Investor Dilemmas

If entrepreneurs are the backbone of the economy than investors are like doctors. They act on a daily basis to help seeds grow into successful businesses. For one facing the business world alone the idea of asking for money might be foreign and awkward. It’s important that an entrepreneur looks past comfort and chooses the right financing for their specific situation.

            Wasserman lays out 3 major types of capital that are mandatory in the running of a business. The first is human capital which includes all the knowledge and labor at the firm’s command as they face competition in a market. The second is social capital which includes all the networks that the business must reach out to for advice e or financing. Financial capital is the final and most relevant in the minds of most entrepreneurs when considering who they want to receive aid from while growing their business. Most founders are unaware however that the location that they receive their financing from an have long term benefits or consequences. Like anything else in the early going of a business short term gains may come back to hurt the firm in the ed.

            The most common places that entrepreneurs raise money from are friends and family. These are often like gifts with little to no terms laid out regarding there payback. In addition, these investments tend to come from individuals that have little or no experience in the area the business wishes to enter. It’s extremely important that the entrepreneur considers the possibility of failure and speaks openly with friends and family before taking their money. If the business turns in a negative direction these investments can sometimes force the entrepreneur into an “all or nothing” mentality or ruin key social relationships all together. AN entrepreneur should only accept money from those close to them if they are absolutely sure that they can execute their business plan and have exhausted all their personal financial options.

            The second option for founders is the angel investor. These investors often have little to no experience in the field in question but may have larger social networks that the firm can access. In addition, these investments often lack the formality and longevity of venture capitalist investments and can therefore may not provide the proper amount of feedback and check on the entrepreneur. One of the major benefits of angel investors is that there are a large variety of angels that span all industries. This variety means that even someone launching a venture outside of the high risk, high reward markets can still find someone to share their venture. Finally, it is important to recognize that these investors often wish to take on a mentor role with those they invest in. This is a way to give back to the next generation or help guide a new business to success.

            The final option outside of debt financing is venture capitalists. These investors manage highly diversified portfolios and seek out high potential startups to maximize the gains for their constituents. Normally these investors are much more involved in the business process, often establishing boards of directors in which they personally wish to sit. These investments are also long term and tend to have the potential to provide consistent funding to firms that are showing positive results. The social networks that these firms vary as well with the larger firms offering less money for more equity due to their knowledge of business and extensive connections. These investments should not be taken on early in a firm’s life because they will often require massive portions of the equity to minimize their risk.

            Throughout the options the founder must decide whether their priorities and motivations lie with control or financial gains. IF the entrepreneur recognizes that there are others that can either run the business more effectively or offer more to the initial growth then it may be smarter to bring on larger investors to expedite initial growth. If the owner wishes to maintain their control and equity stake than it may be wiser to max out personal expenses and seek a smaller angel investor or family member with resources and experience. In the end it depends on the business in question and the motivation of the entrepreneur.

References

Herrenkohl, E. (2010). How to hire A-players finding the top people for your team – even if you don’t have a recruiting department. Hoboken, NJ: Wiley.

Wasserman, N. (2012). The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls that Can Sink A Startup. Princeton, NJ: Princeton University Press.