The business world today has been flooded with startups, and with them has come the attitude that any restriction on a founder’s vision can be poisonous to a company’s success. But many ventures — as well as many of the people who launch them — can benefit from the help of outside investors in more ways than one.
Before you set out to bring your business vision to life, you should know the following three things about starting a company and how venture capital can make it easier.
1. Everything Comes at a Price
Entrepreneurs should plan out exactly what they’ll need to build their new business before deciding they don’t need outside investment. To do that, they must keep one simple maxim in mind: starting a business from scratch is a zero-sum game.
New business owners have a limited amount of resources, time, and money and it’s nearly impossible for them to get more of one without giving up some of another. More tools and team members might free up your time, but at least in the company’s early stages you won’t be able to get those things without spending a good deal of money. If you don’t have enough initial capital to get all the resources you need, or if you don’t see a way to make enough profit in your first few months to cover it, VC funding could make sense.
You should also factor the advice and perspective of potential investors into your decision. If you’re entering a new vertical with this venture, you could very well benefit from the input of people with enough industry experience to recognize your idea’s potential.
Finally, consider how quickly you’ll need to get your company up and running in order for it to be profitable. The success of your business could depend on some temporary market factors, in which case your business will need to grow quickly and gain the resources it needs to adjust when those factors change.
2. “Smart Money” Means Better Leadership
The people contributing to your new company will be your partners, and if you choose them wisely, they could contribute a lot beyond just money. The investors you bring into your business — who they are, how they align with your vision, and how you align with theirs — is a very important variable in funding a new venture.
The hard truth about a lot of business founders is that while they may have conceived of the company’s main product they aren’t the people who actually build the company itself. You might create or conceive of an app that you believe will solve a frustrating problem for consumers, but that doesn’t make you a manager, visionary, or CEO — it makes you more of a technician. Founders like these often need the help of investors to make their great idea into a company that can actually grow.
Of course, you may have a great idea and also be capable of creating a company from scratch. But you need to be honest with yourself about what your role in the company will be so that you can align it with the expected roles of your investors. If you’ve never managed a growing business before, most of your effort and time will be put towards learning how to do it. Meanwhile, all the work you already know how to do (e.g. coding, engineering) will start to get shoddy and unfocused.
With your own expertise in mind, look for investors who not only share your vision, but have skills to complement your own. Don’t refuse outside help just because you’re afraid of losing control — again, it’s better to have partial ownership of a great company than to have full ownership of a business that’s not growing.
3. Investors Will Institutionalize Your Company
Many people believe that the best possible business is one that you have complete control over, where the business leaders never have to answer to a board of directors. However, I would argue that an even better business is one that has a strong, intelligent board of directors that gives you perspective, offers outside resources, and challenges you to make smarter decisions.
While you do have to answer to the big shareholders in your company, there’s nothing wrong with another layer of leadership if it offers input that you value and respect. Checks and balances are fundamental to a well-run business, and by bringing VC money in at the right inflection points, you can purchase a great system of checks and balances with your equity.
Bootstrapping offers a business some great advantages, but it’s not right for every venture or at every moment in a business’s growth cycle. The advantages that investors offer a new business could go well beyond money, and they’re often well worth what you give up in exchange. Like every aspect of starting a business, this decision requires that you be honest with yourself and put the future of your company before all else.
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