There comes a point for all startup businesses where they have to consider taking on investors versus bootstrapping their operations to grow the company. For a lot of founders, they wrestle with this decision several times in the first few years.
While I do think bootstrapping is sexy as hell, I’m not opposed to investors. Some startups can’t even take a business idea off paper without significant seed investment and many investors are absolute rock stars that will do anything they can to help an investment succeed.
With that stated, there are a few things to consider before taking on investors. For the sake of this article, I’m going to consider accelerators, incubators, venture capital and any other scenarios where equity is exchanged for cash or subsidies as an “investment.”
- A VC fund is considered successful if 10% of their investments do well while you could 100% fail like any of the other 90% of their plays that don’t pan out. Don’t believe the hype; succeeding as a company is way better than “learning from failing.”What is it about that VC fund that makes sense for you- other than their stacks of cash? A typical VC probably only has about 2% of their capital invested in your company while you may have every credit card maxed out, loans from friends and family due and employees to pay at the end of the week. The stakes for you are ALWAYS much higher than your VC investors. Choose wisely.
- Who is actually managing that accelerator or incubator? Are they a subject matter expert in the markets their incubated companies are competing in or are they just a big name in the startup world? Name recognition can be a huge asset as long as it’s big enough. Minor celebrities in those communities are probably not driving enough value if they aren’t also providing super-relevant industry experience.
- Be careful not to fall for the “easy” country-club deal. Raising money among friends and acquaintances can be a legit way to generate capital but they require much of the same structure, governance and construction as a VC/ PE deal.For example, I found one deal where a minority owner provided capital in exchange for equity but then expected their investment to be paid back first before any other owners could receive any distributions of profit. That’s a pretty crappy provision considering this came with a measly $20k investment.
- Pick your startup competitions with care. As I have previously pontificated, startup competitions can be a total waste of time when they are poorly conceived, executed or judged.There was a competition recently announced here in Birmingham where the contestants have to pay $50 to enter, compete in three rounds over a 6 month time frame, 50 companies could enter and the prize was only $10k.The lost-opportunity cost alone is higher than $10k and the contestants are actually subsidizing 25% of the prize money through their own “application fees.” By winning, you would be doing so on the backs of other start-ups. That just seems crappy and it a massive waste of time and resources.
Capital, or the lack thereof, is always a primary concern for a company wanting to start, grow or innovate. Every founder needs to seriously consider their individual opportunities for outside investment. It should not be an easy question to answer and the more thought expended when considering funding options, the higher the likelihood that a company finds investors that are passionate, supportive and truly helpful. If the total value of what they offer is measured in decimal places, you may need to consider other options.