PeakSpan Growth Parables: Are You Selling the House or Picking a Roommate?
Picking a financing partner is like selecting a roommate. Make sure you end up with one who will help you realize your goals.
When it’s time to sell, price is really the name of the game.
My family has lived in our current home for over ten years. It’s a special place for us obviously with tons of memories and physical manifestations of our time together. In the door jamb to my son’s room, for example, we even have pencil markings that track the progress of my kids’ growth over the years.
At some point, it’s likely that we will have to move. While I know we will miss this house, when it comes time to sell, it’s my strong suspicion that the most important factors to us will be the price the buyer is offering and their likelihood to close on the agreed terms. I’d like to think that the new buyer won’t paint over the door jamb to my son’s room so that we can return years from now to look upon those pencil marks and warmly reflect upon the wonderful times we enjoyed in our home but I don’t think we’ll take a big discount on the price of our house to add this to the closing conditions. That’s because when it’s time to sell, price is really the name of the game.
Things are a bit different of course if instead of selling you are bringing in a roommate. Imagine you have a plot of land with a simple log cabin. The view is beautiful and you have grand plans for building a palace on this special plot of land but you have a ways to go before this dream becomes a reality.
You know that in order to realize your ambitions you have to bring on a partner and that partner is going to have to share your modest current circumstances and help you build and improve the property. You’re asking this partner to pay rent in order to join you on this journey as a roommate. Clearly, the level of rent the partner is prepared to pay matters but you wouldn’t (or at least shouldn’t) just optimize your decision of which roommate to bring on just on the basis of the rent they’re willing to pay.
After all, if you select a roommate who’s prepared to pay high rent but they’re disingenuous or unwilling to shoulder their fair load of helping you clear stumps, build the second level of your home, and design the landscaping you envision for your dream house you will quickly regret your choice of partner. Even worse, a roommate who pays rent that’s candidly too high may be very difficult to work with. They may question whether your vision of the house is adequately grand.
They will likely push you to develop too quickly or construct an artifice that looks beautiful on the outside but that has a weak foundation that could fall over in a flood or topple in a modest wind. They may at the end of the day demand that you pursue a more aggressive plan than the one you are comfortable with to justify the high price they paid to partner with you as a roommate. In short, the ideal roommate is one who pays fair rent but who most importantly will help you get the best price for your dream house with the least amount of drama and lowest level of risk. Optimizing on rent only to see your dreams of successfully completing and selling your house dashed to the ground makes no sense obviously. Your decision around your new roommate needs to ultimately be grounded on the best partner who will help you realize your goal successfully. The rent is an important variable in this obviously but there are lots of other factors that go into this decision as well and ultimately the best partner who’s prepared to work the hardest and show the greatest alignment may not be the prospective roommate who’s prepared to pay the highest rent.
While the above analogy is admittedly a little tortured, we see this same dynamic with entrepreneurs — particularly entrepreneurs who have successfully bootstrapped or achieved incredible results on a modest capital budget — all the time. These entrepreneurs are so invested in the hard work they have put forward and identify so strongly with the potential for their “dream house” (aka their business) that they mistake a financing partnership as a terminal sale event. They optimize around the price of the investment round at the cost of bringing in the partner who instead can best help them achieve their goal with lower risk and distraction. They pick the high price bidder and are then dismayed when this new partner demands (rightfully so, perhaps?) flawless execution, a grand (and risky) plan for the business, and a very high exit price for the house that may be very, very hard to achieve. These entrepreneurs fail to recognize that they are not “selling the house” in a financing but instead bringing in a roommate. Successful entrepreneurs will take the opportunity in any financing to evaluate the quality and caliber of their prospective roommates. They’ll optimize around picking a roommate who pays fair rent but who importantly shares their vision for the potential of the business. They will in the end select a new partner who’s prepared to shoulder the burden and work harmoniously and without undue risk or pressure to secure the best possible price when it is time to finally sell the house.