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Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
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Most entrepreneurs dream of the day that the investor’s check clears and they have the funding to grow their business. It is a day that they struggle to achieve. Most put in long hours of preparation. They polish and re-polish their elevator speech and dog-and-pony show. The slide stack is revised and re-revised. The diligent ones even look to their own performance and appearance during the presentations to find ways to improve results and finally greet that sunrise on funding day.
Fred was one of those types. He lead his team on a magnificent money hunt. Over the course of about six months, they probably made two dozen presentations before finding an angel investor willing to write a check. They went into that last meeting in full stride. Fred and his team had honed their presentation skills to a fine point. They had developed effective responses to all the important questions and were able to, easily and professionally, respond to every question. Fred’s team was the epitome of persuasiveness. In the broad scheme of things, they only had one weakness – Fred’s business idea was not ready for prime time. They had not done the spade work to mature the business model – particularly the revenue model.
The Short Honeymoon
The first months after funding were euphoric for both Fred’s team and the angel investor who had funded the company. Sure, there were some rough spots; the investor seemed more intrusive than Fred had anticipated and customers were not responding to the value proposition as anticipated. “But that is just the fog of a start up,” Fred observed. The team was working out how to interact with the investor. The investor was working out how to work with Fred’s team. Everything would work out in the end.
One major bump in the road did cause Fred some concern. The investor was much more focused on the numbers than Fred had anticipated. He seemed to see the company in terms of spreadsheets and constantly pressured the financial person on the team to come up with more and more sophisticated analysis of the numbers. It finally got so bad that the controller quit. The first member of the team left after only two months. “Good riddance”, was the investor’s response, “I have somebody who will do a far better job.” When Fred attempted to recruit a new financial member for his team, he got a shock. The investor showed him that the funding agreement required investor approval for major hires and the investor would only approve his anointed candidate. For Fred, the question became “who is running this company?” For the investor, the statement was “I am”.
The Straw …
While the struggle over control was going on, something else began to become clear. Fred and his team had spent so much energy and focus on perfecting their investor presentation that they had neglected to refine and test their business model. Over the six months prior to funding Fred had spent almost all of his time chasing money. He had neglected the developing contacts with potential customers. As more and more of his team were drawn into the money chase, they ceased to evolve their understanding to the business and its value proposition. They became very good at selling what they had – but what they had was not sufficient to become a profitable business.
That straw that broke the camel’s back was the need for the team to go back to the drawing boards and redesign the value proposition. Instead of using the funding to establish a market position, the team drew salaries and revamped the business plan. As the bank balance diminished the tension between the investor and Fred’s team increased. Eventually, things erupted into open warfare. The investor accused Fred and his team of conning him into investing in a poorly formed and tested idea. Fred defended himself and his team. They were doing the best they could under the circumstances. The investor’s intrusive tendencies had caused a drop in morale. The new financial person was not fitting into the team. Some of the key team members were thinking of leaving.
May I Have the Mediator Please
There is often very little to do in such situations but try to get the parties separated. Tragic experiences are sometimes best left behind and all parties are better off if they can lick their wounds and move on. I was asked to intervene in this situation by the investor. Even though the investor suggested my involvement, Fred welcomed it. From his point of view, there had to be some relief no matter what the source. Things were falling apart. It did not take long for me to present initial findings:
- The focus on the money chase and then the use of the funding had been very bad for Fred’s team. They lost their entrepreneurial edge. Instead of thinking how to build a business – of new ways to implement on a shoestring – they had focused on the need to convince an investor to write a check. Their tendency to think creatively and to focus on innovating their space was substantially reduced and eventually virtually eliminated by the pressures of the money chase.
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11 Responses to “Fred Got Funded – And He Hasn’t Had a Good Day Since”
Sorry, the comment form is closed at this time.
Chasing investor dollars feels a lot like being the ugly kid at the school dance. You want so badly for someone to dance with you that your desperation makes you even less attractive. Now that I’ve taken a few dance lessons and grew out of my “ugly” phase, I’m no longer willing to dance with someone who is going to step on my feet all the time.
In my last venture, we spent so much time and energy chasing (and being lead on by) investors, that it ran us out of business. Now most of the old team is involved in one of two startups. Both these new businesses are designed with less emphasis of investment dollars and more emphasis on customer dollars and strategic partnerships. This strategy has made our businesses viable a lot quick and greatly reduced our stress levels.
Stefan Popadiin wrote:
yep! cash is bad before you learn how to earn it!
Khalid Munir wrote:
Businesses in different parts of the world with different economic standings undergo different experiences. The key question before leaping into whether business is to be started or not is the same as pointed out by Elizabeth . . . how many people are prepared to buy your products or services. This is the most critical question even if your core offering is the most wonderful product or service on earth. This is where people are trapped in illusions. Knowledge of market size, of product’s competitiveness and of buyer’s buying capacity create these illusions but the famous saying ‘ several slips between cup and the lips’ is often ignored. Finances are as important as anything else but then you see unless all loops which fall within the bigger loop known as business cycle is visualized and well thought over something always goes wrong.
That is not all. Even beyond that there are other factors which may come into action and ditch the whole plan. I wish I had time to share experiences but still I ‘ll love to continue this discussion.
Sincerely
Khalid Munir
Vic Williams wrote:
I’ve been in crashes, sometimes a big market shift so the product was a miss-fit (in a way quite like your example), or a product clash with a regulator, software to operating system upgrade clashes, culture (China to other). I think your example is apt, and the causes can come out of the undergrowth even with preparation.
A good team should be able to adapt on the go. The plan is the map, and the map is the menu. We eat the meal not the menu. Use the map or menu as a guide and look to go beyond its roads, and even go off-road.
Jim Janco wrote:
Interesting experience.
I’ve been in several situations similar to Freds….and from both sides.
Fred committed the most common mistake for a start up seeking Venture Capital. Believing the dream, before considering…. Where’s the beef?
When I’m on the presenting end – here are a few questions I’ve asked myself since:
What do I do when some actually writes the check?
What’s more important, the start up cash, or delivering to an angel investor?
How can I front load this to provide a quick return to the investor? NOT Maddoff style.
How can I most effectively instill confidence in my investor that will entice them to bring more $$$ to the table if necessary to grow?
Knowing what I know, would I give me the money and feel good about it?
As an investor, or bringing investors to the table… but these questions work in reverse if your seeking VC:
Where’s the beef?
What are the numbers and Third party support?
Do the number tie or is everything ‘an illustration’?
Am I working with a dreamer? Not that dreams are bad, but I don’t want their dream to become MY nightmare.
When the music stops, who’s left standing without a chair?
Do they have skin in the game?
How many of these have they tried before?
How much an I willing to LOSE????
Elizabeth Gage wrote:
The interesting thing about being a woman entrepreneur is that the odds to obtain financing are against you. In fact, only 3% of women entrepreneurs get funded. Because of this I have always focused on sales. Until someone buys something you really don’t have a business anyway. With a real customer (3 is better) you have a chance to fine tune a business model for profitability. It’s amazing what you learn struggling through this process. In fact in one startup I learned that what I thought at biz plan prep, as our niche of ‘ready-to-buy” customers was in fact a list of long cycle ‘if at all customers’.
Businesses need time to grow and too many investors don’t seem to get this. They want a high rate of return within a certain time period. Time is anyone’s guess.
As an entrepreneur I think an investor needs to be a cultural match and offer some high level expertise to the company. Maybe it is their connections or finance acumen but without something other than money the relationship is hardly useful.
Sincerely,
Elizabeth
Amit Srivastava wrote:
How often you ask? It is the nature of life.
When I was kid, I wished to grow up soon. As a grown up I always think life was much simpler and happier as kid.
When renting I always wished to own house. After owning realized it comes with a big “to buy” and “to do” list.
I can keep on going, but lets rather focus on learning, solutions and strategies.
Firstly, from personal experience, I feel that no matter how prepared and planned I am there are always surprises. So, plan meticulously but leave room for surprises.
Secondly, when in quandary after getting what you wished focus on the positives. You must have had reasons to wish for this, and those same reason can be your elixir to motivate you to keep going and cross the hurdles.
Lastly, never let these problems stop you from wishing or dreaming. Those who wish are the ones who get!
Khalid Munir wrote:
I have added the following submissions
“Businesses in different parts of the world with different economic standings undergo different experiences. The key question before leaping into whether business is to be started or not is the same as pointed out by Elizabeth . . . how many people are prepared to buy your products or services. This is the most critical question even if your core offering is the most wonderful product or service on earth. This is where people are trapped in illusions. Knowledge of market size, of product’s competitiveness and of buyer’s buying capacity create these illusions but the famous saying ‘ several slips between cup and the lips’ is often ignored. Finances are as important as anything else but then you see unless all loops which fall within the bigger loop known as business cycle is visualized and well thought over something always goes wrong.
That is not all. Even beyond that there are other factors which may come into action and ditch the whole plan. I wish I had time to share experiences but still I ‘ll love to continue this discussion.”
Sincerely
Khalid Munir
Wallace Jackson wrote:
Self-Funding & Sweat Equity Production is the way to go to avoid control nightmares!
Francisco Laborde wrote:
My advise to the start-ups:
1. Focus on the customers’ needs and expectations.
2. Understand what quality is and how to get it.
3. Start small and grow slowly.
4. Don’t sell your ideas. Sell your products and services.
Fungus
Phil Lauro wrote:
Actually prepare to receive what you wish for, not the fiction that tends to crop up in your head that focuses on all the benefits and none of the less attractive parts of running your own show.