Why do entrepreneurs purposely underfund and willingling go out of business?

[ronniespringer]

I recently visited a post that was looking for the top reasons businesses fail. At the top of that list was inadequate funding. I would like to start a conversation about that topic alone. Why do entrepreneurs under fund? Do you think it is investors’ or banker’s fault, or do you think it is the fault of the entrepreneur. My experience is that most entrepreneurs view asking for capital injection or loans view it the same as asking their parents for a loan – thereby asking for the minimum amount they think is possible to complete their project. My experience is that banks, investors, and entrepreneurs would find the conservative path to be the one that provides adequate funding plus a buffer – so why do so many entrepreneurs think the conservative path is to request such a low standard for funding and why do banks and investors approve it? I blame it all on the entrepreneur for asking for too little because my experience with banks and investors tells me that they would much rather take more risk to see a project through than to see a project start… I would just like feedback as too why so many people in my opinion purposely under fund… I don’t understand it, but I deal with it every day…

Startup Help

[RawMarketing]

My Opinion

My first business was unsuccessful. I like to think that in the end I got out of it at around break-even, but I think in reality, I lost around $20,000AU. I'd put the reason for it's failure down to simple things such as Inexperience, Lack of Confidence, Laziness and a generally bad business concept. I was able to learn these things quite quickly though and as soon as I realized the business wasn't ever go anywhere, I got straight out of it.

My current business however, has huge potential for growth and can potentially flourish for many years to come. This obviously provides a huge amount of extra motivation as I know that everything I'm doing is for a greater cause and there is a more well-defined long-term goal. This means that I am willing to stretch myself ridiculously and take greater risks (such as refinancing for larger amounts) because I know that I have a shot at achieving something.

Short Answer

Businesses underfund because the person doesn't have confidence in themselves or their product. They don't want risk their own lifestyle or security for the chance to enjoy the benefits of a hugely successful business.

Fail to plan, plan to fail.

[ronniespringer]

I agree with you on fail to plan plan to fail, but I think that there is a pandemic when it comes to entrepreneurs requesting what they need to succeed... I dont understand why it takes failurers to teach that lesson. Every entrepreneur should be good at math - why do they purposley underfund??? I dont get it...

Startup Help

[RawMarketing]

I think for people who are inexperienced in business, they just see every expense as money that they're losing or that they won't see again.... rather than seeing it as a small investment that will generate them a massive return for possibly the rest of their lives.

Selling marketing products, I have clients who think:

"If I pay $3,000 for a website, that's 4 weeks wage gone, right there..."

Rather than the optimist who will think:

"If I pay $3,000 for a website, I can double my income within 4 weeks, then I'll be earning $6,000 a month, yippee!"

It's normally that extra few % of expenses that will be the difference between getting your business off the ground and it failing.

I think a lot of people also think "I'll just not pay myself for 2-3months and then I'll be able to start up my business from my savings rather than having to get a loan!" .... Making unrealistic sacrifices won't get you very far.

[chrisro]

Yes underfunding is a major issue, But that goes back to lack of experience and not counting all the cost involved just because they dont know.

[itsjustmoney]

Underfunding ventures is the norm with new entrepreneurs since most lack sufficient resources. Successful entrepreneurs are unlikely to underfund their ventures since they have the capital necessary to fully fund them. Fully funding vastly increases chances of success.

A new entrepreneur may be risking their entire savings and still be underfunding. A previously successful entrepreneur can risk a fraction of their savings and fully fund their new venture. The new entrepreneur has to compete with people with more capital, connections and experience. This is just the harsh reality of the business.

[pboychuk]

no bankroll for speculative start-ups is bad news.. Honestly, its not that hard to start a business that will make money guaranteed. However, this may be considered more of a grinding type business than something innovative, new and exciting.
If you can't link the majority of your expenses to a direct result in profit than you are probably throwing money in the wrong direction.
Some things are necessary but when just starting out, do you need to rent office space? Hire a secretary? pay for any services you could otherwise perform yourself?