Hey, Entrepreneurs, It's OK to Walk Away From an Investor
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The startup world isn’t exactly hurting for funding. According to a MoneyTree report, nearly $60 billion was invested in new businesses this past year. With so much money available, it’s no wonder we’re seeing more and more new ventures coming from entrepreneurs with nontraditional backgrounds.
"Door, for example, is a startup making waves in the Dallas real estate market. Instead of charging homebuyers the traditional 6 percent commission fee for brokerage services, Door charges a flat rate of $5,000. Founder Alex Doubet was inspired to start the company after his mother sold her home and paid more than $30,000 to close the deal. When he made clear his intention to find a solution, the idea caught the attention of investors, and the venture recently raised $2.3 million.
Door is a great example of a startup succeeding in raising capital. But many first-time entrepreneurs don’t know the proper avenues to bring their products to market in terms of branding, marketing and packaging -- not to mention properly budgeting for all the other things needed to launch a business. That makes the choice of investor absolutely critical to a startup’s success."
A startup founder has to get this choice right, because saying yes to the wrong investor could spell trouble.
Ensuring your best interests
Investment funding offers shouldn’t be received with an automatic “yes!” by founders. Yes, they may see funding as the golden ticket that frees them from one of their biggest pain points: finances. But, buyer, beware. This “get out of jail free” card also may be a prison of your own making.
If the only reason you bring on a venture capitalist is to scale quickly,that goal could be the biggest regret you’ll have in the life of your company. The reason: Once you give up ownership of your venture, it’s nearly impossible to get it back, so matching your startup with the right VC is essential.
Before agreeing to any financial help, then, consider how much control the investor is asking to have over your company's business decisions. If he or she is unwilling to clearly define terms, that’s a major red flag right there.
You also need to consider what sort of resources the VC brings to the table. Does he or she have a network of different companies and providers to work with you on branding, marketing and public relations? Experience working with other companies in your industry? If the VC is a good fit with your startup, this person should be able to either provide the advice you need or connect you with other experts in his or her network. If not, be careful, and question if this is a good fit.
In other words, make sure the VC’s goals are in line with yours. Don’t get sucked in by the idea of quick growth and easy success. Your choice of VC should be as strategic as every other decision you’ve made during your journey as an entrepreneur.
Finding the perfect fit
Finding a VC that matches your vision isn’t easy. But the following strategies can safeguard you against getting involved with an investor who doesn’t have your best interests in mind:
1. Hold out for the right one. Waiting for the right fit sounds obvious, but newbies to the startup game may feel the need to jump at the first offer. Choosing an investor, in fact, is a lot like dating. Don’t take the first offer; you might end up in a sour marriage.
Play the field while looking for your ideal match, especially in a climate where plenty of investors are looking to get in on the ground floor of the next big thing. Stick to your guns, and recognize that if your business or product idea is viable, more than one person is going to come knocking on your door.
2. Build your business on relationships. Relationships carry a lot of weight. People work with my company, for instance, not just for the end product, but also for the experience and process of doing business with us. If we don’t develop a mutual trust, communication and respect, well, it’s just not going to be fun for anyone.
When you work with the right partner, you support and understand each another. Everybody works a little harder to get things done -- you’re essentially in the same foxhole. So, meet with potential partners to make sure the chemistry is right; it’s not just about the money or timing. You want partners who have a genuine desire to see you and your business succeed in the way you intend.
Don’t be afraid to ask pointed questions about how they envision the relationship working.
3. Toughen up. People enter into deals with the best intentions, but it’s generally better to plan for the worst and expect the best. Taking on any kind of partner can be tricky, and it’s all a negotiation. Understand the areas you are willing to be flexible with and those you are not.
Having those defined before moving into a deal will provide a North Star for what is most important to you (i.e., nonnegotiable), and what matters you feel are open to discussion. This preparation will allow you to set ground rules at the onset and make parameters clear. After you’ve built up a trusting relationship, you can loosen the constraints.
This need to make decisions up front illustrates a lesson that Denise Mari, founder of Organic Avenue, says she learned the hard way. Her first investors, who were focused on growth above all else, became increasingly involved in her business decisions.
Mari was soon bought out, and then watched her company being forced into bankruptcy. Eager to reclaim control, Mari again enlisted investors, but this time was direct and specific about what she wanted. Two deals fell apart because of her demands, but the right partners eventually came along.
4. Take your time. Not that you want to drag things out, but don’t jump into a partnership just assuming it’s going to work out -- or because you’re afraid to miss an opportunity.
Take your time to do your research and to consider the relationship and its effects on your business from every angle. Also, recognize that contracts last forever, so read every one of them. Don’t assume anything is boilerplate. If your idea is worth it, trust that investors will wait for you to vet them and their offer.
Consider it a bad sign if your investor is rushing you into a decision without allowing for mutual due diligence.
5. Don’t forget all the work. All too often, new founders enter the marketplace thinking, “Wow, I’ve got this brilliant idea -- all I need now is [insert: capital, marketing, PR, branding, connections, etc.],” only to realize the difficult reality of running a business.
When somebody comes in to offer help, your natural inclination may be to say, “Yes, please, by all means, help me.” The trick is to make sure you’re getting the right kind of help. If you say “yes” to the wrong VC, the resulting deal might feel like a solution at first, but you’ll also be opening the door to someone that might be hard to get rid of.
Bringing on a VC seems like a wonderful way to quickly escalate your startup, and in some cases it is. But if the investor offering to seed your company isn’t in line with the way you want to grow, this person could be one of the biggest regrets you'll ever have. So,take your time, choose wisely and don’t be afraid to say “no.”