For those who have heard me speak publicly, privately or any moment in between, this phrase is my most common and succinct advice to the would-be Entrepreneur. “If you have to pick up the phone more than once to raise money – you shouldn’t be raising money.”
For a wordy guy like me, it’s hard to believe I boiled it down to a sentence, as most would have expected an entire unpublished book about it. However, publishing is hard and you are very busy and important so I’m doing my best to boil it down to the best bits.
However, I didn’t realize that in boiling it down to a single sentence, it could leave a lot of room for misunderstanding. What I realize is it’s not so much “misunderstanding” as “Yeah…. but!”. There is no such thing as “Yeah… but!” There is “Yeah” – which would be to claim experience in these matters and “But!” which alters the “Yeah” to doesn’t.
Following a recent conference where I gave this advice, I’ve had a lot of people reach out for clarity. “Do you mean one phone call AFTER you made 80 calls?” “What if you have TWO people who want to give you money, how do you pick one?” “What if I use email?”…. OK, I made that last one up but it’s pretty funny.
So to help clarify what I mean and how I’ve seen it in action, here’s why I believe what I do, based on my experience from 2012 – today. Here is a post I took from the yet to be published book…
Chapter 10: If You Have to Pick Up the Phone More Than Once to Raise Money, You Shouldn’t Be Raising Money
There is a case to be made that this chapter needs no further explanation. I have learned a lot over the last eighteen months: About companies, about cultures, about building a business, about the people you partner with and the people from whom you raise money. And while in every interaction there is something to be learned, I can honestly say there is the only one you should remember.
I have had glimpses into this at times, but I missed the bigger picture. It was like a dream – you would wake and could feel it but then couldn’t exactly place your finger on what you dreamed about.
When we raised the $2.4 million dollars to start Synchronicity, my first start up (and ultimately big financial failure) I truly believed in what we were doing. I believed we had this great, novel business plan; this incredible team filled with great experience and we I thought investors would be pouring all over us. It’s the reason I naively but earnestly raised money from my family and my closest friends. Ultimately, between the 3 main partners, we raised $2.4 million dollars to pay salaries, get an office and “look like a real company”.
But the business plan we wrote didn’t require $2.4 million dollars. It required $500 million dollars and the people who were providing the $2.4 million couldn’t close the gap. That was our biggest error. Don’t show up to a gun fight with a water pistol. We called the people who trusted us – our “one call” and raised money but with that money, we should have been buying $2.4 million dollar deals… it was not the ante into the bigger game of oil and gas finance.
We also got enamored by “the waterfall”. The waterfall is the way management teams get paid for their great ideas. Once the primary investors are paid back and receive a “preferred return”, profits are split. Invest $1. Return 10%. Profits over $1.10 are shared. Waterfalls are where your start up goes from “a job” to “wealth creation”. Or at least I heard about this one team once that made like $10 million!! Or was it $50 million? Man, I want to be like them.
It’s easy to get excited about the money and forget about why you are starting a business in the first place. You believe you have the skill sets to deploy those skills to make a great business but to deploy those skills – you need money. The best ideas in the world die without money. So, we got the cart in front of the horse. We had no money and what’s worse, we didn’t know what the “money” wanted (refer to my blog called “What You Need To Know About Money and the Ligers”).
Here’s the executive summary: the finance world is really about fees–fees for raising money, fees for advising, and fees for doing deals. Your wealth manager charges you a fee to manage your money. Your real estate agent charges you a fee to sell your house. Their vested interest is in “assets under management” (AUM) because their income is directly related to the gross on which they receive the net fees.
When you are dealing with hundreds of millions of dollars and the people who run that money, and generate their income off the returns they get, there are no free lunches. In order to grow AUM, you must have success. In order to have success, you must derisk failure as much as possible and do to THAT, they select known quantities with a track record. It isn’t a perfect measure – and arguably is actually the wrong measure but you must be a known quantity. This is what many teams and people that say “Yeah… but” don’t agree with. There is no “Yeah… but”. Ask yourself this question: “How is the fund raising going?” Exactly.
Let’s use the analogy of a job interview. The interview process usually involves your resume which lists all of your accomplishments in infinite positive detail if you don’t know the company. Numerically speaking in this interview, you likely didn’t get the job. Chances improve if a friend told you about the job and set up the interview for you because they know the interviewing manager. But not always.
A sure fire way to get hired is when you have previously worked for or with the person hiring you or people they know really well. In that case, you don’t need a resume. In fact, often, they call you and ask if you want the job. They wouldn’t have called you if they weren’t going to offer it to you. They know you will deliver the goods and, in most cases, those types of partnerships will continue for many years.
Raising money is the same thing. If someone believes that you have what it takes, they will call you. Or, when you call them, they will take the call and give you money. End of story. If you are worth hearing about, then you have been heard about. You don’t need to do presentations and PowerPoints to prove that you are capable. They are useful props to be sure, but I have been to a lot of money meetings and the only one that I have been a part of that was successful did not involve a PowerPoint; it didn’t involve a business plan. It was a meeting at a kitchen table (a very nice kitchen table, I will say) and we, the team (that wasn’t even officially a team yet) described what we were going to do. Our investors had invested in my partner twenty years before and he made them money. So when he wanted to start another company, he called them.
We reached an agreement for the first fund at $40 million, which was our request and much smaller than their desire. By the time we closed the fund, it was $50 million. A month later, they called because they had received investment board approval for $250 million. We didn’t ask; we didn’t even have a deal to spend it on. They just called and said “Good news. You are funded to $300 million. Have a nice day.”
That’s why I say “If you have to pick up the phone more than once to raise money, you shouldn’t be raising money.”