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5 Questions to Ask Yourself Before You Take in Investors
Posted By Randy Gage On February 22, 2013 @ 11:00 am In VC & Angel Capital | 6 Comments
So I was brainstorming with a couple of my partners for a start up venture we’re about to launch. They seemed genuinely shocked when I said I didn’t want to take in any investors.
I know the trendy thing today is creating a pitch that attracts VC firms. But as a rule, I usually don’t want them. Their job is to find investments they can grow and cash out. And that sometimes clashes with the best long-term objectives for a business.
Read INC, Entrepreneur or Fast Company magazines and everyone is proud of how many rounds of financing they’ve scored and how much money they’ve raised. This can get pretty intoxicating. You start to dream of making your pitch, and how much one of the Silicon Valley firms will come in on your deal for.
There is a very big difference between raising money and actually earning money. The first one is an obligation that needs to be repaid and creates additional pressure. Which is usually the last thing you need more of when you’re starting a new business.
Obviously a lot of start up entrepreneurs are looking at investors, because banks aren’t really doing much lending in their space. And outside of VC’s, people are looking at angel investors and crowdfunding is gaining steam right now. But it may not be in your best interest to take in investors in any capacity.
Borrowing money is very seldom the path to prosperity. I do believe in leverage and definitely recommend it. (Real estate, for example.) However, if a venture capitalist wants to invest in your business, they need to leverage their money, which often means to grow the business and cash it out. Investors sometimes mean conflicting goals for the business – more pressure for quicker returns or even losing control of your business.
So think hard before you blindly jump at the idea of raising cash through investors.
One hundred percent of entrepreneurs fervently believe they’re in the latter category and need more cash now to compete. In reality, only about five percent really fit into that category. The other 95 percent would be better doing a slow build through the cash flow.
At the end of the day, it all depends on what outcome you are looking for. If you’re looking to start a business and flip it for a profit – investors may be a good fit for you. If your business is your dream and your life’s mission, you might be better to go it alone.
So whatever your objectives are – be mindful of them and approach investors with discernment.
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