Planning, Startups, Stories


Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

10 Good Reasons Not to Seek Investors For Your Startup 5

Sure, maybe you need the money. Maybe that’s what your business plan says. But seriously: Do you really want to have investors involved in your dream startup?

I’ve said it before: bootstrapping is underrated. I get frequent emails from people asking how they can get investment for their new startup, and I’ve admitted to being a member of an angel investor group. But let’s not forget, while we’re thinking about it, these 10 good reasons not to seek investors for your startup.

  1. It’s almost impossible to get investment for your very first startup. If you don’t have startup experience, get somebody on your team who does. Chris Dixon said it best: either you’ve started a company or you haven’t. And if you haven’t, and nobody in your team has either, that makes it very hard.
  2. You are selling ownership. Investors write checks to own a serious portion of your business. I admit that’s patently obvious, but you should see the emails I get in which people think of investors as if they were some sort of public agency. Once you get investment, you don’t own your entire company.
  3. Investors are bosses. You are not your own person when you have investors; you’re part of a team. You can’t decide everything by yourself. Politics matter. Investor relations matter. If you screw up, you do it in front of other people, and it hurts those people.
  4. Valuation is critical to them and you. Simply put, valuation means the price. If you want to give only 10 percent of your company to investors who pay $100,000, you’re saying your company is worth $1 million. And so on. Simple math, but wow, not so simple negotiation.
  5. Investors don’t make money until there’s a liquidity event. That’s why we always talk about exit strategies. You can be the world’s happiest, healthiest, most cash-independent company, but your investors won’t be happy until you get them cash back. The win is getting money back out of the company. Some big company stock buyers like dividends. Startup investors don’t.
  6. If it’s not scalable, forget it. The real growth opportunities are scalable. It used to be products only, but now there are some scalable services, like web services, for example. But if doubling your sales means doubling your headcount (that’s called a body shop), then investors aren’t going to be interested.
  7. If it’s not defensible, it’s tough going at best. Not that I trust patents as a defense, but trade secrets, momentum, a combination of trade secrets and patents, plus a good intellectual property defense budget … if anybody can do it, then investors aren’t interested. (Of course, what would I know, I thought Starbucks was a bad idea because I thought that was too easy to copy … there are always exceptions.)
  8. Investors aren’t generic. Some become collaborative partners and even mentors, some are nagging insensitive critics. Some are trojan horses. Some help, some don’t. (Hint: choose carefully which investors you approach.)
  9. Just getting financed doesn’t mean diddly. For an example of what I mean read this piece from the New York Times. You haven’t won the race when you get that check.
  10. Investors sometimes take your company from you. Well-known strategy consultant Sramana Mitra has a couple of eloquent minutes on that them in this two-minute video. She seems to be talking about India, but she’s well known in the Silicon Valley, and what she says applies perfectly well here.
  • bruunkaru

    …and never start your company too early!
    Get over the garage phase without being forced to take salaries out of your startup. Then you might be able to survive without any investors in the beginning. So you might avoid being presented with an ultra-expensive CEO proposed by the investor (because they know themselves from the local country club). Down the stream I have seen too many startuppers working for free 24/7 on companies where they hold not more than a percent of the shares.

    This is especially true for Northern Europe, where taxes and “employer’s fees” cost dearly and where investors are usually huge state-run organizations.

    Please note: “Risk capital” means that YOU have the risk and SOMEBODY ELSE has the capital.

    • Thanks for that, nice additional comments

  • Dineo John-Mosarwa

    …and a lot of people don’t see it this way. So insightful and put well into words.

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  • As always, fantastic points Tim. Completely agree with your post. We lose the leverage of having a great business plan just because of the dependency on the investor(s).

    I’m glad I get to read all these good advices when I’ve just embarked on entrepreneurship journey. Thanks a ton.

    Cheers,
    Sajid.

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