The Drawbacks of External Financing

July 20th, 2021 by Diana Coman

~This is my translation of a 2011 article on Trilema: Dezavantajele finantarii ~

As an entrepreneur, one of your best possible moves is to obtain external financing.

Such a move has several positive effects, for instance improving the morale as well as the financial security of the development team, confirming publicly the potential of the business as well as the competence of the team, serving as a bit of de facto publicity. These are all minor advantages. The major advantage is the practical application of the intelligence and the professional competence of some people that are significantly better paid than the entrepreneur himself, let alone his team.

These advantages depend of course on the quality of the respective investors and the extent1 of their involvement. If the investor is an angel2 who can be, after all, simply a rich uncle or some rich heir from among the wider circle of friends and acquaintances (which tend to cross more easily during adolescence the social borders that become more dominant later on in an adult's life), then the advantages will be commensurate. Generally speaking, an angel cannot contribute very significant funds, not necessarily because of lacking them but mainly because of being unable to justify to themselves the taking of the corresponding risk.

The reason why an angel can't justify such risk comes from his inability to assess the project in depth and this inability comes in turn from a poor understanding of the project's details as well as of the project's relevant context. The3 rich man is interested in driving his own car (because he can't just hire a chauffeur for that) and toeing the line of public sentiment (because he doesn't know the usefulness of well-chosen spy-assistants). As a result, he has no time (which is to say he has no interest and even less ability) to follow in detail what one citizen-billionaire4 vividly described as "these children's nonsense".

If the investors are, however, an investment fund (as it happens in America only, since we5 don't have such things) and especially if the investment happens in a properly structured way, with all the various steps involved in what is called a financing round (term that I won't even attempt to start defining as the gaps in the Romanian context are just too fundamental to bridge over) then the entrepreneur will enjoy the full benefit of what I mentioned earlier, namely the intelligence and professional competence of people that are paid significantly better than the entrepreneur himself, let alone his team. Because indeed, a board member who is also a partner in an investment fund receives millions in annual salary, which is never ever the case for an entrepreneur, no matter how senior. Moreover, such a board member also knows directly, as friends or at least acquaintances, all the other people just like him, which is again never ever possible for an entrepreneur, given that there are thousands of partners in investment funds but millions of entrepreneurs.

The benefits that the aforementioned financier can bring to a project are of two types: proper and toxic. The proper type of benefit is the direct representation of the project to the capital. The rich uncle or the heir-friend cannot provide this sort of representation because nobody listens to them. What do they know? By contrast, if a financier backs a project with firm and at least superficially verifiable statements that correlate with success... then it's done. The market (hence, not merely the other financiers but the market directly) will accept these statements as correct and that's it. That's it. They become real, just as real as Groupon being a successful project without actually being one, just as real as being worth six billion dollars without being worth as much, just as real as hundreds and thousands of other examples. The market is, on the short term, a voting machine.

The toxic benefits are the financier's abilities with respect to organisation, representation and management. This part can go both ways: on the one hand, some entrepreneurs are simply total idiots when it comes to the management and organisation of a business. This is just how they are and the example of Imagine is illustrative. In such cases, the intervention of a calm hand directed by a mind capable of seeing beyond the nearest trees is simply salutary. The Fred Quimby example is even more illustrative of this, as is the counterexample of 3D Realms. On the other hand, discipline is always the enemy of creativity (although not from fundamental causes but mainly because of the poor upbringing of creative children) and therefore the results can be at times dreadful.

A good example for all the above is a situation that we can finally discuss now because indeed, the whole discussion up to here has been merely an introduction. The extent of lagging behind is quite remarkable when a cultural space requires 7006 words of introduction to simply get to the point where one can finally discuss a business problem. Still, the example comes from a discussion with a friend regarding the recent improvements to fain7. The friend in question being a person with a solid understanding of theoretical underpinnings of reality, the discussion focused mainly on mathematical representations and other theoretical approaches, as opposed to more direct considerations of the woods and its trees. Nevertheless, there was also one notable exception that pierced through the whole theory and went all the way to the very core of the matter:

It's interesting to observe with respect to the motivation by means of karma points that the dialogue will not move to dtng although it has there the optimal conditions to carry on and moreover there are no limitations there for the producers of 10.000 messages/month.

Indeed, I also find this very interesting. I also know why such move never happens: people don't want to express themselves inside a broom closet, they want to express themselves outside, in the public square. Mommy! MOMMY! LOOK AT ME! People who talk a lot want the attention of others and therefore dtng is not the right place for them or at least not yet.

The above observation also points out the obvious cause why mere liveliness cannot be the goal on fain, just as it cannot be the goal anywhere: someone has to read it, too! If nobody reads it, then what's the point in writing it?

This is a strategic mistake that facebook or twitter for instance failed to avoid and, as a result, this is the main complaint of their users: that anyway, nobody reads what they write. Mainly because it's not possible to read. Because there's too much noise. How did it get to such situation?

The toxic benefits are the financier's abilities with respect to organisation, representation and management. Since the only measurement currently used for representing businesses in the Market is the number of users, the amount of activity, in short the liveliness, the financier will put pressure on optimising (in the sense of increasing) the liveliness. At the expense of anything else. Of absolutely anything and everything else. If the number of messages published monthly on twitter increases from 10 million to 10.5 million, the financier will conclude that the service is progressing well. Even if the average number of people reading one given message decreased from 10 to 0.1 and even if this means that next month the whole thing will fall off a cliff and collapse entirely.

Economics is the science of optimisation but it never optimised anything other than what is measured and that's why it's perfectly capable of producing disasters such as the one on Easter Island. Economics cannot pursue the "good" in itself - all it can do is to pursue very elaborate versions of intellectual masturbation labeled as "good". As a result, economists need entrepreneurs to provide what is called vision: the ability to intuit and moreover to correctly intuit the good itself beyond a smokescreen of numbers. By contrast, entrepreneurs don't really need economists: their gifts are too often toxic.

If I had investors on board, I could never have imposed a measure such as the one discussed above without shouting, table pounding and other violent actions. And probably they wouldn't have given in anyway, being stubborn as all financiers are and so we'd have quarreled. The good news is, of course, that Fain is out of the zone where the team's incompetence might have sunk it, except it didn't and entering thus the zone where the investors' incompetence might have sunk it, except it didn't. Or at least it didn't just yet.

The disadvantages of financing are that you tie a stone around your neck and that stone has the absolutely diabolical property that it can't be correctly measured ahead of time. To explain this by means of a metaphor, you accept a stone of 5 kilos, you calculate correctly your own strength and you go to the gym to fully prepare etc., after which, knowing full well that you can swim with a 5 kilos stone tied around your neck for a distance X, you start swimming for only Y where Y is not even half of X, so everything is truly thought out very well indeed. But then the Y distance turns out to be in practice through the swamps among the mangroves and the stone turns out to be a railway tie. So you drown, dragged underwater not by the weight of the stone but by its shape. Who would have predicted that?

Eh, the experienced entrepreneurs are the ones who would have predicted that. In other words, you. From now on, you.

  1. Funnily enough, the original text sounds back-translated from English to Romanian at this precise point. The "extensiunea investitorilor" would be a rather puzzling notion by itself to a single-language Romanian speaker except that none such is really likely to make it as far as the second paragraph in this sort of article to start with. For everyone else, the sense is anyway directly available and so it doesn't really register at the usual read, it's only at translation time and even then rather belatedly that it stands out, basically at revision time (translator's note). 

  2. This term's translation to Romanian should be "deranged person", I think. 

  3. The Romanian "deh" that starts this sentence in the original text is not all that easily translated to English. Happily for me, I have already used it in the best possible place so that the very author whose text I'm translating here provides himself the explanations and attempted translation of deh to English, too. And to make it even more confusing, note that I'm using his previous translation of my own words to support my current translation of his own words that were however previous to my use -at least the one that got translated- of that same word! This is most definitely and entirely a translator's note. Which translator's? 

  4. The linked article includes the transcript of a conversation in which a Romanian billionaire (in euros) at the time (later inmate) clearly states -for the benefit of the young counterpart- that he intended to buy the kids in question, not to do business with them as they and the counterpart seemed to keep misinterpreting it. Back in 2011 when the original article was written, this model of a "rich man" and his interests was rather visibly a direct description -and direct derision, too- of what passed for a rich person in Romania around 2011. Meanwhile, this exact model seems to have become so common across the world that I don't think that there's any loss to the overall argument even when crossing the language border directly like this from Romanian to English (translator's note). 

  5. Again, this "we" here used to stand in 2011 for Romania only and the original article means it as such but meanwhile I think it rather stands for a much wider space, so I'll leave it in text exactly as it is (translator's note). 

  6. Hah, the 700 words of introduction to the Romanian article caused by the lagging of Romanian cultural space behind the American cultural space became... closer to 800 words of introduction in the translation of the text to English. This lag thing turns out to be a very stretchy thing in practice (translator's note). 

  7. The Fain project focused on improving the quality of Romanian blogs and it had at the time a very lively and active community that included readers and commenters as well as bloggers. The improvements mentioned here basically reduced drastically the benefits (as measured in "karma" points that were in turn redeemable at the time for money) of multiple comments by the same person beyond a threshold of 150 within a given interval (translator's note). 

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4 Responses to “The Drawbacks of External Financing”

  1. hanbot says:

    Heh, footnote three was an honest treat. Meanwhile I wonder if dtng merits a parenthetical here as the old .ro 4chan/image pastebin, though finding a proper Trilemese anchor for it isn't all that straightforward.

  2. Diana Coman says:

    Glad to hear footnote three was enjoyed! (It was fun to write, too.) As for dtng, I think you are quite right that it could use a reference, thanks for the nudge. Perhaps this brief description of dtng by its owner serves as a reasonable anchor - the article even preserves some of the usual nsfw dtng content.

  3. [...] improving the trading nor getting more merchants really, but instead, spurred by a combination of Wall Street investors wanting to see users over profits and the socialist, being an engineer tendencies of the "CEO" Ira [...]

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