Many entrepreneurs have an abundance of ideas and moxie, but capital is often in short supply. While wooing and obtaining an investor for your business venture may seem like the ideal solution to your lack of funding, it’s not always the answer.
Who's The Boss?
With investors come some drawbacks, says Matt Richter-Sand, serial entrepreneur and author of The Agile Startup: Quick and Dirty Lessons Every Entrepreneur Should Know.
"One of the least expected disadvantages to obtaining funding is discovering that the day you take on an investor is the day you might be committing to selling your business,” Richter-Sand says. “Many entrepreneurs don’t realize that generally the only way an investor can get liquidity from your business is to sell it, and their interest in growing the company quickly to sell may not align with your goals.”
When you take on investors, it’s not a passive relationship, Richter-Sand cautions. “Angel investors, for instance, typically become very involved in the business. It’s essentially like taking on a business partner, which means that someone else also has a voice in the future direction of your company.”
Giving up control is necessary and not always welcome, agrees Dave Mathews, founder and CEO of NewAer, who initially bootstrapped his current company and eventually accepted strategic funding after a prototype application he launched won an award.
“If you are an entrepreneur, chances are that you don’t want a boss, but as soon as you get funding, you have many bosses,” Mathews says. “They are your board of directors.”
A Shift In The Plan
Obtaining investors is a full-time job. “Landing an investor is a lot harder than you may realize,” Richter-Sand says. “Less than 3 percent of companies are funded by venture capitalists. Finding and then courting investors is a six- to nine-month proposition that will take most of your time, which means not focusing on building your business.”
Richter-Sand also feels that funding can sometimes stifle the hunger to succeed. “When your back is against the wall financially, you’re forced to develop a business model that really works, whereas there’s a different dynamic when you have $2 million in the bank and you aren't worried about paying your bills at the end of the week,” he says.
Whether you need an investor for your company is closely tied in with your vision for your business. “It’s often asked, do you want to be rich or do you want to be king?” Richter-Sand explains. “Do you want to run a $100 million dollar business, or do you want to be in complete control of three stores in town that enable you to pull in $5 million a year and make a great life for yourself and your family?”
When An Investor Makes Sense
If you choose the avenue of quickly making as much money as possible, an investor may be your best option. “Especially in the later stages of your startup, a venture capitalist can help you accelerate much faster than you could on your own, which in some instances can be critical to your company’s success,” Richter-Sand notes. “Imagine Facebook or Groupon without significant capital. They wouldn't have been able to expand and scale up quickly enough.”
"Almost every company requires capital at some point to be successful. The question is when you take it,” says Dale Fox, CEO of Tribogenics. He has started five companies and launched two dozen products, including going through multiple funding rounds that total about $9 million.
Fox’s current company is working on commercializing breakthrough technology that will make affordable battery-powered x-ray machines available to people who wouldn't have access otherwise. Because of the potential for profit and the high cost of launching the product, obtaining funding proved the best route.
“In some circumstances, you could bootstrap for years and never get anything done,” Fox says. “The venture capital is the gas that fuels the fire. Without it, the idea would be tiny embers that never even become a fire.”
When you bring in investors, you also invite in their connections and years of expertise. “Bringing in people who are motivated for your success will make you more successful,” Fox adds. “Our investors have introduced us to companies with whom we've partnered and brought in experts to solve technical challenges.”
Mathews agrees. “With strategic investors, we were able to gain two things that are difficult for startups: credibility and access to their partners. This is huge, as the investors introduced us to their Fortune 100 companies as a 'rising star,' and as a result, the larger companies have paid much greater attention to us.”
Angel investors in particular can be especially helpful in uncharted territory, Richter-Sand adds. “If you’re going into an industry where you have little experience, an angel investor’s connections and years of expertise are just as valuable as the person’s checkbook,” he says. “The investor’s network and wisdom will help you avoid having to learn the hard way.”
A freelancer since 1985, Julie Bawden-Davis has written for many publications, including Entrepreneur, Better Homes & Gardens and Family Circle.
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