The February 1 Wall Street Journal (today’s) carries a front page article (“When the Home Bank Closes“) about the founder of a startup company that has no financing, has garnered huge potential orders for his products, but is inconvenienced by the bank pulling the home equity line he was using to finance his business because the value of his home had sunk. Awww shucks!!!
Despite all that we and others have written on this topic, it seems there are always aspiring entrepreneurs who don’t get the message, or don’t believe it. In this case he even got Big Media attention. I’m certainly not a fan of the big banks’ methods of managing their businesses at customers’ expense, but that’s not what this is about. If the value of the bank’s collateral goes down, they should be entitled to ask for more collateral, since their job is to lend the money and then get it back again. No, what this is about is a startup that is inadequately financed, not yet profitable or self-sustaining, going after a chunk of business that it cannot hope to support without a loan for which it has no collateral. That perennially bad idea that if we just sell enough stuff, everything else will take care of itself.
The reality is that it doesn’t. Selling more than you can deliver simply causes a sequence of bad things to happen. the CEO is euphoric about the sale, then stresses about how to deliver, THEN looks for the source of capital, and typically guesses low on what it will take, when it will be needed, and how much profit will be earned when the deal is done. And finally, of course, the customer will have gone through such trauma to get their goods, or not get them, that they’ll certainly not come back again.
Wouldn’t it be simpler to just plan your growth rate and resource needs together? Or does that make it less exciting?
As always, I welcome your comments and feedback.
PS: The same paper carried another article today entitled: “How to finance your startup without home equity.”