Should you tell your investor that you don’t need money?
Here is an interesting question for most people. Let’s suppose that you are doing a start-up and you have enough funds to sustain the entire team and product development. So, one day, you finally meet up with an angel investor or you decide to go and look for investors. Without hesitation as a brash youth, you tell the guy that you don’t need his or her money but you want his or her contact in later stages. Is that a wise move? It may be interesting to examine the different schools of thought on this simple question.
- Never reject money that is coming to you: That’s the first school of thought. I was told by my business mentor in the UK that I should never reject money. If an investor offers to put money in your company, you should accept the deal with favourable conditions that benefits you and your team. The key is to negotiate. In his opinion, if someone wants to put money in you, it means that you do have something there. So, the instinct is to work out your own valuation of your start-up and make the other guy go for a lower equity stake. Do note that this reasoning may be different in Singapore. There are lack of deal flows and everyone would just go for anything possible. Hence it is the onus of the entrepreneur whether they should accept the investment. Remember, venture capitalists can be quite difficult to deal with if you really accept their money.
- If you reject them now, it’s unlikely that they will help you: In a recent business presentation, a team told the judges that they are not here to seek investment but just to see whether their idea works or seek contacts if a future investment is possible. During the judges’ review, a business lecturer said that he would have failed them on the course. Apparently, in the US, if you flat out reject a deal when you got a presentation, it means that you are not giving the investor any face. Besides, think about if from the other perspective, you are asking for it. You tell people that you look for money and get your meeting. Then you go to the meeting and snub the interesting parties that you don’t want the money but their contacts. Do you think that they won’t be offended? Even if you want them to come in later, they may not take you take seriously. It’s the business of credibility and forthright that comes into play.
- Why not? We don’t really need money: This is the opposite end. If you don’t really need money, just keep quiet and move forward with what you do. If you seriously need to tap the interests of the investor, you should be in the position where your product has been talked about by the customers and gaining traction from technology blogs like TechCrunch. You can try to go to a VC and do exactly the situation I talked about in the previous bullet point. It may end up in another situation. Perhaps, the VC won’t be offended and decides to be your mentor, so that he or she can be kept in the next round (or given priority for first round investment).
Whatever the situation is, you have to be careful when you tell someone that you don’t need money. You might accidentally offend someone in the process. If you seriously don’t need it, don’t go to the investors and set up a meeting to waste their time. You might be better off to get the product out first and then go to them after that. Of course, the decision lies with you, the entrepreneur.
No related posts.
Loading ...
7 Comments, Comment or Ping
Ng Kai Hoe Raymond
Interesting article here, Bernard.
However, having been a financial & management consultant for many years, I do understand the points you have made. There is always a deeper point.
In financing, financiers will give money to those who want the money as opposed to those who need the money. You may think I am playing with words, but I am not.
I find it very worrying that we should just accept money that comes our way. Certainly you have to consider whether you have use for that money, whether that money can grow the company. Or if you can get that equivalent amount of money from bank loans instead if the nature of the development has very short financial payback cycle.
Also, in financing market, whenever we hear of people who don’t need the extra money, we would say to them, it is the best time to get more money then. After all, when you really need the money it is harder to get them.
Aug 4th, 2007
Melvin
That’s quite a provocative view of whether one should just accept investor’s money because if reject those money will make the investor’ lose face. This view doesn’t take consideration of the fact that there are many investors in the market willing to inject money into someone’s business. It also presume that investor know more about entrepreneur’s business than entrepreneur’s themselves and therefore will be smarter to accept the investor’s money and help.
Having some business on my own, I tell of my experience using some scenario
Let’s say John setup a business.
Let’s say that there are ten reputable investors willing to pump money into John’s business but does that mean that John must accept all the ten investors’ money ? John will be smart to realize that large amount of money pump in means a large amount of equity given away, and lot of accountability and more restricted freedom to do the thing the way he want. Probably, John may endup having pacifying the investors than focus on the business, and in the end business will suffer, and investor pull out in the end, trying to claim as much money as possible.
Therefore, a wise investor must never take rejection personal and must view from business point of view , and John realized that in business, you win friends and lose friends as well and often because business become personal. Giving face is secondary compare to actual value creation between those party in business in long term.
John eventually have to choose what’s best route for him.
John do meet investors regularly and knew that investor will learn as much from him as he learn from investors. These are win-win situation. Investor shouldn’t feel that meeting is a waste of time if no deal is made but take the opportunity to build relationship and understand John’s situation, market, concern and John in same way do likewise. John will also help to open up network and contacts to investors as much as investors do likewise. Most of the time, deal are cancelled because after subsequent meeting, alignment and expectation could not be meet. John and investors should know this and be prepare to accept this and move on. When party want to venture into business, then both party must be willing to accept rejection and move on if criteria is not meet. It must never be personal. The reason people choose to be investor or entrepreneur is because they have choice and can make choice of who they invest in or be invested, so it is very important that both party must never violate or disrespect the party’s freedom of choice.
Investor should not have such thought like if you did not accept investment in me, then you must be my foe. A case of “If you are not my friend, then you must be my enemy”. These is very dangerous thought because one never know if the entrepreneur succeed one day and become influential. One bad blood led to another.
Most successful entrepreneurs I meet are very frugal and disciplined and does not take money blindly and spend lavishly. If they could do themselves and enjoy the freedom they have, they rather reap as much benefit from their hardwork. As such, most entrepreneur actually reject money more often than accept it. They take very calculated risk in that they meet selective investors and do ask for contact should their business scale and need money. And wise investors do give contact and help them, because by experience, they knew that entrepreneurs will help them in future opportunity through referral from other entrepreneurs if not himself. In other words, many entrepreneur prefer to bootstrap their business and yet meet with investors, VC and show their product to build more contacts and network.
In fact, entrepreneur respect other entrepreneur more than investor because they go through same kind of pain and struggle, and investor will end up with more opportunity helping the entrepreneur because those referral could be very valuable !
No self-respected entrepreneur like to feel that they are just merely tool to make money for others.
Investor will probably want to invest in business that they probably have hand-on experience before so that they understand the true nature of the business rather than just merely reading from magazine, blog, etc. Experience varies from place to place. and most of the time investors/entrepreneurs relationship go sour because investors enforce a certain way of working that seem logical and rational way but is in fact due to lack of understanding of how thing work in certain business.
Investor must never harbour the thought that entrepreneur are just people able to come out products with no sense of building scalable business. In fact, most entrepreneurs I know of, know how to build scaling business than investor because these entrepeneur are in fact knowledgable, highly practical , hand-on and control-freak !
Business is either build through money or contact. If one get can’t money, they ask for contact. It’s often that if entrepreneur take someone’s money, it ’s more that money and contact entrepreneur ask for ! Because many entrepreneurs are proactive and highly independent and resilience, they never give up, and even if he does not successfully ask for contact and network from a particular investor, he will move on to other ways to get network and contact.
On the other hand, entrepreneurs must be prepared to give up their freedom and flexiblity when they accept money from investor because investor expect to see concrete result within certain time frame or else they have the right to penalise the entrepreneur through having away more equity and losing some control. Investor want stability and consistency in business not dynamism.
Entrepreneurs must not be naive but take it that investor (unless the investor is some daddy or mummy of entrepreneur) invest in a business is to reap of profit over their initial investment, and that everything else remain secondary. Entrepreneur must learn also to think from business point of view and from investor’s expectation.
Aug 5th, 2007
Ng Kai Hoe Raymond
Melvin,
I am not so ready to agree with you when you say that investors want stability & consistency unless we specially qualify what they actually mean;
Actually even for investors, there are different markets, and stages of growth they may be looking at. There are some that invest in startup stage, which is a very financially risky activity. There are some that invest in Pre-IPO and stuff.
So it really depends, and besides, what is risky for one segment of investors may not be for another segment because they have the know-how to manage that specific problem that makes it risky for the other segment of investors.
There are also some investors that invest for strategic reasons, it may not be for the short term financial gains. Some investors may look at future M&A potential among the portfolio of investments they have.
Financing market in itself is very colourful, even in a dull Singapore.
Aug 6th, 2007
Melvin
Raymond, read on to see which angle I’m looking at.
If you really work with many entrepreneurs, you probably realize that investor are simply scare off by entrepreneur who will simply just take risk looking for potential business opportunity. To entrepreneur, it is something like if you don’t try, you won’t know. But to investors, their mind is always thought about potential risk of business opportunity and tend to take a risk-adverse view afterall they say it is their money.
For every risk that entrepreneur takes, investor worry about their investment. It’s very rare that investors simply park money into entrepreneur’s business and still willing to let an entrepreneur explore many business options. That’s why investor always love to have concrete plan to help regain their sanity, hhaaha and most want the entrepreneur to stay close to original plan. That’s why, I tend to say they prefer stability and consistency. Generally, what investors tell you before pumping money are always different after their investment, same wise for entrepreneurs. Money is a sentimental thing !
When I wrote about this comment, I trying to relate the actual inner working world of entrepreneurs and investors from my own experiences working with them. Investors may be strategically invest for some other reasons, but ultimately, they invest because of return on investment, whether it is long term or short term, and these alway qualified into some form of monetary value. Any asset is still value in term of money if they get liquidated, don’t they ?
Other people’s experience might be just different from me though.
Aug 6th, 2007
Ng Kai Hoe Raymond
Melvin,
Thanks for the fast reply. However, actually in my practice I just call them businessmen, I don’t call them entrepreneurs. Entrepreneurism is a state slogan, which I do not have much emotional attachment to. :)
I think it has something to do with the fact that I became a businessman way before the country encourages us to strike out on our own.
And still it depends on which market segment you are referring to. I know that there are investors complaining the investee are not taking enough risks, not doing enough activities. Seriously, if as a businessman you choose the wrong investor, then it is too bad for you. It is the job description of the businessman to select the right investor with the right terms and conditions.
Besides, how do you measure risk? Not spending == less risk? I have seen enough examples of not spending bringing about more risks. Risk itself is a whole school of study. I may write more on that when the opportunity comes.
Aug 6th, 2007
Melvin
Raymond, sometimes, the role have to be flexible. In appropiate time, entrepreneur will like to see themselves as businessman, and businessman like to see themselves as entrepreneur. Exhibit the characteristics of entrepreneurs and businessman where needed. The ability to use those characteristic at the right time is what make most business successful.
Therefore, it will not be that you have to be either one or the another at all time. You can choose when to be one or the another at appropiate times.
Aug 9th, 2007
Ng Kai Hoe Raymond
What I meant was more subtle than that. To me, I do not even see the difference between an entrepreneur & a businessman. Do you see any function a businessman is serving that an entrepreneur is not? Do you see any function that an entrepreneur is serving that a businessman is not?
It is a state slogan for it distinguishes the new age businessmen from those old hokkien pai businessmen.
In any case, I acknowledge the term and respect that people may describe businessmen using a space age term that is a product of a well orchestrated government marketing.
Aug 11th, 2007
Reply to “Should you tell your investor that you don’t need money?”