The Last Thing You Need is an Investor
Every entrepreneur and every startup founder dreams of the ultimate investor. “If only I could find an investor who believes in my idea, I’d finally be able to get my company off the ground and on my way to wealth and freedom.”
Let me be clear. It can happen. It does happen. There are some very cool investors out there that could make that a reality for you, but it is an astronomical longshot and probably not how you want to start your business.
This is what Mark Cuban from SharkTank had to say: “I think the biggest mistake people make is once they have an idea and the goal of starting a business, they think they have to raise money,” Cuban said on the podcast ‘On Air,’ “and once you raise money, that’s not an accomplishment, that’s an obligation. Now, you’re reporting to whoever you raised money from.”
There are many pitfalls in investor land. Here are a few:
- Most entrepreneurs tell me that they want to start their own company so they can finally have control over their career, their company and their destiny. The moment you take investor money, the investor has control. Money always comes with strings attached. You are giving up the very thing you are seeking when you take on investor money.
- Money Wants Money. Investors (regardless of what they say about their patience and long-term outlook) are about ROI. They want a return on their investment and they want it as fast as possible. When your company finally does make money, it will go to the investors first, not to you. Not only do investors want money from you, they want an exceptional return, above market returns, risk adjusted returns. That means that they are not looking to just get their money back. They want 5 times their money back…or more! Investors are professional money makers. They know how to do it. They know how to get risk adjusted returns and that usually means that they will take your lungs. They will control whether you can breathe or not based on whether you are growing fast enough and meeting milestone accomplishment and creating the wealth for them that they expect you to create. If you are not performing, they will take a kidney or two as well. They are not being vicious. They are not being mean. They are doing what they know how to do to protect their investments and get exceptional returns on their portfolios. It’s just business, but it won’t feel like that to you. It will feel like you are killing yourself working for them and if you don’t produce, they will take your company. 50% of startups fail in their first 4 years. If you take on investors and fail, they will own your ideas, intellectual property, patents, brands and everything you have built. Know what you are getting into before you take their money.
- Investors usually don’t work in the business. Think about this. If you give a partner a piece of your business, they will be working in the business. But if you take investor money, they will likely NOT be working in the business. That means it’s all up to you to produce the result. “Yes,” you say, “but I can hire people to help me with their money.” True. But now you have to manage the employee who is not an owner and hope that they work out and produce exceptional returns for you while simultaneously managing the investors and their expectations. If the employee leaves or doesn’t work out, you’ve spent the money, but you don’t have a result. Now what?
- Get Real! Less than 1% of startups are funded by VC’s or Angel investors. I see entrepreneurs spending weeks, months or even years polishing their pitch and their pitch deck. For what? For a less than 1% chance of getting funded? Are you crazy? That’s a terrible use of your time. What if you spend the same effort finding customers or perfecting your products or services?
- 57% of startups are funded by the founders with loans and credit. Is that risky? Well, it depends on your definition of risk. There are dozens of kinds of risk. Yes, you are risking your capital and your credit rating, but you are not risking the loss of your business and your IP to the credit card company. You are not risking that someone else will be in control of your business and be telling you what you can and cannot do. You won’t be risking years of your healthy life waiting for investors. You won’t be risking the fact that someone else comes up with your idea first and gets it to market. You won’t be risking your dream. Life is all about risk. You just have to pick your flavor.
- 38% of startups are funded by money from friends and family. This always seems like an easy way to go. Those people love you and want you to succeed. They will be patient. They won’t take your company. You hope. There are many relationships that have been ruined by money. You value these people’s judgement’s about you and those are at risk as soon as you take their money. Be clear about all expectations and put them in writing. Write a PLAN B agreement in case things go south. If the business fails, how will they get paid back? Or will they forgive your loans. Or will you become their slave? What is the plan? Be clear. You still want these people to love you when this is over.
- I am a huge fan of crowdfunding because there are far fewer strings attached. If you can run a successful crowdfunding campaign and get up and running that way, it is usually a big win. Being successful at crowdfunding is a whole separate skillset. Do your research and build an exceptionally strong plan along with a PLAN B AND PLAN C.
I am not here to rain on your parade. I want you to get started and to succeed almost as much as you do. I believe that we must become a nation of entrepreneurs to strengthen our families and our countries. Small businesses are the bedrock of a strong, diverse, vibrant and responsive economy. Just know what you are doing before you take on investor money. It is not “FREE!”
I also want to say that there are some amazing incubators and angel investors who will really work with you to help you succeed. They really are angels, but there are not nearly enough of those to go around.
What is the alternative?
- Get Money from Customers and Potential Customers. If you are truly adding value for your customers, they will pay you in advance or help you get started. If you can bootstrap with your customers money, both of you will be more committed to success. You’ll OWN your business and you will be in control. This should ALWAYS be your first choice for startup money.
- Get Money from Potential Partners who have a Vested Interest in Your Success. My son wants to start a restaurant. He found a hotel that needs an exceptional restaurant experience to get approved by their franchise for “Premier” status. The hotel is putting up all the money to start the restaurant. He will owe them nothing except a percentage of ongoing profits if they are successful. By finding partners who want to serve a shared customer base, you reduce your capital risk and gain a committed marketing partner.
- Start SLOWLY. Another avenue for self-funding is to just start slowly with tiny capital. Let’s say you want to start a clothing line or a jewelry line or a makeup line. Start with a single blouse. Sell it. Make two blouses with the profits. Then three and so on. You will own 100% of your success and it makes more sense to spend weeks or months face-to-face with customers than it does playing with your pitch deck. You’ll be learning about your market and building the business at the same time.
- Find a Partner. I have said this many times throughout these videos. Finding a partner or someone who will take a share of the business or a success fee is a much better way of building your business that you own and control. Partners have a vested interest in your success and they will be more understanding of setbacks in the business because they will be part of them.
- Create a Partnership with an Existing Firm. There may be other firms who serve your customers currently. By partnering with them, you should be able to accelerate your revenues and growth. If they stand to gain from referrals or co-contracting, they might be willing to give you a loan against those commissions or referral fees.
- Get a Loan from Your Supplier. Who else stands to win big from your success? If there is a supplier of raw materials or other goods or services who would be a huge winner if you are successful, ask them for help. They will do everything they can to help you succeed and if the business goes south, you still own your IP. They will probably have lots of good advice for you, too because they know your market and competitors. Listen to them.
- Take the Bootcamp Shortcut- If you are hell bent on raising money, at least go to bootcamp first. George Kenney is a VC in San Diego who runs a bootcamp that forces you to get your business plan and your pitch deck in world-class shape. For a few thousand dollars he coaches you one-on-one until he thinks you are ready for the big leagues. Then, you have to pitch in front of a panel of CEO’s, VC’s and entrepreneurs that George puts together. You have to score an 85 out of 100 to get past that group and graduate from bootcamp. Of those who have graduated from Georges bootcamp, 50% have received funding within a year.
The bottom line is that there are some companies that need a good chunk of capital to start. If you are one of those companies, be very careful who you let invest and get a very good attorney to help you draft or review the documents. The right investor can change your life. The wrong one can ruin it. That’s why I say “The last thing you need is an investor!”