Think 10 Steps Ahead With Your Money — Why the Wrong Investor Is Worse Than No Investor

All entrepreneurs have lived through a cash squeeze at some point in their history.  There is nothing worse than worrying about whether you will be able to fund your next payroll or stay liquid enough to survive another day. 

That fear of running out of money can cause you to become desperate, willing to take cash from whoever happens to show up to save the day.  But sometimes taking that cash can have unintended consequences, that had you thought about its longer-term impact, you may never have taken that cash in hindsight. 

This case study will help teach you how not to make this same mistake in your business.

A case study — living in the present

I met a retailer who had a chain of boutique jewelry stores.  They preferred to locate their stores in affluent suburban areas of highly populated metropolitan markets.  They started to experience a downturn in sales when consumer spending started to slow, which created a cash squeeze on their business.  With no excess cash in the bank, they needed to quickly find an investor to save their business.

Luckily, they did find an investor who was willing to infuse the much-needed capital into their business.  But that cash came with strings attached.  The investor was a fan of the store and wanted a new location opened up closer to where she lived.  The problem for the company was that the investor lived about 30 miles outside of the city center, in a less affluent, more rural community.  The entrepreneur was very skeptical a new store in that location would be successful, but she was desperate for the cash, and she made an exception to her new site location strategy to close the investment deal.

The good news is the company’s bank account saw the much-needed cash infusion, which allowed it to live on and fight another day.  The bad news is, when the new store opened in the investors’ hometown a year later, it was doomed to fail before it even opened.  There simply wasn’t enough affluent people in the area that were interested in high-end jewelry.  After investing half of the funds raised into this new location, and losing a year of time getting the new store off the ground, the company decided it needed to close the location after about three months of it being open.  That put the company right back in the same situation it was a year earlier, in a cash squeeze with nothing to show for it.

But this time it was worse.  When she approached investors this second time around, she now had the egg on her face of having to explain why their newest store opening was a failure and needed to close so quickly after it opened. 

The new investors started to question her expertise in finding good site locations, which had them questioning all the new store opening assumptions in her growth plan.  And what do most investors do when they have newfound uncertainty in a business plan? They typically do nothing, which is exactly what happened here. 

The company was unable to raise the capital needed the second time, and was forced to take the company out of business entirely.  What a mess!

The same case study, but living in the future

If this entrepreneur had been thinking in the future, not the present, and was willing to stick to her defined strategy for new site locations, this business could have survived.  She should have told the first investor her rationale for why she did not want to open a location in a “non-prime” market. 

That investor would have had more respect for her, demonstrating the clear discipline she had in running a successful chain of stores.  Maybe that investor would have walked, but that is perfectly okay.  You simply find a new investor who won’t make you run through unnecessary hoops that your own gut instinct would have told you was a bad decision.

Part of the point here is that all cash is not the same shade of green.  Cash that comes with strings attached that knowingly hurts your business is not cash at all, it is potentially a precursor to a death sentence, as it was in this case.

Closing thoughts

Running a business is like playing chess; you always need to be thinking ten steps ahead.  Because if you don’t, and you succumb to the needs of putting out a short-term fire, you may end up tying a noose around your neck in the process, and you didn’t even know it at the time.  Every action has a consequence; some of them are good, and some of them are bad. 

Just be smart enough to see “the forest through the trees”, planning far enough ahead, to make sure you are not sparking an unintended wildfire.