As a rule, I don’t tell entrepreneurs whether or not to seek outside investment or who to take money from. But I can tell you that there are two schools of thought about taking investor money, and without nuance, they’re both bad advice. That’s what I want to get into in this post.
Outside investment is neither “good” nor “bad”
The two schools of thought I’m referring to are that outside investment can either be:
- Good, or
- Bad
On a case-by-case basis, neither generalisation is true.
In a vacuum and without context, I usually come down on the side that a founder should never take outside investment unless it’s the only alternative remaining to bring on the minimum necessary resources to achieve an almost-certain next level of growth.
That’s a lot of “ifs.”
On the other end of the spectrum, I won’t hesitate to tell you that building a startup properly requires a lot of money. Whether it’s money invested in time, resources, materials, even opportunity cost, it has to come from somewhere.
If your startup requires a big influx of capital to get to product-market fit, at some point, the economics of a revenue-first approach start to work against you in a substantial way.
Most investment mistakes are made by the founder
You’ve probably heard a number of stories about a founder taking an investment from either an angel or an institution, and everything immediately going to hell. In my experience, the road to hell is almost always paved with founder mistakes:
- The startup isn’t a good candidate for outside investment
- The startup is too early for outside investment
- The team either misrepresented their plan or overlooked a fatal flaw
- The team didn’t know what to do with the money when they got it.
In those rare cases where the startup/investor pairing was a bad fit due to a flaw on the investor side, well, that’s usually the founder’s fault too:
- The investor isn’t right for the startup, but the money is too tempting to pass up.
Anyone with money to invest is a good investor
Just maybe not for you.
Yes, I can tell you about a few folks in my past with a lot of money who were batshit insane. Those people exist, and they invest in startups, and they cause all kinds of trouble, even ethical and legal trouble, once they get involved.
What I can’t tell you about is the magical investor who is willing to put their money to work with a startup and not have requirements, qualifications, milestones, expectations, and ideas about how that money should be put to work.
Some of those ideas are crazier than others, but let’s face it —battery powered cars and selling stuff without having a store and shooting regular people into space were all crazy ideas at some point.
Entrepreneurship is usually just a few degrees away from crazy. And if you’re hoping someone with a lot of money will put that money into an idea you thought up that’s never been done before, you’re probably counting on a little bit of crazy rattling around inside that person’s brain.
Every startup investment deal is different
OK, I’ve been a bit tongue-in-cheek with my painting of how a startup investment deal works and the character of the players.
My point is — for the deal to work, you need to understand exactly what you’re getting into. And you have a short window to do your due diligence and a financial incentive to take a lot of short cuts on that due diligence.
So we all have to make assumptions and we all have to rely on threads of connection between our expectations and the investor’s expectations. If enough of your assumptions are wrong, and enough of those threads break, you wind up with a “bad investor.”
This article was originally published on Medium by Joe Procopio
Joe Procopio is a multi-exit, multi-failure entrepreneur. He is the founder of startup advice project TeachingStartup.com and is the Chief Product Officer of mobile vehicle care and maintenance startup Get Spiffy. You can read all his posts at joeprocopio.com
If you want more direct advice and answers, look into Teaching Startup.
