I had an entrepreneur approach me several years ago for funding. He had a unique product idea in healthcare benefits. The opportunity was created by the affordable care act. He wasn’t from the healthcare industry but had done his homework. I decided to lead the deal and brought in two other angels. We each put $100k in the business. I still have the pictures from the closing.
Three months later the business was out of cash and I said, “No more. We are done.”
The problem was the dramatic run-up in expenses. He went through $300,000 in four months. The entrepreneur did not really know the market, but spent like he did. The result: the initial investment was gone and with it our confidence.
All In (An Entrepreneur Is Born)
The entrepreneur was a very experienced software sales executive and his cofounder was an experienced software developer. He had personal financial means to fund the business but was he willing to use his resources to continue his dream? To help him decide, the investors agreed to give back almost all our equity and he agreed to treat our investment as an unsecured loan to the business. He could have folded the company right then but he didn’t. He wanted to chase his dream.
The entrepreneur, his wife and his cofounder stayed the course. He cut his pay to zero and put all his cash and other assets into the business. He right-sized his lifestyle, cut his pay to zero and reduced the business burn rate. This gave him and his cofounder the time they needed to understand the market and its real need. This was an “all in” move for him and his family. He burned the ships. There was no going back.
Surprisingly, by the end of the first year he was still in business. By the end of the second year he was making money and raised capital from an industry insider who helped him secure deals. Seven years from his “burn the ships” moment he had an offer on the table which made him a multimillionaire.
I learned something from watching this entrepreneur. I learned what it means to be an entrepreneur. He learned it, too. Here is what we both learned:
Risk (Your) Money
If the business you are starting is a good investment, and you have the means, then you should invest along with your angel investors. You need to be at risk for more than loss of reputation.
Keep Your Edge
Too much money is a bad thing. If you have money in the bank and you know a bonus check is coming next month, you will spend more money. It is human nature. How many of us look back on what we were paid in our first job and wonder, “How did we get by?” You did it because you had to. If this method works for your personal finances, you can bet it works for your business, too.
Commit To Impossible
This is entrepreneuring. You are about to undertake a goal deemed impossible to achieve. This entrepreneur introduced a new healthcare benefits product into a market filled by multi-billion dollar corporations. They had all the resources at their disposal and they lost to this entrepreneur. In the end, they could not compete so they did what all big companies do, they bought his company. He did it. He achieved the impossible.
When I told the entrepreneur “We are done. No more funding,” that was not the end, it was the beginning of him becoming a real entrepreneur.
I stand in awe of this man and what he and his wife and cofounder achieved. This is why I love entrepreneurs. Me and my co-investors were a small part of this success story. Strangely enough, our part was to help the entrepreneur with initial funding and then shock him into reality by stepping back. He met the challenge and we are still good friends.
I know you are wondering if we made any money on this investment. After all, we gave the entrepreneur back almost all the equity. I am happy to say, he was a man of integrity. He paid us back our original loans and we made two times the money, plus interest on the loans. An unbelievable happy ending for all involved. Who could have written this script?