Raising Money? Do This First

Raising money, it’s what entrepreneurs do.  How they go about it, that’s often a don’t.

Take the oft-repeated example of Entrepreneur, “Ed.”  Ed has a great idea and is convinced it will make him rich.  When asked about his long-term goals, Ed outlines a scenario in which he raises investor money, successfully launches his new product and sells the business for a large profit five or so years later.  Not original, but not bad either.  Ed forms his team, promises them a piece of the action, and hits the fundraising circuit.

Then something happens.

Poof!  The long-term goal changes.  Ed doesn’t really want to sell the business in five years; instead, he sees himself as “the next” Mark Zuckerberg, running his company forever.  Maintaining control is his new, though unstated, focus.  Despite having no product, no sales, and no money, Ed sets an unrealistically high, pre-money valuation; to do otherwise would be to risk “excessive” dilution.  Investors, after all, “are nothing more than money providers.”  And those key employees?   That 15% to 20% option pool would come out of Ed’s holdings.  Best not to grant any specific percentages to anyone yet; promises will suffice for now.

Ed’s funding commitments never materialize, the venture fails.  Sounds exaggerated?  Not really.  I’ve seen this scenario play out time-and-time-again.  Many entrepreneurs fail to honestly assess their strengths, weaknesses and, most curiously, their true long-term goals . . . before attempting to raise money.

When working with founders of startups, I often ask them to answer questions like:

▪Are you comfortable with the essential fundraising trade-off, having a smaller piece of a much bigger pie?   (Or, would you prefer to own a very large piece of a much smaller pie?)  

 ▪Have you ever reported to a Board of Directors or to outside investors?

 ▪Do you see yourself as the best choice to run this business once it reaches $30 million in sales, with a workforce of 40 employees (as projected)?

 ▪What do you want to be doing five years from now?  (Retired?  Working in your next venture?  Running this business?  In a lesser role with the current business?)

 ▪Do you realize that assigning your patents to your new company is not negotiable? 

The answers to these and other, similar questions vary.  Often, I’m told what the entrepreneur thinks I want to hear.  Other responses are more frank.  Almost without exception, however, founders cannot envision their companies operating without their active input.  Such enthusiasm is laudable, helping attract investors and key employees; it can also lead to future disappointment.

So, before seeking outside funding:   Think long term; the short term can wait.