As entrepreneurs who are trying to grow our companies, it’s an important question. One that we’ll be constantly faced with: should you seek or take investor money? Whether you’re just starting or you’ve been around a while and want to grow faster or capture another market, it’s a tough decision to make. It’s not an easy decision because there are considerable trade-offs to consider.
As one of my favorite bands, Oingo Boingo, sings, “Who do you want to be today? Who do you want to be? Do you want to be just like someone on TV?” Do you want to build a large, multi-million dollar company or more of a lifestyle business that brings in just enough money so you can spend most of your time rock climbing or traveling to places like Paris? Surprisingly, a lot of company founders don’t sit down and agree on what the end goal is at the beginning. It’s especially important if there are multiple founders because not everyone will have the same goals and timelines. Without that agreement, conflict is much more likely to arise as the company grows.
I know several teams of successful founders who had to deal with their success in an unexpected way. Once the company got profitable, some of the founders didn’t want to work anymore. They were happy just getting a check every month. Other founders in the same company wanted to keep pushing hard, working long hours and building the company even larger. There’s nothing wrong with either of those visions. The problems come when the founders don’t agree on the two divergent paths.
It’s vital that entrepreneurs establish their vision, values, and goals early on. Social media professor, Spencer Taggart, taught an excellent course for us on how to do that. It’s called How to Set a Strategy & Vision and is worth watching if you’re a company founder or if you’re an entrepreneur with your own solo company.
Once you’ve established and agreed with your co-founders (if you have any) what direction you want to go and what you’re ultimate goals are, then it’s much easier to think about funding. Ask yourself, will funding help get you to where you want to go and, more importantly, is it necessary or are there other ways to get there?
I meet a lot of entrepreneurs who just assume that getting funding is that way to go and some who even assume that every founder’s goal should be to grow a company to an IPO so they can exit. There are a lot of other options that may be better and a lot of downsides to an IPO, even if you could get to that level of growth.
One reason it’s so important to know what your vision, values, and goals are is that investment money comes with strings. If you and your investors are aligned, you’ll be more likely to be okay with those strings. When investors put their hard-earned money in your company, they’ll want a say in business operations, at the least. and complete control of the company, at the most.
Investors may say they want to be silent investors, but they never are. I’ve taken investment money and am an investor and can tell you that investors want to be sure you’re taking care of their money. They’ll do what they need to in order to protect it.
Let’s pause for a second and talk about investors who are also friends. Caution must be taken if you’re thinking of taking money from friends or family. A lot of businesses start this way and it’s the best and easiest money to raise if you’re just starting out. However, it has the most potential to cause heartache and pain. Imagine how Thanksgiving Dinner is different when you owe money to your rich uncle or brother and you’re behind on your payments. That happens and it’s super uncomfortable.
That’s how relationships go south, so be cautious and be sure to write a well-defined contract that eliminates as much ambiguity as possible so both of you know what you’re getting into. If things go south a contract protects both parties and also protects the relationship if you’ve done your best to fulfill the responsibility outlined in the contract.
One of the trickiest parts of bringing on investors is getting the timing right. If you include an investor too early, then you’ll likely give up too much equity because you don’t have a track record or maybe even a product, let alone much traction. If it’s too early, then you just wasted a lot of time only to be told that you should come back later.
Most of the time I’ve sought funding, angel investors and VCs have asked me to come back when I had more traction. That’s tricky because what they’re saying is that they want to wait to invest in you when you have enough business where their investment is much less risky – or not risky at all. Or in other words, when you don’t need an investor as much. It’s like the thing people say about banks – they will only lend to people who don’t need the money.
If an investor approaches you about putting money into your company, ask yourself if it’s the right time for you. A friend of mine told me that recently a VC friend of his approached him wanting to invest in one of his companies. The investor said that “as an investor, I want you to take my money, as a friend, you should hold off as long as possible.” I mention that because it highlights the inherent conflict between investor and founder. All the more reason to be careful and take money only in certain circumstances, which I’ll cover below.
As the saying goes, time is money. Your time is valuable and maybe even more valuable if you’re just starting a company or in a competitive market. Preparing a company to be fundable and then looking for funding, pitching and finally, closing the best deal, is a very time-consuming process. Plan for at least 6 months to make the rounds pitching at different events. You may get lucky and find an investor right away, but expect it to take a long time.
Just because someone has money, doesn’t mean you should accept it. A good investor is one with an aligned vision, the same exit timing, and a general agreement on strategy. Their investment risk tolerance and management should match yours too. Be as careful interviewing your potential investor as you are when you hire someone. Or maybe even as careful as someone you’re considering marrying.
Investors have varying visions and strategies, as I mentioned above, but they also have a variety of styles. Then there’s dumb money vs. smart money. That’s not a judgment on the people, but rather how much he or she knows about your industry and how much value they can add. Smart money can be a real advisor and add a lot of insight, while dumb money is just putting in the money.
Problems arise when people who are dumb money think they’re smart money. That’s when you get investors who want to be really involved in the business, but can’t really provide value. They end up getting in the way and creating more work for everyone.
In many cases, you may be much better off not seeking investment capital and being small and still having a great business. Money may exacerbate problems if a company isn’t prepared. It may help scale, but it’s wasted when the company isn’t ready to scale or if it’s not the type of business that can scale.
Having more money than you need can also cause some unique problems. Take, for example, the super investor every tech startup wants money from, Softbank. Their CEO, Masayoshi Son, believes in over funding a startup so they have plenty of money to crush their rivals and dominate the market. We’ve seen in the past year that this strategy doesn’t always work out and in many cases causes even more problems. (See WeWork, Uber.) Read more about the dramas at Softbank and how extra-large investments can cause more harm than good here.
When you take investor money, you give up control. Even if it’s a “silent” partner. You’re accountable to someone. That’s not always a bad thing. For most founders being held accountable is a great thing, however, there are many other ways to be held accountable.
Taking investor money means there are more people at the table whose interests must be considered in major (and sometimes minor decisions). Depending on the terms, that may even mean the investor or investor group (VCs, angel group, a private equity firm, etc.) may de facto have control. Have you ever wondered why incredibly talented founders like Steve Jobs can get fired from their own company? Well, that’s how. They gave up control to others.
If you don’t take money, you have full control. Without that money, it may take you much longer to scale, so that’s a risk and tradeoff to consider. It comes down to this question: Is control or growth more important to you?
If you answered “growth” as being the most important to you, then you should take the money. In some industries, you may not have another option. If the industry is fast-moving and innovating quickly, it may not only be in your best interest, but you could be toast without the needed capital to keep up. That’s especially true if your competitors are taking large sums of money to allocate to product development and marketing to roll it out. If you don’t have funding, you won’t be able to keep up.
In some industries, seeking investor capital is the only way you can do it. No investor is considering bootstrapping a thorium nuclear power plant or building rockets to go to Mars. Those kinds of projects take some serious money.
So when thinking about seeking investment capital, there’s a lot to consider. It’s not an easy decision and not an easy “yes” or “no,” or a “good vs. bad.” Think about what kind of company you want to be, what you would need the money for and what the trade-offs are.
If there is anything I missed or you have a story about when you got funding (good or bad), I’d love to hear from you. Send me an email here.
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