In business, there are few things more painful than fundraising. As a private equity friend told me a few months ago, there's two kinds of people in this world: the ones who work for the money and ones who hold the money. Most of us work for the money.
In the startup world, entrepreneurs are constantly working for the money. The feeling of running out of cash is always imminent.
George Zimmer, the former Men's Wearhouse CEO, said that even a decade into operations, his business nearly failed running out of money. If it wasn't for - of all people - his mother investing $500,000, Zimmer would have gone bankrupt.
The whole scary episode "told me that my economic model probably was not the right model and it was from that problem that we actually redesigned the economic model," Zimmer said in this week's episode of Radiate. (You can listen to Zimmer tell his incredible story here on iTunes or here on SoundCloud)
All this leads to a well-known strategy in fundraising. If you can secure a big name like Jeff Bezos or Mark Cuban or a big-name VC, it's a housekeeping stamp of approval. Others may follow just simply to be in the same elite circle of people like that.
Except seller beware: sometimes that strategy can come back to haunt you at your next stage of fundraising.
Here's 3 reasons why:
1. You will forever be mentioned along with that name. Five years in, any time someone mentions your company they'll mention this big name in the same breath as your startup. Sometimes that makes you sound good and sometimes that overshadows what you do.
2. The big name doesn't invest in your next stage. Since you're associated with this big name, your next investors want to know why this big whale isn't chomping again. Is there something wrong with the growth? Why did he/she invest in the first place? Just be prepared for those questions.
3. The big name invests in your competitor. This is the worst. Say big name investor invested in your company because he's doing you a favor. Your kids went to school together, whatever it is. It's chump change for him. But then, he gets enamored with an amazing new startup and puts millions into it. Suddenly you look like exactly what people suspected - the recipient of a sympathy piece of cash. Rather than adding value to your company, he's just destroyed it. It's not his fault - hey, he was just doing you a favor.
None of this means you should turn down money from a billionaire or top-of-the-line VC. It just means as with most things in business, fundraising is like playing chess. You just have to anticipate a thousand different scenarios and make your moves knowing exactly what you're getting into. Keep your eyes wide open but take the money.
If you like this article, you'll love my new podcast, Radiate, featuring interviews with CEOs, entrepreneurs, and thought leaders. You can click on new episodes on iTunes, SoundCloud or on my website. www.betty-liu.com. Here is the RSS feed too. And please don't forget to REVIEW the podcast or contact me at firstname.lastname@example.org.