A d d u c e n t

A new client prospect answered a question that I ask to gage where they are at in the process of raising money for their business.

Question: “Have you turned down any funding offers in the past six months?”

Answer: “Yes, a private investor offered $500,000 for 50% of the Company and 100% of the online rights giving us a 50% profit royalty. In this case, I felt it was the wrong angel investor with the wrong thought process looking to play on our need for capital, which is not someone I wish to work with long or short term.”

This is from an entrepreneur, who has developed multiple products for a specific niche, that seems to do a better job than the competing products but those products are from much larger well-capitalized competitors.  Let’s look closer at the entrepreneur’s situation:

• They formed their company 4 years ago and have generated less than $75,000 in revenue, in total, over that 4-year period. 
• Over that time, they have lost spent to twice that amount.
• They have been looking for capital since they formed the business (without success). 
• They still have not penetrated their target market. 
• They have serious competition (who has a lot more money and marketing muscle). 
• They need capital.   

Given the above points to consider, why would they turn down the money?

I understand the emotion that went into their decision.  They felt that the investors had an advantage on them and was trying to carve out too fat of a deal for themselves.  Not an uncommon thing with angel investors and venture capital.  This created an emotional response.  But sometimes, in business, you have to take emotion out of the equation. 

As an entrepreneur, creative person, inventor or developer of products there is basic question you need to answer:

Do you want to own a business or do you want to make money?

Most of us will acknowledge that owning, managing and building a business takes time, effort, commitment and money.  Very often, a lot of each is spent over a long period.  Just being in business does not guarantee you will make a profit or any money from it.  Not everyone has the skills to be a successful entrepreneur.

Think about it. 

If you are a creative person, inventor or product developer (or a savvy marketing person who can identify a niche and contract out the product development and retain ownership of the product) … are your skills best suited to start, manage and build a company?

Or are they best used to create and develop products?

Here’s another question to answer or consider:

Is it better to have 50% of something with value potential (and $500,000 in your pocket) … or 100% of something that has yet to develop into any value for you (and may not develop without capital)?

In my opinion, if you can create multiple products, putting forth the time, energy and money that goes into the part of the business that does not pertain to creating the products … is a dilution of your best value.

In this case, the investor apparently has the business background and ability to execute and get the product rolled-out and in the marketplace better than it has to date (or why put $500,000 into it).  They can do something that the entrepreneur has not been able to do yet.  They bring that value (along with the money).

There is more to check out, and specifically there are many ways for the entrepreneurs to protect themselves so that the situation is not a “predatory” one.   But a licensing deal like this client prospect passed on would probably be the smart move to accept given their circumstances and that they do have several products developed and have future development capability.  By accepting the deal, they can make money without further financial exposure.

This is something I discuss with clients and client prospects to help them prepare for such decisions:

Bottom line (and this is a very important thing in business) entrepreneurs and start-up/early-stage business owners with products they have created as the basis for their business, need to think things through when making decisions about bringing in an angel investor and answer the questions:

Do you want to own a business or do you want to make money?

Is it better to have 50% of something (with financial backing to make it valuable to you) or 100% of something that has yet to develop and without capital may not turn into any value for you?

The answer to these two simple questions can dictate the success and financial rewards of your venture.