We have concluded many times that “Money buys time” and liquidity will give you opportunity to make better, more sound decisions that may contribute more to the long-term health of the start-up. Time and money keep you from having to take a major risk too early in the company that could jeopardize the start-up itself as well as gives you opportunity to adjust strategies when something doesn’t work.
So, what do you do when you do not have the liquidity to sustain a basic entry into your business until it reaches a level of profitability? There will always be a temptation to look for outside funding but weighing the need versus the reward and disadvantages is important. We have discussed previously how investors may become a necessity but may affect the cohesiveness of the business and will most certainly place the founder in a control versus wealth decision making position. Wasserman outlines the 3 most common types of outside investors in his figure 9.2 in chapter 10 of “The Founder’s Dilemmas. His table allows you to weight the differing values and risk of using either Friends and Family, Angel Investors, or Venture Capitalist.
Certainly, the most common type of outside funding is Friends and Family funding. As in my company, most start-ups will not grow to a level that will reach the interest of a venture capitalist. However, an Angel Investor is common in my business and will most likely affect my company’s cohesiveness and strategies. Wasserman details well in his book the emotional ties that are brought into the start-up when Friends and Family money is used as well as the most often limiting tools and experience the friends and family can offer versus an angel investor or a venture capitalist.
Wasserman references an investor that states that “friends and family money is too easy to obtain and encourages people to start marginal businesses”. I would also argue that having little to no liquidity may also place the founder in a position to make a risky decision they may not be capable of managing. Both positions bring into question the founders experience and ability to insure the health of the business. We all fall into the romanticism of the business result that we can imagine but the steps to get there will always challenge us beyond what we can imagine. The reality of our abilities will need to be honestly assessed and if we are able to detach emotions then we will be in a better position to know when to ask and accept funding from outside sources.
The ability, experience, and talent of the founder certainly comes into play throughout the growth of the company. This is examined again by Wasserman in Chapter 10 of the “Founder’s Dilemmas” as he gives examples of how the changing needs of a successful company will most often lead to leadership changes. I don’t want to know how it will feel to be fired from my own company. It seems that issues with Wealth versus Control stays as an ever following issue.
Wasserman, N. (2012). The Founders Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton Univ Press.