There is a lot of material for entrepreneurs that’s posted on social media, in magazines and in the press. A lot of it is great, but some is not helpful and may even be shared to promote the agenda of a company trying to sell something.
Most of the information is well-meaning, but some is based on ill-founded ideas that just don’t work. Maybe they used to work or worked for some people, but not everyone. Some are downright lies, even if unintentional.
Startups are told a lot of lies. In this series, “Lies We Tell Startups”, I share some of the information that isn’t useful to entrepreneurs, even though it may be popular.
The first big lie is that everyone needs funding. It’s almost a requirement in startup culture that the more funding you have, the better your company is. I’ve been around long enough to remember the dot com boom (and bust) and experienced the height of insanity when every startup was getting huge dollars in funding thrown at them, sometimes for having nothing more than a business plan.
During peak cycles this happens a lot. It’s been happening the past few years, although that is slowly changing.
Technologies and ideas get hot and investors need to put their money somewhere, so they put it into promising startups. That’s not even including the banks who are often willing to lend a new company money as long as the founders are willing to guarantee the loan.
But do all those companies really need that money? In many cases a new company gets more money than they need, which can lead to waste. When I was raising money for a company I was told my investors that it’s just as much work to raise $500,000 as it is raising $5 Million, so ask for $5 Million. What if I don’t need that much money? What do I do with the rest? You end up spending it inefficiently and giving up equity for it.
On the other hand, there’s borrowing money from a bank. Something I don’t recommend. Mark Cuban has said that only idiots borrow money from a bank to start their company. Why? Because if the company fails (and there’s a good chance it will), then you get stuck with the loan. I know from experience this isn’t a good place to be.
No one thinks their company is going to fail. One of the traits of an entrepreneur is optimism, which can at times be blinding. However, you’ve got to hope for the best, but plan for the worst so you don’t get stuck paying off a huge loan for the next 5 years.
Before taking out a loan or accepting investment, give serious thought to whether your really need it and if it’s worth either taking on the personal debt or giving up equity in your company. It may not be worth it.
Related: The funding ecosystem
For more lies you should consider, watch the video below:
0:30 – Everyone needs funding
1:40 – You should borrow money
2:50 – Always try for a home run.
4:00 – Equity hoards
4:35 – The All Star founder
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