Monday, November 9, 2015

The Top 4 Wrong Reasons to Seek Investors

pinching-penniesA popular myth these days is that successful entrepreneurs must attract investors to get their businesses going, when the reality has been that more than 80 percent of new businesses are started and grown with no outside investment at all. In fact, there is plenty of evidence that too much money can undermine a startup more quickly than squeezing pennies.

The cost of entry to entrepreneurship is lower than ever, due to smartphone apps and powerful free tools to create websites and ecommerce offerings. Yet many entrepreneurs rely on expensive outside services and outside money, rather than do the networking for a co-founder or two who have the right skills to work for equity. Bootstrapping not only reduces cash needs, but increases commitment.

Many of the best entrepreneurs I see find themselves besieged by investors, and have actively turned them away, at least until they reach a point of valuation and scaling where they don’t have to give away a lion’s share of ownership and control. Here is a summary of the top four wrong reasons I see for looking for investors:

  1. A desire to start with an impressive infrastructure. Some entrepreneurs think a new brand is all about having plush offices for displays and visitors and an upscale address. They forget that the product or service makes the brand, not the environment. With most solutions, infrastructure cost is overhead you don’t need.

  2. You don’t want to risk your own money on development. The first question from most investors is the size of your own investment. If you won’t risk your own money, they question your commitment to the project. If you claim to have no financial resources or savings, investors might suspect your strategic planning ability or financial acumen.

  3. The need to hire staff immediately. Creative and determined entrepreneurs always find ways to get people to work for equity, barter services or share later revenue rather than pay cash up front. Salaried staff will never have the commitment of co-founders that depend on the success of the startup.

  4. A desire to roll out on a massive scale. Most startups need to pivot at least once, so you need a limited rollout territory with a minimum viable product to keep the costs of corrections in line. Hitting a broad market initially with multiple fully-featured products and a huge marketing campaign is a recipe for disaster that bootstrapped startups never try.

Indeed, there is a time and place in every new venture where even a bootstrapping entrepreneur should consider bringing on investors. These would include the following:

  • You have a proven business model. Once you have a complete offering, with real revenue from real customers, it’s time to ramp up the business. You need extra cash for inventory, marketing and a real operations team, and investors can calculate the return and risk. Organic growth at this stage may be non-competitive.
  • The solution requires expensive equipment or processes. If your medical solution requires long clinical trials or your product requires injection molding or special fabrication equipment, it’s time to look for an investor. Even here, an alternative solution is to partner with a related vendor or potential big customer for equity or royalty advances.
  • You need investors' domain knowledge and management expertise. Famous investors bring value just for their credibility and name recognition in the marketplace. If one of the top venture-capital firms invests in your startup, your potential for success will be boosted by the association. Medical expert investors can be worth more than the money they invest.

Another good reason for skipping investors is to shorten the whole startup cycle. Most entrepreneurs don’t realize that finding an investor can add months to the process and require huge amounts of your time during the critical development and go-to-market period of your startup. In this rapidly changing marketplace, your opportunity can quickly evaporate or be grabbed by competitors.

Thus finding investors early is most often the hard way to get your startup off the ground quickly. Bootstrapping continues to be the preferred approach, giving you maximum ownership, control and agility. Isn’t that why you chose the entrepreneur lifestyle in the first place?

Marty Zwilling

*** First published on on 10/30/2015 ***



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