The term ‘respect the money’ in the finance world – particularly within venture capital circles – is frequently used. And it’s sound advice. Any group or individual willing to put up the capital, which will allow you to pursue a new venture, must be respected. And you ‘respect the money’ by following through on what you said you would do in the expected time frame. Better yet, under-promise and over-deliver from day one.
Definition of ADD money: A funding source that is in a rush to make money and has unrealistic timeline expectations. Also known as ‘selfish money’.
Don’t ever allow short-term thinkers the opportunity to fund your deal in the early stages! It’s a recipe for disaster and all but guarantees that your progressing male pattern baldness will kick into 6th gear.
ADD money will shatter morale and put an unnecessary level of stress on you. While pressure is good in business, making critical decisions based on producing short-term returns is not.
I’ve seen it too many times: a founder of a startup takes unnecessary risks in order to try and keep the impatient money happy, resulting in missed opportunities and a lack of innovation, putting the future of the company in jeopardy… worse yet, that impatient money becomes so demanding that it begins to bully the founder out of his/her role as Chief Executive. This stuff happens all the time. You can even see it on a large scale with blue chip firms being influenced by so-called activist investors.
An Example of ADD Money
I was recently in a meeting with a prospective funder for an early stage tech startup. He came with glowing reviews. During the meeting it was relayed by the founder of this tech startup to the potential funder that it would likely take 24 months before commercialization could be reached. Immediately the funder responded “Why would it take that long?” He continued, “you need to get this done in 9 to 12 months. Haven’t you been watching the markets lately?”
This funder was thinking solely about his own pocketbook, which won’t work for a startup. Sure, a funder’s main objective is to make money by investing early, but realistic expectations are a must. Company timelines can’t be altered to accommodate individual desires to make a quick buck.
Paul Samuelson once said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Needless to say, I encouraged the founder of the tech startup not to consider accepting that VC’s money, at least in the early stages. He was the definition of ADD money and had unrealistic expectations/demands.
How to Spot ADD Money
It’s very simple. When presenting to any VC, be crystal clear about your projected development timelines. And err on the side of caution. If you think it will take 15 months to go from R&D to having a patented prototype, tell them you believe it can be completed within 18 months. Remember, under-promise and over-deliver. If they scoff at that time frame without providing any solid solution to speeding things up, don’t accept their money. It won’t be worth the hassle. Making sure the money you collect understands the risks and has reasonable timeline expectations is paramount to your success, as well as theirs.
Treat the seed money you raise as if it is a commercial marriage. You are tied to that money for the long-term. And once you collect it, there is no early exit from the relationship without things getting really messy – just like a divorce.
The initial money you raise must be strategic. It must bring value to the company by opening doors with other industry experts that will help progress the development of your startup, not hinder it.