Should you, or should you not take investor money?
There are two schools of thought, and both have merit; it just depends on what you want and how quickly you want to achieve it.
For example, if you are a 21-year-old tech grad building a software company out of your garage, and you want to list on the stock exchange, and reach a billion-dollar valuation, all in the next ten years, then it’s highly unlikely you can achieve those goals without taking investor money.
Why I didn’t take investor money
I was different. I never wanted to take investor money or even take on a partner.
I was a business improvement consultant. I worked for myself, with a team of seventy people, and we used whatever cash came into the business to build the business. If we didn’t have it, we didn’t spent it.
If we really needed it, I put it on the credit card or got a loan. I eventually achieved a $20 million valuation and then a successful sale of my business so this strategy definitely paid off, and I did it without outside investors or partners.
Did I need money to grow? Yes, of course, but I wasn’t prepared to give up my independence and freedom to do so.
Did it take longer for me to grow without that extra injection of cash? Possibly, but it was a price I was prepared to pay for my freedom.
And I don’t use that word ‘freedom’ loosely.
Don’t say I didn’t warn you
Here’s the reality. If you take startup capital from anyone – a family member, mate, an angel investor, a venture capitalist or an accelerator group – you have to be prepared to live with them hanging over your shoulder like a hungry albatross, watching your every move.
Having lunch with a mate on a Friday afternoon and an investor walks by? The investor will wonder why you’re not at work.
Post a pic on Instagram having a holiday with the family at the snow? The investor will wonder why you’re not at work.
Picking up the kids from school and they’re picking up theirs too? The investor will wonder why you’re not at work.
Wherever you go, they’ll be there, waiting for their payday.
They will also have a ‘to do’ list for you as long as your arm and it will be not negotiable.
They’ll expect you to follow orders because they gave you money and they’ll want a 10x return back on it as soon as possible.
It’s a very stressful way to fund a business. Unfortunately, most novice business owners don’t realise they’re stepping into this bear pit until they’ve already taken the money and are too deep in it to get out.
This is controversial
I am fully aware this position is controversial and at odds with almost every business book on the shelf: ‘How to raise capital’, ‘How to pitch’, ‘How to scale’.
They all say the same thing. ‘Go get investment.’
But what they don’t tell you about is the noose that comes with it; the flypaper. Whatever way you turn, those investors will be there; waiting for their payday.
So, what’s the alternative? There’s a simple solution. If you want to raise capital, get it from your customers. Ask them to buy something you make, and use that revenue to fund your expansion.
I often hear young (and not so young) entrepreneurs say, ‘If I take investor money and lose it, that’s their problem, not mine.’
That’s true, of course but what gets left unsaid is that those investors are people, with mortgages, and families, and financial commitments, and hopes and dreams just like yours, and they gave you money in good faith in the hope that the work, sweat and effort you put in, would return them a premium or a dividend on that investment.
Sure, some of them are millionaires many times over and can afford to lose a buck or two without having to go without their champagne, caviar or cognac. But is that the point?
Even if the loss is not felt financially, they will feel it emotionally because they believed in you and invested in you.
And make no mistake, they are investing in you; your vision, your skill and your ability to execute a plan.
Investors have long memories
If you are that 21-year-old working out of your garage, and you take money and you lose it, some will say, ‘Good on you for having a crack. You have time on your side and as memories fade, you can return bigger and better, and hopefully smarter.’
But people have long memories. You may forget that you lost their money, but your investors won’t.
It’s not fashionable to say that the fastest way to raise money is to start selling something people want, but that’s what I did. After 16 years, I achieved an eight-figure sum for my business, and am now building my next business.
All of it was self-funded. I wouldn’t have it any other way.
- Kobi Simmat is a self-taught expert in business management and advisory services, and the founder of Best Practice Biz.