My friends know I love to celebrate the joys of being an entrepreneur, riffing on the challenges, and seeking opportunity within said challenges. As I am in the midst of raising seed capital for my latest venture WeMontage, I am reminded almost daily of the need to meet and connect with so-called smart money investors (i.e., investors who understand what I’m doing and can add real value). However, I seem to mostly meet people who like to invest money in start-ups, but don’t really understand tech-related businesses or my industry.
Like most other start-ups, I’m bootstrapping my biz and have a limited amount of time for which I can continue to do so. The dilemma is do I try to hold out to connect with the perfect investor or cut a deal with an investor who doesn’t understand my business, can’t offer real value, and, in the worst case, is extremely nervous about losing his/her money.
Put another way, do I take the money, or do I not take the money? That is the question.
A Cautionary Tale
I was speaking to my buddy, Mark, who founded GroupRide(dot)Me, a tool for cycling enthusiasts to find comparably skilled cyclists to go on group bike rides, when he started telling me a story about a friend, call him, Bill, who created a niche pharmaceutical biz and had invested $500k of his own money. But Bill desperately needed a cash infusion, so he took $300k from a guy, let’s call him, John, who knew nothing about the pharma biz.
Shortly after investing in Bill’s business John lost his job and decided he wanted to take a hands on role in Bill’s business. And because John was now unemployed, he was more concerned than ever about losing his money. Bill says this was the worst decision he ever made.
This is a cautionary tale, which many of us would be wise to heed.
An Alternative Capital Raising Step
In addition to speaking with smart and not-so-smart potential investors, I am contemplating putting WeMontage on KickStarter. I’ve completed the profile and have submitted it to a few trusted friends for their feedback. The goal is to raise money in lieu of a traditional friends-and-family capital raise. Unfortunately, there is no guarantee KickStarter will accept my project . But I’ll keep you posted!
Finally, in the book Rework, the 37 Signals guys say taking money is Plan Z. Perhaps that’s true for some, but I suspect it’s not the case for the average entrepreneur trying to make his/her dream a reality. What do you think?
Have you needed to raise capital for your start-up before and faced the dilemma of taking money from someone you weren’t sure was a good fit for you and your biz? What did you do and what happened next?
Please tell me in the comments section.
@jamesoliverjr
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Great post James!
I really enjoyed this! I'm a big fan of Dragon's Den and Shark Tank, and they show this scenario all the time. The Sharks/Dragons won't even invest if they don't add any value to the company.
Cool. Thanks.
Always always always negotiate from a position of strength. Never take money because you feel you HAVE to. Never take funding from someone who does not have a strong stomach and who cannot afford to lose it. I prefer an angel investor with solid contacts, even if they do not fully understand the business. The contacts can more than make up for this deficiency.