A major mindset shift is required as we transition from Scrappy Entrepreneurs to Strategic Entrepreneurs.
I will share a few stories that I guarantee will help you go from Scrappy to Strategic.
You might think my stories are self-serving—and you’re right—but we have designed our business model to be completely aligned with our customers. Your success is our success. Thus, before you judge me, see if these five mental models will help you make tough decisions.
1. Value your time.
We entrepreneurs tend to undervalue ourselves, whether because we are told, “Your idea is stupid,” or because we have run out of cash So. Many. Times.
I remind our team of this: “Last year [Entrepreneur X] increased the value of their company by $1m. They own half of the company. That means their time is worth $300 per hour. Don’t waste their time.”
I’d like to remind you entrepreneurs as well. Instead of spending $2,000 to have a professional write a business plan, I’ve seen entrepreneurs farm it out to an intern, which requires 40 hours of revisions. (Per the above hourly rate, “saving” $2,000 cost $12,000.)
2. Probability vs Uncertainty
Recently, we helped a company raise $2m, but it was almost $0m. Originally, they said $2,000 was too expensive, considering they didn't know if they were going to win, so I asked.
“What if I told you that for $2,000, I will flip a coin, and you’ll have a 50% chance of getting a Land Rover? Would you do it?”
“Yes.”
“If I change that to 10 Land Rovers in a year, would you still do it?”
“Yes, of course.”
We signed a contract with them and now they have ~24Land Rovers. Ok, not quite, but they have the dollar amount of 24 Land Rovers.
This is an example of Probability. There was some probability they would win. If they didn’t win the first try, we could try a second and third time.
Uncertainty is very different. Take the risk that your country will have an ebola pandemic next year. There is nothing you can do to influence the risk or to ascertain the chances. Stocks or bitcoin, too, are examples of uncertainty. You can keep betting on a stock, but the price might keep going down regardless of how many times you bet. To wit:
"I might as well just throw my money at Bitcoin if I don’t know we will win this funding for sure," an entrepreneur told me.
“It's interesting that you bring up Bitcoin.” Luckily, I had researched this before. “If you invested $2000 in Bitcoin, the most you could have returned in a 2-year period if you were completely clairvoyant would be $54,000, a 27x return.”
“Yeah, exactly my point,” they said.
“But! What if you invested $2,000 in trying to raise $1,000,000 grant from Mastercard Foundation? Your return then would be 500x, right? And you don't have to be clairvoyant—we just have to write a good application.”
They thought this was amazing!
It gets better: fundraising is even better than flipping coins because we can influence the probability by making a better pitch or proactively meeting the funder at a conference. We can make our own luck.
3. Cost vs Value
“Your price is so expensive. [X consultant] will do it for half the price,” an entrepreneur told me years ago.
They went with the cheap option.
I heard from them last year: "We lost that grant and are looking for someone else to help us. What's your best price?"
“The same as last time,” I replied
There is no shortcut to getting valuable work. As they say, “Cheap is expensive.” This person “saved” $1,000, but it cost them $2,000,000 worth of funding.
The best way to think about the cost of a good transaction advisor like Grant&Co is not as a cost. Though our commission ranges from 1.5% to 10% (typically on the higher side), we can usually get 50% more money or 50% better terms than an entrepreneur could get for themselves. This means the "cost" pays for itself.
Getting the best terms is the most important thing we do at Grant&Co—no one believes me until after the fact. One time, we negotiated from 50% cofinancing to 0%. Another time, we negotiated from $100,000 disbursement fees to $0 in fees. One time, the funder wanted to give the money in local currency (despite the fact that the black market would reduce the value by 20%). We got the money for our client in USD; all the other investees got local currency.
With a good transaction advisor, you are more likely to win and get a better deal. A bad deal can be worse than no deal at all.
4. “I need to shoot less,” said Kobe never.
“I tried to raise equity before. But it was a was a waste of time,” an entrepreneur told me.
“Oh yeah? How many funders did you talk to?”
“Five.”
If Kobe Bryant took 5 shots, missed all of them and decided he wasn't any good you know what he would be?
He wouldn't be Kobe Bryant.
You have to believe in your business. You miss 100% of the shots you don't take.
Why talk to so many funders?
“[investor x] seems good enough. I don't want to go on a wild goose chase to find other funders,” an entrepreneur told me.
This funder was a good fit. But at such an early stage of the conversation, we had about a 10% chance of winning. A 10% chance of winning $10m (as this case was) gives a great expected value of $1m, or a 500x return. But I cautioned the entrepreneur:
“Even though $10m is tantalizing, there’s a 90% chance a year from now that we lost; you’ll be mad at me andI’ll be mad at you. Do you really want to put all your eggs in one basket?”
“Well, when you put it that way…”
In poker, this is called the Kelly Criterion. You need to make enough bets. You can’t expect any single hand to win. Even pocket Aces lose sometimes
That’s why I encourage entrepreneurs to budget $10,000 or $20,000 per year, whether they do the fundraising internally, hire someone else or hire us. Statistically, if you bet all your hopes and dreams on one application, you will be disappointed.
5. Opportunity cost
“We have 1 month of runway. Can you help us raise?”
“Sorry, no. 1 month is not enough time.”
[Flash back 6 months]
A biomass company wanted help raising money. But they only had a runway for a few months. They didn’t like the idea of paying money upfront to raise capital. “We will just save money on fundraising for now. If we run out of money we will call you.”
And they had called. But the sad thing is that by the time people realize they need help raising capital, there are no more bullets left in the clip.
Entrepreneurs are eternal optimists. Unfortunately, raising capital takes at least a year, so the right time to start is when you have 18 months of cash left. This gives you a year to close plus 6 months of cash still in the bank, so you can negotiate good terms and aren’t forced to take a bad deal.
In summary
Decision-making Tools to transition from Scrappy to Strategic:
Value your time.
Know the difference between Probability and Uncertainty.
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Is fundraising a good investment?
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How to turn $2,000 into 24 Land Rovers.
A major mindset shift is required as we transition from Scrappy Entrepreneurs to Strategic Entrepreneurs.
I will share a few stories that I guarantee will help you go from Scrappy to Strategic.
You might think my stories are self-serving—and you’re right—but we have designed our business model to be completely aligned with our customers. Your success is our success. Thus, before you judge me, see if these five mental models will help you make tough decisions.
1. Value your time.
We entrepreneurs tend to undervalue ourselves, whether because we are told, “Your idea is stupid,” or because we have run out of cash So. Many. Times.
I remind our team of this: “Last year [Entrepreneur X] increased the value of their company by $1m. They own half of the company. That means their time is worth $300 per hour. Don’t waste their time.”
I’d like to remind you entrepreneurs as well. Instead of spending $2,000 to have a professional write a business plan, I’ve seen entrepreneurs farm it out to an intern, which requires 40 hours of revisions. (Per the above hourly rate, “saving” $2,000 cost $12,000.)
2. Probability vs Uncertainty
Recently, we helped a company raise $2m, but it was almost $0m. Originally, they said $2,000 was too expensive, considering they didn't know if they were going to win, so I asked.
“What if I told you that for $2,000, I will flip a coin, and you’ll have a 50% chance of getting a Land Rover? Would you do it?”
“Yes.”
“If I change that to 10 Land Rovers in a year, would you still do it?”
“Yes, of course.”
We signed a contract with them and now they have ~24Land Rovers. Ok, not quite, but they have the dollar amount of 24 Land Rovers.
This is an example of Probability. There was some probability they would win. If they didn’t win the first try, we could try a second and third time.
Uncertainty is very different. Take the risk that your country will have an ebola pandemic next year. There is nothing you can do to influence the risk or to ascertain the chances. Stocks or bitcoin, too, are examples of uncertainty. You can keep betting on a stock, but the price might keep going down regardless of how many times you bet. To wit:
"I might as well just throw my money at Bitcoin if I don’t know we will win this funding for sure," an entrepreneur told me.
“It's interesting that you bring up Bitcoin.” Luckily, I had researched this before. “If you invested $2000 in Bitcoin, the most you could have returned in a 2-year period if you were completely clairvoyant would be $54,000, a 27x return.”
“Yeah, exactly my point,” they said.
“But! What if you invested $2,000 in trying to raise $1,000,000 grant from Mastercard Foundation? Your return then would be 500x, right? And you don't have to be clairvoyant—we just have to write a good application.”
They thought this was amazing!
It gets better: fundraising is even better than flipping coins because we can influence the probability by making a better pitch or proactively meeting the funder at a conference. We can make our own luck.
3. Cost vs Value
“Your price is so expensive. [X consultant] will do it for half the price,” an entrepreneur told me years ago.
They went with the cheap option.
I heard from them last year: "We lost that grant and are looking for someone else to help us. What's your best price?"
“The same as last time,” I replied
There is no shortcut to getting valuable work. As they say, “Cheap is expensive.” This person “saved” $1,000, but it cost them $2,000,000 worth of funding.
The best way to think about the cost of a good transaction advisor like Grant&Co is not as a cost. Though our commission ranges from 1.5% to 10% (typically on the higher side), we can usually get 50% more money or 50% better terms than an entrepreneur could get for themselves. This means the "cost" pays for itself.
Getting the best terms is the most important thing we do at Grant&Co—no one believes me until after the fact. One time, we negotiated from 50% cofinancing to 0%. Another time, we negotiated from $100,000 disbursement fees to $0 in fees. One time, the funder wanted to give the money in local currency (despite the fact that the black market would reduce the value by 20%). We got the money for our client in USD; all the other investees got local currency.
With a good transaction advisor, you are more likely to win and get a better deal. A bad deal can be worse than no deal at all.
4. “I need to shoot less,” said Kobe never.
“I tried to raise equity before. But it was a was a waste of time,” an entrepreneur told me.
“Oh yeah? How many funders did you talk to?”
“Five.”
If Kobe Bryant took 5 shots, missed all of them and decided he wasn't any good you know what he would be?
He wouldn't be Kobe Bryant.
You have to believe in your business. You miss 100% of the shots you don't take.
Why talk to so many funders?
“[investor x] seems good enough. I don't want to go on a wild goose chase to find other funders,” an entrepreneur told me.
This funder was a good fit. But at such an early stage of the conversation, we had about a 10% chance of winning. A 10% chance of winning $10m (as this case was) gives a great expected value of $1m, or a 500x return. But I cautioned the entrepreneur:
“Even though $10m is tantalizing, there’s a 90% chance a year from now that we lost; you’ll be mad at me and I’ll be mad at you. Do you really want to put all your eggs in one basket?”
“Well, when you put it that way…”
In poker, this is called the Kelly Criterion. You need to make enough bets. You can’t expect any single hand to win. Even pocket Aces lose sometimes
That’s why I encourage entrepreneurs to budget $10,000 or $20,000 per year, whether they do the fundraising internally, hire someone else or hire us. Statistically, if you bet all your hopes and dreams on one application, you will be disappointed.
5. Opportunity cost
“We have 1 month of runway. Can you help us raise?”
“Sorry, no. 1 month is not enough time.”
[Flash back 6 months]
A biomass company wanted help raising money. But they only had a runway for a few months. They didn’t like the idea of paying money upfront to raise capital. “We will just save money on fundraising for now. If we run out of money we will call you.”
And they had called. But the sad thing is that by the time people realize they need help raising capital, there are no more bullets left in the clip.
Entrepreneurs are eternal optimists. Unfortunately, raising capital takes at least a year, so the right time to start is when you have 18 months of cash left. This gives you a year to close plus 6 months of cash still in the bank, so you can negotiate good terms and aren’t forced to take a bad deal.
In summary
Decision-making Tools to transition from Scrappy to Strategic:
Value your time.
Know the difference between Probability and Uncertainty.
Cheap is expensive.
Budget to take several shots.
Raise before you’re desperate.
Yours,
Kyle