The psychology of asking “why?” to oneself is so important but often overlooked – perhaps due to the uncanny discovery of our innermost deceits. One quote I’ve picked up in my weekly reading which I found deeply rewarding was:
All of humanity’s problems stem from man’s inability to sit quietly in a room alone. — Pascal
In my frequent conversations with intrepid entrepreneurs who were looking to raise funds, one common reason that surfaced was that it was to gain speed in building their businesses. However when probed deeper, most couldn’t explain how the funds would be used, whether strategically or tactically. The answers typically danced around “hiring more heads”, “increasing marketing efforts”, “developing a better product” and one even said “just as a buffer…”.
While all the above seems logical since they make up the spectrum of business operations, banking on cash as a panacea for creating a strong business can be dangerously naive. In fact the outcome can be completely counter-intuitive.
Whether through debt or equity financing, there is a cost to capital. Fund-raising brings alongside other intrinsic and invisible burdens such as investor expectations and diminishing control (in the case of equity financing). Simply sitting on a stockpile of cash only provides a false sense of security that heightens the oblivion to impending challenges to the business.
With more cash, a business gets more fuel to grow – but there is corresponding pressure on capital efficiency. The greater challenge is that capital efficiency is a lag indicator, meaning the entrepreneur has to decide his bets and boulders ahead of time. Unfavourable outcomes are usually too painful and too late for course correction.
Some entrepreneurs would cite the need for more capital to test-and-learn about the market. While testing hypotheses is definitely a necessity in an ever changing and dynamic world, this strategy hinges more on the quality than quantity of the hypotheses to be tested. Testing everything means testing nothing.
Moreover, many entrepreneurs are themselves victims of the start-up cult. Exotic off-sites, sleep pods, ping-pong tables, gym machines in offices, the list goes on. The controversy lies in creating an extravagant culture that masquerades behind employee welfare. In this respect, the tech start-up scene has no lack of such examples, especially perpetuated by the rising co-working space culture.
Acute stress response (also known as “fight, flee, freeze”), a theory by Walter Bradford Cannon describes human’s response in a crisis. It is imperative for the entrepreneur to understand if the fund-raising’s inherent goal is actually for the business to “fight” or “flee”, otherwise in crunch times and without building up the right muscles, the likely response would be to “freeze” and collapse eventually.
The entrepreneurship journey is not just about creating economic value but well-being for the society including the entrepreneur himself/herself. Fund-raising calls for entrepreneurs to have an ontological inversion so that not only resilient businesses may be built but strong culture of accountability in people can develop continuously in the long run.