I recently read a 2010 article in the Business Insider talking about how most startups assume that all they need is an investor. Discourse about investors in the startup community will make you think they are talking about a fairy godmother with a wand. The truth is, an investor can change your life forever, the article conceded, but many of those ways are negative.
Investors are not just dishing out money, they are not some benevolent force in the universe granting wishes to those who believe enough or work hard enough. Investors are businesspeople. They are looking to make a profit and maybe mentor the next generation of world changers while at it, but first and foremost to make money.
- PART OF YOUR BUSINESS/COMPANY
It is only fair.
If you start a company, your investor gets equity according to the value of their investment vis a vis the value of your company. That is if they give you one hundred thousand shillings in exchange for ten percent equity, you are valuing your business at one million shillings. What often happens is that your business is probably in need of five hundred thousand, and that is fifty percent equity.
There are people who have slowly lost their entire company to investors. Steve Jobs was fired from his own company. Tesla CEO Elon Musk has on several occasions almost lost his seat as CEO of a company he founded and built from the ground up.
If it is less formal investor like family or friend, the numbers make even less sense. How much do you owe them? Do you give them the value of their investment plus some interest or do you share the profits and at what percentage until what point. Never accept any money from family or friends without discussing clearly the nature of the relationship. Make a contract. For clarity.
Even an investor who trusts you will need some level of control over his investment. Often, the investment comes with a board, reports and evaluations to establish the security of their money. The role of all this is to makesure the business succeeds. The danger is when these outside influences overpower you or set your cofounders and partners against you. Taking an investor’s money is ceding some control of your own business. The more the investment, the less your control.
A mistake most people make is to oversell or overvalue the business to an investor. In their eagerness to impress, they pitch a future version of their company and not what they actually have. Then they quickly realize that most investors don’t cough out the entire check in one go. They set deadlines and benchmarks. You hit a certain benchmark by a certain deadline, you receive a certain percentage of the dough, and then a new benchmark is set with a new deadline for a certain percentage. It is how investors protect themselves, it is an exit strategy before they are scammed or lose all their money all at once.
So now the pressure just got real. Francine Hardaway of the Startup Professionals Musings puts it this way, you are required to be at your best, produce your best and investors do not understand terms like reasons beyond my control. You are stripped of the space to fail over and over again and learn from those mistakes. You are forced to play it safe and nothing great ever comes out of that.
- COURSE CORRECTION
Sometimes an investor or his board can decide to course correct the direction of the business. This usually happens even out of their best intentions. The investor can find more lucrative niches, tricks to cut on costs or even more popular trends your business could follow.
The problem arises when these things conflict with your long term vision for the brand or your personal convictions. You have heard of jazz musicians being signed into a record label and shortly afterwards being forced to make pop music because that’s what sells. The artist makes more money, so does the record label, but they forever feel cheated, untrue to themselves and like a sellout.
- INVESTOR MANAGEMENT
Investors are bosses, you have their money, you answer to them. Some investors are pretty good people but even they get anxious about decisions you are making with their millions. The more investors you have, the more people you have to please. The people pleasing business is very, very hard, ask Elon Musk.
Having investors is not a bad thing. It is necessary validation that your business has potential, it is capital most entrepreneurs badly need and it may also mean great mentorship from people who know the industry better. However, in light of all the negatives stated above, it may be time to get down to it and find alternative ways to fund your ideas.