Ever receive worthless advice?

Ever get bad advice? Sure. We all have in our past. Ever take that advice without question because the person giving it was an investor, a superior in rank, the chairperson of your board?  I’ll bet you have at least one story of bad advice taken and being bitten as a result.

Reaching back for an important lesson

As one illustration among many I can recall, let me tell you the story of the first investment made by a newly organized formal group of angel investors. Some of you can guess that name of the group. It was thrilling for these angels to find a young entrepreneur with an idea for a business that seemed so destined for greatness that the angels invested over $1 million on the condition that the group receive two board seats and one observer seat on the start-up’s board.  The young, eager entrepreneur immediately agreed, and the business was launched, well- funded and anticipating great profits.

Good intentions sometimes lead to…

As the business expanded into a second city and then planned expansion into a third, there was a rift that became evident between these angel board members, played out in front of the CEO.  The angels argued about whether the expansion was too quick, requiring additional money, or should be slower and bootstrapped with profits from the first city’s success.  Finally agreeing upon expansion at speed, the angels raised more money and encouraged the CEO to accelerate the expansion, which the CEO did with enthusiasm.  It did not take long for the company to again run out of money, and for the board to split over the next moves (since the first city continued to be profitable).

The consequences of not thinking ahead:

[Email readers, continue here…]    The angel investors could not raise the next, larger round to finance the shortfall and further expansion, putting the fragile young company at risk for following the advice of its board.  In the end, the company had to turn to a wealthy individual investor who took control of the corporation as his price for saving the company.  Look ahead only a short time, and the new major shareholder ran into trouble overleveraged with his real estate investments and defaulted on his funding promises.  But I digress.  Painfully.

What went wrong?

Had the angel board members been able to agree upon a financeable strategy for growth, the company might have been immensely successful.   To put an ending to this story, the entrepreneur followed the suggestions of the new investor just as he had followed the angels, and accelerated quickly into more cities, again running out of cash.  And now you know that the wealthy investor in the meantime, could not make good on his promise to further fund the company, which found itself unable to meet its obligations and ultimately was shut down, causing a complete loss for all.  Bad advice taken by an enthusiastic and compliant young CEO was the root of the cause, compounded by circumstance.

And the result for the entrepreneur for taking this advice?

By not putting up any argument and being completely compliant, the CEO ceded control of the company to outsiders who gave bad advice.

The lesson for any CEO or for any of us for that matter is to filter all advice through the strainer of good reason, taking that which seems reasonable and rejecting that which is wrong for ourselves or for the immediate time.  And, as I have learned from experience, if you perceive advice to be in error or against better judgement, form your arguments after a little thought and make your case with information to back it up if necessary.  Most of the time, the person on the other side of the table will see your side, feel your passion, and either agree or withdraw any objection.  Remember, passion and reason almost always win the day in these cases, even when facing a superior in the food chain.

Now you can tell your story…

Images for this block created using DALL-e, Microsoft Designer, with prompt: A group of diverse standing adults surrounding a single young businessman, all casually dressed, with all staking at once. Photo-realistic image with ragged edges and transparent background.

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2 Responses to Ever receive worthless advice?

  1. Will Hill says:

    Interesting perspective but is this just a case of hind sight being 20/20?

    Many (if not most) start ups face this same dilemma. This is almost always a judgement call with risks either way. Were there competitive companies in the space? If so going big could be the only way to gain first mover advantage.

    While I agree that any advice must be critically reviewed this doesn’t seem to be a black & white example.

  2. As always, Dave, a nice exemplar of the challenges for both founders and investors. Both need to be effective at the balancing act of giving/taking the right advice.

    A common manifestation of this issue in today’s world is the “mentor whiplash” in accelerators. That’s when different mentors give the budding founder conflicting advice. Most accelerators do nothng to equip the founders with the tools to recognise and reconcile the value in those conflicting inputs. Most accelerators do nothing to validate and qualify that the mentors are actually suitable to be mentors.

    On that same point, Angel groups have to be rigorous in their selection of nominee directors because it is not a role for the wrong person, given the very real impact on the livelihood of the founders and staff, as well as the impact on the returns for investors.

    Varied advice is a useful and valuable source of input to executive decision making. Provided both the Angel board members and the founder CEO understand that the advice is input and not command, things can work well.

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