In this tight lending climate, entrepreneurs may be tempted by an investor’s offer of cash, even if it comes with strings attached.
Vlad Shmunis, the founder of RingCentral, an Internet company that serves small business owners, has an answer to that offer: Think carefully before you accept it.
Mr. Shmunis said that when he was trying to raise money for his start-up company eight years ago, the venture capitalists he approached would not invest unless he changed his business model. Instead of serving small business owners, they wanted him to aim at private consumers.
“We had a fairly solid vision of what we wanted this company to be,” he said, adding that he had built a previous start-up by selling software to small businesses and knew he could find strong demand in that market. But the investors did not agree. “Many V. C.’s just follow the leader, and for a time it was in vogue to just fund consumer-based plays.”
His complaint is echoed by other entrepreneurs. They tell of putting years into finding a business strategy that works and how their success attracts a professional investor. Then, while negotiating the terms of his involvement, the investor asks for changes. He might want to move a company’s headquarters or fire the chief financial officer. Or he might ask to replace one product line with another.
Especially in this weak economy, entrepreneurs may feel pressured to comply. And many times, complying is the smart thing to do because investors usually have more industry experience than the entrepreneurs they finance. Some entrepreneurs also cling to irrational ideas. But agreeing to such requests just because an investor offers cash is not always the best thing for the business, experts said.
“Often the investor’s advice isn’t the right advice; maybe it’s not fully informed,” said Winston J. Churchill, managing partner at SCP Partners, a private equity firm based near Philadelphia. “An entrepreneur has to be very careful from whom they take money, and what the person’s experience is.”
Mr. Shmunis said he gave up on finding an investor after a series of discouraging conversations. Instead, he said, he tapped his savings account, rented a tiny executive suite and worked without a salary for several years. Luckily for him, the investors were wrong: RingCentral now has almost 80,000 small business customers, each paying up to $100 a month in subscription fees. When he was finally ready to take money from investors two years ago, Mr. Shmunis raised $24 million — on his terms.
Many entrepreneurs, like Mr. Shmunis, prefer to finance their businesses themselves rather than tie their futures to a partner who now has a say in how the company is run. A few, however, learn their lesson the hard way.
Jason Brown said he was 26 years old in 1984 when a group of venture capitalists offered to buy into Cotton Comfort, the small chain of clothing stores he founded in Dallas six years earlier. The group, which included established investors, knew about his chain because they owned malls where he leased space, and they were impressed by how quickly he had increased sales.
Mr. Brown said he was wowed by their offer of $5 million, and agreed to give up a 46 percent stake in return for their money and management experience. But Mr. Brown said the investors tried to expand too rapidly by making large investments in the company’s headquarters and manufacturing equipment. When the economy slowed down in the late 1980s, Cotton Comfort could not pay its bills.
Source: http://www.nytimes.com/2009/01/29/business/smallbusiness/29sbiz.html?ref=smallbusiness
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