Q: What should a startup know before rejecting an outside investor?
Know they may not be there later.
Investing in start-ups is very risky. Not only do most start-ups fail, but it is more than that. It’s really hard to do enough diligence in enough time:
- It’s hard to really get to know the team that well. You might have literally just met them. And often, they will have zero real track record, or close to zero.
- It’s hard to know if the handful of customers they really have, if any, will grow.
- It’s hard to know if they might quit if it gets too hard.
- It’s hard to know if they will spend too much of the money, too quickly.
- It’s hard to know if there might be a better competitor just across town.
There just almost never is enough time and bandwidth to know for sure if you should do the investment. Startups are … raw. And startup investment periods are often compressed.
And yet … and yet when you see a startup you think is in the top 5%, you want to invest. Often badly. And quickly. Because the great ones produce all the returns.
But that’s often a moment in time. If you stumble after, and/or the diligence gets worse, or you become even a tiny bit of a less attractive investment … that prospective investor will often fade away.
So if you say No, assume that’s it for that investor. They’re simply gone.
And if you say No, and have no one else that is out there with a backup Yes … assume you may not get another investor at all. At least, not for a while.