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<\/picture> Tim Berry<\/a> <\/p>\n3 min. read<\/p>\n
Updated December 3, 2024<\/p>\n<\/p><\/div>\n<\/p><\/div>\n
Before you buy into the myths about startup investors<\/a>, first consider whether you actually want startup investors for your new business at all. <\/p>\n No, I\u2019m not bitter \u2026 I had VC money in Palo Alto Software for a few years and they were helpful, collaborative, and good people. I\u2019m not a bitter victim.\u00a0 And I\u2019ve invested in more than a dozen startups, so I don\u2019t hate investors; I am one. <\/p>\n But I try to tell the truth. Most businesses are better off without startup investors. Here are a few reasons why.<\/p>\n That dream you had of building your own business ends when you take on outside startup investors. You have partners now. You have people who have a claim to ownership<\/a>, shares, and having a voice in key decisions. You no longer set your own goals, strategy, milestones, and pace. <\/p>\n You\u2019ve got a share in a business, but not your own business. Investors write checks to own a serious portion of your business. I admit that\u2019s patently obvious, but you should see the emails I get in which people think of investors as if they were some sort of public agency.<\/p>\n Some become collaborative partners and even mentors, some are nagging insensitive critics. Some are trojan horses. Some help, some don\u2019t. (Hint: choose carefully which investors you approach<\/em>.)<\/p>\n You are not your own person when you have investors; you\u2019re part of a team. You can\u2019t decide everything by yourself. Politics matter. Investor relations matter. If you screw up, you do it in front of other people, and it hurts those people.<\/p>\n For an example of what I mean\u00a0read this piece<\/a>\u00a0from the New York Times. You haven\u2019t won the race when you get that check.<\/p>\n Well-known strategy consultant Sramana Mitra has a couple of eloquent minutes on that them\u00a0in this two-minute video<\/a>. She seems to be talking about India, but she\u2019s well known in the Silicon Valley, and what she says applies perfectly well here.<\/p>\n Simply put, valuation<\/a> means the price. If you want to give only 10 percent of your company to investors who pay $100,000, you\u2019re saying your company is worth $1 million. And so on. Simple math, but wow, not so simple negotiation.<\/p>\n That\u2019s why we always talk about exit strategies. You can be the world\u2019s happiest, healthiest, most cash-independent company, but your investors won\u2019t be happy until you get them cash back. <\/p>\n The win is getting money back out of the company. Some big company stock buyers like dividends. Startup investors don\u2019t.<\/p>\n If you don\u2019t have startup experience, get somebody on your team who does. Chris Dixon said it best:\u00a0either you\u2019ve started a company or you haven\u2019t. And if you haven\u2019t, and nobody in your team has either, that makes it very hard.<\/p>\n The real growth opportunities are scalable. It used to be products only, but now there are some scalable services, like web services, for example. But if doubling your sales means doubling your headcount (that\u2019s called a body shop<\/em>), then investors aren\u2019t going to be interested.<\/p>\n Not that I trust patents as a defense, but trade secrets, momentum, a combination of trade secrets and patents, plus a good intellectual property defense budget \u2026 if anybody can do it, then investors aren\u2019t interested. <\/p>\n (Of course, what would I know? I thought Starbucks was a bad idea because I thought that it was too easy to copy \u2026 there are always exceptions.)<\/p>\n Further Reading: <\/strong>What investors want to see in a business<\/a><\/p>\n Which would you rather \u2014 steer by committee, with people looking over your shoulder? Or just do it yourself, you drive, you decide?<\/p>\n Also, before I go too far, yes, there are opportunities that demand investment. These are the opportunities that you can only address with substantial deficit spending, which are also worth it, with a big pot of gold at the end of the rainbow. If that\u2019s what you\u2019re looking at, hooray.<\/p>\n I\u2019ve said it before:\u00a0bootstrapping is underrated<\/a>. I get frequent emails from people asking how they can get investment for their new startup, and I\u2019ve admitted to being a member of an angel investor group. <\/p>\n Like this post? Share with a friend!<\/p>\n<\/div>\n Tim Berry is the founder of Palo Alto Software<\/a> , a co-founder of Borland International, and a recognized expert in business planning. Tim is the originator of Lean Business Planning<\/a>. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning. His full biography is available on his blog<\/a>.<\/p>\n<\/p><\/div>\n<\/p><\/div>\n<\/div>\nValuation is critical to them and you<\/h2>\n
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