You may consider me an unexpected source for such a discovery, but Iâd like to announce that Iâve stumbled on an as-yet undocumented law of physics.Â Â
Unlike others that help us understand the age of the universe, speed of light and whatnot, this may be the first law of physics that pertains to money â" and specifically the ability of entrepreneurs to raise it.Â
Weâll call it Priceâs First Law: Your ability to raise startup capital is inversely proportional to your need.Â
Since the Nobel Committeeâs online application form required for a graph, I've created one.
For you non-physicists, hereâs how to interpret this:Â
- Corollary #1 â" If your startup is flush, money people will be tripping over themselves to fund you.Â If your business has plenty of cash, a product thatâs shipping, and paying customers â" then angels, VCs and banks will be seeking you out asking how they can help.
Corollary #2 â" If your startup is poor, youâre radioactive to money people.Â If youâre just getting launched, struggling to finance the development of your first product, or otherwise low on funds, investors will avoid you like the Chernobyl.
You see, investors â" whether they be angel investors (high-net-worth individuals), venture capitalists or corporate investment arms â" generally hate putting money down on unproven concepts.Â So, whereas thereâs a broad belief among entrepreneurs and startup teams is that if youâve got a strong idea, a well-documented business plan and a strong team, you ought to be able to raise financing for your startup â" thatâs surprisingly not the case! Â
What youâll find is that itâs the very rare investor who wants to be the first money in on a deal.Â And itâs the very rare investor who likes being the only source of money in on the deal.
This all sounds frustratingly circular, doesnât it?Â It is.Â Itâs a proverbial Catch 22.Â When talking to potential investors as entrepreneurs, we tend to hear a lot of, âIâd like to keep in touch,â âLet us know when youâve got your product launched,â and âWe might be interested in investing once you have a strong customer base.âÂ
Which sounds an awful lot like, âWe might consider investing once you no longer need our moneyâ!
Where does this newly-documented law of physics lead us? Â To realize that we entrepreneurs need to be clever not just about our product, our business model and our go-to-market strategy, but with our early-stage financing strategy as well.Â More on this in future posts.Â
Jim Price is a serial entrepreneur and Adjunct Lecturer of Entrepreneurial Studies at the Zell Lurie Institute at The University of Michigan Ross School of Business. Â©2012, James D. Price.Â