The question is do you really want the investors’ money? Why shouldn’t you? Well, first of all because no investor will be giving you the money for the sake of your blue eyes – except your mum and uncle, of course. The rest want something in return – a share of the company.
By Nicolaj Nielsen, author of Startup Funding Book
In startup jargon, this is called ‘dilution’, when your share of the company is diluted by investors. Typical dilution starts with you getting a co-founder and having friends, angels and accelerators to invest in the company. Next, you give shares to the first employee and later employees in the form of an option pool, and then you receive a huge investment from a local venture capital fund and later an international venture capital fund.
So is going from 100% of a very small cake to some 20% of hopefully a large cake worth it? This depends on your specific situation and what you really want to do with your startup. Is it more important for you to be in control of your company (maybe a small one) than to grow it into a world-leading company? Then you certainly shouldn’t go this route! But if you have a startup where you need funding to grow (or grow fast enough), VC and other types of investors might be exactly what you need! You should ask yourself: Do we really need the money? Will the money really make a tremendous difference for our company –or could we achieve what we want without it? And if we need money, do we need it now or could it wait
You should ask yourself: Do we really need the money? Will the money really make a tremendous difference for our company – or could we achieve what we want without it? And if we need money, do we need it now or could it wait till later? It’s hard to find entrepreneurs who regret they didn’t take in external investors earlier in the journey, while it’s easy to find entrepreneurs who regret taking in investors too early when (they know with hindsight) they would have been able to bootstrap longer. Why do they regret it? In many cases because they now know the huge value-jumps a startup is taking when reaching new milestones. When the value of an idea is close to
zero, the value skyrockets as the startup builds a team and prototype, launches a product, gets revenue and starts to grow rapidly.
The first investments you take in are very expensive since the value of your company is low, so you will have to give up a lot of your company to the investor for a relatively small amount of money if you take investor in early on. And if you end up taking too much money too early, you might end up owning only a small fraction of your company at exit. This not only impacts your financial upside but also your ability to be in control of your company.
Nicolaj’s upcoming book takes an in-depth approach to funding.