Any advice can be worthless, or worse.

Let me tell you the story of the first investment made by a newly organized formal group of angel investors.  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 agreed immediately and the business was launched, well funded and anticipating great profits.

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).

[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.  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 the angels, and accelerated quickly into more cities, again running out of cash.  The wealthy investor in the meantime, unknown to the CEO or the board, ran into personal trouble with real estate investments, and 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.

The lesson is for any CEO to filter all advice through the strainer of good reason, taking that which seems reasonable and rejecting that which is wrong for the company or the times.  By not putting up any argument and being completely compliant, the CEO ceded control of the company to outsiders who gave bad advice.

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2 Responses to Any advice can be worthless, or worse.

  1. Good post, Dave. This is really a challenging issue – what’s reasonable, thoughtful advice? I suspect that your next post could be the same story – only in reverse…in fact, if you don’t have one, I’d be glad to donate one.



  2. Michael says:

    Ditto to cap’s remarks Dave. Wisdom comes from experience and in a back handed way your story affirms the necessity of a leader who is executing a vision being at the helm, preferably with a small Board of seasoned veterans to encourage restraint. I guess the moral is always careful who you take money from or maybe its just plain old VC’s are like gamblers – better to bootstrap and grow from a cash positive position:) I know, novel idea…

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