Robert came up with a "great idea" for a new consumer beverage--a spicy carbonated beverage with a flavor different from any currently on the market. He researched the market fairly well, and he developed some valuable industry contacts, including Terry, a PR and advertising expert, and Leslie, a packaging expert who designs cans and bottles for retail markets. He developed a business plan that called for $500,000 in seed money and several rounds of further investment.
This is a true story. I've changed the names, but not the events.
Months went by. As he continued to work on his plan, Robert believed in his new product, believed in the target market and believed in himself. He also believed in his business plan.
Terry and Leslie set up a meeting with an investment group in Chicago. Robert met them in the reception area on the 19th floor of a 22-story modern office building--one of those very impressive offices with an elegant reception area, oak panels and all the trappings of wealth and power. By the end of that meeting, Robert had to suppress the urge to celebrate by jumping up and down. He wished he had a partner to share a high five with. The investors said they were interested. They said the idea seemed good and the main points of the plan--they hadn't read it, but they had read the four-page summary memo--were solid. They just needed to talk to a few people, to double-check some things. They asked Robert not to take any other deal without checking with them because they wanted in.
Robert couldn't wait--literally. His wife, his parents and his two siblings told him, in one way or another, "Don't just dream about it, do it!" He incorporated the new company. He quit his job and gathered all his and his wife's savings. Using that money, he paid Leslie to develop sample can designs and Terry to start the PR, giving both of them fees plus ownership in the new company.
The next few months sailed by in a blur of exciting new developments. Robert took some of the steps outlined in his business plan. There were more meetings with several different potential investors, who generally loved the new prototype can design, the plan and the market. The press releases worked, and Robert danced through a series of media interviews. He appeared on national cable TV, the local news and even a national network TV show.
As time went by, the startup grew, much of it according to the business plan. The new company produced thousands of cases of the new beverage and got it into local distribution, although not at a profit--production in low volume was much more expensive than Robert had anticipated. Since at least some of the investors he'd met with were still encouraging--but not writing checks--Robert ran through his and his wife's savings, then borrowed money from his parents, and then from his siblings. He and his wife mortgaged their house.
This story doesn't have a happy ending. In less than three years, Robert ended up with a failed company, no market and about $240,000 in debt. No investor ever put a dime into the business. Robert and his wife lost their home equity, his parents lost their savings, and his two brothers lost their investments.
The story does, however, have an important lesson to teach. If you're developing a new business and working on a business plan, take this advice to ensure you don't end up like Robert:
- Stick to your plan--or at least reevaluate it. Robert originally planned on getting $500,000 in seed money from professional investors. He didn't get the money, but he went on spending anyway. He should have stuck to his plan, or at least reevaluated it. Without that first piece of funding in place and with unanticipated costs, he got only halfway to success, which ended up as failure.
- Don't ever spend money you don't have. Don't invest money you can't afford to lose. And don't borrow money you can't afford to lose.
- Don't spend investment money until the investors' checks clear. Investors say yes when they mean maybe, and maybe when they mean no.
- When investors don't invest, take it as a clue.
One final thought on this subject: Robert's story doesn't mean that there's something wrong with building your own business without investment funding. Most businesses start without outside investment--but that's how they're planned from the start. If, however, you plan on investment and then don't get it, you'd better revise your plan as you continue. Half of a vast plan is a half-vast plan.