Investor Dilemmas and the Issues of an Evolving Company. Week 7 Blog – WCU ENT600

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. 

References:

Wasserman, N. (2012). The Founders Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton Univ Press.

5 thoughts on “Investor Dilemmas and the Issues of an Evolving Company. Week 7 Blog – WCU ENT600

  1. Great post! I agree that the advantages and disadvantages of seeking outside investors should be carefully considered. Like you, I also do not want to experience what it would be like to be fired from the very company that I dedicated by life to building. I have read several instances of this occurring, and it seems that it would be a living nightmare and truly devastating. The reason that I have created my organizational structure to maintain control is to avoid this very thing.

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  2. Hey Jeramy,

    I enjoyed your blog. Indeed, “time is money” is a very old saying. I agree with Wasserman in that friends and family are probably a last resort, at least as far as I’m concerned. It would just put too much at risk. I am just now learning about Angel Investors but I am intrigued with the Manor that they are utilized. These seem to be people that want to help not just financially but in many different ways. I suppose that’s a great feeling you get from philanthropy. You’re able to help the industries are most passionate about. As you point out, leadership changes eventually as the company ages. So, the likelihood multiple avenues of funding will grow right alongside it.

    Brandon

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  3. Jeramy,

    You brought up some good points family donating money. I think it’s good advice that if you haven’t developed your business idea enough to attract an Angel Investor or VC then you shouldn’t ask your family for money either. I was just reading a few minutes ago about Amazon’s founding where Jeff Bezos’ parents gave him 250K to start, but looking at it today he “only” owns 16.8% of Amazon. With the success of Amazon and the initial funding it surprised me that he still ended up giving up that much of his company, but as the text pointed out, he wouldn’t be where he would be at today if it wasn’t for the extra funds. I was trying to find more history of equity control of Amazon, but I ran out of time. I’d be curious on how it evolved.

    -Joseph

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  4. Jeramy,
    I enjoyed reading your post. You brought up some very good points. I agree that we look to our close relative to assist us financially when it comes to obtaining start up money. This is not always a wise business decision and could lead to future strife is the business is unsuccessful.

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  5. Hi Jeramy,

    Good job covering our reading and and explaining the sources of outside investments, as well as the pros and cons of each. I also would hate to be fired from my company! This weeks readings made me sit back and go over the wealth vs control dilemma again. I don’t need, and possibly wouldn’t even want to be the CEO of a large company. I think that I would be comfortable switching to the CTO position once the company grew to a certain size and “outgrew me”. I would stay like to ultimately be the majority shareholder and gather wealth. Do you always see yourself in the CEO role or would you transition to another C – level role. Wasserman recomends founders initiate the change rather then waiting on the board to surprise you. On page 319 of the Founder’s Dilemmas the graph was an eye opener. 73% of founders who initiate their role change end of up with another C- level title. Remember that even Steve Jobs was fired from his company!

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