4 Ways Founders Can Avoid the Money Trap
One investor’s call to entrepreneurs to remember why they got into their change-the-world business in the first place.
Dear Founder,
I cannot speak for all investors, but I can speak for Findaway Adventures and like-minded investors when I say that what draws us to investing in your company is, first and foremost, your passion for your cause, whatever that cause may be. The cause may have a large or small impact on your communities, but passion and impact are two primary criteria for investment.
Part of the passion stems from your purpose, but the other part grows naturally from the founder-startup relationship, which goes from seeing the company as a business to seeing it as a beloved child — something to love and raise to adulthood. We love entrepreneurs who love their companies.
Enter the money trap.
The money trap takes place when you face the prospect of harm to your baby and, in order to save it, take in new money from an investor or investors without vetting them first. This usually happens because you are under the gun financially. You might even face going out of business or running out of cash as your burn rate exceeds your bank accounts. An injection of cash keeps you in business for a while, but at a cost that may undermine your mission and culture. My old friend Jethren Phillips described this situation with the saying, “Money has energy.” Sometimes that energy can bring a money-first mentality which might be counter to the original passion you intended.
Sometimes, you might not even need pressure from an investor to obsess about money and put pressure on yourself. One founder we know, with nary a word from Findaway Adventures, has made up her mind that she is letting us down by making $60,000 a month in sales rather than her projected goal of $90,000. Another entrepreneur, who is doing over $300,000 a month and grew 50% last year, has told himself a story that he really ought to be growing at 100% a year, given the great demand in his marketplace.
Both of these entrepreneurs have fallen into the money trap, which I define as letting financial pressures cloud your thinking and motivation about why you went into business in the first place. The problem with relying on this finance-focused mindset is that it can take the fun out of raising your baby — and this new money-focused attitude has the potential to cause great harm.
While having financial goals is an important way to learn, as a small company these should never be your rudder. I suggest you avoid the trap altogether, and I offer four considerations to help you do this. They are:
Think about why you started the company. And the why has a lot to do with the passion and sense of purpose with which you started the company. Ask yourself, “Why did I start this company? What am I trying to solve in the world?” I help my companies renew that spark that may have been dampened by money thinking.
The second step I might do is ask you to focus on your 1,000 true fans, those who think like you do and want to solve the same kinds of problems you do, whether it’s a personal problem you’re trying to solve in your product or a bigger societal problem, like poverty or climate change or whatever it might be.
Third, I’ve been doing a lot of work on the idea of zone of genius (see The Big Leap by Gay Hendricks), which is that skill or set of things you’re doing that just energizes you like nothing else does. We all have things we’re good at and things we’re not good at, but zones of genius are the things we are not only great at but can do easily and forever. The more you stay in your zone, the greater your impact on the company’s success.
Finally, no matter how dire things look from a money perspective, don’t skimp on due diligence. Learn what investors expect in their relationship with you. Don’t listen to the story in your head about what they want. Ask them what they want. How much revenue growth? How high a profit margin? Assume nothing. Ask everything, so that you and your investor align on expectations (preferably before they make an investment).
These are four of the ways to keep yourself energized in your purpose and mission, while avoiding getting caught in the pitfalls of the money trap. If you have discovered other ways that have worked for you in your change-the-world company, I would love to hear about them.
Sincerely,
Enjoy this article? If you would like to see simple, practical tips in your inbox every week sign up for TwoTip Tuesday to help scale your change-the-world business.
All credit to my ghostwriting partner, Dave Moore, who is instrumental in getting my thoughts out in a coherent manner & into these blogs. Thanks Dave!