With more than 15 years in the startup CEO business, and with four startups under my belt, I’ve been asked hundreds of times by other entrepreneurs about the benefits and risks of raising third party capital.
The benefits are obvious; more money to fund the business being the key one.
On the downside, however, these conversations invariably reveal a certain fear on the part of the entrepreneur in terms of what it will be like having to meet the expectations of a financial investor who isn’t in the business every day. Specifically, they wonder what will happen to them if they miss sales targets, or product deliverables, or anything else they commit to. I’ve seen some entrepreneurs talk themselves out of seeking investment, to the detriment of the business, just so they don’t have to answer to anyone.
All four startups I’ve run have been venture funded with multiple investors. I’ve experienced the good, the bad and the ugly and my resounding response when asked whether a founder should take third party money is typically: “Go for it.”
There are lots of exceptions, of course. But assuming the price is right, and the investor has a great reputation, I wouldn’t hesitate.
The fact is that early stage companies are risky. Delivering bad news to your investors at some point, and likely more than once, is a foregone conclusion. They get it. It’s the business they’re in. But, the more you actively seek help and involve them in what’s going on, the better they will understand the intricacies and challenges and the more tolerant they will be when things aren’t going perfectly according to plan.
Every founder has the power to get the most out of their investors by seeing them as a resource and an ally instead of a reluctant partner. Don’t forget: their success hinges on your success.
Let’s take a look at ways to leverage your investors to your advantage.
Help with Strategy and Tactics
Investors can provide a wealth of knowledge regarding strategy and the tactics to execute. Don’t forget, they have other portfolio companies who’ve tried many things, and they can bring the benefit of those experiences to your situation if you ask for it.
Entrepreneurs are sometimes reluctant to seek their investors’ advice about strategy for fear of seeming weak, and like they don’t know what they’re doing. Strategy is hard and most of the time in the early days of a company you will get significant things wrong.
You will hit hurdles you didn’t anticipate and you won’t know where to go next with confidence. Admit it, and your investors will help you brainstorm so you can get moving on the next avenue as quickly as possible. They won’t think you’re stupid. Two or three heads are way better than one and they will appreciate that you asked.
Data and Metrics
One of the biggest benefits I’ve received from investors is hard, cold, independent data with which to benchmark our progress and measure our activities. First of all, you should be setting measurable targets for yourself period. That’s a given. But how do you know whether you are at the top, middle or bottom of the pile? For real?
Investors often have access to comparable data that can be difficult for you to get. Whether it’s revenue growth percentages year over year, salary or option data, or overall company valuations—ask for it. If they don’t have it, they can often find it.
Benchmarking against these metrics allows you to rethink plans, adjust your compensation practices to be more competitive, and to understand whether you’re tracking to a positive outcome down the road.
Search For Talent
It’s no secret that startup recruiting is incredibly competitive. There are other startups offering the chance to get in early on something exciting, as well as tech giants aggressively building out their tech teams with big paychecks and recruiting bonuses.
Investors typically have strong networks. In addition to helping you find someone, an investor can also be quite insightful in helping you assess the quality and fit of a candidate. They’ve seen a lot of people over the years.
For example, I don’t hire anyone onto our Executive team who hasn’t met with at least one of our investors. It’s especially important to get their insight the more senior the hire. They don’t want you wasting time and money on a high-priced candidate who doesn’t work out and that you need to replace in 8 months. Getting their buy-in up-front is valuable every time.
Make Strategic Connections
I’m always amazed at how many entrepreneurs don’t mine their investors’ LinkedIn profiles looking for connections to potential customers or partners or industry influencers. Let me say it again: your investors know a lot of people.
If you craft the right introductory message for them, they are usually more than willing to make a soft introduction. If nothing else, those connections can give you incredible feedback about your product, the market or the competition.
Once a month or with some regular cadence, let the investors know who you’re targeting and ask for ideas for how to reach them. You’ll be surprised at what you might get back. I’ve also asked for connections to smart VPs of various disciplines like Sales, Marketing, Product or HR who can help guide our process or metrics. I’ve never been turned down when asking for advice.
The investment community is tightly knit. When you bring an investor on board who believes in your vision and wants you to succeed, they’ll be more than happy to point you in the right direction around who might be a great potential investor for the next round.
They’ll also let you know what milestones you need to hit, what expectations you will need to meet, and what the normal valuation range for the round might be under current market conditions. They’ll review your pitch deck and set you straight about what a fresh investor will want to hear. They’ll also let you know who NOT to go after because not all investors are made equal.
Who better to leverage to position yourself than someone who spends their week looking for the next investment?
There are many more benefits to having the right investors. If you have the opportunity to raise capital, do it and don’t be afraid. Investors place a bet on you for a reason.
They want you to be successful because they want to be successful. They are not there to criticize you or throw obstacles in your way, and will appreciate your commitment to doing what it takes to succeed.
Not taking full advantage of what your investors have to offer is like leaving money on the table.
Carol Leaman is a finalist for Entrepreneur of the Year in the Canadian Startup Awards.