10 Good Reasons Not to Seek Investors for Funding

Before you buy into the myths about startup investors, first consider whether you actually want startup investors for your new business at all.

No, I’m not bitter … I had VC money in Palo Alto Software for a few years and they were helpful, collaborative, and good people. I’m not a bitter victim.  And I’ve invested in more than a dozen startups, so I don’t hate investors; I am one.

But I try to tell the truth. Most businesses are better off without startup investors. Here are a few reasons why.

1. After investment, it’s not really yours anymore

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, shares, and having a voice in key decisions. You no longer set your own goals, strategy, milestones, and pace.

You’ve 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’s 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.

2. Investors aren’t generic

Some become collaborative partners and even mentors, some are nagging insensitive critics. Some are trojan horses. Some help, some don’t. (Hint: choose carefully which investors you approach.)

3. Investors can be bosses

You are not your own person when you have investors; you’re part of a team. You can’t 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.

4. Just getting financed doesn’t mean diddly

For an example of what I mean read this piece from the New York Times. You haven’t won the race when you get that check.

5. Investors sometimes take your company from you

Well-known strategy consultant Sramana Mitra has a couple of eloquent minutes on that them in this two-minute video. She seems to be talking about India, but she’s well known in the Silicon Valley, and what she says applies perfectly well here.

6. Valuation is critical to them and you

Simply put, valuation means the price. If you want to give only 10 percent of your company to investors who pay $100,000, you’re saying your company is worth $1 million. And so on. Simple math, but wow, not so simple negotiation.

7. Investors don’t make money until there’s a liquidity event

That’s why we always talk about exit strategies. You can be the world’s happiest, healthiest, most cash-independent company, but your investors won’t be happy until you get them cash back.

The win is getting money back out of the company. Some big company stock buyers like dividends. Startup investors don’t.

8. It’s almost impossible to get investment for your first startup

If you don’t have startup experience, get somebody on your team who does. Chris Dixon said it best: either you’ve started a company or you haven’t. And if you haven’t, and nobody in your team has either, that makes it very hard.

9. If it’s not scalable, forget it

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’s called a body shop), then investors aren’t going to be interested.

10. If it’s not defensible, it’s tough going at best

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 … if anybody can do it, then investors aren’t interested.

(Of course, what would I know? I thought Starbucks was a bad idea because I thought that it was too easy to copy … there are always exceptions.)

Further Reading: What investors want to see in a business

Bootstrapping is underrated

Which would you rather — steer by committee, with people looking over your shoulder? Or just do it yourself, you drive, you decide?

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’s what you’re looking at, hooray.

I’ve said it before: bootstrapping is underrated. I get frequent emails from people asking how they can get investment for their new startup, and I’ve admitted to being a member of an angel investor group.