A closer look at the J Curve
Below is an example of an ideal cash flow for a new venture.
The zero on the horizontal axis represents your break-even point. Before you start the company, you are at zero. You dump a lot of money into the company over the period of a few weeks or months, and you are in a negative cash flow. Now, your company may be selling products or services, even from day one. So let’s say we spend $100 in the first week of operations, and we bring in $30. Our cash flow is a negative $70. The next week, we dump an additional $200 into the company, and bring in $40. We add the $200 to the $70, subtract the $40, and we are at a negative cash flow of $230.
As stated earlier, Figure A shows the ideal cash flow for a new venture. I've heard it refereed to as a hockey stick. Why we want our cash flow to look like a hockey stick is because it is realistic. It takes money to make money. A venture capitalist will look at this and in one fast glance know that you are accounting for all your costs, and they can also see at what point the company they are investing in is going to be cash flow positive.
Now that we understand what the “J" curve is, how can we make this knowledge applicable to starting a new venture?