As we enter the second month of Shark Tank, I thought it was time to reflect on an important topic. Although this might seem confusing, sometimes when you miss out on an investment deal, it’s actually the best thing for your business.
This may seem contradictory, but when someone so passionately shares the ins and outs of their business – and it looks as if it has significant traction – sometimes it’s best if they just keep doing what they’re doing with no outside help. When we choose not to invest in a business, it’s not necessarily a reflection of the business – it’s often about what’s best for the person who owns it.
Figures released this week by ME Bank claim, “people who are ‘self-employed’ feel more financially secure than salary earners”. The report confirms that flexibility and control are the real benefits of being your own boss. They’re not unaware of the risks as 60% of business start-ups fail, but on balance they prefer the life on an entrepreneur.
The moment a self-employed individual takes investment, they are by definition no longer ‘self employed’. They now have responsibilities not just to their customers, but to their investors as well. There is also significant compliance, governance and fiscal responsibilities that come with the investment, not to mention the budgets performance indicators and regular reporting.
What can be a ‘great little earner’ for a self-employed person is not necessarily a great deal for an investor. When a deal is made there is pressure to build, grow and develop and a new focus on scaling the enterprise. And quite frankly, this is just simply not for everyone. As we saw in episode three of Shark Tank, what can be a fantastic marinade business, becomes an enterprise beholden to food regulation and trademarks. What is a fantastic children’s activity program, becomes one man having to be everywhere all the time – and his commitment to his own family life will be effected.
Life is forever changed for the business owner with an investor. The investor wants their funds to work solely for creating growth opportunities for the business, not for reducing the debt on the balance sheet. As Jimmy Kimmel said in his famous Horse Pants skit, “building a new house and getting a divorce”.
Business owners know that they need to prepare before approaching the bank for an overdraft or loan, and it is the same with investors. As I pointed out recently in “Seven Secrets to Nailing your Pitch”, being a really nice person is not usually enough to secure finance. But if you do nail the pitch, then what…
Many of the pitches we saw were vague on how they would use the money they were asking for to grow their business. Most came to us with a valuation that they thought sounded fair and reasonable, and some just wanted to get the money they invested out of the business back but the point is they won’t achieve this by taking on an investor. The shareholders get their money back on exit when they sell the business in entirety to someone else.
In fact when we asked, “How will you return the investment?” some looked surprised that we had asked this question. I know I have been quoted as saying, “This is not a donation – it is in investment, and that means there needs to be a return.” No one would ask for a bank loan not expecting to pay it back, and it’s no different with an investment.
The sharks coached many of the entrepreneurs to be careful what they wish for, and I recommended the book Small Giants by Bo Burlingham to many. Being self-employed can be a great way of life if you have a good recurring income or regular clients. But when you grow an enterprise it can begin to own you – you have responsibilities to your customers, employees and suppliers. And taking on investors takes that commitment one step further.
I explore much more about making career and life choices in my new book Live What You Love.
This article first appeared as part of my Influencer posts on LinkedIN in February 2015