Dave Berkus gives Best advice entrepreneurs never follow. So true, especially the borrowing of money from the family.
<Video Transcription – Dave Berkus with Eye on Business>
This is Dave Berkus, with Eye on Business. Today we’re gonna talk about the Best advice entrepreneurs never follow. Let me tell you a few short hair raising stories of entrepreneurs who raised money and regretted it later. Here is some of the rules that entrepreneurs almost always ignore to their own peril.
Rules Entrepreneurs Always ignore
Don’t take money from relatives who can’t afford to walk away without remorse. Do take money from the experienced family members, only after you asked them if they’re sure 3 or 4 times, that they’re willing to invest. But the third time you can be sure that they are just being overly emotional or feel they can say no. Also if things go south, they’re more likely to remember that you weren’t pushy and that you gave them 3 or 4 more chances. Is a common expectation among entrepreneurs that seed money from family is great, letting close relatives and on the ground floor of a new deal. Well the problem because, comes if the business fails. Some relatives believes that a family bond is an insurance policy, and that all investments and notes will always be re-payed, no matter what the circumstance. Consider whether the family member being asked to invest, has the capacity to walk away happily from a lost cause.
Is don’t take money especially startup loans, from unsophisticated investors. I was a co-lender and assume the chairmanship of a young startup where the entrepreneur’s cousin also lend money into the same terms as I did, and when the business failed, the cousin sued his own relative and me and my wife, who didn’t even know the name of the players, and even my family trust and Estate Planning vehicle with no separate assets. It took several times the value of the cousins loan in legal fees alone and the settlement just two extradate my interests from the sue that had no merit, but would have cost hundreds of thousands of dollars just to go to trial.
Do take loans from unsophisticated investors or from sophisticated investors only after you have tried everything to get them to purchase equity instead of a loan, and always with clear wording on automatic loan extensions if you’re gonna take a loan. Even if you’re making progress but need additional time to meet the full set of goals.
Don’t let yourself talk yourself into a high valuation for the first round of financing for any reason, no matter what. Even if your hair are on fire and even if you’re idea is worth billions. The lesson is that no one should price them too hard, and is not only hard teach, but is ignored by entrepreneurs on a regular basis. Early investors, who don’t have the experience to compare values, or ask tough questions, or except the word of the entrepreneur as to evaluations. They’re the ones that are the most damaged when this happens. Later investors will enter the picture only after ensuring that the valuation is reasonable and comparable with other opportunities for their money. And often, they’re gonna walk for a deal that has a higher valuation in an earlier round just to keep from having to worry about arguing with the earlier investors. It’s not just worthy effort, to argue whether the earlier investors when there is so many other deals that call for sophisticated investors money. It’s just not worth walking away.
Try not to take dumb money where the investor, or lender suppliers nothing other than cash. There are five attributes of great investors. Again I wrote this in the book, quite a long time ago, extending the runway is the money under reasonable terms, their ability to guide you with advice that you, the entrepreneur, can take to grow a company, to knowledge of how to best use a corporate resource, in time. Their ability to extend relationships with others that will help you get there faster, the speed of growth. Those are additional assets that are worth as much as the money that has been offered himself.
Don’t walk away from rejection by experienced investors thinking that they’re stupid or just don’t get it. Most of us in the world of early stage investing have seen thousands of proposals. I must have seen 7 or 8000 myself. Good and bad and even if we don’t seem to like the brilliant idea that you have or buy into this value, we may be comparing it to previous lasted investments or industry experiences far behind yours.
Do ask sets of aggressively deeper questions to get down to the heart of why they didn’t invest. Every contact should be a learning experience and those with a sophisticated investors are doubly valuable. A well placed know could well be a step to the correct cause and a later yes.
In Conclusion for Best advice entrepreneurs never follow
Well, those are pieces of advice from someone who has been investing for a long time to people who often have never seen the opportunity to see a sophisticated investor, and what that investor can do. But here is my wish for you if you are looking for money. May you do it in an organised way. In a way that follows these rules that we just talked about today, and may you be successful. This is Dave Berkus, for the business report of Eye on Business.