How premature funding leads to the demise of an entrepreneur and their organization.
So many entrepreneurs and small businesses believe the magic pill to their success is funding and while money will provide the ability to buy more inventory, hire more team members, pay themselves and even execute on their business plan, there is no correlation to success based on the ability to obtain funding.
So why is this? Why does the ability to obtain funding not result in success? Why is there not a direct correlation?
I believe it has a lot to do with what I call the Lottery Winner Syndrome. According to the National Endowment for Financial Education ( NEFE), a large portion, around 70%, of people who win the lottery will lose it in a matter of years. Despite millions of dollars provided to them, they are unable to be successful and to live abundantly. So, why does this happen? Dr. Stephen Goldbart, co director of the Money, Meaning, and Choices Institute, coined the word “Sudden Wealth Syndrome” and points out lottery winners are particularly prone to impulse buying because they have no previous ties to the money they have won, as opposed to those who gain large sums though salaries.
According to Rod Hairston, founder of Envision U, “A lottery winner lacks the identity necessary to make choices and the mindset to take action in line with the uber wealthy identity that was just created. Instead, they will subconsciously revert back to old patterns, behaviors and habits. Without a transformation of who they are and how they relate to millions of dollars, they cannot have success with their newfound fortune.”
Winning the lottery is a similar experience to receiving large sums of funding for an idea or company. Without the “previous ties to the money” there can be a disconnect for the entrepreneur. Therefore, this same crisis can and will occur for many entrepreneurs with teams who obtain funding without this necessary mindset, behaviors and habits. So how does an entrepreneur avoid this dilemma? How do they build for success?
The key is to find a team and create a business based on business knowledge, to grow the business based on strategy and create success based on utilizing business development. This foundation will provide for the identity of success. When focus is on these areas, the funding will follow . . . And it always does. After all, funding sources ONLY goal is to maximize returns for their investments.
Additionally, the entrepreneurial journey is a process, it is a series of experiences that will aggregate into a wonderful life and business story. With each mistake, lessons can be learned and knowledge is gained and over time this will transition into wisdom. This wisdom will ultimately allow for exceptional decision making and look to the outside word as brilliance, when it really was a lot of hard work, dedication, willingness to learn and ability to get back up after falling down.
Also, many services, books and programs in the entrepreneurial eco system focus on the tactics and strategies to build a business with the outcome for raising funds. While this is important, as an Entrepreneur you should focus on the ability to create value for your customers, for your funders and for your team. Through the creation of value, you will build a sustainable organization that will grow and is worthy of funding.
If funding is necessary, and every organization requires funds for resources and staff, it is a great strategy for every organization to go through some form of crowdfunding initiative. This may be a formal campaign on a web portal or the exercise of going to the crowd (i.e. family, friends and funders in your network) to raise capital for some aspect of the business. This is important for a few reasons: (1) If these people will not invest, no one will, (2) it allows the entrepreneurial team to practice and develop their product/ service with people you generally know, like and trust and (3) the mindset necessary to influence others to invest is an important characteristic of successful entrepreneurs and this exercise is usually a strong indication as to the ability to succeed.
If an entrepreneur is - lucky enough to get to the Venture Capital round of funding and receiving funding, they have a 1 in 10 chance of success. That is right, 90% of VC backed deals do not harvest - meaning they do not move onto another round or ever exit. While they might turn a profit, they are not successful in continuing the journey to the elusive unicorn world we hear so much about. There are many reasons for this and one cannot help but ask, is the onset of VC money anything like the lottery winners money?
So before an entrepreneur states they need money, they should think again . . . do they want it to be their kiss of death? Do they really want to have the pressure and responsibility that comes with taking money? Or would they rather bootstrap a little bit longer and create the value where they are able to use the funds in a way that is valuable to them, the investors and their customer, which will ultimately create long term success and a better chance of an exit.