10 Good Reasons Not to Seek Investors For Your Startup

Before you buy into the myths about startup investors, first consider whether you actually want startup investors for your new business at all. No, I’m not bitter … I had VC money in Palo Alto Software for a few years and they were helpful, collaborative, and good people. I’m not a bitter victim.  And I’ve invested in more than a dozen startups, so I don’t hate investors; I am one. But I try to tell the truth. Most businesses are better off without startup investors.

Bootstrapping is underrated

Which would you rather — steer by committee, with people looking over your shoulder? Or just do it yourself, you drive, you decide?

Also, before I go too far, yes, there are opportunities that demand investment. These are the opportunities that you can only address with substantial deficit spending, which are also worth it, with a big pot of gold at the end of the rainbow. If that’s what you’re looking at, hooray.

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.

Startup investors are partners, co-owners, and sometimes bosses

  1. After investment, it’s not really yours anymore. That dream you had of building your own business ends when you take on outside startup investors. You have partners now. You have people who have a claim to ownership, shares, and having a voice in key decisions. You no longer set your own goals, strategy, milestones, and pace. You’ve got a share in a business, but not your own business. 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.
  2. 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.)
  3. Investors can be 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. 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.
  5. 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.
  6. 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.
  7. 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.

Besides which, startup investors are hard to land

  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. 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.
  3. 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.)

Comments

  • Sarah A says:

    You are exactly right. Startup investors are sometimes hard to control. You might loose your startup at some point. So take your decisions wisely.

  • Jack says:

    Thanks for the article, I was really thinking about the best way to finance my new project. My partner and I did with our own money, instead of selling the idea. To start with our own money and try to find customers seems to be the best way. Then we will have the skill to solve problems when bad times will come.

  • Yashika Chopra says:

    Terrific points to consider before starting a business, something really unique and helpful.
    Thankyou for sharing!

  • Marina says:

    Thank you, Tim, for being so very honest about the true nature of investors! What better options are then left for young people? Should they seek grants from the government…

    • Tim Berry says:

      Marina, thanks for the question. Only a very small minority of startups get investment. Mine didn’t, at least not until years later, after sales passed $4 million per year. So most of us are left with working hard, consulting to pay bills, keeping the day job, finding allies to share the work and the ownership, using credit card debt, starting small and growing more slowly. Google “bootstrapping” for lots of examples. Tim

  • Ericson says:

    Hello there I have started my company 2018 and now I’m on my second year I started with nothing negative money and I have debts of around 120 thaosand dollar Loss to casino gambling almost loss my wife but I promise to her I will change my life and work hard to start a business.. in my first year it’s a struggle, on my second year the stars are starting to shine on me and the big opportunity of making the company into hundreds of millions opportunity is bright..because I develop I very unique business that I could not even make it public yet As the advise of this investor.. I met a company owner when Which I did business to her she offered me help to bring the company to the next level for 50/50 shares and willing to help me to bring my business to the next level.. currently my company is making 50k in a month but it will be triple or quadrupled in no time because of its big market opportunity..Now because of my debt that I have to pay every month plus business expenses I still struggle to pay our bills plus business expenses plus I am working to be everything accounting/manager/Sales/Hr/ plus wife nagging about money so the pressure is so high for me to take this investor offer to stop her from working and leave the life she always wanted no more debts right away..Should I take the investors offer but for how much is the question because the business projection it will take to 100k/month so that would be 1.2milliom/ year or more in just a year. That’s the big question for me my accountant said hang on do not say yes.. but i know this investor could bring my company to more than a million dollar business..

  • Julie says:

    Dear Tim
    I am looking for a bit of advice ,I had a successful business for six and half years
    Then through covid-19 I fell out with my landlord and have been unlawfully locked out of my shop(to cut a long story short) i am now taking my landlord to court.
    However I have a great opportunity to open
    An other business on a bigger scale in a fantastic location with plenty of footfall.
    Two of my well known regulars have asked me would I be interested in an Invester
    These two people do not know each other.
    I was quite flattered and said thank you and would have a think about it.
    This would be a great help but I am not sure
    If this would be a good idea one lady is 87
    Bless her but a very intelligent lady and the other one he is 48 years old.
    What are your thoughts and advice this would be greatly appreciated thank you for your time

    • Tim Berry says:

      On a decision as important as this one, don’t trust advice from strangers. Ask somebody who knows you and them, plus your location, and all the specifics.

  • Rickey Morris says:

    I got to this on a google search. A friend loves my business plan and my idea for growing the business over a course of a few years. This is a market that has all ready been done. However, there was some small changes that could be made to make this market profitable all year. Long story short I am wondering about these pention investments I keep hearing about? Do you or anyone know much about them? Is an oil and gas sector investment easier then a real estate investment? Is it possible to pay back the money invested and then buy their shares? What’s the average pay back on let’s say a 5 mil investment? Is it best to have a few partners? I mean their are tons of questions but being new to a start up business…… now granted it’s all ready being done and there are a lot of existing/turn key business you could buy….. I just may have an opportunity in the near future to get in front of some investors and am trying to decide to go that route or what another 10 years and save it myself and go at it. However I may not be alive in 10 years so starting now would allow me time to get the business going. I don’t know. Tough times and tougher decisions ahead!

    • Tim Berry says:

      Rickey thanks for the comment and that’s a lot of questions. I think I’ve got dozens of posts on this blog that touch on some of this, but only touch on, not answer. If you’re in the US I’d recommend getting in touch with your nearest Small Business Development Center (there are more than a thousand; search them at https://americassbdc.org/) or a chamber of commerce or local development agency. Although I’m a member of SCORE, I recommend only if you’re careful about who you deal with (some of us older folks thing gray hair makes us wise; but you’d need a SCORE counselor with specific relevant experience). Ideally you partner up with somebody you really trust who has relevant experience. And of course there are millions of blog posts, articles, online courses, workshops, and books to buy. Best of luck to you.

  • Linus says:

    I wish to find out if there is any clear cut formula for determining how much an investor gets in return and for how long.

    • Tim Berry says:

      Linus, there isn’t such a formula in mainstream investment in startups. A startup investment today will return years from now an amount that depends on the performance of the business over years plus market realities. It is all just guessing, with no guarantee. Banks and financial institutions, and bonds, offer financial instruments that fix the return ahead of time using the math of interest.

  • Zsolt Csillag says:

    Hello,

    I have a very good idea how to improve very widely used product to a much better version. There is no such a thing in the market.
    The problem is that the solution is so simple (yet nobody thought of it) if I tell somebody he would be able to create it (without having me).
    I wrote email to the biggest manufacturers and the essence oftheir reply was about this : “… if you don’t want us to use your idea, first patent it …”

    But the problem is I don’t live in America, patenting it would be a great sum of money (travelling there and back, hotels, finding the right offices etc.).
    So it seems that I have two options:
    – don’t do anything and in a few years somebody else would find out and be a rich person
    – or try to trust somebody with my idea that he would not rob me

    What do you advice? Thank you!

  • Ditshepe makgalemele says:

    hey there. i am a 17 year old from South Africa who has an idea of opening a model and talent agency.How do I look for investors without them taking my dream away from me and how do I make possible investors take me seriously?

    Ditshepe

    • Tim Berry says:

      Ditshepe, I don’t know South Africa, so don’t trust my advice. I may not have the knowledge you need. Having said that, welcome to the real world. You’re like 999 out of every 1,000 people who can’t use other people’s money to start a business. I was the same, when I started mine … no investors and no hope of getting investors, at least not until I had built it up without them first. The myth of startup businesses having investors is just a myth. Only a very select few can get investors, and those few are offering investors a strong team, huge potential market, ability to scale, and some way to differentiate.

      What you can do, instead, it get started. Find a way to start very small, without other people’s money. Get initial sales and invest some of that in marketing, then get more sales. Work hard, and do it yourself. That’s what most people do. And you’re young, so if you possibly can, focus first on education, because that makes everything else easier.

  • William Door says:

    I created a system: Servers, Web site, Doctor’s Portal, Patient’s app, the complete system. Investor came in after the Product was completed, tested with real paying patients. We needed to expand.

    We all signed contracts. Investor received all source codes, payroll stopped, we all got fired. Two out of 5 received minority/ silent shares. I only hear from them via text message when I ask “how is it going”. Reply always is “it is going slow, but going”.

    Clearly, we have been robbed.

    I’m sure you have seen this movie before. How does it end ? We want to start all over again with what we built since there is a breach of contract.

    Bill

    • Tim Berry says:

      Bill, ouch! My recommendation is find a lawyer you can trust. Use word of mouth recommendations and check them out before deciding which one. Talk to them, talk to some clients if you can (that’s not always possible). But yours is a story for a lawyer. Tim

  • Mr. Kelly says:

    What are your thoughts on this strategy. I am able, and am currently bootstraping my financial technology startup idea. Working on getting an SEC No Action Letter now.
    My strategy is to bootstrap it to generating revenue before seeking the funding I would need to scale it. This is so I can maximize the value proposition to an investor. ie, the value of my company (Should) be much higher due to bringing in revenue at first outside funding stage. So I should theoretically be able to either A. get a higher dollar amount per share of equity from an investor. Or B. Have a potentially larger pool of potential investors in which I may be able to chose one that brings more than money to the table.

    Seems like a logical approach to me, but what do I know? Your thoughts?

    • Tim Berry says:

      @Mr. Kelly good idea, seems sound to me. Especially where you say “seeking the funding I would need to scale it.” Needing funding to scale is a good reason to seek funding. And postponing it until you really need it improves your valuation and leverage. Thumbs up.

  • Umit says:

    Dear Tim Berry,

    I have prototyped a invention for the automotive market, where for a marketing campaign is launched where yearly approx 300 million households purchasing such product.

    If i am going for a investor what for me his experience is more valuable to me then his money, and willing to give 50 percent of my company and ip.

    What step would you advise me to do? And whom can I give such offer?

    Best regards,
    Umit

    • Tim Berry says:

      Umit my advice would be not to go to any investor until you have a patent. That’s all I can offer in a public forum. I wish you the best of luck. Oh, and please read the post above. Several of the 10 reasons here apply to you.

  • Shernise says:

    Hi Tim,
    Glad I found your forum. What do you think is best when wanting to start a small restaurant. A desert bar? Do you believe that is something that can be executed alone or do you believe I should take out a loan and fund it myself or should I find investors. I am having mixed feelings after reading your post.

    • Tim Berry says:

      Shernise, thanks for asking, that’s flattering. But giving you a useful answer would require knowing you, your market, your strategy, your resources, etc. These issues are case by case, not general.

  • Dave says:

    Hi,
    I have a business idea with all the paperwork ready. This is a unique idea where there is nothing out there yet. I need money to build the App.

    I have owned my own shop so I know what a struggle things can be in business. How do I go about finding money to build the App and who do I approach?

    • Tim Berry says:

      Dave, I have another blog post for you, answering that question specifically, How to make money on your business ideas. That one is more recent, too. The problem you face is that no serious investor buys into an idea as just an idea. They wait until they’ve seen the work, prototypes at the very least, preferably users and downloads. And they don’t care a big about what they are supposedly missing, because the worst risk in the world is betting money on something when it’s just an idea. You might also try these alternative funding methods too.

      Good luck to you.

  • Cynthia Jerman says:

    Hi,
    Have you known of any small businesses or start-ups, who were able to get back their business after losing it to Investors?

    • Tim Berry says:

      Cynthia, in Palo Alto Software we took on a minority investment from Silicon Valley venture capital in 1999, and bought that share back from them in 2002. That’s not exactly what you describe because they never had more than a minority share, so we didn’t lose the company to investors at any point. And the transactions and the relationship was friendly, not hostile.

      I don’t know many cases like what you describe, but I’d guess they are happening, on the sidelines, without a lot of publicity. I’m not sure, but I think that might be the case with allbusiness.com, which was sold to NBC in the late 1990s but when valuations plummeted after the dot-com crash, was sold back to the original owners at a small fraction of the original investment value. I’m not sure that’s true and I can’t reconstruct the source.

      Tim Berry

      • Cynthia Jerman says:

        Tim, thank you for responding. The Founder and friend, started a company in 1992. The brand was or shall I say is natural hair care products. The business took off. You can find the products in Whole Foods, Targets, Walmart, the Vitamin Stores and Ricky’s of NYC etc. The product is also sold overseas. The name of the company is The Jane Carter Solution. The big mistake, I believe, is getting investors involved 4 years ago.

        Disagreements of the direction the investors wants to take the company along with fighting with the CFO, whom she brought in, is coming to a head. The investors now wants to dissolve the company. The Founder is not standing by idling and watch her company dissolve. She’s going to litigate. I heard about Founders losing their start-ups like Famous Amos and Carol’s Daughter. And that was my question to you, have you known of Founders of start-ups getting back their business? Did they have to buy the company back?

        • Tim Berry says:

          Cynthia, I don’t know personally any case except mine with Palo Alto Software. We did buy back the shares we’d sold. We might have negotiated a lower valuation because that was in 2002, the deal was done in 1999, so valuations had plummeted; but I didn’t want investors to lose money for having invested with me, so I scrimped and saved and came up with enough cash to pay them back in full plus interest.

          I have read about three other cases. Ebags, Diversified Search, and Snapsort. On those I know only what I’ve read. I hope that helps.

  • Joseph G. Hartel says:

    Do you recommend getting a LOAN?

    • Tim Berry says:

      Joseph, re your question about getting a loan, my answer would depend on the specifics. Every startup is unique. A high percentage of startup founders take out personal loans, but there are tradeoffs involved. You borrow money, then you have to pay it back. It’s a risk you have to take. Sometimes it’s the best way. Sometimes investment is better, if it’s available. And sometimes it’s better to scrimp and get by during the early growth period with what you can from early product and early sales. It depends on the details.

      Thanks for asking.

  • aleduc12@hotmail.com says:

    ok very nice but we still need the money to start!!!
    we have an idea the we want to patent in order to protect the market a potential of $1 billion in nord america alone, the Cie that I work with right now, with out having all the detail has written me a letter of intention and thats great but…we still need large amount of money to protect this invention and to get our patent, any suggestion?
    aleduc12@hotmail.com

  • bruunkaru says:

    …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.

  • Dineo John-Mosarwa says:

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

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  • Sajid Husain says:

    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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