VOL. 128 | NO. 123 | Tuesday, June 25, 2013
Some Reasons Why (Not) to Take the Money and Run
By Matthew S. Heiter
The most exhilarating, stressful, satisfying, frustrating, rewarding and anxious event for an entrepreneur is raising capital to fund his business. Statistics show that less than a third of startups actually receive funding. With these odds, why would anyone ever turn down money?
Sometimes that money comes with strings or conditions that are not only onerous, but could ultimately stunt the growth of the business. The entrepreneur must try to look past the dollar signs and examine closely what may be lurking behind them.
The following are several reasons why the entrepreneur should think twice about taking money proffered and in some instances, turn it down completely.
There are other options. The entrepreneur who has been knocking on multiple doors and hearing “no” relentlessly is very tempted to take the first money offered. But before taking the first cash offered, the entrepreneur should consider other sources of capital. For example, there may be government or state programs set up to fund his particular business. This money is sometimes “free money,” in that it comes in the form of grants, which don’t have to be paid back or be given in exchange for equity.
Is it enough or too much? Again, many of you are probably thinking, “Yeah, right, Matt, like there is ever too much.” Well, there can be. For example, if a business needs only $500,000 to get to positive cash flow, taking an investment of $1 million adds an additional $500,000 worth of dilution that simply isn’t necessary. If it’s not enough money, the entrepreneur may end up running out of it, not yet obtaining cash flow positive and going back to the well for more funding. The danger here is that that well may be dry or, more likely, the terms of that second round of funding will be much more dilutive than the first.
Who’s offering the funding and what else can they contribute? Sometimes, though rare, money is all that is needed. For the typical startup, an investor may bring guidance and expertise that the founders don’t otherwise have, such as marketing or accounting. So look hard at what else the investor brings to the table besides money. If it is nothing but the dollars, look for someone who can bring more.
You’re not fully, 100 percent, all in, committed to the business. Before the cash is handed over, the entrepreneur should take a good, hard look at themselves and the business to reconfirm the commitment. Investors are more than willing to make second bets on entrepreneurs who may have failed in their first effort, so long as that effort is perceived to have been a fully committed, all-in, 100 percent effort.
After all, the old saying is true, investors invest both in the people and the business. Without a dynamic combination of both, you may not ever have the opportunity again to decide whether to take the money, or not, and run.
Matthew S. Heiter is a shareholder with the Memphis office of Baker, Donelson, Bearman, Caldwell & Berkowitz PC.