You may consider me an unexpected source for such a discovery, but I’d like to announce that I’ve stumbled on an as-yet undocumented law of physics.
Unlike others that help us understand the age of the universe, speed of light and whatnot, this may be the first law of physics that pertains to money – and specifically the ability of entrepreneurs to raise it.
We’ll call it Price’s First Law: Your ability to raise startup capital is inversely proportional to your need.
Since the Nobel Committee’s online application form required a graph, I’ve created one.
For you non-physicists, here’s how to interpret this:
- Corollary #1 – If your startup is flush, money people will be tripping over themselves to fund you. If your business has plenty of cash, a product that’s shipping, and paying customers – then angels, VCs and banks will be seeking you out asking how they can help.
Photo: Jim Price
Corollary #2 – If your startup is poor, you’re radioactive to money people. If you’re just getting launched, struggling to finance the development of your first product, or otherwise low on funds, investors will avoid you like the Chernobyl.
You see, investors – whether they be angel investors (high-net-worth individuals), venture capitalists or corporate investment arms – generally hate putting money down on unproven concepts. So, whereas there’s a broad belief among entrepreneurs and startup teams is that if you’ve got a strong idea, a well-documented business plan and a strong team, you ought to be able to raise financing for your startup – that’s surprisingly not the case!
What you’ll find is that it’s the very rare investor who wants to be the first money in on a deal. And it’s the very rare investor who likes being the only source of money in on the deal.
This all sounds frustratingly circular, doesn’t it? It is. It’s a proverbial Catch 22. When talking to potential investors as entrepreneurs, we tend to hear a lot of, “I’d like to keep in touch,” “Let us know when you’ve got your product launched,” and “We might be interested in investing once you have a strong customer base.”
Which sounds an awful lot like, “We might consider investing once you no longer need our money”!
Where does this newly-documented law of physics lead us? To realise that we entrepreneurs need to be clever not just about our product, our business model and our go-to-market strategy, but with our early-stage financing strategy as well. More on this in future posts.
Jim Price is a serial entrepreneur and Adjunct Lecturer of Entrepreneurial Studies at the Zell Lurie Institute at The University of Michigan Ross School of Business. ©2012, James D. Price.
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