Impact investors, venture capitalists, foundations, family offices, government agencies, development organizations, grants, and PRIs. It’s great to have so many funding options, right, entrepreneurs?

Entrepreneurs should say “no” to funders that don’t make sense for their companies Tweet This Quote

There are many sources of funding for entrepreneurs these days—I’m thankful for that, both as an entrepreneur and as an investor. But like each company has different goals, each funder has their own interests—some are to generate financial returns, some are to encourage education in Africa, some are to ensure clean energy in India. Instead of waiting for funders to adjust their behaviors, I suggest a different approach: entrepreneurs should say “no” to funders that don’t make sense for their companies. Funders perform diligence on where their money will go—why aren’t more entrepreneurs performing due diligence on their funding sources?

Of course, entrepreneurs may need to accept any funding possible and not have the luxury to choose between different funders. Even if that’s the case, with proper due diligence, at least entrepreneurs will know the situation they are agreeing to.

Funders perform diligence on where their money will go—why aren’t more entrepreneurs performing due diligence on their funding sources? Tweet This Quote

This perspective has precedent. During my ten years in private equity investing, I watched many competing firms treat management teams poorly, micro-manage operations, or entirely disengage post-investment. Over time, many of these investment firms have disappeared. Entrepreneurs started doing their due diligence on funders, better understanding the “terms” of the agreement, and ultimately having the confidence to say “no” to money. It isn’t easy, and fundraising is no one’s favorite activity. But if lack of diligence leads to poorly aligned perspectives between funders and entrepreneurs, the answer seems clear.

Barry Schwarz, in Paradox of Choice, lays out a good framework when thinking through How to Choose between many options:

  1. Figure out your goals
  2. Evaluate the important of each goal
  3. Assemble the (funding) options
  4. Evaluate how likely each of the (funders) is to meeting your goals
  5. Pick the winning (funders)
  6. As time goes on and factors change, modify goals with funding partners

Over the next several years, I believe the funding universe will evolve in a direction that’s more conducive to better partnerships. More funders will enter the space, and realize that their reputation and success are linked—if they don’t act as good partners, providing quick feedback and treating entrepreneurs fairly, they won’t thrive.

Entrepreneurs need to take responsibility for choosing good funding sources with aligned interests. Tweet This Quote

But in the meantime, entrepreneurs need to take responsibility for choosing good funding sources with aligned interests. The marketplace is still developing—continued progress will require Unreasonable effort from all of us to get there.

Ashok Reddy

Author Ashok Reddy

Ashok is a founding partner at Unreasonable Capital—a fund that invests in entrepreneurs solving social and environmental challenges in emerging markets—and has executed more than $2.5 billion in transactions during a career that has included 10 years of private equity investing.

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