I cannot tell you how many times I have seen executive summaries of business plans in which the entrepreneur seeks $5,000,000 to build the business.
First, few startups can use that much money today with all of the virtual services available and increasingly inexpensive methods of development, prototyping and marketing. Second, almost no professional investor will consider putting that much into a startup until there is proof of market demand, product viability or some other mitigation of failure.
Third (if you’re keeping score), it is not wise to dilute the founder’s ownership greatly in the first round of financing. The investors want a motivated entrepreneur, and it is certainly more difficult to motivate a twenty percent owner than a sixty percent owner.
Fourth, there is the matter of control. Entrepreneurs have a vision for what and how to create and build a great business. Giving control over that vision to others early on often dilutes the vision and is a disincentive to the entrepreneur.
[Email readers, continue here…] Professional investors love to see companies where the first round of financing came from the entrepreneur, showing “skin in the game” and more motivation to succeed because of money invested as well as time and creativity.
There are so many resources for early money to validate an idea, turn it into a product and increase the value of the company before professional investors come into the picture.
Starting with credit card debt or a personal loan and working through money from friends or family, or simply consulting to earn money for investment, entrepreneurs should consider early resources for capital to produce a prototype, do market research or start to build a team. Once there is progress in any of these critical areas, raising professional investment is easier and the likelihood of a higher valuation makes for retention of more equity during the first important professional round.
This is really good–as is most of your emails–should be required reading of all aspiring entrepreneurs, and Angels investors..!!!
Never better said. Money follows money 😉
As a disciple of Berkonomics, Dave’s comments really hit home for me today! I have been self-financing the turnaround of my business and struggling to raise an investment round. This has forced me to dig deep and use my own resources to finance the business and now I am starting to see the light at the end of the tunnel! Revenues ramping, major customers signing up and tracking towards profitability.
The conclusion I have come to is that as an entrepreneur you need to drive to profitability first and then look at your financing options. If you need capital to get to profitability, the best option is a strategic investor that shares and understands the vision and can help you grow the business.