By Francine Hardaway, Ph.D.
Taking other people’s money to fund your startup changes your life in ways you cannot predict. And many of those ways are negative.
I meet with dozens of entrepreneurs a week. No matter how they couch it, they are asking for money. They come to me wanting to know first, will I invest myself? Doubtful, unless I already know them really well, know the company really well, and have some spare cash. Those often don’t occur simultaneously.
Okay, then will I connect them to someone who will invest? At the very least (or perhaps it’s the very best), they ask me how to get ready for funding. What do they need to do?
I always tell them to forget it.
To someone laboring in a cash-strapped startup, money often seems to be the endgame. “When I get funded,” the entrepreneur thinks, “I can build a prototype, hire a development team, go to market, scale more quickly, and beat my competition.” All problems will go away.
Maybe. Maybe not. But there are some things that DEFINITELY come with other people’s money. They’re new and different problems.
- A board. Many startups have an advisory board of sympathetic people with industry expertise, or people who enjoy mentoring, or people who donate a few services on the come. Once you take investment, you will also have a fiduciary board, with the responsibility of making the company successful. Some of those will be outside the company. Be careful they don’t outnumber your people. And that they don’t set your co-founders or key employees against you in meetings. If you can, keep an odd number of people on the board, people who support you, so the board won’t be deadlocked.
- Deadlines and benchmarks. Few investors send you the entire check immediately. Most of them give you some money and withhold the rest until you have proven something. Those who give you money often take a board seat so they can watch you.
- Financial controls and budgets. Most startups are terrible with systems for payables and receivables. But there’s an old aphorism that cash is King, and when you get a large sum, you think it will last forever, until it doesn’t. You have to make the money hold out until you have met that deadline, and if you miss the mark, you might never see the rest, even though the problem that kept you from meeting it was out of your control. It’s funny how investors can forget everything from technical glitches to supplier problems, to the earthquake that destroyed your factory.
- Strange course corrections. Yes, it is now in vogue to say your startup can, or did, pivot. But when your investors decide that you are going to pivot and you don’t think that’s the right direction, the wrong investor can force you in a direction you didn’t want to go in, wasting time and money. Much of this depends on how “smart” the money is about what you are doing. Don’t ever take dumb money, even if you are starving.
- Demands on your time. Investors are a time suck, because they need to be handheld. The worst investors are small investors. If you raise an angel round consisting of five investors who put in $100K each, that’s five people you have to answer to. Five phone calls every time things change direction, or something bad/good happens. That’s why there is an entire industry built around “investor relations.”
- An early exit on your part. I have actually known one guy who has been ousted from the CEO job in not one, but two of his own startups, by investors who either wanted to bring in their own guy or even their own team.
I have known more than one who has been shuffled to another position whether for the right or the wrong reasons. Often these shufflings are good, because they bring in experienced management. But sometimes they bring in management with no industry expertise, and they destroy both morale and your vision.
Remember “The Social Network” movie about Facebook? Remember what happened to the alleged co-founders when Peter Thiel came in? Well, some of the people who considered themselves co-founders suddenly found out they weren’t!
Moral: Before you decide that it’s absolutely necessary to take outside investment, explore all the possible ways you can partner, outsource, affiliate, collaborate, or…heaven forbid, get customers.
Today’s article is presented by the founder of Stealthmode Partners in Phoenix, Arizona. She is a true angel investor, and has helped package and secure funding for many high-tech startup companies in the area. She has also created positioning and marketing strategies for dozens of growth companies. You can contact her directly at firstname.lastname@example.org.