March 8th, 2009 11:09 EST
What's the Problem with Having a Sugar Daddy?
Every entrepreneur, whether a business owner, real estate syndicator, or other person who is trying to raise capital and make their project come to life, thinks that having a Sugar Daddy would make their dreams come true. I am defining a "Sugar Daddy" as an investor who just keeps funneling money into your project (i.e. real estate, independent film or any other business venture) because they think you`re so terrific.
Although it sounds great to have somebody bankroll every project that you want to do, the people who I know who have investors who bankroll them find themselves in awkward positions. They wish that earlier in their careers that they had developed a diverse and broad-reaching clientele of investors to support their projects instead. Having one person bankroll your project makes them a lot like an employer.
When you have one person or client who funds your activities, it is called concentration. Concentration means that all your eggs are in one basket. If you have one customer who buys too much from you, banks and lenders will run away because they know that if something goes wrong with that relationship (i.e. such as if that customer falls on hard times, if that customer falls out of favor with you for any reason, etc.), then the survivability of your business is at risk.
The same is true when a single party bankrolls all of your projects. Here are several things that can potentially go wrong when "concentration" is affecting your business:
1. You`re always at risk of being put out of business. If that big client pulls the plug on you for any reason -- including their own financial difficulties, or if they simply stop believing in your ability -- then your business can be in trouble. As you probably know, everybody always wants to know "what have you done for me lately?" And if your performance has been average or worse in the very recent past, then all of the good work that you`ve done over a long period of time could well be forgotten.
2. The second problem with having somebody who bankrolls all of your projects is that they become a lot like an employer. Who is calling the shots when one person is writing all the checks? Think about the Golden Rule that says "he who has the gold makes the rules."
You might find yourself in a situation as the promoter, real estate syndicator, film maker or entrepreneur who is raising capital -- yet you are almost like an employee whose running the deals for the person whose writing the checks. Your percentages, the amount of income that you make, everything that happens in the deal becomes subject to the scrutiny of this investor. It is true, however, that small investors who aggregate to large dollars also care about the deal, but no single person has enough clout or enough money in the deal to be able to call the shots in this case. When you have a Sugar Daddy who puts in all or most of the money, this is when you should be extra careful.
3. Finally, people who have one of these killer investors, find themselves in a situation where they just don`t control very much of what they`ve created. I personally know two people who are in this specific situation right now. For 20 years, they`ve been syndicating projects and making a decent amount of money, but neither of them have attained the kind of wealth that would be expected by someone whose doing multiple deals and calling the shots. Both of these individuals had asked for my help in restructuring their relationships, so that in the future they could take a bigger percentage of the deals that they find, operate, and close. Both of these individuals by themselves are caught in the unfortunate situation where they`re given a little piece, but the vast majority of the profits goes back to the money source.
So, in the long run, if you want to avoid being in a situation where you have little control over your own destiny, don`t take the shortcut. Don`t allow any single investor to control more than 30% of any one of your investments. Always break up your investments in small pieces that many people own or control. Make sure that you retain control of the projects that you set up, whether you`re raising capital for a business, raising capital so that you can syndicate real estate, producing an independent film, or putting together some other kind of project or business.
It`s a little harder at first, but I promise that if you follow this advice it will make your life significantly better for years into the future.
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About Joel G. Block, President of Growth-Logic, Inc. Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and faculty member of the iLearningGlobal community.
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