My first thought at the beginning of my entrepreneurial journey was that I needed to find an investor to fund my ideas from concept to reality. Only later did I come to understand that capital investment in no way guarantees success.
I discovered the hard way that investment can often derail success. This is especially true when investors provide millions of dollars or more, even before the entrepreneur has created a minimum viable product (MVP). You don’t have to think too hard to recall a story of a startup attracting big capital before the company even launched its product, and then failing—even when they had seasoned, experienced founders.
That’s not to say that investment can’t be good, but it’s not the silver bullet for success. And though some may disagree with me, I believe the best time to receive investment is when you don’t actually need it.
This post discusses what I’ve learned about outside investment in startups, including how it can be more useful at specific points in your startup’s growth, when used for specific purposes, and when it adds more value than simply the monetary amount invested.
Time spent attracting investors, not working
The problem with investment starts when you must woo an investor. The company founder or founders spend time preparing pitches for investors, calling and emailing them, and meeting with them in person. This can take a lot of time, particularly if you don’t live close to your potential investors. For example, we would have to fly to San Francisco to meet with investors. All this time could be spent further developing your product. It’s a sobering thought, too, that some very successful companies received their first investment only after meeting with dozens of investors.
And that’s just the beginning.
On some level, I think many founders see outside investment as validation of their idea. If someone not connected to their startup wants to write a check to support them, it must be a good concept, right? But, to me, validation comes from the marketplace. Customers will buy what you are selling or they won’t. No amount of investor validation will change that fact and the startup landscape is littered with investor-funded startups who didn’t start up.
The need to hurry up and show value to investors
If you do get someone to invest in your idea, your next challenge is to quickly figure out what to do with the money. Investors want to see results and will hold you accountable. Again, this takes time and creative energy right at the beginning of developing your product, when your focus should be on developing, launching, and marketing your product.
Real complications surface, for example, if things don’t go as planned, and if the investor owns a lot of the company’s shares and is on the board directors. At that point, it’s rare to avoid conflict.
My experience in obtaining investments
About six years ago, when I began working on a startup called idooble, I didn’t have these insights. At the time, with just enough money to create a prototype and get users, I sought $3 million to support the various stages of the project. Looking back, I can now laugh at myself. Of the 30 letters sent to potential investors, I received only two responses—and those were to express lack of interest due to the complicated nature of the market for my startup.
Undaunted, I persuaded a friend in Moscow to give me $300,000, not so much as an investment, but more as a loan that I had to repay after my project failed. The experience was painful. The loan also created demands for time spent for meetings, receiving money, and repeatedly answering the same two questions: “How is everything going?” and “How are you using the money?”
The problem was not the investor; the problem was me. I shouldn’t have asked for or taken the money. At the time, I was 100 percent sure that success of my company and idea would only work with investment. After this difficult experience, I decided that I would never again ask for investment or a loan at the initial stage.
PICR’s stance on outside investments
Currently, I am working on a startup called PICR, a platform for finding and booking photographers online. Given that it is my seventh Internet startup–and my twelfth business started overall, I come to this project with enough experience under my belt to know what types of startups succeed and what don’t. I’m confident that PICR will succeed, even though things may not always go completely according to plan. Given my confidence and positive energy for this startup, taking a risk and personally investing in PICR felt right.
From the very beginning, the decision was made that until we can prove that our business model works, we will not seek outside investment. We are still working toward that goal and feel like we’re making great progress.
Recently we’ve had some notable shifts in fortune. One in particular has made our team extremely optimistic and fueled our desire to make this project succeed. We see enormous interest from the photographers and potential customers, and we see a significant problem in the industry that so far no one has fixed. We are at the right place at the right time with the right idea. We’ve been given this good luck, and now it’s up to us to do the right things and do them well.
Investment should be more than money
The term “smart money” refers to value beyond the actual money invested—the value you get from investors who have experience, connections or vision that can contribute to your startup’s success. This is the right investment only when money is not the highest priority.
If money is the first priority, smart money won’t help—if investors can only give money, and not value beyond simply money, this is the worst thing for a startup. Some may disagree with me on this, but when successful companies get investments they don’t need, they end up as highly overvalued companies.
The plan around investments going forward
We have established criteria that we must meet before considering outside investment. As such, we will only consider outside investment when we:
- Have tangible results
- Can prove that we have a strong team worth the investment
- Can demonstrate real customer interest in our product
- Have a product that is solving a real problem
- Have great prospects
- Can become a major player in our market
I asked a Facebook friend involved in helping companies grow if it is necessary to attract investment to start a startup if the startup founder has the money to build a MVP. He replied, “If you can take someone else’s money to play roulette, it’s better to not play with your own money.”
Perhaps for some founders, startups seem like a game of roulette—you don’t have to know much to play it, you just take your money and put it on any number. The odds will not change. At PICR, we think that we create our company’s success. Our fate is not based on pure luck.
I recently spoke with Arkadiy, co-founder of PICR, about our views surrounding outside investment. We agreed that the right time is in round “A”, and not anytime before. This lets us remain completely focused on creating and launching the product. Even if someone offers to invest, we don’t want to lose that focus by spending the time to discuss it.
The right time for investment
At some point we will need investment. For us, that’s after we successfully launch in several cities and require money for further development and scaling. At that point, the main expenditure will be to support the company run rate so that we can focus on growth, not on our output and income. Is profit possible right after you launch a product? It might be, but it will be difficult to make money without sacrificing growth. In the early stages, growth is more important than profit.
Our approach to seeking investors
We have decided that we won’t chase investors. Our Portland, Oregon location makes it difficult to pitch our product around the country. Instead, we will be focused on creating a company that every investor want to invest in, and only then we will spend some time on pitching startup to investors and picking right ones. In ideal situations we want investors to pitch us
It really isn’t about the money
What I wanted to say in this post was that money will not solve anything. It’s why at PICR, we aren’t currently seeking investors. We must first launch PICR and prove to ourselves that we have something real, that’s important and worthy of investment. Only when we have come to that point (and we will), will we be ready to seek investors to help us grow our business.