Why Do Startups Want Money?
Furthermore, why would a funded company want more capital in the early stages?
I’m not saying these are the right ways to think about gathering more resources, but it makes sense to some people to have a cushion.
Of course, some people thrive on risk and others want to mitigate it. If I can convince someone to invest in my company and they can provide an offer of cash for a small percentage of my business that I can live with and feel comfortable, why not seek more money? Of course, the issues become; can you control the investor, and if you need more money, how will that dilute your shares.
Your Startup’s Business Model
A proven business model that is trending, unique, and exciting is a magnet for people to invest in. The business model may be on the edge of a new technology, is offered for the first time to millions of consumers who want it (e.g. medical marijuana) or has been somewhat proven in other markets. This follows risk assessment, in that people would rather have a proven model that addresses the risk factor of the investment. I’m sure you would feel more comfortable asking for family and friends to invest if this was the next ‘new’ thing with an almost guaranteed success.
Family & Friends Round
This is a tough issue. In the previous example, a trending product with full potential might be a cash-cow you might want to share with those closest to you. However, what if the business is on the edge and you are even hesitant about whether it will succeed? I don’t know about you, but my family and friends are mainly entrepreneurs who have struggled and worked hard for their money. The company I am working on better be a ‘unicorn’ before I would invite my family and friends to invest. I’m not sure I could live with myself if I caused them to lose their investment because I was blindsided by how great I thought my business was going to become.
The Management Team
I may have the perfect idea, risk managed and a proven business model but what if I can lever some money to get a better management team at considerably less than the money it would normally take to acquire them? Would I be able to offer them equity plus some walking-around-money but probably considerably less than fair market value? I’ll jump at that opportunity both as an investor and part of the management team. Beware of startups with an eclectic mix of management types who seem somewhat out of place until you realized those guys are either related to the founder or are his best buds. Family and friends are best kept as first round investors. It is also one of the main reasons companies fail because the right people are not in the right positions.
Hmmm, lets see; if my partners and I are experienced entrepreneurs with solid backgrounds, versus the 20-year-old programmer with a cool business idea but no experience, who would you put your money on? Would it make sense for someone to invest in my company, or the 20 year-old entrepreneur? A cool idea is worth nothing unless it can be implemented, and it’s not likely to be developed without the money.
If you have a considerable amount of networking connections, this will add to your value as the place for an investor to put money into. With several hundred thousand followers in many networks, I can find investment, and influence peoples’ attitudes. Is that worth money? It’s just another variable but an important one – the size of your spheres of influence. If people realize you are a thought leader in a certain field and you are looking for investment, it’s likely you will find it.
If you have a vision, a story that sounds like a plausible way to make money with little risk then it makes sense to offer an investor some entry into the deal. Remember it’s sometimes nice to have an investor to not just share risk, but to bring to the table a different perspective, more networks and new ideas. The thing with just having an idea and a good story is that you will probably ‘give away the farm’ for an investment. I’ve seen this scenario and it never works out the way the founder thinks it should. If all you bring to the table is an idea, your investor will probably need to invest not only, money, but time, management, focus and a lot of hand-holding. In one case my ‘idea guy’ got a very small percentage for allowing others to run with the idea.
Finally, if people are asking to invest in your company because they like you and the idea, why not take on an investor without giving the business away for all the reasons above. It might make sense to reduce the headaches, the lost sleep and an unknown future by bringing on sophisticated experts to help you.
Running a startup with a bit of extra money, coupled with a team of like-minded people and a vision for the future is the ingredients of a very exciting venture.
(Photo 1 by Steven Depolo)
(Photo 2 by Blogtrepreneur)