Taking funds NOW or LATER

Dr. Shridhar Lolla

CVMark Consulting
lolla@cvmark.com

Draft 1.0
Mar 2011,
Bangalore, INDIA

(This caselet belongs to ‘respecting the business’ series of CVMark. It is based on real
life experience at AdON- an advertising space orchestrating firm; and several other
startup companies )

Key words: entrepreneur, startups, entrepreneurship, investment, funding, business rules, business
fundamentals, built to last, capacity building, entrepreneurial behavior, first generation entrepreneur,
neu-entrepreneurs, value system, culture, focusing behavior

Definition: Prime Rule (n)= Non negotiable rules

Prime Rule #700: In a majority of cases, the building block which would determine
performance of the business may not be finance. And hence, obtaining investment when
the business does not demand it, will not improve performance of the business. On the
contrary, it has dangerous potential to misdirect the business.

This is a sequel to following caselets:

0. The Saga of Startups

1. When sales Staff quit, Clients switch over
2. Sales is the prime responsibility of entrepreneurs
3. Not Succumbing to Pricing Pressure
4. Entrepreneur Agrees to do Sales
5.Temptation of taking large orders
6.Pitching Business Idea within 3 minutes
7. Startup Carnival

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Business is a system, comprising a number of interdependent building blocks, which

together determine its performance. In an interdependent system, the weakest link
determines the performance of the system. Depending upon stage of each business, one
of these blocks could constrain (and therefore determine) its progress. It, therefore
behooves on the entrepreneur to focus on the weakest link at any time.

However, our experience of working with startups as well as early stage businesses
shows a dangerous trend. Irrespective of the state of the business, a vast majority of

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entrepreneurs is driven to almost a cult belief that funds (finance) is the key constraint of
the business. Our study reveals that in majority of the cases, something other than finance
becomes the constraint or the business still would have a long enough time by when
finance could become a constraint. As a result of this cult trend entrepreneurs loose focus
of their business and instead of focusing on the real constraint, are forced to drive their
business by solely financial considerations.

Actually, startup ecosystem has come up a long way in India and entrepreneurship is
increasingly being considered as an alternative career by youngsters. Even during the
financial crisis of 2008, entrepreneurship only grew up. Also, the startup space has never
been so flush with funds as it is now. Investors are literally walking around with checks
in their pockets, in a hurry to invest. Given that there is already a wrong perception built
of funds being the key constraint of new businesses, neuentrepreneurs often face dilemma
about timing of funds.

This case study presents one such case and the direction to come out of this serious
conflict. The basis of solving conflicts, as always has been, stick to the fundamental of
business; and in this case let your business tell you if its requires funds NOW. Do not
take funds, just because it is available.
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Shiva is already into his start-up for over 2 quarters. Seeing potential of his business, a
group of known Friends (traditional investors) approached him to fund his venture. The
investors want to disburse the funds immediately. Shiva feels that he needs to work on his
business plan a bit more before committing to funds. He wants investors to wait for
sometime, but they do not want to wait.

Shiva is in a great dilemma with regard to investment. He needs to decide between

‘taking funds now’ and ‘taking funds later’. This is a classical dilemma, often faced by
entrepreneurs. Also, he needed not to unduly hurt his friendship.

When he talked to his peer group, over 50% prompted him to take funds immediately by
saying, “in startups, funds are always in shortage and should never refuse incoming
funds”. However, the other half, cautioned him to do a clear estimation of his needs and
how much stakes he is willing to dilute. This only made his conflict tougher.

Option-1:Taking funds now:

Shiva can readily take the funds and ramp up his operation. There is also pressure from
the investor to take it NOW otherwise, it may not be available later as they could invest it
some where else.

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He thought that he must take funds if

He needs funds NOW.

He foresees difficulty in getting funds later.
He knows exactly how to deploy the funds. (very clear business plan)
He is sure of rate of growth of his business, so that he is able to give reasonable
returns on funds. (this is an ‘investment’ and not a friendly ‘help’, although at the
moment his friends behave as friends)
Funds are available at dirt cheap price.
He does not want to harm his friendship.

Option-2:Taking funds later:

Shiva is yet to get a clarity on his ideas and yet to have a clear assessment of his funds
requirements. It is quite possible that once he is clear about the business plan, he will be
in a better position to know the need of funds and accordingly can support his plan. Any
intake of funds now, may force him to tweak his business to utilize funds. It may also
limit his future funds flow and throttle potential of his business (plan). Once he
understands the business model properly, he can then make the right decision. In fact
knowing his business better, he can also value his effort better.

He thought that he must take funds later, so that:

In the near term he does not need substantial funds.

He will have right assessment of funds requirements.
He will have right assessment of his valuation.
He will take decision objectively and not emotionally.
He could offer better returns to investors.
He must protect his relationship with his friend NOW as well as in FUTURE.

Boundary conditions:

There is a boundary condition for taking funds. As far as possible, in these days , funds
of substantial value must be taken from smart investors. Smart investors are the one who
will add value to your business by understanding and supporting your cause for the
business and strengthen your decision making abilities.

For an early stage business seeking substantial funds, pure financial investor could be
avoided, unless the business is in distress. Financial investors of substantial funds has the
sole goal of earning money. Often, their lack of understanding the entrepreneur’s angle of
business, may lead to conflicts and throttles ones passion and freedom to build business.
And the neu-entrepreneur may not be in a position to deal with such conflicting situation.

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It is okay to take a small fund from known people in kind (from friends, family etc. as
help) but taking substantial funds as ‘investment’ from a non smart investor must be
avoided.

Explanation:

Shiva said that the investors want yes or no. Which means that his well-wishing friends
are not ready to discuss and resolve the conflict and are in a hurry. It means that the
environment is not comfortable to take such a big decision, even though Shiva claimed
his friends to be friendly. It is a very tough situation to be in, when your years of
relationship is at stake.

The advice therefore, is that while there is a conflict in the business front; Shiva needs to
avoid conflict in personal relationship. Under current circumstances, accepting funds
NOW, may lead to harming his relationship and his business NOW as well as FUTURE.
He must say NO, and when he gets opportunity must append that he would like to protect
their relationship and be friend NOW as well as in FUTURE. And let it be left to the
progression of business to come out with opportunities to collaborate in future.

Shiva calls off the deal.

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Disclaimer:
CVMark Consulting is an independent business-innovation research agency based in Bangalore, INDIA.
It handholds entrepreneurs and promoters in road testing their business ideas and in delivering
breakthrough performance.

CVMark Consulting intends to serve business community through advisory, consulting and coaching
engagements. As a part of its engagements, it regularly brings out insights, perspectives, research reports,
newsletters, issue-oriented reports and other products.

This caselet captures description and direction of solution to generic problem faced by business owners. It
is intended to share experience of CVMark with a wider business community. This document in part or full
can be reproduced subject to a reference to CVMark Consulting and to this document.

Factual material contained herein is obtained from sources believed to be reliable, but the publisher is not
responsible for any errors or omissions contained herein. Opinions are those of CVMark and are based on
research conducted for this report. CVMark holds no responsibility for decisions made on the basis of
content of this report.

CVMark Consulting
Bangalore, INDIA

Clet:11-21

___________________________________________________________________
What do entrepreneurs and promoters do before they write business plan?
They get their business idea road tested by CVMark.

For developing, innovating and executing your business model, call Tel: +91 94480 70081 or Email details to : lolla@cvmark.com .
CVMark Consulting, #2304, Nandi Park, Gottegere, Bannergatta Road, Bangalore 560083, INDIA Web: http://www.cvmark.com

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