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subject: Fred Got Funded - And He Hasnt Had A Good Day Since [print this page]

Most entrepreneurs dream of the day that the investors check clears and they have the funding to grow their business. It is a day that they struggle to achieve. Most put in long hours of preparation. They polish and re-polish their elevator speech and dog-and-pony show. The slide stack is revised and re-revised. The diligent ones even look to their own performance and appearance during the presentations to find ways to improve results and finally greet that sunrise on funding day.

Fred was one of those types. He lead his team on a magnificent money hunt. Over the course of about six months, they probably made two dozen presentations before finding an angel investor willing to write a check. They went into that last meeting in full stride. Fred and his team had honed their presentation skills to a fine point. They had developed effective responses to all the important questions and were able to, easily and professionally, respond to every question. Freds team was the epitome of persuasiveness. In the broad scheme of things, they only had one weakness - Freds business idea was not ready for prime time. They had not done the spade work to mature the business model - particularly the revenue model.

The Short Honeymoon

The first months after funding were euphoric for both Freds team and the angel investor who had funded the company. Sure, there were some rough spots; the investor seemed more intrusive than Fred had anticipated and customers were not responding to the value proposition as anticipated. But that is just the fog of a start up, Fred observed. The team was working out how to interact with the investor. The investor was working out how to work with Freds team. Everything would work out in the end.

One major bump in the road did cause Fred some concern. The investor was much more focused on the numbers than Fred had anticipated. He seemed to see the company in terms of spreadsheets and constantly pressured the financial person on the team to come up with more and more sophisticated analysis of the numbers. It finally got so bad that the controller quit. The first member of the team left after only two months. Good riddance, was the investors response, I have somebody who will do a far better job. When Fred attempted to recruit a new financial member for his team, he got a shock. The investor showed him that the funding agreement required investor approval for major hires and the investor would only approve his anointed candidate. For Fred, the question became who is running this company? For the investor, the statement was I am.

The Straw ...

While the struggle over control was going on, something else began to become clear. Fred and his team had spent so much energy and focus on perfecting their investor presentation that they had neglected to refine and test their business model. Over the six months prior to funding Fred had spent almost all of his time chasing money. He had neglected the developing contacts with potential customers. As more and more of his team were drawn into the money chase, they ceased to evolve their understanding to the business and its value proposition. They became very good at selling what they had - but what they had was not sufficient to become a profitable business.

That straw that broke the camels back was the need for the team to go back to the drawing boards and redesign the value proposition. Instead of using the funding to establish a market position, the team drew salaries and revamped the business plan. As the bank balance diminished the tension between the investor and Freds team increased. Eventually, things erupted into open warfare. The investor accused Fred and his team of conning him into investing in a poorly formed and tested idea. Fred defended himself and his team. They were doing the best they could under the circumstances. The investors intrusive tendencies had caused a drop in morale. The new financial person was not fitting into the team. Some of the key team members were thinking of leaving.

May I Have the Mediator Please

There is often very little to do in such situations but try to get the parties separated. Tragic experiences are sometimes best left behind and all parties are better off if they can lick their wounds and move on. I was asked to intervene in this situation by the investor. Even though the investor suggested my involvement, Fred welcomed it. From his point of view, there had to be some relief no matter what the source. Things were falling apart. It did not take long for me to present initial findings:

The focus on the money chase and then the use of the funding had been very bad for Freds team. They lost their entrepreneurial edge. Instead of thinking how to build a business - of new ways to implement on a shoestring - they had focused on the need to convince an investor to write a check. Their tendency to think creatively and to focus on innovating their space was substantially reduced and eventually virtually eliminated by the pressures of the money chase.

Freds team came to think of their most important audience as the investor community instead of their base of potential customers. They spent a lot of time trying to figure out how to make the company attractive to investors and not nearly as much time trying to figure out how to make the companys value proposition attractive to potential customers. The result was that they won the battle but were in danger of losing the war.

The investor had substantially overstep his prerogatives and had acted as a shadow CEO. His passion for financial analysis had overridden prudence. After writing the check, he should have reduced his footprint and became much less of a distraction. In other words, he should have let Fred and his team get about the business of building a business. He was, after all, only an investor and not a member of the management team. But that did not happen. Instead, he became a major distraction and eventually destabilized Freds team.

Once the focus shifted to restructuring the value proposition, the investor found himself in the middle of a re-development process. The team was doing what they should have done before embarking on the money chase - they were trying to figure out how to build a business out of their vision. But, this was not what the investor signed on for. He expected that this work would have been done before funding. He had a point, but he was also culpable as a facilitator of an inadequate process. After all, he invested before it was prudent to do so.

Facing Reality Often Means Looking in the Mirror

There were no smiles in the room after I had presented my findings. Both the investor and Freds team had major roles in creating the train wreck. The question was, now what do we do? That was going to be the hard part because there were no easy or painless solutions.

Look, I said, there are only a few ways forward that make any sense. The first is to put the company out of its misery; declare bankruptcy and close it down. You can then work out who owes whom what. The second is to renegotiate your understanding and find a new way forward. That would require both sides to find reasons for doing so. I would be glad to facilitate that process but would insist on certain undertakings from both sides beforehand. The third option is to reach an agreement that allows you to go your separate ways without closing the company. That would involve the management team buying out the investor. It is not possible that the investor could be made whole if that means returning the funds advanced. But there may be alternative arrangements that would make sense.

It took a couple of days for both sides to sort out their options and preferences but they finally decided on the third way forward. We set about negotiating the terms of an amicable separation. But that is a story for another time. For now, the lesson I want to highlight is -

Be careful what you wish for. Wishing and having are two very different things.

Dr. Earl R. Smith II

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Related Articles:

Of Course The Tragic Mistake Part One: Diagnosis

Of Course The Tragic Mistake Part Two: Designing the Fix

Of Course The Tragic Mistake Part Three: Let the Coaching Begin

Of Course The Tragic Mistake Part Four: To Be Or Not To Be

Investors Are Human Too

The Money Chase: Breaking the Truce

by: Chief

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