Week 7: “Discuss Investor Dilemmas”

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ENT 600 – Week 7: Discuss Investor dilemmas (Chapter 9, The Founder’s Dilemmas)

Method to seek for outside money for rapid growth, does it matter if it is ethical or unethical? How the decision impacts the business?

“To survive and grow, startups need human capital, social capital and financial capital. Core founders who lack any of these three often try to attract co-founders or hire employees who can provide what is missing. Sometime that works. But for many founders, the startup’s financial capital needs (e.g., for product development or for rapid growth) exceed the capital they can provide, and lead the founders to seek outside funding.”  (p.251  Investor Dilemmas – The Founder’s Dilemmas of Noam Wasserman).

According to The Founder’s Dilemmas, taking funds from outside investors, either from family and friends or from angel investors or from venture capitalists, will definitely bring the advantages and also the potential risks to the company. I want to share a true story that I think may a little off side with the discuss topic but I found really interesting and may bring a lesson somehow, regarding a founder’s decision and his approach of raising money for his business.

Something that happened to Rex – a successful businessman in the 90s in Florida. With over 15 years’ experience in manufacture home business, including retail sales and property subdivision development, Rex decided to move to NC due to a family reason. Having been a successful manager/developer of a successful manufactured home company, he knew that he could secure a new position with ease after his relocation settled down. Via some of his friends, Rex heard about one individual man who wanted to startup a mobile home dealership business which including retails sale and manufacture home subdivision development in the same town where he lived. Rex was so excited and applied for a job at this new business. With no surprise, Rex had been hired right away with a good pay and a promising for success and bonuses in the future. With Rex’s experience, business skills and being a manager, he was responsible for recruiting and hiring not only the entire office staff but also and most important, the sales team. With his social media and in his business circle, Rex recruited many new employees, trained them for over the next 6-8 weeks while bring set up crews to set up all the models as quick as possible and ready for the launch of business. Business started doing great and growing fast. Sell, sell, sell…Dealership came together, homes were delivered and set up in many places including a new subdivision the founder has been working on.

One day, Rex over heard in the office that the founder/owner was using Rex’s resume and sales experience to secure a large line of credit, that the owner knew he could not get it by himself. The owner was approved for a $1.8 million line of credit from a Financial Institution. For that large financial fund, the owner looked and felt secure about his startup and growing business.

On the following Saturday morning when Rex came to work, he was greeted by the owner on the front porch with the boxes of personal items and a one-week severance pay check with a “Thank you but I can take it from here and I no longer need your services.”

Rex thought there was something wrong here and would like to find out if what he heard was true or not. Rex contacted the Financial Institution and learned that the owner had been approved to get a greater line of credit because of Rex’s success in the resume and in the last few months of launching business. The Financial Institution told Rex that since the line of credit has been approved and the fact Rex had been fired story will not change a thing, even though they realized what the owner did to Rex was not ethical but the process of credit line was legal and for that reason the owner was able to achieve a goal with liquid money that without Rex, the owner could not achieve in years.

Someone asked Rex: “What was your feeling when looking back?” His answer was “Gratification.” He said, in less than 2 years after he was gone, he witnessed the business went downhill and finally went out of business. It has been posted in the local newspaper  “Unfortunately, a totally unsuccessful business because of poor management.”

This story was sad and I felt so sorry for Rex. For me, it seemed more likely relating to work ethic and integrity as a person and as when doing business. The startup owner in this story, instead of seeking out for outside investors such as friends or family, angel investor or venture capitalists – whom surely in exchange would get a part of the company equity and control, he did choose to take advantage of his key employee to get/claim his own funding and to maintain the ownership stakes, kept control of the company. In this case he unnoticeable invited the risks himself and jeopardized his business. He indeed was “playing-with-fire”. Don’t you think his motivation and decision related to wealth and control?

Money can help business run and grow with time if it can be used with a good decision-maker person. It’s a shame to lose a talented employee who helped manage and run successfully the company from the startup.

 

Source:

Wasserman, Noam (2012). The Founder’s Dilemmas. Princeton, NJ: Princeton University Press

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9 thoughts on “Week 7: “Discuss Investor Dilemmas”

  1. Mary,

    Thank you for your story, it was very sad, but a lot to learn from that. I am glad that Rex is grateful and can see the good out of the situation. I don’t know how he could have seen all that coming or how he could have treated the situation any different. What goes around comes around, and it sounds like the owner got his.

    Thanks,

    Mackensie

    Liked by 1 person

    • Hi Mackensie,
      Thank you for your your comment. Rex was grateful to find the job that so well fit him into everything he knew and the thought of creating anything from scratch was exciting. In the hindsight, the one different thing he should have done was to open his own dealership and not work for other.

      Mary

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  2. Mary,
    Great story and it goes back to what I believe is karma. It sounds like Rex knew that too. What Rex’s boss did was certainly unethical. My guess is the other employees knew that once Rex was gone the company would fail. Wasserman talks about the difficulties for the other employees when the founder is removed, replaced, demoted, and moved to the board. Many people are still loyal and ethical. I wonder if any of those people work with Rex now.
    Cece

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    • Hi Cece,
      It was difficulty for the employees when Rex was gone for sure but they needed a job. Besides, the founder knew that some of the employees were loyal to him. Rex was end up to have a better job outside of of his area and he was successful.

      Mary

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  3. Thanks for sharing that story. Business ethics are so rarely talked about, but in the end they are really the most important part of the business! I have to wonder if that business owner inadvertently did Rex a favor – I can’t imagine the owner would have had much in the way of ethics or respect for his employees if he is already pulling a bait-and-switch on the bank. I’m sure that is likely a cold comfort, but at least he didn’t get leeched any longer than he did…thanks again for sharing.

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  4. This was a great story and, unfortunately, I think that it happens everyday on various levels. I could easily see this happen with a startup business, where the lender is actually investing in the person, rather than the business. I could also see it happening within a larger publicly traded company, which could be disastrous to its shareholders.

    Chris

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  5. Mary that was an awesome story about Rex and his boss. Because of Rex’s credibility he grew someone the owners business. Even in my own field I am very careful to share my whole idea to my colleagues.

    Great Post

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