Parents, use caution when investing in your child’s big idea

Published in UT San Diego, August 19, 2013

Rule No. 268

Love means never having to say you’re sorry — but the next round is a down round, nevertheless.

For the last two years, my wife, Barbara, and I have been writing about entrepreneurship primarily from the standpoint of the entrepreneur, the founder, the innovator and the creative driving force behind the idea.

Today, I would like to digress and tell a story from a different point of view.

Recently, on two separate occasions, I have been asked to give advice to a different kind of entrepreneur — the parent.

Here is one story. A wealthy man comes to see me and tells me that he has two children: a daughter and a son. The daughter gets married and the father backs the son-in-law’s company. The company struggles and the father realizes that he must replace the son-in-law as CEO to save the company. He does this and the company survives, but the daughter will no longer talk to her father since he “fired” her husband.

Now, his son gets married and the father backs his company. (In both instances, the backing was in the millions of dollars). This time, the son gets divorced, and the company fails as well.

But wait, there’s more. A gentleman from India comes to see me. In his culture, family is critical. The son is brilliant, with a master’s degree and a doctorate. He goes to his father and says he wants to start a social media website. The father invests in the idea. Now pause here. I ask the father if the son writes code (no, he does not). I then ask the father if the son got an MBA from Wharton or Harvard (no, he did not). So I suggest that the son has no business competing in a space where he has no domain knowledge or any kind of unfair advantage.

In 1935, President Franklin D. Roosevelt formed the Works Progress Administration, which employed people on public works projects. I propose to create the new WPA — Wealthy Parents Anonymous, modeled after Alcoholics Anonymous — to be a support group for parents of would-be entrepreneurs to help them understand and deal with the following: having the ability to fund and support your child does not mean that you should do that. And if you do it, to what extent and when do you draw the line and say nada más?

The issue of loving your children and wanting to be supportive and encouraging of their desires and goals is admirable but when is it equally and potentially destructive? I am not talking only about the infamous “trust fund” babies. I am talking about investing the early money in your child’s deal — the “friends, family and fools” round of financing. What is the right amount and when is enough is enough?

I felt badly for the two parents who came to see me. It is almost as if the parents need their own support group, their own mentors to advise them. Saying no to your child is never easy if you have the means to say yes.

So, WPA would be a six-step program:

• Admitting that love means sometimes saying no.

• Getting an unrelated third party to vet the idea thoroughly. Just because your little Johanna thought it up does not make it the next big thing.

• Recognizing a higher power — the venture capitalist that you need to fund the series A.

• Instead of seeking guidance through prayer and meditation, do it through rigorous due diligence.

• Pick a number and when you reach it, stop.

• Initial valuation — low, very low.

I love entrepreneurs, but as an old man and as a parent, I am pained when I hear tales like the above. So if you want to join the new WPA, please send Barbara an email and maybe we can put something together.

The good news about the new WPA, unlike AA, is that a dry martini will be served at all meetings.

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