An entrepreneur I know says that companies in constant pursuit of venture capital investment have fallen victim to the lure of “entreporn”. It’s easy to see why business owners become obsessed with chasing investors. The stories we hear about venture capitalists and entrepreneurs connecting report big money going into the companies. We are left to assume that it will be a happy, successful marriage.
And it is easy to believe that big money is within reach, when we read that Richmond-based SnagAJob received a $27 million investment earlier this year. And just up the road, Washington, DC-based Living Social received a $400 million investment from venture capitalists.
Entrepreneurs salivate over these stories.
But some investor-entrepreneur partnerships leave both sides disappointed.
Take that “For Sale” sign down for just a minute, and take a break from perfecting your elevator pitch to your moneyed contacts. Consider when, to whom, and why you should (or should not) sell parts of your business for a lump of cash.
When
Before you spend all night scouring LinkedIn and Facebook in attempt to find 2nd and 3rd degree connections who may provide an “in” to the world of private investing, ask yourself if the time is right. If your business does not yet have (1) some visible proof of concept, (2) a realistic path to profitability, (3) a pitch that anticipates the hard questions, or (4) your first paying customer, then it may be too soon.
A premature pitch runs the risk of making a bad first impression, which can be extremely difficult to overcome even as your business matures. Every investor is going to need to see the proof of concept before they give you any substantial amount of money. This is not a simple overview, but a discussion and demonstration on all the details, including an analysis of the target audience and revenue streams. The investor needs to know who will buy your service or product, how much they will pay for it, and how many customers you will need to get you into solid cash flow.
Who
Like many successful relationships, the partnership between a business owner and investor works best when both parties know and understand their roles. As the entrepreneur, your job is to build a product or service that fills a market need, attract customers, and get paid for your services. Those are your duties alone, not the investor’s. Their job is to place their money where it can create the most growth, and then capitalize through a successful exit strategy. It’s key to know that most investors are not in it for the long haul. They most have their eyes on a profitable exit strategy, even as they are getting in.
Just as investors will prefer to work with companies that meet their criteria, you should also have a good idea of the non-monetary terms that will make a successful match for you. Do you want management and big-client networking help from your investors? Or do you just need to be left alone with your team to finish version 1.0 without co-owners looking over your shoulder?
Why
A pile of cash is never a bad thing, but do you really want and need investors? It’s vital that you have an honest conversation with yourself and any existing co-owners about the need to infuse money into the company in exchange for part of ownership. Also be mindful of the control compromises that come along with the cash.
Depending on the business, there are times when the business reaches a barrier that can only be overcome with outside money. In that case, private equity is a good way to fill that need and get you to market.
In other cases, slower growth with 100% ownership retained can be a beautiful thing. If early sales are possible without outside money, and if those early sales can fund expansion, you may be better off if you stop dialing for dollars and start signing up customers.