Funding Fairness: Investors vs. Founders (part 1)
By Oleg K. Temple, July 2011.
Part I of II: Opening gambit
Every modern businessperson will agree: honest investors are hard to find. In the ever-escalating battle for survival, small and medium businesses seeking funding are required to comply with a mind-boggling quantity of rules and regulations. Actually, hundreds of major international banks and investment companies can be found fairly easily online, however, passing the screening process is no trifling matter and it is more likely that a plan to rescue one's personal economy by cracking Fort Knox would work first time round than a business plan would sail pristine through to the finish.
There is a plethora of advice available online about how to correctly formulate a business plan and how to present it, but this information is usually one-dimensional and reads along the lines of "investors' word shall be your law! Heel, ye sniveling, puny businessling and yield gratefully to every whim of thy betters!" Basically - if you are seeking funds, strip away any and all of your standards of self esteem, security and business acumen. Divulge your deepest business knowledge and secrets to a person who makes no commitment whatsoever then roll the dice and hope for the best, for as long as it takes. Tragically, this is what the industry has come to today - investors have the upper hand in all matters and the entrepreneurial spirit is trampled underfoot as the essence of the company, the core management team, who envisaged the entire venture are undervalued and made to feel worthless by levying of impossible goals and withholding of paychecks.
| I have partaken in various forums where business founders were being groomed to slavery, taught to bend over backwards and cast their business plans into the very maw of the void just on a whispered pseudo-promise of some frivolous investor. It is so hard and hopelessly time-consuming to see through the sly circus acts of the prowling mountebanks, self-proclaimed experts, and charlatans online and find that one real deal. |  |
I have gathered here my more poignant and detailed responses to some of these discussions, in an attempt to restore a modicum of balance to the public opinion and encourage fund seekers to not waive their basic business rights - the investors need you just as much as you need them - if there was no demand for their service, they would actually have to go out and work on an idea/concept like the rest of us, rather than spend their days bullying and reshuffling funds. Doubtless, it takes talent and skill to make money, and most investors are intelligent and hard-working, but it is vital to note that money is only an ingredient - without the right people it is worthless!
One Response to "Do startups need more talent or money?"
This, obviously, is a "chicken or the egg" question, as quite clearly both are needed in generous amounts throughout incubation and germination of the seed business. A talented founder will not take more than what is needed, on the other hand, a safety margin will give him the confidence needed to succeed. People who quickly secured funding and those who've never tried looking for funding from scratch (e.g. "payroll junkies") tend to haughtily judge those still seeking.
For example, Tony G commented:
"Startups require real entrepreneurs not money where the true entrepreneur will find resources without having to pay upfront cash for them. This provokes the real debate that ought to focus on those who support entrepreneurs. We need an entrepreneurial culture where services and support for entrepreneurs and their enterprise are provided for deferred benefit (consideration or shares) not immediate payment in cash.
The true entrepreneur understands this, but too many self-styled ‘entrepreneurs' seek funds and often expect to pay themselves before proving their business can make money. ..."
I replied to Tony (because his comment seemed to suggest that with enough talent ALL problems are solvable. I point out that if I had ENOUGH strength in my arms I could fly and therefore wouldn't need a car. However, what's the point of musing about impossible attributes no one has or is able to garner?): "Consideration or shares"? You ever tried to convince any of your suppliers that your company will at some point in the future be worth more than the stock they provide you with today to build it, i.e. if nothing slips and you're straight as an arrow, of course? Smashing, "just put it on my tab, Bob" or "I will give you 0.0001% of my nascent company's stock in exchange for that there monitor, Earl." That's like Wimpy proclaiming "I'll gladly pay you on Tuesday for a Hamburger today!" or Raul Julia in Street Fighter trying to pay a tomorrow's fortune in "Bison dollars", for a cache of weapons he needed to conquer his empire today... Give it a shot - take your kid to the store and try to get a guitar, piano or drum set from the manager on the promise that your kid will one day be a famous performer and will come back to endorse the shop. Do try it sometime; it will rock your world. No matter how good you are, it will take you at least 100 times as long to make a SINGLE acquisition of anything than it would with cash or card with an >80% fail rate to get anything done, you try to build a business on that - you will have no time for anything other than haggling and burnout within the first quarter. Any entrepreneur with an iota of talent will first chase money that will allow him to seed his company in the most efficient way and only then consider best incubation, growth and further development options. This is like saying I'd rather be good than lucky. My point is: it is easy to be a critic, especially when you risk nothing yourself, but nothing is ever so black and white. Yes, in an ideal world this would work just fine, work in = profit out i.e. action is equal and opposite to reaction at all times, in all circumstances. However, depending on the particulars of the venture, it is often too hard to keep the balancing act of credits going, when frequently people don't pay on time and various factors are impossible to ascertain ahead. What you suggest is that start-ups need to take way MORE risks than they do now - NO ONE would get anywhere without being lucky at some point, but you suggest they should be lucky ALL THE TIME until they succeed. Don't believe in luck? Well, here's a reality check for you: plan as you might, you can't control all the factors that lead to success. Even if you keep your small team on a tight leash, refuse to pay partners' salaries (not that people can live and be productive on fresh air, mind you - if you don't feed the horse, how can you expect it to work properly?), etc. unexpected things beyond your control can and WILL let you down at some point e.g. a shipment arrives late or a bank closes early due to an epidemic of the flu, fire next door or whatever. That is just like claiming you don't need any form of insurance because you can plan your life perfectly and not get hurt, into an accident, or robbed. Imagine how much you could save... You can do your best to plan your every action, but you will inevitably fail. Start-ups are too fragile to bear the full risk and brunt of all-round credit (plus as mentioned above, where a millionaire has no problems getting his credit line extended, a start up does not enjoy such luxurious preferential treatment and getting credit without collateral is practically impossible) - if something should fail without a safety net of investment to buffer the blow, the entire venture will collapse like a house of cards in a light summer breeze. Consider this: what's the use of a brilliant, Earth-shattering idea if you can't get it to the market? Be as brilliant as you like, but without luck AND a reasonable investment you're going nowhere - the proportion of the equation changes depending on how much of each attribute you possess. Also, remember, that inspiring others and keeping their faith and passion burning is so much harder without financial backing, especially when juggling all the other tasks and risks involved in a start-up's incubation. It is easy to be an "armchair quarterback" and criticize the game saying "if you're good enough, you will ALWAYS find a way" (i.e. "if you're so smart, why are you not also rich?" sure, if you are strong enough you'll never become ill and if you're fast enough you can dodge a bullet. These statements are just as true and equally as useless and non-constructive, as NO ONE is that fast, that healthy/strong or that good). Point is: generalization is never a good thing - the situation varies from project to project.
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True enough that "Power (money) is nothing without control (talent)". However... the pendulum swings both ways! ;) For a successful venture you need: idea/talent + money/leverage + LUCK. The proportion of the ingredients can vary, but with any of the catalysts missing the venture will never take off or crash immediately thereafter. |
Whom to approach first - Angels of VCs?
The sequence of financing increments is like a baton race, generally following the path of least resistance - first you develop the idea as far as you can on your own savings, then (hopefully, before you run dry) you accelerate the venture further with the help from Family, Friends and Fools, then pass the torch to an Angel (by this stage you need to have a comprehensive business plan) and then sail all the way to an IPO with the help of a VC. Depending upon the project's specifics, goals, your talent and luck, you may be able to skip or even do without some of the steps, but that is a typical "Stairway to Heaven". However, en route to funding there are many hurdles and pitfalls - just because you have a brilliant idea, does not necessarily mean that it will ever become a fecund venture that will see the light of day.
Trust and Opportunists
Funding is a two-way street, i.e. I believe that it must be a good fit both ways. The business plan is a brilliant self-assessment tool that also winnows the lazy, happy-go-lucky vagabonds that waste investors' time by thinking they can just cruise through to cushy financing on their tongues. However, imo the sum of this formality accounts for just about 30% of the screening process, the rest is a series of personal meetings, ethics and presentation. I believe that the general consensus is that Angels are supposed to be in it for reasons that do not only revolve around money, e.g. for the thrill of winning, to keep busy, to help upcoming entrepreneurs, ideals, politics etc. they typically chose to operate in an industry they are familiar with and would like some personal say in the company.
| They tend to be more "human" if you will and therefore the logical choice for seed/incubation-stage investment, whereas VCs are more formal, following more a set formula and require much higher level of success to impress, as well as preferably serious backing and/or endorsement of an early-stage investor. They don't bet on dark horses, in fact they don't gamble period and if they join, they take the helm. |  |
Most likely, if a millionaire pops by his local bank and asks for a loan of 100k for a side business, he will get it on the day as his credentials/collateral would be his bank account history, not a business plan. So, when you've already made it, the mere fact opens doors. Investors generally say "show us strong revenue and we'll help you multiply it". They say they invest in people, in ideas, but in fact they only invest in a proven, steady turnover. I once read a beautiful quote from an investor who was used to taking advantage of groveling startups: "After I invest, the bank account IS the whole company. The entrepreneur has to change that by building a company around the bank account. And he expects to own a majority of the bank account at closing? Give me a break." With this kind of logic, fledgling founders have no chance of retaining any semblance of control over their brain children. In a dog-eat-dog world, be absolutely sure that this is what you want, i.e. that by letting the investor in, you do not lose more than you gain, as the wrong investor will be like a wolf among sheep in your company.
If this oppressive trend continues, it will soon be much more sensible, feasible and painless to just go to the banks or apply for grants, I've never heard of bankers demanding a 1000+% ROI on a tried, sure deal! I believe that the reason so many parasitic intermediaries (websites and "consultants" offering to write/proof a business plan and put entrepreneurs in touch with investor for a fee) are entering the market and preying upon gullible start-ups is precisely because investors make it so hard to secure financing, so in order as to carry on with their business, start-ups must delegate the tedious preparation of the intricate business plan, etc. to a 3rd party. Just like to keep up with Google's whims any serious website owner now MUST hire/outsource an SEO expert or simply fail as the time-consuming task of researching what the big G wants for breakfast today is simply impossible to keep up as a part-time job.
Empirically I've come to the conclusion that rather than spend the tremendous amount of manpower and effort kowtowing to fastidious investors during the fragile start-up stage, it is far wiser to just focus 100% on growing your business (-they will demand it anyway) and let money come to you, i.e. if you get good enough, doors will open, but if you get better, you won't have to run after investors - they will come looking for you!
To those who risk nothing - i.e. if you are neither an investor, sowing (YOUR OWN) hard-earned money nor spending precious time seeking investment, you should not scuff at those who are laying it on the line. It's easy to rest on one's laurels and criticize everyone else from an ivory tower, but the gritty reality of start-ups is that we can't always afford to do things in a text-book perfect way.
END of part ONE of two
About the author: Oleg K. Temple has worked as an editor and consultant on numerous projects advising various start-ups and fledgling SMEs (mostly in the travel, accommodation, tourism and HR sectors) for over 12 years. His main project has been The Cornerstones of World Business, international business directory focused on bringing to light the best companies from each country and state, providing them with affordable advertising and marketing opportunities while encouraging them to engage in lucrative B2B and B2C relations. For travel information such as hotels in California, accommodation New York, hotels Illinois and other destinations across Europe and USA; or if you seek reliable financial, real estate, consultancy, insurance, construction or shipping partners - welcome to CornerstonesWORLD.com.
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