Last week I talked about the new JOBS Act making “equity-based crowd funding” legal; and how I believe it is a good thing for startup funding. So this week I thought I would talk about a potential pitfall for the entrepreneur from this “easy money”. I’m ignoring any pitfalls that may be introduced by the act itself – until we see a draft of the regulations I think it is too soon to comment.
While I don’t have any “real data”, based on my own experience I would say that when you talk to people starting a business at least 80% of them come out with some statement along the lines of “if I can raise [insert number here], then all of our problems will be solved”. Unfortunately for many of them, raising the amount of money they are targeting – or even twice as much – won’t help them succeed.
Why? Because money makes you stupid!! Don’t believe me? Ask many of the winners of large lottery prizes.
You may think I’m being a little silly (those of you that know me know that that isn’t a stretch for me!), but let’s think about it for a minute. Why do so many winners of big lottery prizes have trouble? Because they aren’t ready for that large influx of money. The same can be said for many startup business owners – in many cases they are looking for funding before they have defined some important aspects of their business.
Also, having a cash cushion allows you to cover up or ignore fundamental issues with your business. This is not just a problem for new businesses, it can also be a problem for established businesses. In one example a company that was started and did well during boom times had problems when faced with its first recession because it hasn’t had to learn the necessary financial discipline to survive during the hard times – it’s apocryphal that companies started during a recession have a better chance of survival, why? Because they have probably better learned the lesson of how to do more with less. In another case, an established company continues to focus on its “cash cow” product, only to have the marketplace pass it by, so that in five years it is 25% of the company it used to be. Does this qualify as money making you stupid?
But let’s get back to our startup businesses.
As you are all aware, there is more to starting and growing a business than getting funded. I define the needs as a three-legged stool. The first leg is your product or service; what is it; why is it better than the competition; etc. The second leg is the market; what is the market opportunity your product or service addresses; what market niches are you addressing, etc. The third leg is resources, including people and funding. These are all banded together by the business’ strategic and tactical plans and their execution. I’ve blogged about most of this before so check some of my prior posts if your interested in my view in any of these areas. The fact that you are going to put your funding needs up on some crowd funding platform doesn’t negate the need for you to have a solid three-legged stool (business) for someone to invest in.
Without this understanding you, the business owner, may deluding yourself – and any potential investors – about what the impact of gaining the sought after funding may be.
Don’t get me wrong – adequate funding is a necessary part of starting a business. Funding is an accelerant for business execution. The trick is adding the accelerant in the right amount and in the right places so that you get the growth you desire and can handle, versus an out of control wildfire!!