Dec 202009

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Dr. Earl R. Smith II


I attend a fair number of ‘presentation events’ over the course of a year. Mostly they have the same format. A panel of investors has been brought together. Applications for submission have been received from a wide range of start-up companies seeking funding. The applications have been reviewed and a lucky few have been invited to present. The room is packed with investors feeling important and the center of attention, nervous teams going over their last minute check lists and envious audience members. As the program advances, it is clear that many of the presenting teams have not asked a very simple question. Should they be in the Money Chase at all?

It is What We Do

I have put this question to dozens of teams and their responses have covered a wide range. But one type of response is particularly interesting. It goes something like this, “Of course we should be in the Money Chase. We are entrepreneurs and that is what entrepreneurs do.” The first time I heard this, I was taken aback. I asked the team what they meant by it. It was clear from their replies that they had a particularly provincial and rather limited view of the process of starting and building a business. They obviously believed that the way you started a business was to get a ‘good idea’ and then find somebody to fund you. Having completed this process successfully, you were in business.

Although the understanding of this particular team was extreme, I have found that the general attitude infects many of the presenting teams. They see the process more or less the same:

  • A. Get an idea
  • B. Assemble a team
  • C. Write a business plan
  • D. Get an investor
  • E. You are in business

When I tracked the origins of this understanding, I made a surprising discovery. Most of it originated during the time that one or more of the team had spent in a university entrepreneurism program. Some had degrees while others had attended seminars or belonged to programs that were affiliated with universities. The point is that their understanding of what it means to be an entrepreneur came intellectually before experientially. If you believe that starting a business is a journey from A to E, you are probably in for a rude shock.

The Costs of the Money Chase

Every hour you spend chasing investors is one you cannot spend chasing customers. At bottom, business is about having customers who pay you for your product or service. How much they pay you, when compared with how much it costs you to deliver, determines your gross margin. That margin is reduced by overhead. Overhead includes the time, effort and resources you commit to the Money Chase. For most start-ups, this cost is far higher than they realize. Here are a few examples:

  • The Distraction of the Senior Team: The overriding objectives of a start-up team should be to prefect and monetize the value proposition. Nothing else approaches that in importance. The Money Chase takes senior members of the team offline. Instead of pushing to meet these two objectives, they spend large chunks of time preparing and making presentations to investor groups. Such a talent drain may make sense after initial successes with customers, but it is seldom wise prior to that. Too many teams decide to chase money too early in the game.
  • A Dysfunctional Culture: The message that senior members of the team put out through their focus on investors can be very corrosive. “The real game is the money chase, not the business.” If the Money Chase comes to dominate the activities of the founders too early in the process, the team will divide into two factions; the group that is chasing funding and the others who have been left at home to tend the fires. This is like sending your first-stringers out to the press conferences while having your back-up players actually play the game.
  • The Message to Potential Customers: The role of the senior founders in building the trust that leads to potential customers becoming customers cannot be overstated. If a decision-maker is going to risk his job by going with a start-up, he will want to first build a strong relationship of trust with the CEO and other members of the senior team. What message does it communicate then the response is, “Bob is not available. He is busy with potential investors. You will have to deal with us.” The answer is simple. It says to the potential customer, “You are not as important to this company as the Money Chase.”

These are just a few of the costs. Chasing funding is a very expensive process. It can suck the energy out of a start-up and doom it to failure. In the very early stages, founders should be focused on the duel objectives of perfecting and then monetizing the value proposition. Until they can demonstrate an ability to do that, they should not be involved in seeking funding.

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