10 reasons not to seek investors for your startup
Sure, maybe you need the money. Maybe thatâ€™s what your business plan says. But seriously: Do you really want to have investors involved in your dream startup?
Iâ€™ve said it before: bootstrapping is underrated. I get frequent emails from people asking how they can get investment for their new startup, and Iâ€™ve admitted to being a member of an angel investor group. But letâ€™s not forget, while weâ€™re thinking about it, these 10 good reasons not to seek investors for your startup.
1. Itâ€™s almost impossible to get investment for your very first startup. If you donâ€™t have startup experience, get somebody on your team who does. Chris Dixon said it best: either youâ€™ve started a company or you havenâ€™t. And if you havenâ€™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 thatâ€™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 donâ€™t own your entire company.
3. Investors are bosses. You are not your own person when you have investors; youâ€™re part of a team. You canâ€™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, youâ€™re saying your company is worth $1 million. And so on. Simple math, but wow, not so simple negotiation.
5. Investors donâ€™t make money until thereâ€™s a liquidity event. Thatâ€™s why we always talk about exit strategies. You can be the worldâ€™s happiest, healthiest, most cash-independent company, but your investors wonâ€™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 donâ€™t.
6. If itâ€™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 (thatâ€™s called a body shop), then investors arenâ€™t going to be interested.
7. If itâ€™s not defensible, itâ€™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 arenâ€™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 arenâ€™t generic. Some become collaborative partners and even mentors, some are nagging insensitive critics. Some are trojan horses. Some help, some donâ€™t. (Hint: choose carefully which investors you approach.)
9. Just getting financed doesnâ€™t mean diddly. For an example of what I mean read this piece from the New York Times. You havenâ€™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 sheâ€™s well known in the Silicon Valley, and what she says applies perfectly well here.