The Downside of Professional Investors
When you’re starting a business, finding investors may seem like the answer to all your problems. But in many cases there are downsides.
It’s not that I don’t believe in the value of investors, because I do. But not right away. It’s far better to bootstrap as long as possible, especially during the earliest stages of building your business. Here’s why.
There are strings attached.
When it comes to professional investors — people like fund managers, active angel investors and experts who manage other people’s money — outside funding always comes with strings attached. So when you take on these kinds of investors, you could be taking on more than you bargained for. In fact, sometimes it can be harmful to your business.
It may harm your business.
Yup, you read that right… professional investors may not be all that. The reality is, taking on these types of investors isn’t usually in your best interest early on. That’s because part of the deal includes:
1. A boss.
Along with accepting money, you’re accepting a new boss. Isn’t that the opposite of what you want? Didn’t you decide to start your own business to be the boss? Once you take on investors, you’re not the only one calling the shots — now you have other people to answer to.
2. Someone else’s agenda.
Investors’ goals aren’t necessarily your goals. To be blunt, they’re in it for the money. Your goal is to build a successful company over the long haul. Their goal is to get a return on their investment in 5-7 years.
Investors are looking for a way out (an exit strategy) while you’re presumably looking to build something for the long-term. They’re focused on scaling your business so that it can either be acquired or issue an initial public offering (IPO). Why? Because that’s how they make money. Otherwise, no payday for them. In most cases, they want your business to grow as fast as possible, which isn’t always good for your company’s long-term health.
Finding investors, especially ones that are a good match for you and your business, takes a disproportionate amount of time and attention, not to mention resources and expense. Worst of all, it pulls your focus away from the thing that matters most: running your business well.
4. Great expectations.
It’s amazing how often people confuse the illusion of success with actual success. Too often, founders fall into the trap of thinking that landing investors adds legitimacy and street cred to their business. Don’t be fooled. It’s merely window dressing — a superficial measurement of your company’s worth and/or potential. Even worse, along with that window dressing comes: (i) very real demands, (ii) very real expectations and (iii) a lower tolerance for mistakes. Bottom line: You run a greater risk of losing control of your vision and your company.
It’s likely a bad deal for you.
Without a track record, not only do you not know what your company is worth, neither does anyone else. By pitching investors, you’re asking them to assume some level of risk. What if demand isn’t there? What if your pricing structure isn’t profitable? What if expenses spiral out of control?
If you’re planning to take on professional investors early on, just be prepared to pay a premium for it. Proof that your business is on the right track puts you in a far stronger negotiating position; so the longer you can wait, the better deal you can negotiate.
Proven success = Lower investor risk = Better terms for you
Anyway, do you really want to trade away part of your business so early in the game? Before you really know what you have?
It’s tempting, I know.
Listen, I get it. The thought of someone investing a boatload of money in your business is pretty appealing. I mean, what’s not to like?
You get money in the bank along with an ego boost. It’s only natural to feel validated, and the attention from others can be pretty heady stuff! Back here in reality, though, you should know that more than 50% of startups (some say 90%) fail within the first 5 years.
So it’s important to remember: raising funds is not the goal; building a thriving business is.
It’s worth the wait.
After giving it some serious thought, you’re likely to find that self-funding is the smarter way to go for the time being. Why? Because you’re giving yourself the gift of time — time to work out the kinks and see what you’ve really got.
- Your network will be expanding.
- Your experience will be growing.
- You may discover other financing options that are a better fit for both you and your company’s future.
And if you decide to take on professional investors down the road? You will have built:
- A track record
- Valuable experience
- An invaluable network
- And some good old-fashioned know-how.
No need to go begging, hat in hand.
Everything you need and nothing you don’t.
Get more tips like these delivered right to your inbox.