Funding Fairness Investors vs Founders Part 1 of 2 Opening gambit

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Funding Fairness Investors vs Founders Part 1 of 2 Opening gambit

Posted On : Jul-19-2011 | seen (174) times | Article Word Count : 2191 |

This article (in 2 parts) outlines some of the problems and pitfalls on the way to securing investment which contemporary start ups sadly must face. Not only is there a plethora of offerings, i.e. demand for funding by far outweighs the supply, but this very fact results in unfair business practices, the liberal belittling of talent and in a few cases plain theft of ideas.

There is a wealth of information available online about how to write a business plan or 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 “business-ling” and yield to every whim of thy betters!” Basically – if you are seeking funds, strip away any and all your measures of security, self esteem and business acumen. Divulge all your business knowledge and secrets to a person who makes no commitment whatsoever and roll the dice 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 have envisaged the 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 sneaky acts put on by myriads of self-proclaimed experts, charlatans and mountebanks online and finds the 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 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. True, 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!

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, in my opinion 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 scoff 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.

One Response to “Do startups need more talent or money?”
This is a “chicken or the egg” question of course, as quite obviously both are needed in generous amounts. A talented founder will not take more than what is needed, but a safety margin lends him confidence. However, people who quickly secured funding and those who’ve never tried looking for funding from scratch 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. …”

Here's my reply to Tony (who seemed to suggest that with enough talent ALL problems can be solved. I point out that with ENOUGH strength in my body I could fly. i.e. what's the point of musing about impossible attributes no one has or can 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 the stock they provide you with today to build it, provided nothing goes wrong and you’re honest, of course? Great, “just put it on my tab” or “I will give you 0.0001% of my nascent company in exchange for that monitor.” That’s like in Street Fighter Raul Julia trying to pay in “Bison dollars” worth a fortune tomorrow, for a cache of weapons he needed to conquer his empire today; or Wimpy saying “I’ll gladly pay you on Tuesday for a Hamburger today.” 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 purchase than it would with cash with an 80% fail rate to get anything done, you try to build a business on that. 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 then consider best incubation, development and growth options. Point is: it is easy to be a critic, but nothing is ever so black and white. This is like saying I'd rather be good than lucky. Yes, in an ideal world this would work, i.e. action is equal and opposite to reaction and work in = profit out. 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 far more risks - 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, 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, don't pay partners' salaries (not that people can live and be productive on fresh air, mind you – if you don’t feed the horse, how do you expect it to work??), etc. things beyond your control can let you down at any time e.g. a shipment arrives late or a bank closes early due to an epidemic of the flu, flood or whatever. This is like saying you don't need any insurance policy because you can plan your life and not get into an accident, hurt or robbed. Imagine how much you could save... You can but try to plan your every move, but you will inevitably fail. Start-ups are too fragile to bear the full brunt and risk 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, the entire venture will collapse like a house of cards in a light summer breeze. 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. What's the use of a brilliant, Earth-shattering idea if you can't get it to the market? Also, remember, that inspiring others and keeping their passion going is much harder without financial backing especially when juggling all the other tasks of a start-up in incubation. It is easy to be an "armchair quarterback" and criticize the game saying "if you're so smart, why are you not rich?" (i.e. "if you're good enough, you will ALWAYS find a way". sure. if you're fast enough you can dodge a bullet. If you are strong enough you'll never become ill. - these statements are also 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.

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.

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<h1>Funding Fairness Investors vs Founders Part 1 of 2 Opening gambit</h1> Author: <a href='http://www.articleseen.com/profile_Oleg K Temple.aspx'>Oleg K Temple</a> There is a wealth of information available online about how to write a business plan or 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 “business-ling” and yield to every whim of thy betters!” Basically – if you are seeking funds, strip away any and all your measures of security, self esteem and business acumen. Divulge all your business knowledge and secrets to a person who makes no commitment whatsoever and roll the dice 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 have envisaged the 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 sneaky acts put on by myriads of self-proclaimed experts, charlatans and mountebanks online and finds the 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 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. True, 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!

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, in my opinion 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 scoff 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.

One Response to “Do startups need more talent or money?”
This is a “chicken or the egg” question of course, as quite obviously both are needed in generous amounts. A talented founder will not take more than what is needed, but a safety margin lends him confidence. However, people who quickly secured funding and those who’ve never tried looking for funding from scratch 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. …”

Here's my reply to Tony (who seemed to suggest that with enough talent ALL problems can be solved. I point out that with ENOUGH strength in my body I could fly. i.e. what's the point of musing about impossible attributes no one has or can 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 the stock they provide you with today to build it, provided nothing goes wrong and you’re honest, of course? Great, “just put it on my tab” or “I will give you 0.0001% of my nascent company in exchange for that monitor.” That’s like in Street Fighter Raul Julia trying to pay in “Bison dollars” worth a fortune tomorrow, for a cache of weapons he needed to conquer his empire today; or Wimpy saying “I’ll gladly pay you on Tuesday for a Hamburger today.” 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 purchase than it would with cash with an 80% fail rate to get anything done, you try to build a business on that. 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 then consider best incubation, development and growth options. Point is: it is easy to be a critic, but nothing is ever so black and white. This is like saying I'd rather be good than lucky. Yes, in an ideal world this would work, i.e. action is equal and opposite to reaction and work in = profit out. 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 far more risks - 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, 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, don't pay partners' salaries (not that people can live and be productive on fresh air, mind you – if you don’t feed the horse, how do you expect it to work??), etc. things beyond your control can let you down at any time e.g. a shipment arrives late or a bank closes early due to an epidemic of the flu, flood or whatever. This is like saying you don't need any insurance policy because you can plan your life and not get into an accident, hurt or robbed. Imagine how much you could save... You can but try to plan your every move, but you will inevitably fail. Start-ups are too fragile to bear the full brunt and risk 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, the entire venture will collapse like a house of cards in a light summer breeze. 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. What's the use of a brilliant, Earth-shattering idea if you can't get it to the market? Also, remember, that inspiring others and keeping their passion going is much harder without financial backing especially when juggling all the other tasks of a start-up in incubation. It is easy to be an "armchair quarterback" and criticize the game saying "if you're so smart, why are you not rich?" (i.e. "if you're good enough, you will ALWAYS find a way". sure. if you're fast enough you can dodge a bullet. If you are strong enough you'll never become ill. - these statements are also 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.

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.
About the Author: Oleg K. Temple is a consultant advising various <a rel="nofollow" href="http://www.cornerstonesworld.com/directory/country/USA/state/Illinois/category/Business-Finance">start-ups</a> about <a rel="nofollow" href="http://www.cornerstonesworld.com/directory/country/USA/category/Business-Finance/state/California">business plans</a> over 12 years. This article outlines the problems on the way to securing <a rel="nofollow" href="http://www.cornerstonesworld.com/directory/country/USA/state/New%20York/category/Business-Finance">investment</a>
 Article Source: <a href='http://www.articleseen.com/Article_Funding-Fairness-Investors-vs-Founders-Part-1-of-2-Opening-gambit_67286.aspx'> http://www.articleseen.com/Article_Funding Fairness Investors vs Founders Part 1 of 2 Opening gambit_67286.aspx</a>

Article Source : http://www.articleseen.com/Article_Funding Fairness Investors vs Founders Part 1 of 2 Opening gambit_67286.aspx

Author Resource :
Oleg K. Temple is a consultant advising various start-ups about business plans over 12 years. This article outlines the problems on the way to securing investment

Keywords : investment, investors, financing, business plan, business strategy, start-ups, founding a company, business investment, secur,

Category : Finance : Finance

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