Investors are natural enemies of startups
In nature, predators maintain the natural balance. Among startups, such predators are venture capital investors (business angels, venture funds, etc.). They limit the size of the population and heal it by eating the weak and the sick (it is clear that in most cases the “weak and sick” have their own point of view on this process, but the facts are a stubborn thing).
For two years now I have been trying to raise my own startup, during this time I met and talked with dozens of potential investors, so I hope that my vision of the problem of relations between investors and the founders of startups may be useful to someone. It is clear that many start-ups living in this world know about all of this not less (and even much more) of me, but I hope for beginners or potential businessmen from high technologies my (purely subjective) opinion to look more realistically at things.
Note: everything that is described here is limited to my personal experience in Russia in attracting third-party investments at an early stage (“seed”). I do not pretend to globality and objectivity of conclusions.
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Why do you create a startup? In my opinion, the only real reason is the desire to get more money than you have now, and much more. The reasons like “tired of working for my uncle, I want to work not for myself” for creating a startup is simply not enough - you can work for yourself without creating a company like any startup (options: freelance, individual entrepreneurs, etc.). The ideas of “enslaving the world” and “making this planet better” are also meaningless to consider, probably, because such an activity has little relevance to business — pure charity (in both cases).
So, we, the founders, need money. Where do we plan to receive them? The obvious answer is from the profit of our company (about the only exception - a little lower). Those. Our business as entrepreneurs is to increase the company's profitability . Well, like, you spent a million, earned two, thanked your native state for the opportunity to do this, got dividends. And so from year to year. The future is seen somehow, huh?
There is an exception. Not in terms of the fact that people do not need money, no. It is just that some innovation market professionals initially do not consider the option of making a profit from the activities of the enterprise. They create startups to sell them. A sort of “surrogate mothers” are carrying business for other (adoptive) “parents”. This is a very specific activity, not everyone can do it (I just could not, for example). We need to regularly produce ideas, go through the (most difficult) initial stage, find buyers ... And so - time after time. In my opinion - incredibly hard! But there are people who are in a rush. However, if you are such a person, then you are unlikely to be interested in my article: I am a pathetic amateur with my only startup, and you are a professional shark of the market.
Stupid question? By no means. Many aspiring entrepreneurs think that investors are like wallets in order to take money from there. So, this is an illusion. Investors are needed for your business to survive. Once again, literally: it is not a question of financing , it is a matter of business survival . If it is not about survival - you do not need investors, this is a fact.
About the "promotion", "leap in development", "smart money" and other pseudo-reasons I will tell a little lower. In the meantime, just agree with the obvious: you exchange a unique non-renewable resource (part of your share in the company) for some help, which by definition is not unique (there are more than one investors, right? But your company is the only one for you). Is such an exchange justified if there is no question of survival?
So startups want money. What do investors want? Surprisingly, they also want money, only much more (quantitatively) than you. Why more? Because they initially have a lot more money than you have. And if they invest their (by no means the last) million in your risky business, then they want to get at least a measly ten million (for a couple of millions they can earn in the same time by much less risky ways). The usual start-up is a beggar (at least against the background of an investor, and often on an absolute scale), and his planning horizons are much more modest. What is bad for you? Your super-project with an awesome potential market of 10 million dollars to an investor may be completely uninteresting .
And they do not want money from profit, but from the capitalization of your company. Why? If you do not trade in drugs, it is unlikely that profits in the first few years will provide the investor with income many times more than the money invested. Venture investor buys a share for investments. A few years later, he is selling the same share for a lot of money - a profit (my favorite venture term is “exit strategy”, like, “how to get off in time and profit”). His direct interest is to increase the market value of the company (capitalization). At the end of the year there was a profit - great! Only here to extract it is not in the interests of the investor. It can also be invested in a business and its value will increase (and this means that the investor’s profit will increase when he will sell his share). No profit - for the investor it does not matter if capitalization has grown (see Twitter). In the meantime, you go in old jeans and take the subway, because you have other financial sources other than the profit of the only (in the case of most startups) company. So if your company has venture capital investors - forget about personal financial well-being for a few years ...
And yet - we are in Russia, gentlemen. Therefore, in 99% of cases, the investor wants control. Well, the air here is probably in this country - totalitarian and authoritarian. In my practice, only one investor with whom I spoke did not demand more than half of the share in the company for their investments. Record - one of the investors offered to give him 100% of the company, and I nobly agreed to give an option (the right to acquire a 20% share of the company at a fixed value if certain conditions are met). It seems that according to all the canons of venture business, investors of the first stage should not take control of the company from the founder (so that the founder doesn’t lose motivation, for example). But somehow our investors (who at the same time call themselves “business angels ”) have a slightly different approach to this issue.
Also, investors love when you keep your word. Written in the business plan, “the income for the second year will amount to a million tugriks” - be sure, remember about it when the time comes. Perhaps, even in the investment agreement, your responsibility “for the market” will be reflected.
In my experience - most of all the investor does not like to risk.
Therefore, do not be surprised at all attempts to reduce costs (“black” and low wages - a favorite topic, legal software is expensive!, Etc.) - it also risks this money! At the same time, you sometimes risk freedom, but investors traditionally take this easier.
It is the risk minimization strategy that prevents you from receiving investments from your unique project .
What other common ways to reduce risks? Share them with someone else. “I am ready to co-invest in the project if you find someone else”, “I am ready to invest if the state participates”, “bring me an agreement of intent from a large wholesaler”, etc. The most outstanding case from my experience: “I am ready to invest on repurchase terms”. What does this mean? I (the founder) must sign an agreement under which I will be obliged, after a certain period, to redeem the investor’s share if he wishes on predetermined conditions (if memory does not change - the value of investments multiplied by five in three years).
For the same reason, investors do not like single startups. Tomorrow the tram will move me - and with what will the investor remain? The entire “cost” of the company at the initial stage is concentrated in the minds of the founders ... So look for the co-founder (s), and then scoop the whole pile of problems associated with the separation of powers, responsibility, profits, etc.
More investors do not want to erode their share. The normal proposal on their part, for example, is to reduce the size of the salary of employees by offering these employees in return a share (or option) from your part. Live to the next stage of investment - guess which share will blur more than others?
Smart money, yes. In the role of business angels often are not just money bags, but entrepreneurs with experience, connections, market knowledge, etc. Synergy and all that. But there are a couple of moments ...
Usually, when investors bring not just money, but “smart” ones, they want to reduce real financial investments in proportion to this very “mind”. It is a normal and justified desire. So I was offered several times investments in the form of “smart money” (for a share of 49%, the very same investor who agreed to a lack of control - up to 80% of the company), reducing the “just money” component to zero . After all, experience, market knowledge, logistic channels and distribution channels are expensive (and this is true!). “What other cash investments ?! You will receive part of the profits! "
Many startups are willing to share their shares in the company for helping to promote, reduce costs, communication, competent advice, etc. My advice - do not rush, if we are not talking about the survival of the business. All these things are very useful and can help your business to make a breakthrough ... But they may not play. And the share that could be sold, will not be ...
And also: often, potential investors with “smart money” have their own business in the same (or related) industry as your startup. And then they can consider your offer not only as a way to invest money in you with a profit, but also as an opportunity to earn your own business on you . This is normal, just consider this factor in the bidding process.
Not because they are nasty and bad. On the contrary, for the most part they are beautiful people, very interesting and intelligent. You can learn a lot from them, even if you have a bummer with investments.
But: their completely rational interests in relation to your company are directly opposed to yours .
Conclusion? It is obvious and many people voiced more than once. Venture investments are the most expensive type of financing. While we are not talking about the survival of the business - do not settle for them.
Venture investors are predators, natural enemies of startups. They can “nibble” you right away (just without giving money), and they can first fatten you up for subsequent “slaughter” (resale). In any case, their interests are very different, and often - directly opposite to yours. Earn inside a startup and make money on a startup (by investing in it) - these are different types of business.
PS I (to my own astonishment) have so far managed to survive without venture capital investments. Although I searched for them many times, and, obviously, if I managed to get them in the early stages, my business would now look very different ...
PPS Just in case: it was about venture investors: “business angels” and representatives of venture funds. “3F” and strategic investors are a completely different topic (or rather, two topics).
For two years now I have been trying to raise my own startup, during this time I met and talked with dozens of potential investors, so I hope that my vision of the problem of relations between investors and the founders of startups may be useful to someone. It is clear that many start-ups living in this world know about all of this not less (and even much more) of me, but I hope for beginners or potential businessmen from high technologies my (purely subjective) opinion to look more realistically at things.
Note: everything that is described here is limited to my personal experience in Russia in attracting third-party investments at an early stage (“seed”). I do not pretend to globality and objectivity of conclusions.
')
Why do we need startups?
Why do you create a startup? In my opinion, the only real reason is the desire to get more money than you have now, and much more. The reasons like “tired of working for my uncle, I want to work not for myself” for creating a startup is simply not enough - you can work for yourself without creating a company like any startup (options: freelance, individual entrepreneurs, etc.). The ideas of “enslaving the world” and “making this planet better” are also meaningless to consider, probably, because such an activity has little relevance to business — pure charity (in both cases).
So, we, the founders, need money. Where do we plan to receive them? The obvious answer is from the profit of our company (about the only exception - a little lower). Those. Our business as entrepreneurs is to increase the company's profitability . Well, like, you spent a million, earned two, thanked your native state for the opportunity to do this, got dividends. And so from year to year. The future is seen somehow, huh?
Professional startups
There is an exception. Not in terms of the fact that people do not need money, no. It is just that some innovation market professionals initially do not consider the option of making a profit from the activities of the enterprise. They create startups to sell them. A sort of “surrogate mothers” are carrying business for other (adoptive) “parents”. This is a very specific activity, not everyone can do it (I just could not, for example). We need to regularly produce ideas, go through the (most difficult) initial stage, find buyers ... And so - time after time. In my opinion - incredibly hard! But there are people who are in a rush. However, if you are such a person, then you are unlikely to be interested in my article: I am a pathetic amateur with my only startup, and you are a professional shark of the market.
Why do we need investors?
Stupid question? By no means. Many aspiring entrepreneurs think that investors are like wallets in order to take money from there. So, this is an illusion. Investors are needed for your business to survive. Once again, literally: it is not a question of financing , it is a matter of business survival . If it is not about survival - you do not need investors, this is a fact.
About the "promotion", "leap in development", "smart money" and other pseudo-reasons I will tell a little lower. In the meantime, just agree with the obvious: you exchange a unique non-renewable resource (part of your share in the company) for some help, which by definition is not unique (there are more than one investors, right? But your company is the only one for you). Is such an exchange justified if there is no question of survival?
What does an investor want?
So startups want money. What do investors want? Surprisingly, they also want money, only much more (quantitatively) than you. Why more? Because they initially have a lot more money than you have. And if they invest their (by no means the last) million in your risky business, then they want to get at least a measly ten million (for a couple of millions they can earn in the same time by much less risky ways). The usual start-up is a beggar (at least against the background of an investor, and often on an absolute scale), and his planning horizons are much more modest. What is bad for you? Your super-project with an awesome potential market of 10 million dollars to an investor may be completely uninteresting .
And they do not want money from profit, but from the capitalization of your company. Why? If you do not trade in drugs, it is unlikely that profits in the first few years will provide the investor with income many times more than the money invested. Venture investor buys a share for investments. A few years later, he is selling the same share for a lot of money - a profit (my favorite venture term is “exit strategy”, like, “how to get off in time and profit”). His direct interest is to increase the market value of the company (capitalization). At the end of the year there was a profit - great! Only here to extract it is not in the interests of the investor. It can also be invested in a business and its value will increase (and this means that the investor’s profit will increase when he will sell his share). No profit - for the investor it does not matter if capitalization has grown (see Twitter). In the meantime, you go in old jeans and take the subway, because you have other financial sources other than the profit of the only (in the case of most startups) company. So if your company has venture capital investors - forget about personal financial well-being for a few years ...
And yet - we are in Russia, gentlemen. Therefore, in 99% of cases, the investor wants control. Well, the air here is probably in this country - totalitarian and authoritarian. In my practice, only one investor with whom I spoke did not demand more than half of the share in the company for their investments. Record - one of the investors offered to give him 100% of the company, and I nobly agreed to give an option (the right to acquire a 20% share of the company at a fixed value if certain conditions are met). It seems that according to all the canons of venture business, investors of the first stage should not take control of the company from the founder (so that the founder doesn’t lose motivation, for example). But somehow our investors (who at the same time call themselves “business angels ”) have a slightly different approach to this issue.
Also, investors love when you keep your word. Written in the business plan, “the income for the second year will amount to a million tugriks” - be sure, remember about it when the time comes. Perhaps, even in the investment agreement, your responsibility “for the market” will be reflected.
And what does an investor not want?
In my experience - most of all the investor does not like to risk.
Therefore, do not be surprised at all attempts to reduce costs (“black” and low wages - a favorite topic, legal software is expensive!, Etc.) - it also risks this money! At the same time, you sometimes risk freedom, but investors traditionally take this easier.
It is the risk minimization strategy that prevents you from receiving investments from your unique project .
What other common ways to reduce risks? Share them with someone else. “I am ready to co-invest in the project if you find someone else”, “I am ready to invest if the state participates”, “bring me an agreement of intent from a large wholesaler”, etc. The most outstanding case from my experience: “I am ready to invest on repurchase terms”. What does this mean? I (the founder) must sign an agreement under which I will be obliged, after a certain period, to redeem the investor’s share if he wishes on predetermined conditions (if memory does not change - the value of investments multiplied by five in three years).
For the same reason, investors do not like single startups. Tomorrow the tram will move me - and with what will the investor remain? The entire “cost” of the company at the initial stage is concentrated in the minds of the founders ... So look for the co-founder (s), and then scoop the whole pile of problems associated with the separation of powers, responsibility, profits, etc.
More investors do not want to erode their share. The normal proposal on their part, for example, is to reduce the size of the salary of employees by offering these employees in return a share (or option) from your part. Live to the next stage of investment - guess which share will blur more than others?
Investors bring more than money
Smart money, yes. In the role of business angels often are not just money bags, but entrepreneurs with experience, connections, market knowledge, etc. Synergy and all that. But there are a couple of moments ...
Usually, when investors bring not just money, but “smart” ones, they want to reduce real financial investments in proportion to this very “mind”. It is a normal and justified desire. So I was offered several times investments in the form of “smart money” (for a share of 49%, the very same investor who agreed to a lack of control - up to 80% of the company), reducing the “just money” component to zero . After all, experience, market knowledge, logistic channels and distribution channels are expensive (and this is true!). “What other cash investments ?! You will receive part of the profits! "
Many startups are willing to share their shares in the company for helping to promote, reduce costs, communication, competent advice, etc. My advice - do not rush, if we are not talking about the survival of the business. All these things are very useful and can help your business to make a breakthrough ... But they may not play. And the share that could be sold, will not be ...
And also: often, potential investors with “smart money” have their own business in the same (or related) industry as your startup. And then they can consider your offer not only as a way to invest money in you with a profit, but also as an opportunity to earn your own business on you . This is normal, just consider this factor in the bidding process.
So why investors are the enemies of a startup?
Not because they are nasty and bad. On the contrary, for the most part they are beautiful people, very interesting and intelligent. You can learn a lot from them, even if you have a bummer with investments.
But: their completely rational interests in relation to your company are directly opposed to yours .
- They want to give less and get more.
- They do not like original ideas.
- They prefer to reduce costs to a reasonable from their point of view minimum.
- They invest in the company's capitalization, not in its profitability.
- They want control over the company, and their view of the business may not coincide with yours.
- They are interested in reducing their risks, not yours.
- They have other sources of income, but you do not.
- They are interested in diluting your share, not yours.
Conclusion? It is obvious and many people voiced more than once. Venture investments are the most expensive type of financing. While we are not talking about the survival of the business - do not settle for them.
Venture investors are predators, natural enemies of startups. They can “nibble” you right away (just without giving money), and they can first fatten you up for subsequent “slaughter” (resale). In any case, their interests are very different, and often - directly opposite to yours. Earn inside a startup and make money on a startup (by investing in it) - these are different types of business.
PS I (to my own astonishment) have so far managed to survive without venture capital investments. Although I searched for them many times, and, obviously, if I managed to get them in the early stages, my business would now look very different ...
PPS Just in case: it was about venture investors: “business angels” and representatives of venture funds. “3F” and strategic investors are a completely different topic (or rather, two topics).
Source: https://habr.com/ru/post/118918/
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