Oct
04

Entrepreneurial Planning Blog Topic Seven

William Casey Asbill-Beck

ENT – 600: Entrepreneurial Planning

 

Blog Topic Seven

 

 

Discuss investor dilemmas (Chapter 9, The Founder’s Dilemmas).

 

To survive and grow, startups need human capital, social capital and financial capital.  This how Chapter nine of the Founder’s Dilemmas begins.  Enter the Investor and enjoy the rewards and added risks.  One can also choose to self-fund their projects instead of taking money from outside investors.

Self-funded projects are possible but Wasserman points out they can be extremely challenging.  Although one may keep more of the control by self-funding, covering startup cost can be expensive and not allow time for the business to grow.

As investors become a desirable option, there are three categories of investors to choose from; Friends and Family, Angel Investors, and Venture Capitalist.  In the startup stages, when one is looking towards close network contacts for resources.  Friends and family can be turned to for money.  This form of investment early on can be crucial, but it comes with certain limitations.  Although this network may held with financial capital, they will not always have the experience and expertise that may come with other investors.

Angel investors contribute their own money even when they do not directly know a business founder.  Usually they can be reached early in startup development for investment.  This can be a better option than friends and family because angel investor are more financially driven.  Human capital is another important factor when looking for investors.  Angel investors will come with more human capital than most friends and family.  This is important if considering attracting the attention of a Venture Capitalist.  There are many advantages angel investors can bring to the table but they come with added risk compared to friends and family.  Because there is usually no prior social relationship, teamwork can prove challenging.

Although they are the most challenging investors to reach, venture capitalist can provide founders with more financial, social, and human capital than friends, family, and angel investors.  Venture capitalist also comes with the most added risk to your control of the business.  These investments come with getting your business plan evaluated and approved before being considered.  After approval, venture capitalist will research and investigate businesses in order to ascertain their potential worth.  Because of this added amount of investor involvement, larger investments are made and professional expertise are added to the talent pool.   Once again we see the increase in investment amount and investor participation correlate to an decrease in the original founder’s control.

Of all the chapters reviewed so far, this seems to me to contain the most amount of risk compared to other decisions.  Financial capital is required for startups to grow and it appears statistically unrealistic to operate most businesses completely self funded.  Therefore one is forced to accept new business partners and investors.  Both of these options come with added risk.  In conclusion, owning and operating a business is inherently risky.

Comments

  1. Yes, I would agree owning and operating a business is inherently risky. But with the risk of owning and operating a business comes the possibility of rewards. Rewards on many other levels than just financial, compared to being an employee.

    The investor, whether they be family or friends, angel investors, or venture capitalists are taking on significant risk as well. The investor is demanding a degree of control to manage his risk, and ensure his investment has a positive outcome.

  2. William,

    I agree that this topic is by far the most risky of decisions we’ve discussed in terms of entrepreneurial planning. It’s interesting how we’ve made it back full-circle from the beginning topics in this course. In week one we discussed whether or not we were a “risk versus king” founder, which has proved to have implications for all other subsequent decisions, including that of seeking investors. I entitled my post on this topic as “Balancing the Funding Equation of Your Startup.” which I think is a good metaphor for our investor decisions. There’s always a trade off of whether or not we want to retain more control, or if we want to sacrifice some of that control in order to see greater returns of growth and potential success. Personally, just doing the research about possible sources of funding and the risks associated with each, as you have done here, has made me realize how inherently risky it is to own and operate a business in general. It’s a bit intimidating to say the least!

    Thanks,

    Ellie Shown

  3. Some entrepreneurs I know once told me to avoid using my own money at all cost. Owning a business is a very risky endeavor. It makes sense on some level to commit as little as possible financially but if you have a great idea, experienced management team, and a strong work ethic shouldn’t you try to retain as much equity as you can by investing your own money?

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