Raising Money is a One Way Street

"I'm thinking about raising money but I'm a little concerned about how having investors might change my potential path. I understand the upside of having investors, but are there some downsides I should be concerned about?"

March 10th, 2021   |    By: Wil Schroter

Raising money isn't just about getting some cash in the bank, it's about committing to a very different path to building our startup.

And there's sorta no going back.

What no one told us going into the capital-raising game was that once we take money from investors, we're basically locked into a handful of outcomes, but more importantly, we're locked out of a few that we're probably going to want back!

We Significantly Limit our Potential Outcomes

When we're looking to raise capital, we're all thinking the same thing "We need more money to grow!" which of course makes sense. What we miss, however, is that taking on investors might increase the potential of our upside, but often comes at the cost of limiting other potential options that could be really meaningful to us as Founders.

The most obvious is that investors need a return on that money. Therefore, we've limited the number of "smaller" outcomes that might work great for us, but not for them. For example, maybe a few years in, someone wants to buy our small startup for a nice $5 million check. That could be an amazing windfall for us personally and potentially have life-changing effects.

But that's not what investors may be looking for, and if so, they may "ask" (without asking) us to keep pushing for a bigger outcome. Not because it's the best thing for us, but because it's the best thing for them. To be fair to investors, that was their goal from outset, it just severely limits the number of outcomes that benefit us personally.

We Get a Boss — For Life

When it comes to who really controls the company, forget about "who owns majority." That's irrelevant. What matters is the Golden Rule — "She who has the gold, rules."

In this case, we're living off of our investor cash, which means their desires are what really matter. Yes, we can go another direction with the company, but the moment we need capital - if investors aren't satisfied — we lose. The only real way to have control of a company is to control the bank account, or at the very least — profits.

We can negotiate certain provisions and rights into the investment to give us the air of control, but absolute control means doing anything without asking permission. The moment we have to ask permission - we have a boss.

It's not "Our Company" Anymore

Perhaps one of the most painful lessons we learn after raising capital is that for the firs time, it's no longer "our company." In the same way, having a roommate doesn't make it "my apartment." From this point forward, and again, never going backward, we now have someone else to contend with - or in some cases - many other people to contend with.

At first, this sounds like a sign of relief "Oh great! Now these lovely people will join this journey with me!" and we feel supported and validated. But that pixie dust wears off very quickly, and in its aftermath, we find out that we just have a bunch of roommates hanging around - for life.

These investor roommates have the potential to be helpful, but in reality, they just turn into one more liability we have to stay on top of. Even long past the point where their money has run out, they are never, ever leaving the house!

We Just Need to Know What We're Signing Up For

It's not that raising money is bad - plenty of companies do it. It's that as Founders we have to understand what we're signing up for. We have to be able to confidently look at our "new path" and say "This is what I think is best" while also looking at the alternate path (control) and saying 'I'm willing to give that up." The problem is we can't have both.

So long as we are 100% on board with the new path, and don't look back, we can confidently feel like it's the right decision.

In Case You Missed It

Will Investors Want to Run My Company? If I take on investors, will they push me aside and run the company?

What Should I Never Say to an Investor? I'm going to be raising capital for the first time — I know what I want to tell investors, but what should I avoid saying altogether?

Can I Have a Boss Again? (podcast) As a Founder, what happens when we're forced into going back to reporting to someone else now that we've tasted the freedom of Founderhood?

About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

Discuss this Article

 
Comments
Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2021 Startups.com LLC. All rights reserved.