More Funding Isn’t Always As Good As It Seems When You're First Starting Out
Friday, November 4, 2011 at 12:50PM It’s easy to be tempted to take too much investor money when you’re first starting out. Recently I’ve talked to a couple entrepreneurs who were ecstatic to secure $500k -1million with just an idea. It’s sometimes hard to understand this early on, but a lot of money upfront isn’t always the best move for the long-term success of your company.
I worked with one talented, eager entrepreneur recently. He had started his company with a single investor who was willing to fund a half million upfront and give him 10% equity to run the business. It sounded great to him at the time. But ironically, as he became successful and raised more money, that initial half-million soon became irrelevant.
He suddenly found himself stuck. Since he had already traded away most of his company equity for that one upfront investment, it was difficult to progress much further
When he needed more funding, he didn’t have much left to offer new investors. When he wanted to hire top-notch executives, he couldn’t really offer them much in the way of a company stake.
Plus, can you imagine how hard it is to stay motivated once you’re working for 10% ownership in your own company versus a higher stake? Working all those long days, nights, and weekends became a lot tougher. After all, 90% of all his success would just keep going back to one investor…someone who didn’t even play an active role in the company anymore.
This entrepreneur would have been much better off with a more conservative approach.
Maybe he could have started smaller: pulling together dedicated time/brainpower to develop a beta site, launch it and show some promising traction early on.
Maybe he could have squeezed by with a $20k loan from friends and family, just to cover some expenses.
That would have given him a lot more breathing room and flexibility to give away some equity to people who could have helped him take the company to higher levels, as he continued to grow.
Think carefully before you give away too much valuable equity when you first start out. The long-term price you pay may not be worth it. There is a right time to raise a lot of money…but it may not necessarily be during your seed round.
Reader Comments (2)
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Andres, this is great advice. I think a lot of people get blinded by the money and forget about the downsides that can come with it!