Do rich entrepreneurs with $40 MM in their bank accounts raise $12 MM from investors for their company or do they just use their own money? How many millions of their own money would they use?

Do rich entrepreneurs with $40 MM in their bank accounts raise $12 MM from investors for their company or do they just use their own money? How many millions of their own money would they use?

Jason’s points are spot on. Even with a two comma bank account, founders think about diversification. Loss aversion is a real thing at almost any income level.

But there are much better reasons to raise money. The best VCs can be a valuable sounding board, tap additional networks, and add value in a number of non-financial ways. Here are a few specific reasons successful founders sign up for VCs:

1. Investment Gets Smart People Around the Table

Capital is easy to come by, especially for a successful serial entrepreneur.

Getting advice from high-quality, engaged minds with similar financial incentives is quite a bit more valuable and harder to get.

Any successful founder can get opinions or advice from people in their network on an ad hoc basis, but these discussions are often superficial and unsatisfying, even when coming from a respected CEO.

Without a deep knowledge of the context you’re operating in, general advice has limited value. People often try to shoehorn their knowledge of what worked in a completely different industry/time into your problem.

It’s hard to find an advisor that compares to a really sharp partner who is financially committed to the project along with you.

2. Investors Can Keep You Honest, Up Your Game

Good VCs bring a unique perspective, often combining the first hand knowledge of building a company with the broader macro perspective that being pitched by many companies can inform. Even if a founder retains complete control over the company, board meetings can help to establish structure and an operational cadence.

In some ways the relationship is like that of an elite athlete and their trainers. Curtis Granderson is an elite athlete, and is having a great post-season, but might not have reached his true potential this year without being reunited with his hitting coach from earlier in his career. Same talent, but better coaching can lead to better outcomes (I had to get the Mets into this post somehow).

There’s a sort of “Collective Wisdom” that emerges when people with different skills collaborate and it’s hard to recreate without some formal financial arrangement.

3. VC Funding Sends a Signal to Top Talent

Self-funded companies, even hugely successful ones, feel like family businesses. They are subject to the whims of CEOs or families. For some people, this is a great arrangement. There’s theoretically more loyalty in these kinds of businesses. They can be run in an idiosyncratic fashion. But they aren’t where the highest-performing talent congregates.

Taking VC funding puts a company on a very specific trajectory. Get big fast. The entire company is working towards that goal. Profits will be reinvested into growth, not into a beach house. If the company’s growth stalls, a new CEO will be installed. It’s less personal, but allows for rapid wealth creation which is often required to get the best people to sign up.

4. VC Brings Buzz

This is a tertiary benefit, but taking money from top-flight VCs does help create buzz around a company. The money can offer credibility, rightly or wrongly, that turns into offers to speak at events, appear on TV shows, and be the subject of prestigious interviews.

5. It’s Great to Be Part of a Team

Some of the best VCs foster collaboration between their portfolio companies.  By doing so a founder gets access to a peer group, resources and sometimes even customers that would be hard to access without being part of the portfolio. This isn’t universally true, but it can be a great benefit of working with a subset of venture funds.

For sure very wealthy founders can bankroll a startup themselves. No doubt that autonomy is a tempting reason to do so. Yet there are many good reasons that previously successful founders decide to work with the top venture capitalists that largely relate to accessing valuable resources beyond their control.


Source: Quora.

November 2, 2015 / by / in , , ,

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