Are advanced entrepreneurs good negotiators?

Not ususally. But, they don't realize they are poor negotiators. So what?

In order to capture the attention of advanced entrepreneurs, I often point out that entrepreneurial businesses make life or death decisions several times per year (sometimes per month), while a large company may make a life and death decision once every five years. Therefore, the liklihood of making a mistake that leads to the entrepreneurial business feeling compelled to be acquired or worse, going out of business, is very high.

Many of the mistakes result from a failure to successfuly negotiate a strategically important transaction or relationship. Why is this? First, most entrepreneurs, like most executives, believe the ability to negotiate effectively is a natural talent (which is not true). As a result, they fail to take courses to develop negotiating skills. Second, the entrepreneur fails to follow the number one rule in negotiation - be better prepared than the other side!

Every entrepreneur will be involved in heavy duty negotiations with people on the other side who are more skilled at negotiating than the entrepreneur. Yet, the entrepreneur believes his or her common sense will be enough to do well in the negotiation. Not even close!

Hiring a lawyer or other expert to negotiate for you is expensive and, often, not very helpful since the lawyer or other expert probably does not fully understand the context in which the negotiation is taking place. Only you have a keen appreciation of the trade offs you may make to get the deal or transaction done. It is easier for you to learn how to negotiate than it is to bring the lawyer or expert up to speed about your business.

Every entrepreneur should take a mini-course in negotiation from the local university or one of the firms that advertise in the airline magazines offering weekend programs on negotiation. This will be one of the best investments of time and money an entrepreneur can make.

Economic gardening is a good thing, but ......

Many state and local governments are promoting "economic gardening" as a means of stimulating growth in their economies and employment. This is a good thing. But, a key ingredient is missing - access to capital for growing entrepreneurial companies. Capital is in short supply by definition. Only those businesses that can convince investors and lenders that they can produce increased value for investors or meet their debt obligations for lenders deserve to obtain capital. The programs for economic gardening seem to focus on helping the growth stage companies deal with growth issues in order to make them more attractive to investors and lenders. This is a good thing also, but needs to have an added dimension.

How can governmental entities make capital more available to deserving growth companies in their geographic areas? Not by promoting venture capital firms to focus on a their geographic areas and not by trying to educate angel investors on investing in entrepreneurial companies. I urge all governmental decision makers to read a new book by Josh Lerner, a Harvard professor, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed--and What to Do About It, The Kauffman Foundation.

So, what can be done? Can angel investors be induced to make more investments in these companies? Probably not. Can growth companies be educated on how to raise capital from angel investors, resulting in more capital being invested in these companies? Perhaps. Can founding entrepreneurs of growth companies be convinced they need to make changes in order to be much more attractive to angel investors? This is the biggest impediment to attracting capital from angel investors. Yet, most entrepreneurs running growth companies cannot accept the realities of valuations of their companies, management changes needed, giving the investors some degree of control (through veto powers, not the power to force the company to take certain actions) and having boards of directors that are not rubber stamps for the entrepreneurs.

Entrepreneurs who have the courage to accept these realities have a much better chance to raise capital from angel investors. Those companies that raise capital from angel investors and make significant progress in developing their companies can become candidates for venture capital financing. Creating the environment where companies can raise more capital from angel investors is the best way to promote investments by venture capital firms in the future. My conclusion - economic gardening can make a difference if the economic gardening programs can help the entrepreneurs running these companies deal psychologically with these realities .

Entrepreneurial Finance is not about capital raising

I'm teaching Entrepreneurial Finance in the Rollins College MBA program this term. The obvious approach to this class is to focus on different means of obtaining capital. But that is not what Entrepreneurial Finance is about. Let's refer to Entrepreneurial Finance as EntFin to shorten this blog. EntFin is about mobilizing resources to take advantage of an opportunity identified by an entrepreneurial company.

For a product, the basic resources to take advantage of the opportunity are marketing and sales resources, working capital and capital equipment. One way to obtain these resources is to raise capital and buy them. But, there are many other ways to mobilize these resources. Since it is usually very hard to raise capital, entrepreneurial companies must be very creative in getting others to provide these resources.

As an example, a start-up company making widgets that use a new technology that has been patented can license others to use the technology to make the widgets relying on the licensees to find the marketing and sales resources, the working capital needed and the capital equipment necessary. Or, the company could make only the component of the widget that uses the company's proprietary technology and sell the component to OEMs who make the widget. The OEMs have to find the marketing and sales resources, the working capital and the major capital equipment to make the widgets (the company may have to purchase some capital equipment to make the components and must acquire the working capital to fund a small inventory and accounts receivable from the OEM).

Or, the company could joint venture with a large company interested in making the widgets by contributing the company's technology to the venture for a share of the profits. The joint venture partner would provide the marketing and sales resources, the working capital and the capital equipment to make the widgets. There are other ways to use other peoples money to provide the necessary resources to take advantage of the opportunity.

So, EntFin is the study of ways to mobilize resources, not just ways of raising capital. Each of these ways have advantages and disadvantages and some of the ways may not be doable. My goal in teaching EntFin is to open the eyes of the students to ways of mobilizing resources that includes, but is not limited to, raising capital.

Is an entrepreneur who failed an "advanced entrepreneur?"

We all know the saying, "We learn from our mistakes." Most people claim they learn more from mistakes than they do from successes. I don't believe this is true. Instead, I believe this is usually a way for a person to "psych" him or herself up after making a mistake that is very costly. Too often, an entrepreneur who started a business that failed blames the failure on outside circumstances or forces, not on mistakes made by the entrepreneur.

On the other hand, most entrepreneurs who have a successful business can readily state the decisions or actions taken by the entrepreneur that caused the success. An entrepreneur who has the courage to face up to mistakes made that caused a failure is likely to be a success the next time around.

For this reason, knowledgeable investors appreciate an entrepreneur who admits mistakes he or she made in the past and states clearly what was learned from these mistakes. Further, an entrepreneur who suffered through a business failure and has the courage to try again is my kind of entrepreneur. This entrepreneur is an "advanced entrepreneur" just as much as one who succeeded the first time.

Are entrepreneurs really risk takers?

I've often said that, in my experience, entrepreneurs are not risk takers. Instead, they don't know most of the risks they are taking. There is a disconnect between the risks that experienced entrepreneurs, looking back on their careers, realize they took versus the risks that new entrepreneurs think they are taking. Why is this?

First, newbie entrepreneurs don't know what they don't know. When I ask a new entrepreneur to list the risks he or she is taking while in the start-up mode, the entrepreneur is often hard pressed to list more than two or three risks. This list is not even close to the kind and number of risks the entrepreneur is taking. This explains the frequent comment experienced entrepreneurs make that, "If I really knew what I was getting into, I probably would not have started my company."

Even when I or others point out risks that the entrepreneur is taking, the entrepreneur usually denies the existence of the risks or assumes the risks can be easily managed. It takes courage to admit that there are major risks that are being taken and that some of the risks, if they come true, may cause the business to fail.

I often remind my students that no one "knows what they don't know." If an entrepreneur knows what he or she doesn't know, then the entrepreneur can research the matters and come up with answers. But, when they don't know what they don't know, they are operating blindly and will usually be surprised by challenges that jump up and threaten the survival of their businesses.

Most entrepreneurs don't know the risks they are taking. The best way to know is to ask questions of those who have "been there, done that."

More myths about angel investors and venture capital firms

Myth - Entrepreneurs generally succeed in raising capital from angels who have no prior relationships with their companies based on the merits of their business plans. Mostly wrong. An angel investor invests primarily based on a prior relationship the angel investor has with the entrepreneur or with another angel who represents he or she will invest because of the merits of the deal and his or her established relationship with the company. The key for a company in raising capital from angel investors is to establish relationships with potential angel investors long before asking them to invest in your company. In other words, a precondition to starting a company which will need angel investment to get past the first year is to "prime the pump" so to speak in order to have a lead angel investor when the time comes to raise capital. Almost all entrepreneurial companies start with family and friends money, hoping to achieve a few milestones that will make the company attractive to angel investors for "just in time" capital from these investors. Inevitably, it takes much longer than contemplated to raise capital from angel investors and the company runs out of money. The reason for this is that entrepreneurs almost always underestimate how long it takes to raise capital from angel investors who are strangers. They wait too long to begin the process of establishing relationships with potential investors.

Myths about Angel and Venture Capital Investors

Most entrepreneurs have been exposed to myths about angel investors and venture capital investors. Let me dispell some of these myths:

• Myth - Venture capital investors invest in technology, not the people. Wrong. Venture capital investors invest in the management team far ahead of the technology that is the basis for the company. Their experience is that a highly qualified management team will engage the market, react and change the product or service the company offers as needed to succeed. Since most companies don't succeed with the first version of its product or service, a management team that can assess the market and make changes will more likely succeed.
• Myth - Angel investor groups act quickly when presented with an investment opportunity. Wrong. There is a trend toward angels forming groups to evaluate investment opportunities, select from the many opportunities they see, negotiate the terms of investment and make the investment. However, in most groups, this takes an inordinate length of time, especially if the angel group does not have a paid managing director to keep things moving. Most angel groups don't have a paid managing director. The reasons for the slow moving process is that the group often only meets once per month, a single naysayer in the group often causes the process to stop until others in the group override the negative opinion and the group has a preferred set of terms that may not be acceptable to advanced entrepreneurs, slowing the process down to get the group to accept other terms. It's not unusual for a company to make a presentation to an angel group one month, come back the next month to answer questions, begin negotiations lasting 30 days, then waiting another 30 days for the legal documentation to be completed before a closing occurs. Is it any wonder advanced entrepreneurs don't want to deal with angel investor groups? On the other hand, early stage entrepreneurs often have no choice but to raise capital from angel groups and don't realize how long the process will take.
• Myth - Venture capital investors want to control your company from the start. Wrong. Professional venture capital firms do not want to take control of companies when they make their first investment. First, they aren't staffed to exercise that degree of control over the companies. Second, if they have to have control in order to make the investment, they have concluded the management team is incapable of running the company which should lead to the decision not to invest. On the other hand, there are individuals and groups out there who hold themselves out as venture capitalists, but who will only invest if they obtain control. These individuals and groups are not true venture capitalists and advanced entrepreneurs should usually avoid them.
• Myth - Angel investors invest to make money. Usually wrong. Most angel investors are successful entrepreneurs who have cashed out. They invest to "be in the hunt" or to join with other angels who they want to be associated with or to have the opportunity to watch an entrepreneurial company go through the growing pains and, hopefully, succeed. Since, by definition, angel investors are wealthy, they don't have to make highly risky investments to increase their net worth. But, they HATE to lose money. Yet, angels will lose their entire investment in most of the investments they make in young companies. How do angel investors reconcile the risk-taking with hating to lose money? It's a mystery.
• Myth - Angel investors bring good advice to the table for the entrepreneur in addition to money. Usually wrong. The best thing an angel investor can bring to the table other than money is relationships, i.e relationships with potential investors, relationships with investment bankers, relationships with potentially large customers, relationships with law firms, accounting firms and banks, etc.

I've run out of time today. I'll continue this another day.