Not a thing.
Most startups will never have professional investors. Friends and family money, especially in quantities appropriate for the investor, is usually very patient and unconcerned about the valuations, structures, and so forth that are part and parcel of professional investing.
It provides a patient environment to the entrepreneur that allows her to grow and develop that first time business. It may be the difference between starting or not.
For most entrepreneurs, in one form or another, it’s the way the business is going to be funded. Next will be revenue, and then, hopefully, positive cash flow.
The only thing that’s lacking is an independent source of oversight that comes with professional investors.
In many businesses, it’s arguable that the entrepreneur doesn’t need it. I’m acquainted with a consulting company that’s now three people. They bootstrapped themselves on credit cards and a bit of savings. (Mostly they spent that money to find customers and eat. Their product was pretty well invented before they began.) Now, they’re billing enough that the business is very profitable, and, like a good surgeon, they’re happy as long as they stay at it.
Their consulting practice is highly technical and very solid. They have a model that they are executing and have contingencies in place as things change. Probably not much need for outside oversight here.
For those businesses that do need it, the canny entrepreneur will find a way to impose that oversight on herself and her company without professional investors. With the right business model and the right oversight, this can work just fine. This takes the form of advisors of some sort. What’s important, though, is how disciplined the process is made to be.
This oversight ought to include not just decision review, but also adherence to financial performance, performance reviews for the entrepreneur with time devoted to developmental plans and actions, an external view of the competition and the market, and regular reviews of key people in the company, their goals, and the company’s plan to fulfill them.
I once had a board member, Len Vickers, who worked for Jack Welch and invented “We Bring Good Things To Life,” tell me that he’d gladly be an advisor, as long as the agreed upon actions were being implemented on a regular basis. That arrangement worked just fine until we sold the company.
Nothing is wrong with family and friends funding an idea unless they do not have any money.
Having grown up in a home and neighborhood without any real capital to speak of, I can say it does not work the way it could for everyone.
However, having put myself through school, getting and MBA and having worked for some quality companies, I have the discipline and experience necessary to get a worhty product off the ground. The capital - beyond what I have been able to put aside - is still the hard part.
My question is how you get over the capital hurdle when you have a product that straddles the fence between the need for Angel Investors and VC money and your friends and family cannot get you over the hump?
Posted by: Bob Bascom | April 28, 2006 at 04:29 PM