Wednesday, June 13, 2007

Greed > Fear = $

I ran in to my friend Mark a few weeks ago. In our former lives (the early '00s), we trained and mentored entrepreneurs together. Dr. Mark is good, particularly when teaching valuations. What’s your company worth? What someone is willing to pay. I chortle at the recall.

Seeing Mark reminded me of an equation I employed. Greed > Fear = $. This basic algorithm was related to raising money from early-stage investors (particularly angels), and it’s based on a simplistic belief that investors invest because they want to make money. This, of course, is not entirely correct … many investors employ a bi- or tri-foci lenses, weighing (whether they know it or will admit it or not) their affinities – the entrepreneur’s gender, ethnicity, geography, industry, alma mater, faith, etc. -- alongside investment return. I buy the bi- and tri-, but still think fundraising’s pretty simple: The moment you get an able investor’s greed to outweigh their fear, you win. (BTW, same goes for many business-to-business sales and biz dev endeavors.)

What is fear? People are strange, phobias too. In an investment sense, fear is pretty simple: It is the undesirable product of failure (lose money, bruise your ego, tamper your credibility, harm your relationship with the invested-in entrepreneur). Investors – and entrepreneurs – want to minimize risk and maximize reward. Unfortunately, that’s not how the world works; as risk increases, so too do potential rewards.

How about risk? It’s derived from the Italian word risco, an oh-shit expression used by sailors to express the chances of ending up on the rocks. Risk is quantification of potential failure. Conversely, uncertainty – which drives fear -- is the absence of information to make an educated decision.

Large corporations play chess; emerging companies play poker. It’s tough to play poker (or invest in or start companies) without being comfortable with placing bets in situations with large uncertainty.

Back to the ways of the world: Whether you’re investing in a company or crossing the street, the world does not work with perfect information. As unknown unknowns increase, so too do risk and fear. Hence, it’s the entrepreneur’s responsibility – be it in pitching a product to a customer, recruiting a key management team member, or soliciting funds from an investors – to provide as much information as possible to enable people to make a comfortable, educated decision. To temper their fear and inflate their greed. And, hopefully, to raise a few bucks.

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