Some years ago, I was chastised by my almost-college-aged daughter when, during a discussion, I told her she was wrong.
She immediately retorted that just because I disagreed with her didn’t mean she was wrong. That stopped me in my tracks. Over the years, we have referred to that moment as a milestone in our relationship as she transitioned from a teen to an adult.
Her wisdom has special meaning for entrepreneurs seeking funding to help them grow their business. Because of the drive and determination needed for entrepreneurs to believe they can succeed, and because often they have developed world-class technology, they may listen too much to their own counsel.
Entrepreneurs often have preconceived ideas about the value proposition, business structure, valuations, market verticals and other matters that are not part of their unique competencies.
Twice recently, entrepreneurs have proposed to me funding their businesses in ways that had no chance of succeeding. One had expectations, or rather demands, for an unrealistically large amount of the equity, and the second proposed compensation for the executives that was so excessive as to be a deal-breaker.
I explained to the first that the technology boom had skewed many people’s perception of early stage funding. I said that a capital source would be unlikely to write a first-round multimillion dollar check in exchange for a few percentage points of the equity. At first, he refused to listen.
He didn’t like the answer. He wanted things his way, so I was just plain wrong.
When we looked at comparable current deals, he was able to see that the market dynamics had changed. To his credit, while he still didn’t like my answer, he stopped insisting I was wrong. We are now in the process of maximizing his equity position and funding the company.
The second entrepreneur, who wanted excessive compensation, insisted that since he developed the intellectual property, he and his team were entitled to whatever compensation they desired. He didn’t like hearing that no early stage investor was going to pay an untried executive of a start-up a salary of many hundreds of thousands of dollars per year.
I don’t blame him for not liking my answer. I spoiled his dream of a new Porsche. But just because he didn’t like my position didn’t mean it wasn’t true. His demands would be a deal-killer, and he didn’t want to hear that.
Unfortunately, I’ve been unable to convince him to rethink his demands and refused to take him on as a client. When he goes to another professional for help, I’ll bet he’ll get the same answer.
The bottom line is this: You might not like the answer, but it doesn’t mean it is wrong. That’s tough to accept, but vital to do. Erwin Bruder ([email protected]) is chief economist & managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext. 2220.
