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.
But That May Not Be The Best Thing For You
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.
Ask Yourself These 5 Very Important Investor Questions First:
- Are you looking for loans or investors to cover up sloppy money management? Investments won’t fix this and only waste other people’s money like your own. You’d be much better off to fix the problem at the source.
- Could you bring in a strategic partner – someone who buys into the objectives of the business and would add expertise that can help grow it? Someone who does this isn’t looking to flip their money quick and is invested in growing a long-term business.
- Would your customers finance you? It sounds crazy, but I have often seen customers advance money to a vendor they trust to ensure uninterrupted supply.
- Do you play well with others? Most entrepreneurs are lone wolves. Most investors want a say in how their money is being used. Sometimes that is a very volatile mix.
- What will the slower time it would take to build without investment mean for your business? Most companies would be much better off if they lived within their cash flow and grew their business from that. This forces them to manage cash flow, do the fundamentals right and only add overhead when it sustainable. Other times, if you don’t get a quick infusion of capital you lose first mover advantage or market share to a better-financed competitor.
Here’s My Experience
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.
Questions Photo via Shutterstock
Mark @ ThinkTraffic
Great post Randy!
I think a lot of people see investment finance as an easy way to riches (who wouldn’t salivate at a $1M investment?). This is probably thanks to shows like Dragon’s den of course…
The reality is totally different and if you have the motivation to build your business organically you are often better off.
I feel that the biggest issue is having an investor wanting say in how the business is run (or, as the owner would say, give up control). This introduces a very different dynamic and can cause loads of stress.
This article is on trend with what I’m doing right now. I actually pulled back and looked at how I can grow what is already going on in my biz. Now even though we don’t have the big cash influx of an investor, we also are still doing it exactly how we need to, to ensure continued growth. Good stuff!
Great questions. It’s important to take your time and think things all the way trough before making any kind of financial investment. You’ve given a good guideline to follow here. Thanks.
Good article, bringing in a business partner to help drive the strategy and success of the business is often the best approach, taking on my debt / equity is not always the best solution long term.