In Mel Brooks' comedy, The Producers, the character Max Bialystock tells young Leo Bloom the two cardinal rules of being a Broadway producer: rule number one, he says, is "never put your own money in the show."
And, for rule number two, he screams: "NEVER PUT YOUR OWN MONEY IN THE SHOW!"
I have met
with dozens (well, it feels like dozens) of people who want to start a business.
But, they
won’t put any of their own money into it.
So, while the concept is funny in a Mel Brooks show, what these would-be entrepreneurs are telling the world is that they have this great idea, but they
don’t believe in it enough to risk their own savings.
On the face
of it, what does that tell you? Would
you invest in a venture in which the owner hasn't put any of his/her own cash? Or would that send up a red flag?
Some might argue that they have, instead, put in "sweat equity". In other words, they have worked to get the business going and that constitutes their investment.
I believe that, to most investors, the idea of "sweat equity" is valid. But, there's an issue here that investors I have spoken with (myself included -- yes, I spoke with myself) see as possibly important and maybe very telling: does the entrepreneur still have his/her day job?
In other words, does the entrepreneur believe in the business enough to take a real risk, quit his or her comfy, secure job and work full time in the venture, for equity, in the belief that the effort and sacrifice will pay huge dividends when the business succeeds? Or are they working 40 hours a week at the good paying job in case the new business collapses?
Because, if they kept their day job and they have no money in the company, how much have they truly invested? To an outsider, this scenario may look more like a hobby than a business.
Entrepreneurs should understand that many investors will expect you to take risk. This is a level of credibility that many private investors look for; they will want to know whether you have risked your own money and livelihood to make
your vision succeed.
After all, if you don't believe in your company enough to truly invest in it, why should an outside investor?
There are alternatives for those with great ideas and high levels of risk-aversion. One is to consider selling the idea to
someone else (perhaps in exchange for a royalty of some kind). My point, however, is simple: generally speaking, if an entrepreneur isn't willing to risk anything, he might have a difficult time getting someone else to do so.
