Money Changes Everything
14th October 2011 · 0 Comments
“The best-laid battle plans are abandoned after the first shot is fired.”
-Old military proverb
In life, there are few things we can count on with certainty. Death. Taxes. And the inevitable financial compulsivity that comes with spending other people’s money.
This is a timeless concept experienced by startups and seasoned companies alike. Locating startup capital can often feel like sprinting a marathon with a 50 pound pack on your back, so it’s not surprising that once an investor check clears there’s an overwhelming feeling of elation and relief. Suddenly, it’s not the entrepreneur’s neck on the line anymore—it’s the investor’s.
When investor money comes into play it’s sort of like letting a domesticated pig out into the wild; they begin growing hair and developing razor-sharp fangs and slowly (or, not so slowly) start to turn feral. Just as a teenager is more likely to wreck the car they didn’t have to pay for, when someone cuts you a check you’re not going to be as careful with it as you would your own money.
No one is immune to the undeniable allure of “OPiuM” (Other People’s Money). Our nation witnessed this firsthand when the federal government “forced” the banking industry (who expertly played the victim card) to accept our TARP monies in order to encourage the industry to resume lending. Most bankers never lent any of it, opting instead to use the funds for operating capital, paying down debts, additional business acquisitions and future investments.
After hearing it, observing it, being trained to deal with it (and subsequently training others), I eventually made a career as a management consultant out of it. After all, that’s what it always comes back to: the management. There are several common mistakes routinely made by management once investor money hits the account:
- Reimbursing themselves of startup expenses and allocating payments to other members of management. I refer to this as taking their skin out of the game or raising money to pay themselves a salary. My favorite was the entrepreneur who explained that up until that point (the point when all he could hear was “ca-ching”) he’d carried all of the risk himself, so he felt justified transferring the entirety of the financial burden to the investor.
- Reverting back to the original business plan. You know, the one that nobody wanted to fund because it was a really bad plan? In order to secure funding the entrepreneur must enlist the input and feedback of corporate advisors and potential investors until the original plan evolves into something worthy of investment… At least until the check clears, then it’s back to the original.
- Purchasing sprees loosely disguised at business expenses. Club memberships, cars, extravagant trips, treating family and friends to dinner “on the company” (for their own personal validation, of course). And you wonder why most investors are so gun-shy.
- Executives re-negotiating their contracts the second the investor money hits the account—because they know the company has the cash. This is my personal favorite, since it smacks of entitlement.
I’d like to say that angels and investors have both become wise to these tricks, but that’s simply not true. It takes a good entrepreneur and a better investor to agree that all parties involved are best served by distributing money over time based on a supplied budget rather than a lump sum. Lump sums should be reserved for M&A and lottery winners. Ideally, tranches should be given as milestones are achieved. Savvy entrepreneurs like this as the value of the company increases while the give-away in equity is less over time.
Both budding and seasoned entrepreneurs need to rid themselves of the delusion that money invested in their venture is an open checking account. Contrary to popular opinion, investors work hard for their money. When the investor decides to put some of that hard earned money into a company, they’re not doing it on a lark; they do it because they believe the management team can successfully execute the business plan they were presented with. Any time there is a perceived windfall, the temptation to take shortcuts and revert to operating within our comfort zone is greater. Imagine your first golf lesson. Before you can make that perfect drive you’ve got to learn the proper form. At first it’s awkward and uncomfortable, but you trust that your pro only wants to help you be successful. You wouldn’t spend all that hard-earned money of yours on lessons from a professional and not listen to him, would you? We all know someone who would though… Whether on the green or at the office, don’t let that someone be you.
If that someone is you—and you’re still reading this—call my office and I’ll help you through it.
