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Starting A Business

 Starting A Business the Right Way

When you are starting a business, the single most important thing you can do is to accept the advice of those who have succeeded in business. To do otherwise is to repeat the mistakes of the majority of entrepreneurs - those who have failed.

In 1984 I had the good fortune to meet and become friends with John David Garcia (now deceased) who soon became one of my primary mentors. John was the most brilliant entrepreneur I have ever met. His knowledge encompassed the full range of the physical and social sciences. He understood the mathematics of quantum mechanics and the biochemistry of evolutionary theory. He knew more history than most historians and wrote eloquently in the fields of ethics and comparative religion.

John's income was comprised mainly of royalties derived from patents on his numerous high-tech inventions. His résumé was a table of the companies he had founded and their current stock values, several of which were in the hundreds of millions of dollars. So successful was he in anticipating, initiating, and recognizing technological opportunities, that a cadre of Swiss investors often called on him to identify projects in which they might profitably invest their funds.

I mention these facts about John David, because the advice that I'm passing along to you on this webpage came from him. He and I spoke often about how starting a business might involve the use of other people's money (OPM) and his advice on the subject was quite explicit, so I hope you will take it to heart.

 Ethical Investment Banking

When John David found someone with a high-potential plan for starting a business, he would secure the funds from his Swiss investors and set up a contract with the lucky entrepreneur. The entrepreneur would get 50% of the resulting company's stock and an option to buy more in specified amounts under specified conditions. If the entrepreneur knew what he was doing and succeeded, he would eventually own the lion's share of the company.

Meanwhile, John got a small piece of the action for brokering the deal. His investors were happy if only one out of ten such ventures succeeded. The other nine might become worthless, but the one that succeeded would offset those losses by a hundred to one; so everyone was happy.

If you must use OPM, this is the kind of deal you need to find. Once you find the investment banker able and willing to make such deals, the fruition of your plan for starting a business with OPM will hinge on the quality of your plan and your own personal credibility. If you already have a résumé like John David's, you will have no problem getting funded. However, if you are a rank beginner with no track record at all, it is unlikely you will find the investors you need.

Since I was in that position when I met John, he gave me two pieces of advice that I have followed ever since:

  • Start where you are. Don't borrow your way into business, unless you already have the resulting profits under contract. There are deals out there where you can contract to buy something of value (say a piece of real estate) and contract its subsequent sale before you borrow the money you will need to close the deal. Most business start-ups are not like this, so don't borrow OPM to cover operating expenses, salaries, and so forth. To do so is an almost sure-fire formula for failure in starting a business.
  • If the business you want to start is not one for which you already have ample credibility, skip the OPM campaign altogether, until you have earned the credibility you need. Start smaller. Start a business that you can afford to fund out of your own pocket, even if you have only a few hundred dollars. This can be done successfully on the Internet, as explained elsewhere on this website.

Having provided the above caveats, I'll now move on to discuss the analysis of your initial assets and resources and how it might impact your plan for starting a business with or without OPM


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Robert Podolsky

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