Startup Entitlement Syndrome: Why Your Cash Request Sounds Ridiculous!

There’s a nasty elephant that resides in nearly every investor’s conference room around the world. And that Woolly-mammoth-sized elephant is called “entitlement.”

And why is it that startup founders today think they deserve a 25x multiple just because they had a great first year and their product’s future looks promising?

Startup founder with swagger

Entitlement. It all comes down to entitlement – a sense that because these guys can saunter into a VC boardroom and nail down tens and hundreds of millions, so to can you.

The main thing such misbegotten founders have failed to recognize is that investors will only consider putting money into a venture that has the potential to make them boatloads of money. Most out there, VCs and angels alike, want to see their capital return in a relatively short time span – say a year or two.

Yes, they do want to make a profit, but despite all the best information and smart predictions of what your product can do based on current market conditions, most investments won’t even end with their investment capital being returned. Let alone, offer a decent return on investment.

Over 80% of startup investments fail. That’s the mindset of the person or persons sitting across the table from you.

So you come in all brash hotshot thinking you’ve created an app that will take over Uber’s market-share, and finally serve to upend taxi companies all over the world for good.

If you have the audacity to ask for millions, even though you can’t show that value on paper, then you’re entitled. Pure and simple.

And, good luck with that! You’re looking for the pot of gold at the end of the rainbow – a dumb first time investor with all the Benjamins you’re asking for – who’s ready, willing, and able to part with that money.

Startup founder and her fast car

“Daddy needs a new Ferrari and momma wants an S Class for jetting the kids back and forth to soccer practice.”

That’s what they’re thinking when they hear a ridiculous valuation with nothing to back it up, or when you come back after the first round asking for more cash when you haven’t even made any significant profits yet.

You see, savvy investors know when they’re dealing with an entitled startup founder. They’ve been there and done that more times than they can probably count. And guess what, they won’t be chomping at the bit to “get in before it’s too late” if you don’t have your eggs in a row.

Somewhere in the neighborhood of 80% of startup investments don’t net a return. Startup investing is based on equal parts informed intelligence, measured speculation, and quite frankly, dumb luck! Maybe more, the data is currently unclear, but you won’t find many good investors that would disagree with that statistic.

Much of the investment world works this way. Taking big risks will eventually lead to big returns. If they can’t temper the losses with significant wins, they’ll go belly-up. This is why so many investor wannabees like to invest their extra money in mutual funds instead of playing the stock market or building their own business.

So what makes you, the entitled startup owner, think your company is worth so much money?

It all comes down to entitlement. You have a great idea (in your not-so-humble opinion) and you think you should have investors lining up for multiple rounds of funding – while paying you a weighty salary, and funding your trips around the country/globe.

Here’s what you’re not considering when you try to blow your net income multiples and cash flow statements out of the realm of reality: Regardless of what you’ve risked up to that point; by investing in your company, the investor, in most cases, is taking on all the risk moving forward.

Business owner calculating ROI

The only guarantee in startup investing is that ROI is never guaranteed…

Maybe you’re completely on the other side of the startup fence. Perhaps you’re not guilty of asking for too much, but rather too little? Undervaluing your brand’s needs will leave an even worse impression on investors.

At least when you ask for too much money you’re demonstrating some brash arrogance that your company is actually worth something. Undervaluation creates a whole slew of new potential problems an experienced investor can foresee.

Essentially, you either don’t know just how much money you need. Or, in their mind, you’re asking for a little now to get them sucked in, and are likely planning a bigger ask – or several smaller asks – in the months/years to come.

Worse, if your idea is growth oriented (and it should be if you’re asking for investor money) they have to worry you’ll need to bring in new investors to make up for your undervaluation as cash needs continue to mount. Guess what happens then? Their shares get diluted. And yep, their ROI and stock values start to go down when/if you ever start making money!

Investors aren’t stupid folks

Learn how to do an accurate valuation on your company before you even think about sitting across the table from a seasoned investor. Otherwise, you’ll just make yourself and that brand you’re trying to build look ridiculous!