Experts spend way too much effort on how to find startup investors and not nearly enough on why you might not want to find startup investors

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

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.

21 responses to “10 Good Reasons Not to Seek Investors For Your Startup”

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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

  8. 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.

  9. Dineo John-Mosarwa says:

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

  10. […] The good news is that not getting angel investment isn’t always bad news. Here are 10 good reasons not to seek angel investment for your startup.  […]

  11. 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.

  12. […] Double reality check: if you can spend less, maybe you can do it without investors. There are other ways to get money. But even in that case, don’t you want to have a good idea of […]

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Experts spend way too much effort on how to find startup investors and not nearly enough on why you might not want to find startup investors