Social Traffic | Social Media Marketing

Cash Investments

One of the challenges of a founder is to keep the cash burn-rate (monthly expense rate) at a point that buy’s them enough time to establish a critical mass of traction. This is needed to take their story to another level to maintain the audience’s attention. Just like a good movie if a start-ups story loses momentum, its audience’s interest dissipates. If the better part of an audience includes investors, asking for another round of funding becomes challenging once they lose faith in the storyline.

Ultimately, regardless of a stakeholder’s investment currency (time, goods, services, or cash), all returns come in the form of shares in the success of the story. Cash is often the most difficult form of capital to raise, because sophisticated investors are the majority who have access to large sums of cash and it’s not by accident. These investors know how to invest in good opportunities at a point in the storyline that amounts to enjoying the highest return at the least risk, at a measured level. This places the founder in a conundrum of having little access to seed capital when they need it the most.

Start up founder’s are better off funding the early stages of an opportunity themselves, along with capital invested by friends, family and or trusted associates or partners to get their story to a point where sophisticated investors are prepared to buy in. In saying that, accepting money from unsophisticated investors is time consuming and risky, it can often end in tears if the story does not go as planned. These people are not as experienced in the risks associated with investing as are sophisticated investors so it’s safe to say they are investing in the person (founder) more so than anything else.

Sophisticated investors know the risks, they know how to cover themselves and they accept the down side to risk. Unsophisticated investors often don’t.

A founder must be careful to disclose all the risks, they must spell out the down side to an investment and make it clear that the higher the potential gain the greater the chance that any money invested will be written down to $0, that they can lose their pants. It must always be made clear that investing in a start-up is not a secure investment like placing money in a fixed deposit bank account where it will safely return a small margin year in, year out. This is business economics 101 – the higher the potential returns, the higher the risk. As you can imagine, having to tell this at a time when your objective is to promote the opportunity is a borderline conflict of interest. Navigating these waters safely requires an experienced head.

Time or value investments:

Founders will usually have to improvise and trade above market rates in share deals in their company as incentives or in lieu of wages, goods and services to attract enough resources to lift their story off the ground. Share deals are a tricky business (in my experience) and only work when dealing with people who are already successful enough to be sophisticated cash investors anyway. It requires a certain mindset from the stakeholder for share deals to work. The dynamics of such a deal must be understood well enough before the deal can be viewed the way it must be to work.

Quite often individuals entering into these deals don’t have this level of understanding. If you pay staff or suppliers shares, they are seen to be far less valuable to them, if not completely worthless whenever the going gets tough. If the story looks in danger of fading away, their interests dissipate, and since the success of the story is dependent on all stakeholders digging in when the going gets tough, deals like this, if entered into with the wrong people, will make an opportunity vulnerable. Yet initially those same shares as a currency had a perceived value attributed to them that was high enough for the stakeholder to risk their investment in time, goods or services when the deal was made.

The problem here is that when the going gets tough; the founder most needs their key stakeholders to stand behind them, to dig in, to fight for the story’s survival. Although a start-up’s story will traverse many troughs where it looks like falling, all great stories must and will always come out the other side better and stronger for having been a part of and won the fight.

Under these kinds of incentive deals however, when the going gets tough, they adopt a mind set of “the ‘founders’ opportunity is sinking, that they are earning peanuts, why hang around?”. This mindset always flies in the face of the objective that is for these same people to take a view that it’s “their” opportunity sinking, their stock options (that could quadruple their annual earnings) are sliding in value, that they should take off their gloves and start swinging to save it.

It’s not about the money:

Entrepreneurs know that a start-ups story will always traverse peaks and troughs in its early life cycle as all great stories do. They also know that it’s the fighting through and coming out the other side that adds the value to what is achieved. If it were easy, everyone would be doing it, thus any gains for achieving it will not be valuable. Entrepreneurs go into their opportunities expecting a fight, yet most employees that enter into stock options or other stock based incentive deals don’t. Sure, if the start-up story takes off and the opportunities perceived value remains bullish throughout the early phases, then these deals will always work but life was never meant to be that easy.

Regardless of how most conversations in business are about the money side of business, cash flow, bottom lines, shares and capital gains; it’s my strong belief that deep down, it’s not really about the money. I have been in this situation more than once and I stand by my belief that as much as it sounds like it is, this is not about the money. Although in their minds those who retreat in such situations will think it’s about the money, it’s not. Allow me to explain…

If the start-up story was a good story shaping up to become a great story – like for example, a company that had run out of cash investors (the one angle investor had gone dry), yet the technology being developed had proven itself as a concept, it was shaving 25% off a global industries (potential) production costs, was patented, is without competitors, had the best engineers in the world leading development, had a great board of directors and a well respected CEO leading the executive team; then those stakeholders who could afford to fund their own cost of living, would stay put, they would continue to work without cash in return for a larger stake in the company.

I believe they would do this primarily to ensure their personal stories became great stories of absorbing risk, hanging in there, riding through the tough patches, working without money for 12+ months – all that only to secure the companies success, and in so doing securing a larger share in the company (that could bring them reward for their vision and risk). The individual stories will be better stories for having become a larger part of the companies (the start-ups story) success through their actions.

Now some will say these people were motivated by the fact they could taste a larger, safer return on their time (being invested without wages) so indirectly it’s still the money that drove them to act. Having worked in this space for over 20 years now, I don’t believe that to be true. True for some but only because they know money chases success, they know that a cash windfall represents huge success which is what makes their story great.

I believe money is the measure that “some people” strive to attain to reflect the level of success they reach. I don’t believe that money is the measure that “all people” strive to attain as a reflection of their success. I know this, “all people” are in the business of building their life story and the people who take risks to ensure their story becomes great are not motivated by money, they are motivated by the opportunity “to build a great story” for themselves.

People working with a mindset of “this is just work – I have no stake in it – I want to put in the minimum required effort – I just want to work for 8 hrs a day and go home to my family” are working to survive. Their work is not their story, their life story lies in their hobby, their sport, their family, their social life or their love life. What they do at work is a means to survive, to have a roof over their head, to eat, and to finance their real passion. The time these people spend at work goes much slower than the people lucky enough to be building their life story whilst earning a living as part of it (or earning a living to finance their real passion). Those people who do not have a passion at all need to find one or run the risk of being eternally lost.

Now all things considered there is an interesting trade-off when negotiating deals with staff for a start-up: top notch people often want and can demand a balanced pay deal, a fair cash remuneration and good share incentive. If attracting talented people to work for less cash compensated by receiving more stock in the company you must start viewing the individuals as both investors and employee’s.

The same rules apply, a founder would need their story to be red hot to attract interested listeners who would need to buy into the story (opportunity) whole heartedly to be prepared to invest more of their skin (for a bigger reward as a founding principle upon success) in the game. As with any other investor these potential investor / executives would need to be made aware of the risks, if the story is not carried through to a cash flow positive business they would lose their investment in time.

Outside of the usual risks associated with a normal start-up, the biggest risk in building an entire company on the back of deal’s like the one described above is that if the going gets tough, the team may not stand and fight. On the contrary, if the story grows into a successful corporation an exit strategy would be complex. A trade sale or IPO would see a lot of the key people become very wealthy overnight, they could potentially lose interest in continuing to work long hours under new ownership which could be a problem for any sophisticated investor(s) able to foresee such issues.

Let me know your experiences and opinions in the comments field.

If you would like to Join the Social Traffic opportunity please sign up on our list to receive email instructions on how to get involved.

Simon U Ford (SUF.EDBD)

Visit my “event line blogs”

Social Traffic – The book

If you enjoyed this post, please consider leaving a comment or subscribe to the feed and get future articles delivered to your feed reader.