On turning down investments
There are many sources to receive investment these days for a startup, either from a VC or accelerator. However, as I’ve come to discover myself, there are two factors to consider with each investment proposal: where you are and where you’re going.
Where you are means being realistic about your company’s / project’s position. It is all about acquisition and retention. If you are making money, then a lot of your funding needs and debates have just become so much simpler. They will come down to how many customers you have now and how many will you have within 3 years time (the minimum investment window length).
If you’re not making any money, then you’d better have very big numbers (5% weekly growth – read some Paul Graham wisdom on the matter) showing great promise. Otherwise, you’re f**ed.
If you’re making enough to cover the monthly expenses: Unless there’s a detailed plan about how you’re going to grow the company / project with the investor’s expertise and money, then probably the investment should be turned down. Keep in mind that an investor should always bring more than just money. In my experience, they must always bring sales, otherwise they are useless long term. Only bring partners in if they can chip in a measurable, sustainable way, every single day.
It may sound like a tall order, but getting an investor that only comes in with money or short term effort into the company, is like hiring an employee that works for free for a while but afterwards starts asking you for a paycheck without working at all. Would you pay that person? I didn’t think so.
Also, consider the terms carefully. Bare in mind, giving up equity is not “free money”. You may find yourself in a position where the previous terms of investment and / or quality of investors will drag you down when confronted with new investors. No serious founder will consider an investor because they’re chipping in solely money or offer non-measurable promises.
If you’re running on profit, my personal instinct is to never go for investment, but to seek partners. The difference is that you never ask them for money. The best value is into the synergy: find a partner that has a good going product, add value to it with your own, and approach that partner with the purpose of selling together, also pooling into their userbase with one swift move.
They get happier customers and better retention long term, you get new users and better value for your existing ones. I’ll go into detail about partnerships in a future post.
Where you are going is about your vision, market and ability. Bill Gates once said that success is a combination of ability and opportunity. If you have the ability to create a product (which is, by the way, more than the technical aspect, but also creating the userbase, bringing in testers, trendsetters, etc), then your partners and investors must take some of the role of creating opportunities.
Don’t misunderstand this by completely separating yourself from the sales process. That’s not the point. There must always be cooperation between what can be done technically and what should be done, so that the product can be sold.
Your investors must work with you to create opportunities. That’s why they are there, which is more than bringing liquid investment: to provide the company with the means to grow. If money is part of your deal, then that’s great, but the long term value of selling your product in partnership is a lot bigger than a pile of money given today.
It is very important to mention that if your (potential) investors are coming in only with promises of helping you go to market, then those promises are not to be taken into consideration. Consider only offers having measurable results.
For such scenarios i would vest shares in that deal, and define by contract the sales they should bring into the company each year, in order that they keep their shares. This creates measurable accountability and it is healthy to all partners. It is important to set the expectations from the start, in writing, without leaving any room for interpretation for both your responsibilities and theirs.
In a nutshell: know your market and product so that you will be able to differentiate between a relevant partner or not. Get investment only in that (marginal) case where the investor is bringing relevant expertise in your specific field, previous sales in your specific field and, if possible, money.
Money is easy.
Choosing to bring an investor into the company just for a cash infusion, in exchange for equity, is like going out with a girl just because she is attractive. When the enthusiasm fades, the situation won’t be pretty anymore.