘Yeah, the investment I can cover for the next year or two years, you don’t have to worry about the financials. Then I will jump into it even though there is some learning curve.”
You should also look at potential outside investors and assess the support you can gain from this area to help your idea take flight. Just because you had the original idea, that doesn’t mean you can’t bring other people in to help you with it.
“If your potential is big, you can probably convince some other outside investors to give you more money to burn fast,” Chen says. “It’s very important that you not just trust your own gut feeling. Usually I share the idea or the rough plan with someone, a board member or someone more knowledgeable. You can have a screen with some internal and external people. You get the feelings of those people as they give you some feedback and you can make a judgment by their feedback.”
