Entrepreneur Beginners Guide
“There’s a Downside to Having Investors”
Angel investor funding (venture capital or private for that matter) for your business is a bad idea sometimes.
—Ryan Mapes, general manager, Go BIG
In the world of entrepreneurship, investors are like gods. Why else would the term “angel investor” exist? These omnipotent and mystical figures have tremendous power and influence, helping determine what companies will ultimately join them in the land of milk and honey. However, having investors is not always a heavenly experience. In fact, having investors can make your life a living hell, especially if you make some deadly assumptions about them and their purpose like so many entrepreneurs do.
As a young entrepreneur I committed this cardinal sin: I assumed that I needed outside investors to grow my company. Everything I read about entrepreneurship stressed the importance of having investors—and at an early stage. According to the books I read, only the most successful businesses had investors. If your idea isn’t funded, then it’s not legitimate or big enough, right? I don’t remember many books discussing the idea of bootstrapping as a real option for a young startup. If a book did mention this option, it provided little or no information on when or how bootstrap-ping should be used. In contrast, most books focused on less pragmatic methods of finding capital that most entrepreneurs will never need.
As a result of my assumption, I set out to learn everything I could about venture capitalists and the Holy Grail, an IPO (initial public offering). I bought High-Tech Start-Up, a phenomenal book by John L. Nesheim on creating successful new high-tech companies. The book thoroughly discussed the IPO process-and the idiosyncrasies of venture capitalists, angel investors, and other types of investors. I was convinced that my idea was big enough for an IPO, so 1 studied the book like it was my Bible. I vividly remember studying the equity tables of Microsoft, Apple, Double-click, eBay, MP3.com, Oracle, and other companies provided in the book’s appendix. I later learned that a great majority of businesses will never reach an IPO, and that according to Saratoga Venture Finance, the odds of going public are about six in a million.
Although my initial businesses were not IPO-worthy—far from it—I did eventually create fundable ideas that would need outside capital to grow and to scale. As I sought and received funding for some of these ideas, my assumptions about having investors eventually would cause me quite a bit of frustration. Three assumptions I had about outside investors are as follows:
- Finding investors will be easy. Overcome by the excitement and conviction of their idea, most entrepreneurs assume that finding investors will be a walk in the park. It is not. I am reminded of Walt Disney’s amazing story of perseverance when he sought capital to build his studios. It wasn’t a walk in the “amusement” park for him. Disney was rejected by 302 banks? Most of us would have given up after the fifth banks rejection. Moreover, finding investors isn’t easy because it is energy-intensive. A good friend of mine, who recently raised capital for his technology company, was always on the road, meeting with different venture capitalists and angel groups. His Aravel schedule was grueling, not to mention the constant drilling by brilliant cynics who wanted to put holes in his business model. It takes the attitude of a marathoner to find capital for your business: When you want to give up,, you dig deep to keep going.
- When you receive a yes from an investor, all your money problems will go away. Not true. In many ways, your problems may be just starting. Rarely do you hear about investment deals going awry, but they often do. After appearing on the popular show Shark Tank, contestant Megan Cummins never received her promised investment of $55,000 for 20 percent equity in her soap company. When she called to get the money, the shark reneged on the deal, asking for 50 percent equity for the same amount of money. With retailers asking for product, Cummins was put in a bad position. I had a similar situation in which an investor agreed in writing to fund my company, but pulled out at the last minute. I ended up in court to save the project. Also, in a recent Bloomberg television feature about Techs tars, a business incubator, one company put its investment capital at great risk. One of the founders took money to pay personal financial obligations. The situation was later resolved, but may have been one of the reasons the team eventually split up.
- Business will immediately get better. Again, not always true. In many cases, more money and resources translate into more problems. If the business plan and model are not sound, throwing more money at it will yield poor results. To illustrate, it can be like giving more money to a shopaholic. The ideal situation for having investors is when your company is experiencing certified, tremendous growth, a spurt that is outpacing your current resources. For example, Facebook nearly doubled its membership in 2004 to four hundred thousand. As a result, the company needed servers, so investor Sean Parker negotiated a deal in which Facebook’s web host company, Western Technology Investment (WTI), gave the company a loan for $300,000. And some of WTI’s executives invested their own funds in Facebook.
Understanding the downside to having investors in your business will better prepare you for the experience, if you choose to go that route. A capital infusion by an investor can be a huge accomplishment and really propel your business to the stratosphere of success, but remember that it can also be pure hell.