Money Comes in Many Shapes and Sizes
In the past few months, I have heard more than a handful of stories about financial commitments made that never showed up. What is shocking is many of these commitments have been made from funds that have yet to raise their own capital. They are not insignificant amounts of money.
The founders, most who are going through this the first time, believe that the commitments are real and then stop fund raising. Time passes and then the truth comes out. Well, it is going to take a few months because we actually don’t have the capital yet. How do you think employees would react to founders not being able to make payroll because they just have yet to raise the capital to pay them?
It is not just LP’s doing this to companies but LP’s doing this in funds to funds. I know of one LP who had signed documents with a founder for $1.5m and decided not to wire. What do you do but scream, scale down and regroup. Are these people just bad players who have zero idea how to behave or do they just not care as long as they can remain in the game?
I went to an event the other night with only founders around the table. We talked about the importance of good capital. How truly good investors can be game-changing for your company. They get it, they have been there, they understand the game and their advice is priceless. You don’t know how good that is until you get that.
Certainly if you need capital, you take it where you find it but do your research. If the investor isn’t a known entity, don’t stop raising capital until you have the money in the bank. I do believe in what goes around comes around. Play the game the way it is supposed to be played and that means do not hand out cash when your pocketbook is empty.
You know what it is? People are not willing to pay for quality anymore except in the case of a very clearly defined luxury good that is supported by social proof. Otherwise someone with a lower price (or what appears to be a better offer) ends up getting things (or the deal) because people believe they are getting a bargain. And honestly it’s very difficult to communicate that to many people and especially younger people that risk. They haven’t been burned. They don’t think it will happen to them. They misread things.The founders, most who are going through this the first time, believe that the commitments are real and then stop fund raising.Similar and applies to so many situations. Last week my daughter had told me she found the perfect apartment and put in an application. This was on Friday. I told her to continue to look over the weekend and put in the effort in case it didn’t go through for some reason. It was a hard sell to get her to do that but she did it. She didn’t need to (was approved) but I said just in case don’t be lazy. It’s called ‘insurance’.I had a person the other day come and look at some medical space to rent. Was a female entrepreneur that wanted a 2nd location. I actually spent over an hour talking to her (maybe close to 1.5 hours) and giving her business advice. (Which I enjoyed doing). She seemed super interested. She even texted the realtor that I was ‘so nice’ and in a genuine way. (Haha me nice?). So she seems ready to rent just get me a lease. I actually charge to draw up a lease ($250 even though I do the work myself). But before I even did that I texted her to get what I call ‘ping’ time. How quickly will she text back. So I texted her ‘just one question before I give you a proposal (which is just an email with some rough points) … are you willing to take any space in the office or just the back room’? The entire idea was simply to gauge how serious she was by how quickly she replied and what she said. Otherwise I am not going to even write a summary email. Well guess what? She never texted back. So I just saved time and effort (and apparently hasn’t returned the realtors calls either). https://uploads.disquscdn.c…
First, we agree. Do diligence on your investors. If you don’t have a lead, create your own term sheet.I was part of a deal in Chicago where one person bounced a check for $350K. Uhg.I am trying to understand this sentence; “It is not just LP’s doing this to companies but LP’s doing this in funds to funds. I know of one LP who had signed documents with a founder for $1.5m and decided not to wire” Does this mean that an LP in a VC fund was going to direct invest and then didn’t? Or, a VC fund committed and then didn’t? Or, did an LP commit to a VC fund and walk? Or something else? Doesn’t sound kosher no matter how you slice it but I am curious.
An LP committed to a VC fund (several) and walked.