September 22, 2008

Other People’s Money

You should plan on doing well before doing good.

I know all of my recent posts have a “don’t to this” theme to them, but there are some common mistakes that I have seen that really make it difficult to get funded, besides, there are a lot of smarter people than me giving out all kinds of advice to entrepreneurs telling them what they should do. For now, I will continue to be the scold.

Robin HoodWould-be entrepreneurs tend to be shockingly optimistic. This is generally a good thing but it can lead to big mistakes if not tempered with a appreciation of reality. Case in point: Don’t put charitable giving into your business plan. A business plan needs to lead to the maximum possible return for the investor. This is already about the riskiest investment around and there really is no room for reducing returns even more. Elements that put any strain on returns that are not absolutely critical only increase risk. This necessitates that charity be separated from your start up plan. Do not tell your investors that you are going to spend their money to pay your janitors $20/hour or that your exit strategy is to give half of the company to a ministry serving unwed mothers or part of your plan is to do pro bono urban renewal with the start up capital. These are actual examples I have seen in my clients business plans just this summer.

The standard expectation will be that this type of work is done through the entrepreneurs as individuals and the investors as individuals. The company exists to maximize return for the shareholders who can do with it what they wish.

Any company’s customers should be better off because of its’ products. Many enterprises naturally benefit their communities in ways not directly related to their products. Business should by their very nature contribute to society (if you’re in a business and it doesn’t, get out now.) But early stage companies need to be focused on maximizing the return of their shareholders. The risks are too high to do anything else.

Also, here is the best “how to pitch” video I have yet seen and it’s from one of the members of the FundingUniverse investor network.