Earlier last month, I was fortunate to attend a lecture by Chuck Lacy former President of Ben & Jerry’s and currently President of Barred Rock Fund. He was a guest of the Legatum Center at MIT and spoke about raising funds as a social business. It was interesting hearing him speak since he really did not focus on the fund raising part as much as some basic precepts that most entrepreneurs should keep in mind – whether you are growing a socially responsible business or a plain old fashioned technology startup.
I thought I would try to distill the essence of what he said as I think it is very relevant especially in these tougher economic times.
- Don’t raise money. Sounds counterintuitive but it makes sense. You should run as long as you can on your own money. You should think about working part time and keeping 100% of your company instead of working 100% and giving up 50% of the company to raise cash. Raising money means you are giving your company away. There are many ways to raise money without diluting your stake in the company – Grants, state funds, PRI funds.
- Don’t confuse writing a business plan with running a real business. There is a business plan disease on campus at all our big schools. People need to know their business. It is great to write “about” a “business idea” but if you don’t know “the business” it is nothing but an academic exercise. He gave a great example from personal experience. He had got a well written business plan from someone who wanted to start a gourmet cookie company wanting to raise $4 million. When he asked the entrepreneur if he could taste his cookies, he was told “I will hire a chef once I get the money and he will come up with the recipe”. On the other hand he met a woman who had a bakery that was known for her cookies. She was looking to expand and wanted $30K. When he met her all she could talk about were cookies. She never had a business plan but she knew exactly what she wanted to do, what types of new cookies to make based on her first hand experience with her customers, what kind of equipment she would need and exactly what she would do with the money. Chuck said he was more likely to trust the latter person since she really knew her business over the former who only had a “business plan”.
- Get to know your customers. Sometimes they are your best investors. Chuck invested in a company that was breeding grass fed cows. Cows nowadays are bred to fatten fast on corn feed. As a result you cannot fatten them on grass. You need to look for breeds that thrive on grass. His company had identified a strain in Australia and was looking to import some of the cattle to start breeding them in the US. Since grass fed cattle were hard to come by in the US and expensive, his company funded the import operation by pre-selling half the herd to their customers at US prices. The customers saw value in the deal and his company was able to raise the capital to cover their costs from their customers without dilution. His investment of about $40K is now worth $1 Million in a fast growing market.
- Develop your personal network before you start shopping your business plan. Know the activists who hang around conferences in your area of interest. Network and get to know people. It is better to get your plan forwarded or recommended through one of these contacts than to cold call someone. You want to be recommended by someone in the field instead of going through the front door as there too many trying to get thru that door. Develop our network in the field that will give you the right contacts. Get to know journalists and activists. Develop a relationship beforehand so you can get your name out when you need to.
- Show progress. Stay in motion. If all you do is fundraise, investors will wait since there is no compelling event. If you working at your business, investors will see progress.
- Customers are patient investors. Customers are a great source of funding. If you are making a product of value to them, customers will see the inherent worth of what you are doing and be willing to invest. And they will be willing to work with you as you grow the product. VCs on the other hand are impatient and are looking for quick returns on their money and want you to grow quickly.
- Take care of your early investors. VCs are decisive and that is good for them. Angels can’t make up their mind. VCs will squeeze out angels. If you have early angel investors, make sure you take care of their interests also.
- Make sure you really know your business partner. When you chose your business partner make sure you really know them. Make sure you do not create a marriage of convenience based on looking at complementary strengths and weaknesses. It is important that you and your partner have chemistry between you. Make sure you do something outside of work together – hike or play golf – so you get to really know the personality of your partner.
- Keep yourself organized. Maintain your credit scores. Maintain your personal integrity. People are going to check you out.
Finally he summarized by saying that social purpose is an integral part of business itself. If you start your business by focusing only on the business objective you will always keep pushing off the social impact issues. It is very difficult to bolt on a social purpose to an existing organization. Have a powerful social purpose from the very beginning based on values.
BTW the next Legatum lecture is on April 9th at noon at MIT when Jacqueline Novogratz, CEO and Founder, Acumen Fund will be speaking. You can find details about the event at their site. If you are in the Boston area, this is a great resource.