New Venture Evaluation #20

Personal Financial Commitment


unfair

I had an interesting conversation with an entrepreneur last night about the fundraising process for a new company he is looking to pursue.  Although he is still riding out the transition from the sale of his current business to a large corporation, he is

beginning to take steps towards the creation of his next idea.  All this is great, but what really inspired me to tell this story and to shed light onto our investment process was the fact that he was planning to raise money to START the new business, not to grow it.  We hear this all the time, and frankly think it’s unfair. Why should an investor be asked to bet on this idea if the founding entrepreneur hasn’t done so himself?

When an entrepreneur is looking for investment in a new venture the strategic financial needs of the business should warrant the investment of capital that can’t be afforded by the owner.  That said, the personal financial commitment of the founder(s) is a very clear indicator of how strongly the entrepreneur believes in their own business. If they’ve in fact invested some percentage of their own personal net worth towards the success of the company, that shows personal financial commitment.  What percentage of the founders net worth do you feel should be invested in the new company?

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As always, there is a balance here.  We certainly don’t look for the “all in” entrepreneur; extreme risk takers who invest more than they can afford.  Ideally, we look for founders that have invested a considerable amount of their own capital into the business, and have a real “opportunity” cost for venture creation. Is it too much to expect a founder to have put up 30%+ of investable assets into their venture intelligently and constructively to secure competitive advantages? The presence of friends and family investors is also a positive sign when looking at this category.

This is just one of the key criteria forward-thinking investors use when evaluating the strength of entrepreneurs and their new ventures. How do you measure up? Go to www.venturephenomeproject.com to read all 80 criteria and swap knowledge with other entrepreneurs & investors.

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