Tuesday, 6 October 2009

Give me half the money I asked for and an advisor who can save me the other half…

So there’s a rumor I keep hearing in certain circles; that whilst starting a business will take time, it needn’t take much money.

And I agree. Kind of.

Starting up a business is expensive only when you’re spending money on things you don’t need and, broadly speaking, I would claim that startups only need two things: ‘Stuff’ and ‘Understanding’

“Stuff”: Capital expenditure, physical things have a natural expense to them. The cost is usually linked to the wider world, abundance or scarcity of resources & the state of the planet in general, which is is all fine and rational by my account.

“Understanding”: Knowledge, however, has no such natural price point. As long as our accountant costs us less than the price we'd pay for getting the accounts wrong, and as long as getting that test verified earns us more than the certification cost us to get, it was the correct course of action. These experiential things aren’t justifiable or tangible costs but they’re also a bulk of our expendature.

Now, depending on what you’re starting, you’re going to want these at different places in the startup cycle and in different proportions. If you’re daft you’ll start a business that requires a vast amount of ‘stuff’ early on, pre-revenue even, and whatismore you might choose to do so in a recession.. y’know.. Just to make your life really complex but I digress..

At RBD we’re just putting the finishing touches to a £110k funding package. It has been an insane amount of work to push though, and as the money isn’t in our account yet there’s not even a guarantee that it won’t still all go awry, but it’s £110,000. I’m guessing it’d take me 3-4 years to earn that - so what is 3 months buried under a forest of paperwork of loan / equity agreements, tech docs and grant applications in comparison?

Nothing really, until you seriously consider the fact that we don’t need £110k.

We probably don’t need half of £110k,

What we need is a mentor / non-exec / advisor type bod.

Mistakes are expensive; without a mentor we have to budget for them, and so do you, and so do the vast majority of young start-ups with high growth potential who haven’t found adult supervision yet.

The lovely souls at the banks, grant making agencies, government and such would do well to realise that if they started training and encouraging mentors they could save themselves a bundle in cash. By all means buy the stuff, but ought we really to be buying in the understanding?

I, for one, would certainly rather have less money wisely used than a heap of cash with which to outsource my companies knowledge at the expense of my personal learning.

Come on guys, give me half the money I asked for and a mentor who can save me the other half…


Andrew Davison said...

Totally agree on the mentors issues, in the first couple of years of running my business m mentor helped me avoid so many pitfalls that might well have cuppered the business. I'd choose a good mentor over funding any day.

Daughter said...

Amanda's after some adult supervision? Ha, good way of putting it. That's definitely a heap of cash to deal with spending, not been in those exact shoes before but definitely seems like better mentorship would be a huge money saver. Curious what some other startups and investors think on the issue. You on the hunt for an experienced adult? You guys would be a dream to mentor, will put my thinking cap on if you're on the lookout...

Ewan McIntosh said...

I think you're right... partially. A good investor is only partly about the cash. When (s)he invests there is or should be almost as much as the cash value as mentor value, and it's down to you, as you assess the investment possibility, to work out if that mentor value is worthwhile.

Meanwhile, mentors generally don't give their time for nothing, so one way of making that up is to place a concrete value on the table (cash) so that their mentorship, when it pays off, pays off literally rather than metaphorically.

Add to that that when you get serious about a project, serious enough to be seeking investment or funding, all of a sudden you're having to explain to the wider world all the thinking that you've done in great detail, before bring all that back down to a killer elevator pitch. In itself it should be seen as a worthwhile exercise as the process, regardless of result at the end, will lead your product or idea to be better informed and better for the user in the end.

Jess said...

RT @jennielees @Jesso52 its interesting, expertise >> money but you cant always get the experts to help out unless they get some return -> money needed!

Jess said...

RT @bysl @Jesso52 Absolutely--a strong mentor is critical. And equity comp helps align everyone's incentives--cash doesn't.

Amanda said...

Thanks for all the responses so far,

Andrew - Given the other responses, below, it would be interesting to know if your mentor put in cash or just their time and experience and if the latter, why you think this was?

Daughter - Yes, I do think that mentorship can provide a sort of 'common sense support service' which can prevent start ups making rash decisions which will cost them money in the long run as well as providing experiential advice (e.g. simple legal or accounting information) which would otherwise be a service the start-up would be charged for receiving.

Ewan - I completely see your point regarding Investors needing also to provide mentorship / mentors needing to invest financially but I suppose the angle I was coming from was pre-investor readiness. I think the mentor/investor as a unit is less of an issue when you have a business with relatively modest requirements in terms of start-up capital however when you have a business which requires a large sum of start up capital there is a requirement for a mentor (perhaps formalised as a non-exec?) to help the start-up get to the stage where the investor/mentor relationship is accessible to them. Stabilisers on the bike - so to speak!

Jennie - This is somewhat of the same issue, and the problem we are facing. When all mentorship/advice/expertise (whatever you want to call it) comes bundled with investment it forms a catch 22. You need to be at least close to 'investor ready' to access the investors advice and mentorship, but how do you get there un-advised? The Case for better Entrepreneurship education perhaps?

John i would argue that (at least to my mind) equity is equal to cash so if you're giving away equity in return for advice, you're still paying for that advice..

look forward to hearing more of your thoughts on this issue :)

Andrew said...

In my case my university paid for both of them (not sure how much). However that funding ended some time ago and yet I still see them both on a monthly basis. In both cases they are willing to give me their advice and experience simply because they want someone to share in the success they've had.