Apr 292010

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Dr. Earl R. Smith II


Most entrepreneurs dream of the day that the investor’s check clears and they have the funding to grow their business. It is a day that they struggle to achieve. Most put in long hours of preparation. They polish and re-polish their elevator speech and dog-and-pony show. The slide stack is revised and re-revised. The diligent ones even look to their own performance and appearance during the presentations to find ways to improve results and finally greet that sunrise on funding day.

Fred was one of those types. He lead his team on a magnificent money hunt. Over the course of about six months, they probably made two dozen presentations before finding an angel investor willing to write a check. They went into that last meeting in full stride. Fred and his team had honed their presentation skills to a fine point. They had developed effective responses to all the important questions and were able to, easily and professionally, respond to every question. Fred’s team was the epitome of persuasiveness. In the broad scheme of things, they only had one weakness – Fred’s business idea was not ready for prime time. They had not done the spade work to mature the business model – particularly the revenue model.

The Short Honeymoon

The first months after funding were euphoric for both Fred’s team and the angel investor who had funded the company. Sure, there were some rough spots; the investor seemed more intrusive than Fred had anticipated and customers were not responding to the value proposition as anticipated. “But that is just the fog of a start up,” Fred observed. The team was working out how to interact with the investor. The investor was working out how to work with Fred’s team. Everything would work out in the end.

One major bump in the road did cause Fred some concern. The investor was much more focused on the numbers than Fred had anticipated. He seemed to see the company in terms of spreadsheets and constantly pressured the financial person on the team to come up with more and more sophisticated analysis of the numbers. It finally got so bad that the controller quit. The first member of the team left after only two months. “Good riddance”, was the investor’s response, “I have somebody who will do a far better job.” When Fred attempted to recruit a new financial member for his team, he got a shock. The investor showed him that the funding agreement required investor approval for major hires and the investor would only approve his anointed candidate. For Fred, the question became “who is running this company?” For the investor, the statement was “I am”.

The Straw …

While the struggle over control was going on, something else began to become clear. Fred and his team had spent so much energy and focus on perfecting their investor presentation that they had neglected to refine and test their business model. Over the six months prior to funding Fred had spent almost all of his time chasing money. He had neglected the developing contacts with potential customers. As more and more of his team were drawn into the money chase, they ceased to evolve their understanding to the business and its value proposition. They became very good at selling what they had – but what they had was not sufficient to become a profitable business.

That straw that broke the camel’s back was the need for the team to go back to the drawing boards and redesign the value proposition. Instead of using the funding to establish a market position, the team drew salaries and revamped the business plan. As the bank balance diminished the tension between the investor and Fred’s team increased. Eventually, things erupted into open warfare. The investor accused Fred and his team of conning him into investing in a poorly formed and tested idea. Fred defended himself and his team. They were doing the best they could under the circumstances. The investor’s intrusive tendencies had caused a drop in morale. The new financial person was not fitting into the team. Some of the key team members were thinking of leaving.

May I Have the Mediator Please

There is often very little to do in such situations but try to get the parties separated. Tragic experiences are sometimes best left behind and all parties are better off if they can lick their wounds and move on. I was asked to intervene in this situation by the investor. Even though the investor suggested my involvement, Fred welcomed it. From his point of view, there had to be some relief no matter what the source. Things were falling apart. It did not take long for me to present initial findings:

  • The focus on the money chase and then the use of the funding had been very bad for Fred’s team. They lost their entrepreneurial edge. Instead of thinking how to build a business – of new ways to implement on a shoestring – they had focused on the need to convince an investor to write a check. Their tendency to think creatively and to focus on innovating their space was substantially reduced and eventually virtually eliminated by the pressures of the money chase.

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