3 things that every startup should consider when fundraising
“ You should raise money when you need it or when it’s available on good terms. Not having enough money can be bad, but having too much money is almost always bad” — Sam Altman
You don’t need a PhD in Entrepreneurship to know that getting access to investor money is one of the most crucial things on the to-do-list of a startup. But it does, however, take years of experience in the startup world to know, which things you should and more importantly, shouldn’t do, when it comes to taking money from potential investors.
Having lived and breathed the startup way of life for more than a decade, both as a founder and as an advisor, I have met many startups, who found themselves in difficult situations because they took money from either greedy or inexperienced investors. Some of these startups were on the verge of closing down before even getting started. All because of a bad deal with an investor.
I have, therefore, decided to share my thoughts with all of you great startup founders out there. And if you are a potential investor reading this, you might also learn a thing or two.
1) Be cautious
I know you have heard this advice before as the founder of a startup, but it becomes even more important when you are looking to take on investor money. Trust me, I know how amazing it feels when someone wants to support your hard work with real money, but don’t let this investment blind you.
Think about yourself for a second. You’re investing a large amount of time and skills into this project. How much is that worth?
What if you fail because of picking the wrong investors? Then you’ve used your valuable time and burned someone else’s money.
Have you thought about how much time, the investors you’re considering, are going to spend on helping you out? What are their work ethics and values? What are their competencies?
One thing is how the investors act, another thing is how you as a founder act, which is why, you need to be very cautious about not giving away the decision rights as well as not giving away too much equity.
If you’re about to give away decision rights or majority of your company, consider these four scenarios:
a) How will you feel in 6 months from now, when you find out (by validating with the users) that there is a big need for X but the investors overrule this and decides to go for Y because this would create better synergies with another company in their portfolio?
b) How will you feel in 2 years from now, when you have gained traction and have many satisfied users. But there is a problem. You have run out of money and are looking for investment, but your current investors are against taking a very good deal from experienced VCs. They decide instead that you should take a second round of investments from them or someone they know, at bad terms, diluting your shares?
c) How will you feel in 5 years from now, when you are raising another round of investment and your shares are diluted to 5%?
d) How will you feel in 8 years from now, when you have worked really hard and everything has finally become a success. You have just received an offer to exit for 1bn US dollars and your investors gets more than half of this, because they invested peanuts and gave you some advice in the beginning?
2) Always think best- and worst-case scenarios
These four scenarios might never happen, but you need to think really hard about the implications that comes along with them. Think best- and worst-case scenarios. Do your best to imagine possible future outcomes and think about what you can accept and more importantly, what you cannot accept.
If you hand over +50% of your shares or decision rights to investors, they will be your boss, and you risk being left out in the cold. They can make all the decisions and you don’t have a say. This can be very dangerous, and you might end up with a disagreement, where your only option is to leave the company and thereby also leave behind all your hard work. This project will not affect the lives of the investors the same way it will affect yours. You are the one going to work every day for this project. Youlive and breathe for this project. The investors don’t.
Also, your investor can potentially shut out other VCs that are willing to invest and thereby gain full control over the company. Further, many VCs are not interested in investing if an existing investor owns a large chunk of the company.
As a VC once said to me: “It’s kind of a dilemma, because we [The VC] want as much equity as possible, but we also want the founders to hold the majority of the company, because they are the ones who are going to work day and night for this, and we want them to be motivated.”
3) Attract attention
Being cautious and thinking in different scenarios will get you far, but if there is one thing, I would like to single out as my best advice to when dealing with the question of raising money for your startup, it’s to attract attention from all sides to your project. Have the interest of several VCs to get the best possible deal. And remember, money isn’t just money: All else equal, I would always recommend going for smart money and investors who backs you up and is there to help you out along the way.
“The way to get investors to act, is fear of other investors taking away their opportunity” — Sam Altman
A few words of advice for investors
For the potential investors out there who are reading this, a few words of advice: Don’t take too much equity that would dilute the founders nor make horrible terms or veto-rights. You should invest in the startup because you trust the founders to lead the company and take the right decisions. Not because you need someone to micro-manage.