As a small boy, my parents used to say “if you don’t have anything nice to say, then don’t say anything at all.” Normally, I would agree. However, there eventually comes a time where something needs to be said, for the sake of others. Welcome to the first installment of “Down to the Mat.”
So … I came across a post entitled “Angel Investors or Devils in Disguise” by Robert May on BusinessPundit.com. Interesting article, all in all.
Entrepreneurs looking for angel money need to realize they also are being evaluated. Part of the investor’s focus will be on how much money the founder has in the startup.
I was enjoying the read until I got to this quote quote from Greg Fischer, an angel investor in Louisville:
“It’s surprising how many people don’t put their own money into it,” Fischer said. “For a real entrepreneur, you expect them to be leveraged up to the hilt.”
“We like to see three or four credit cards maxed out,” Boden said. Fear of financial failure “tends to be a great motivator.”
Earth to Mr. Fischer. “Real” entrepreneurs are not graded by whether or not they are “leveraged up to the hilt.” They are graded on their ability to execute. There is a big difference. As I pointed out, it certainly shows the commitment level of the entrepreneur when they have personal skin in the game, and it certainly goes a long way toward easing the risk concerns of outside investors. However, there is no “personal leverage” prerequisite to be a “real entrepreneur.” Please.
And Mr. Boden’s advice is some of the worst I have seen in a long time. He may like to see entrepreneurs max out a handful of credit cards before they get to him, but I would strongly encourage entrepreneurs NOT to do this unless you absolutely have no choice, or have a safety net. Credit card debt is the worst possible debt that you can strap yourself with.
What happens if the entrepreneur misses a few payments on those “maxed out cards?” Even if you do make your minimum payments on time, remember, excessive credit card debt will lower your overall credit score (FICO). Opening up new credit card accounts will lower your average account “age”, also lowering your credit score. Credit-card financing strategies can actually come back to haunt you when you go for a later round of financing, or a business loan, and lenders or investors run a personal credit check on you during due diligence. Whoops.
I know that a lot of young entrepreneurs read my blog, and I want to be sure I get this message across to you loud and clear:
There are plenty of other ways to raise money that don’t involve jeopardizing your sheer existence.
If you have the capital to put into your business, great! Doing so will earn you valuable chits with potential investors. However, when you are ponying up the pink slip to the house, digging into Junior’s college fund, or running up expensive credit card debt, you are creating a potentially devastating set of circumstances. And if you show up on an investor’s doorstep, leveraged to the hilt, and in debt up to your eyeballs, guess who has the “leverage” now? The investor does, as he knows you are desperate. Perhaps these are the types of deals that Mr. Boden likes to work with.
Personally, as an angel, I wouldn’t touch a deal where the entrepreneur was desperate and leveraged beyond belief. That’s a different risk altogether. I know a lot of other investors who feel the same way. Running up excessive credit card debt while building a new business is not “entrepreneurship.” It’s gambling.
I have more respect for the entrepreneur who figures out creative ways of getting what he or she wants. Becoming eligible for debtor’s prison is not creative. That’s just stupid. It doesn’t take a genius to sign up for a bunch of credit cards and run up the debt (as keenly demonstrated by my ex-wife.) However, it does take a certain desirable skill to figure out ways of getting your product in the hands of customers, and getting your partners, customers, or other such parties to invest in your business. That’s the guy I want to bet on.
Prove to me that the dogs will eat your dog food. I don’t need proof that you can swipe credit cards at your local CompUSA.
Bruce Gill recently shared this gem with me in email:
Entrepreneurship is like jumping off a tall building and building your wings on the way down.
Entrepreneurs, instead, I challenge you to focus on finding creative ways of funding and building your business. Talk to other entrepreneurs. Network. Ask others for their insights. See my tips on bootstrapping if you need a starting point. If you really get stuck, drop me an email detailing your specific situation. I’m happy to try and provide some guidance for you.
Ok, I’m off the mat now.