Money, as defined by Merriam Webster, is something generally
accepted as a medium of exchange, a measure of value, or a means of payment. [i]
For many entrepreneurs, especially those in the early stages, money is the lifeline
to their startups. The reason being, “if you don’t have money you don’t have a
mission.”[ii] This
understanding sends a lot of entrepreneurs down the wrong path; chart courses
for millions of dollars to keep their missions alive. However, history shows
obtaining millions isn’t always what its cracked up to be. In fact, it is sometimes
best to say no to the millions, when they are offered.
You are probably thinking that I am crazy? And that if your
venture were offered just $1 million dollars you would gladly accept it.
While I am not crazy, and reasoning such as it can be tough
to keep the lights on at your struggling startup does merit taking the money,
there are other factors that should be investigated. For example, will you have
remaining control over the venture as a founder, and what are your potential payouts
after accepting the $1 million dollars, just to name a few.
Rule #1, don’t be afraid to say “No” to potential investors.
Most sales bibles stress “every ‘No’ gets you closer to a ‘Yes”.[iii] Not
every deal will be a great deal for you, your team, or your venture. Therefore,
you must reject a few, if not many, offers before you find the right one. To
further elaborate on this point, John Fearon explains that 20% of the people
you will pitch to will, most likely, give you 80% of your desired funds
(“80/20” rule[iv]).
Therefore, it is important to pitch to many potential investors in order to land
the one(s) you need.
As you are pitching here is something to keep in mind; if
you are receiving overwhelming amounts of Yeses then it is likely you have set
your price too low. Fearon highlights that having multiple investors interested
is an indication that you should maximize your opportunity, and avoid
cheapening your company’s valuation, by setting a price point based on the
80/20 rule.
Is there such a thing as raising too much money? Yes, and it
occurs when your raised cash equals the total amount of your company’s
valuation.[v]
When this happens you are no longer the owner(s) of your company, your
investors are. To mitigate the risk, of losing ownership, raise enough money to
get you to the next stage. Raise capital for developing product prototype one
in the beginning stage, not product prototype 25 scheduled to launch in 2036. Put
even simpler, don’t pad the bank account for the sake of padding or to feel
secure.
Ultimately, it is important to hold out for the right deal
and appropriate investors because while cash is the lifeline to your mission it
can also be the silent killer of your company.
Please share your stories, in the comments section, about your
experience with making deals.
[i] http://www.merriam-webster.com/dictionary/money
[ii]
Social Innovation Incubator Lecture. Tim Zak, 2015.
[iii]
When-And Why- You Should Say “No” To $1 Million: Imagine your investors say, “Yes” and you get the money. Is it really
time to celebrate? John Fearon 2013.
[iv]
When-And Why- You Should Say “No” To $1 Million: Imagine your investors say, “Yes” and you get the money. Is it really
time to celebrate? John Fearon 2013.
[v]
When-And Why- You Should Say “No” To $1 Million: Imagine your investors say, “Yes” and you get the money. Is it really
time to celebrate? John Fearon 2013.
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