Raising capital isn’t an excuse for a party!
January 25, 2009
When I talk to entrepreneurs and would-be entrepreneurs I often get the impression that they believe raising venture capital is the objective. While it may not seem like it, raising capital is often the easiest part of starting a business. It certainly isn’t time to have a party. In most respects once you begin using other people’s money the party is over. The laid back startup atmosphere really needs to end.
Sadly, a wake would be more appropriate than a party. In most cases once an entrepreneur, especially a first time entrepreneur, raises capital from professional investors it is the beginning of the end. Some studies show that 50% of venture backed startups fire their CEO/founder within the first year. In some cases there is nothing you can do about it, but in most if you get serious and start acting like the money you raised is your parent’s retirement you might have a chance.
Entrepreneurs without a pedigree or degree often have an advantage over their better educated or connected peers. Often these ‘lesser qualified’ entrepreneurs can’t find willing investors, especially early on and as a result they must bootstrap their ideas into reality. They may have no idea what a discounted cash flow or internal rate of return is, but they often create real businesses. By the time investors are willing to take a look at their businesses these ‘lesser qualified’ entrepreneurs turn their noses up at professional investors. Better educated and connected entrepreneurs often get professional investors involved earlier and despite their pedigrees they meet the fate of most founders - without much of anything to show for their effort.
I am all for raising capital from investors, but I caution entrepreneurs to think long and hard before doing so. And once you decide to sign on the dotted line - don’t throw a party, get to work…
