When You’re Using Other People’s Money

Posted on March 11, 2008

Investors are easy to understand. They don’t care about CEO’s dreams and plans in the broad sense. They just want what they want, and what they want is financial results.  These are the questions to ask yourself before you ask for other people’s money.

There is nothing more relaxing to a cash-starved CEO than the arrival of a nice, big, fat check. Most of us do not have insomnia that night, knowing that payables will be paid, and that the doors will stay open.

So when we’ve been starving for a long time, we start thinking about bringing in other people’s money (or more other people’s money). We start thinking about it when we should be sleeping. Should it be debt? VC money? Private equity money? Angel money? Family money? Vendor prepayment money?

Wait.

You should know that all the people with money are selfish. Deep in their heart, all they want is a solid (or better) return on their money. They don’t care about CEO’s dreams and plans in the broad sense. They just want what they want, and what they want is financial results. In particular, they’ll want the financial results that you are about to promise them, and they want them on time. Even nice people who would make you feel comfortable and may over time feel like your friend and believe in your dream will become difficult and unhappy if they get a less than an expected return on their investment.

So with that negative, kind of greedy shadow cast upon people with money, I’d like to make a couple of points.

Are you certain that you need to ask for money? Life is not easy for those that use other people’s money. Other people often give money in small lumps, making you come back and get more over and over again after proving that you’re on plan. Debt has to get paid back and that hurts the bottom line (interest), and investors keep a close eye on your performance too (covenants). Correct: The grass is not necessarily greener for those using outside money.

Are you fully prepared to ask for money? The smart money (the folks that invest money for a living and know what they are doing) are really good at sizing up businesses and CEOs to see if they are well-run, have the experience they need, and can produce predictable results. You can’t start the conversation with them until you have a clear vision, a solid plan, and a team capable of executing that plan well. The people with money entrust their money with the CEO, and need to believe that he or she has it all under control and is primed for success. Otherwise, they’ll keep looking at alternative places to invest their money. The good news is that having a clear vision, planning, and laying the groundwork for great execution is something that needs to be done even if you don’t want a nickel of outside money. As to dumb money (widows and lottery winners that don’t know business) – stay away. They may give it to you more easily, but they get nervous, upset, confused and then angry more quickly, too, and often cause bigger headaches faster.

Will the goals of the money source you’ve chosen be aligned with your goals for the entire duration of the investment/loan? Maybe you do need outside money to achieve your goals. But if your source for money needs an exit in five years and your timeline for success is ten years, you’re bound to have a lot of grief at the five-year mark. VC funds typically have ten-year durations, and VCs want dramatic upside opportunity. Private equity firms typically look for an M&A exit in three to five years and want good enough of an outcome to push up the multiplier. Banks only want low-risk borrowers and will lend you money so long as you’re very healthy.

These are all very broad generalizations, and there are many flavors of each type of money source. Take the time and dig deeply to learn their true objectives now as well as in the future.

Now to apologize to my friends (and readers) who are bankers, VCs, angels, or who have money. I know that just like CEOs, you have a job and objectives. You take risks and expect appropriate rewards. The fact that you do it well and avoid bad risks and inappropriate investments (for you) is essential to our economy and the CEOs whom you fund. As people, you are nice, and as business partners, you are nice when things are on plan. I know that for you its miserable when you’re stuck in an investment that isn’t working for you. If I had a magic wand capable of getting all CEOs to only look for money when they should, to lay out realistic expectations, and to only look to the ideal source of money, life would be easier for you and everyone. It was in my selfish pursuit of a spicy introduction for this column to grab reader’s attention that I called you selfish. I’m sorry.

Takeaways:

• Make sure you really need to borrow money before going out and getting it.
• Investors will want to see your business plan – and it better be solid.
• To avoid unexpected grief, understand what your investors expect and when they expect it.