Jim Duffy: Start-ups risk being burned by the dragons

Beware the dragons, writes Jim Duffy. Picture: Katie Lee

I liked this multi-millionaire’s somewhat grumpy demeanour at times coupled with his sense of humour. And of course, we can all recall totally unequivocal “I’m out!!” as he decided he was not going to invest in the apprehensive “entrepreneur” in front of him.

Is Dragons’ Den still on the TV? I don’t know and I don’t really care to be completely honest. It’s a poor TV show that many would suggest has damaged how new-start businesses are shaped up in their early vulnerable stages. And yet so many new “entrepreneurs” still feel the need to pitch their ideas to dragons, whether they be on the TV or in real life.

Startupland is full of these encounters and there is only one winner. On the week when the co-founder at FanDuel, Lesley Eccles, whom I have great admiration for, resigns from the board and in these times when the chief executive at Uber is asked to step down by his investors, anyone starting a new venture and who wants to “scale” rapidly should take note.

Are you building a business for the long term or are you building a start-up for investors to run? Having spent the week in London outside the Scottish start-up bubble, it is clear to me that there is no real distinction between entrepreneurs who are starting either side of the border.

However, a great many are starting new ventures simply to “get investment”. And in chasing this investment, they find themselves in a world that they do not fully understand. It’s a world full of distraction and ego and annoyances.

It’s a world that looks good from the outside, but in fact is one where all is not as it seems. It’s a world that can consume the start-up and its founder as it is built on one thing only – The Dragon.

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It takes a great deal to attract investment into your business. I’ve discussed this before. But, as a business builds and needs more cash to create scale, the stakes go up dramatically. I recall my old Babson Professor (Babson is the number one college for entrepreneurship in the US) telling me that once the stakes are high enough, the investors will decide who runs the company.

Think about that for a moment. You start and build your company and reach a threshold where your capacity or capability or ability is not enough to satisfy investors. So, you get sidelined and a “bullpen” chief executive officer is put in place to maximise the value of the company for sale or exit.

Sure, you will get your payday at some stage, and I’m sure the co-founders at FanDuel will get a decent exit, despite losing control of the outfit. That’s one book I will read and I wish it was written now. I’m not sure entrepreneurs in Scotland and the UK fully appreciate what it means when they say they want to scale.

And if they did, they would be putting measures in place right now to get to the finish line in one piece. I know too many who have gone down the investment route only to find out that it is fraught with danger. And this segues into what I have been writing about in this column for weeks.

We are encouraging our new generation of start-ups to jump on the investment trail, with a short-termism mindset at the fore. As soon as you sell equity in the business to an investor, then that investor, silent or otherwise, has a place and some form of voice and so it goes on as you bring in more cash to grow.

Seeding a business with other people’s money means they believe in you. But, somewhere along the line you will be answerable and accountable and ultimately dispensable. It might not seem important at the early stages, but make sure you think it through and take a long term approach to investment.

Chasing the dragon can be exhilarating. But it should also come with a health warning for entrepreneurs.

• Jim Duffy is co-founder of The Moonshot Academy and author of Create Special

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