Looking for Financing? You Might Try Your Old Boss.
Often Overlooked, Former Employers Can Be A Crucial Source Of Cash
(As written in the Wall Street Journal – June 12, 2014)
Written by: Liz Garone
You’ve asked your family and friends for startup cash. You’ve asked lenders. You’ve asked venture investors.
How about turning to somebody who used to sign your paycheck?
A Known Quantity
When it comes to funding a startup, few people consider looking to their former employers—but experts say they can be a terrific resource. An old boss knows what an entrepreneur can do on the job and may be much more sympathetic than a loan officer or VC. And since the two speak the same professional language, they can work out the details quickly.
They may also be able to provide support along with the cash, lending “early contracting dollars, partnerships, cornerstone client relationships and material support to a new venture,” says Demetri Argyropoulos, founder and chief executive of Prima Worldwide, a business consultancy and venture-origination business based in Santa Barbara, Calif.
Always Be Thorough
Perhaps the biggest mistake entrepreneurs can make when asking for capital is taking the relationship with a former boss for granted.
Jason Schultz, a San Francisco-based serial entrepreneur and investor, has invested in a number of former employees’ new ventures, everything from an online financial-services company to a mobile app for finding restaurants. The biggest problem he has seen with former employees is a lack of preparation when they make their pitch.
“[It’s] almost as though they assume that because of our relationship they can pitch a half-baked idea or something they obviously aren’t that serious about,” Mr. Schultz explains. “Don’t assume that your friendship with the employer somehow negates the need for professionalism.”
Pros also advise entrepreneurs not to rush in asking for money right off the bat. Instead, they should first seek the boss’s advice on the new venture, says Robert Moore, founder and chief executive of RJMetrics, a Philadelphia-based database-analytics and business-intelligence-software company. (While Mr. Moore didn’t pitch RJMetrics to a former employer, one of his former bosses did ask to invest in the company.)
“Show them your idea, your pitch deck, your fundraising plan. If they bite, they’ll feel like the investment was their idea, which puts you in a much better position to avoid a drawn-out negotiation and due diligence,” Mr. Moore says. “If they don’t bite, you’ll get some insights on what’s appealing to them about the business, and you can always circle back with a more direct, tailored ask later.”
Learning From ‘No’
Also be prepared to look at getting turned down as a learning opportunity, says Kash Razzaghi, founder of sports social network Fancred. If a regular venture capitalist says no, it’s rare to get a straight answer as to why, he says.
“Most of them are incredibly vague with their reasoning, and their feedback usually isn’t insightful or helpful,” Mr. Razzaghi says. “They generally don’t tell you that the real reason they’re not investing is most likely due to the fact that they’re evaluating 20 other deals, and a lot of it is simply due to the economics or the traction those other companies have compared to you.”
But it’s different when an entrepreneur is dealing with a former employer; you can ask why. “I think it’s a real opportunity to get candid feedback about your company and specific reasons that drove them to a no,” says Mr. Razzaghi.
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