Saturday, December 11, 2010

Taking Other People’s Money Changes Your Life

By Francine Hardaway, Ph.D.

Taking other people’s money to fund your startup changes your life in ways you cannot predict. And many of those ways are negative.

I meet with dozens of entrepreneurs a week. No matter how they couch it, they are asking for money. They come to me wanting to know first, will I invest myself? Doubtful, unless I already know them really well, know the company really well, and have some spare cash. Those often don’t occur simultaneously.

Okay, then will I connect them to someone who will invest? At the very least (or perhaps it’s the very best), they ask me how to get ready for funding. What do they need to do?

I always tell them to forget it.

To someone laboring in a cash-strapped startup, money often seems to be the endgame. “When I get funded,” the entrepreneur thinks, “I can build a prototype, hire a development team, go to market, scale more quickly, and beat my competition.” All problems will go away.

Maybe. Maybe not. But there are some things that DEFINITELY come with other people’s money. They’re new and different problems.

  1. A board. Many startups have an advisory board of sympathetic people with industry expertise, or people who enjoy mentoring, or people who donate a few services on the come. Once you take investment, you will also have a fiduciary board, with the responsibility of making the company successful. Some of those will be outside the company. Be careful they don’t outnumber your people. And that they don’t set your co-founders or key employees against you in meetings. If you can, keep an odd number of people on the board, people who support you, so the board won’t be deadlocked.

  2. Deadlines and benchmarks. Few investors send you the entire check immediately. Most of them give you some money and withhold the rest until you have proven something. Those who give you money often take a board seat so they can watch you.

  3. Financial controls and budgets. Most startups are terrible with systems for payables and receivables. But there’s an old aphorism that cash is King, and when you get a large sum, you think it will last forever, until it doesn’t. You have to make the money hold out until you have met that deadline, and if you miss the mark, you might never see the rest, even though the problem that kept you from meeting it was out of your control. It’s funny how investors can forget everything from technical glitches to supplier problems, to the earthquake that destroyed your factory.

  4. Strange course corrections. Yes, it is now in vogue to say your startup can, or did, pivot. But when your investors decide that you are going to pivot and you don’t think that’s the right direction, the wrong investor can force you in a direction you didn’t want to go in, wasting time and money. Much of this depends on how “smart” the money is about what you are doing. Don’t ever take dumb money, even if you are starving.

  5. Demands on your time. Investors are a time suck, because they need to be handheld. The worst investors are small investors. If you raise an angel round consisting of five investors who put in $100K each, that’s five people you have to answer to. Five phone calls every time things change direction, or something bad/good happens. That’s why there is an entire industry built around “investor relations.”

  6. An early exit on your part. I have actually known one guy who has been ousted from the CEO job in not one, but two of his own startups, by investors who either wanted to bring in their own guy or even their own team.

I have known more than one who has been shuffled to another position whether for the right or the wrong reasons. Often these shufflings are good, because they bring in experienced management. But sometimes they bring in management with no industry expertise, and they destroy both morale and your vision.

Remember “The Social Network” movie about Facebook? Remember what happened to the alleged co-founders when Peter Thiel came in? Well, some of the people who considered themselves co-founders suddenly found out they weren’t!

Moral: Before you decide that it’s absolutely necessary to take outside investment, explore all the possible ways you can partner, outsource, affiliate, collaborate, or…heaven forbid, get customers.

Today’s article is presented by the founder of Stealthmode Partners in Phoenix, Arizona. She is a true angel investor, and has helped package and secure funding for many high-tech startup companies in the area. She has also created positioning and marketing strategies for dozens of growth companies. You can contact her directly at francine@stealthmode.com.


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3 comments:

  1. A lot of this seems to assume the startup won't remain in control, which is pretty uncommon following an angel or even Series A round... unless the company really does need direction from angels/VCs (in which case why are they investing?).

    If you're really terrified of answering to a board, meeting benchmarks, doing accounting, taking outside feedback on the direction of the company/product, etc. then I think founders need to ask if the company has really matured to the point where any money is necessary. These are great problems to have, they usually suggest customers, revenue, and the potential for more.

    Any if you're putting all your angels on anything more than an advisory board you're crazy... $100k doesn't but them the right to run your company by proxy.

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  2. It’s hard to find entrepreneurs who haven’t faced a problem of startup funding. When people start their business way they are looking for money and investors but it’s necessary to get to know what you can offer to the investors. The author of the post is absolutely right, it’s necessary to consider all the options. Take asking for money as a last resort. Put yourself at the investor’s place – everyday there are people who share their ideas (both good and not really good ones) and want money from you. Would you risk with your hard-earned money for someone? Nope. So in case you have decided to ask for financial help you should be able to offer something instead. Also you can consider such alternative options like taking out loans, online no fax payday loans or other ways of borrowing money.

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