Entrepreneurship Series: Investor interest, avoiding a mismatch
To bootstrap or not to bootstrap, this is a question I get regularly. It is also something I think about a lot. Investors can help your business forward, push you to find your boundaries and they promote change.
But how important are external investors to your business really? Here are some of my thoughts on what it is like to work with business angels, venture capital and other types of monetary supporters.
Do you need an investor?
Two sides of the equation
When two people continue on a journey together, it is not only about the founder anymore. An investor will want to get something out of this collaboration as well, and it is usually not merely a good return on investment.
There are plenty of reasons why you should consider working with an investor. Yet, if money is your only objective, simply raising funds for the sake of raising is not going to get you very far.
I believe there are two sides to the equation of any investor transaction; it is not only about your goals, but those of the investor as well. Hence, you need to make sure that your business targets, align well with those of your counterpart.
Possible business objectives:
- Growth acceleration of core business
- Test new business opportunities
- Market entry (support) ie. internationalization
- Access to patents, resources or other assets
- Credibility for your business
What is your objective?
Think about your long-term objectives. If you get an external investor on-board, this is something that will change your business significantly. What is the real reason you NEED external funds? Or do you just WANT external funds?
I personally believe that you should not raise funds for the sake of raising. There are others in the startup scene who believe that it is important to “take as much as you can when the price is hot.”
“Although it is tempting to raise a lot, quickly, raising funds should support your long-term vision and goal”
Money is only one way to reach your goals. Sometimes it can be just as important to find strong strategic partners. Industry support and the availability of fresh resources are key to success, as well.
Mismatch of interests
In a larger context, investors are vital to startup survival. Just the mere fact that there are people out there who invest in new ideas and concepts is invaluable to an entrepreneur. It gives you as an entrepreneur a new option to how you can reach your goals.
But, in my opinion, you need to understand how you can leverage external funds best. Without the proper fit between your long-term goals and those of an investor, you will be in for a rough ride.
For example, if your investor is set on strengthening a local region in your country, such as a local bank or fund, whereas you are looking to expand your business abroad, this will lead to a clash of interest at some point in the future. Here is one example from experience:
Personal experience, flower delivery service
I have come across this problem with one of the companies I founded. I co-founded an online flower delivery company together with two others. The company had been initiated by a venture builder, who saw the opportunity and set out to get the follow-up project funded, no matter what.
Within a mere 12 months, we had built up a strong local German team. That attracted the attention of a fund, who invested in innovative startups in the Bavarian region (in southern Germany). Their goal: create more jobs in southern Germany. Yet, we knew that we wanted to expand the business internationally.
We needed the money, so we took the initial investment. However, a few months in, we saw that our local market was not big enough. Hence, we had no other choice, but to re-evaluate our business case. If we were going to be successful, we needed to expand our business to other countries.
“But, we could not do expand our business without a follow-up investment”
We had miscalculated how much it would take us to “get big enough” in our home market. Cash became a real issue and our core investor, did not believe or better to say, could not support our business expansion efforts.
Arguably, working with an investor opened our eyes to this problem. It was crucial to our business that we found a new solution. Hence, we had to pivot our business case. I will elaborate on that some other time. But, the key thing to understand is that it is very important to understand both sides of the equation from the get-go.
An investor can give you vital insights, resources and the mentoring you need to take it to the next level. But, he can only do that when your goals are aligned.
I hope this post has given you something to think about. Possibly even a new perspective on what it can be like to work with an investor.
Have a great start to your week, Remco
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