Why do so many start-ups concentrate on getting investors?

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JASON LEMKIN

Many of them shouldn’t.

Selling stock is dilutive, and carries economic, social and legal obligations.  Investors will expect 3-10x returns on the capital.  They’ll want board seats, and consultation, and will often push your company to expand and grow in certain ways.  Which can be great.  But not always.

There are two great reasons to raise money:

  • You have to.  You have no choice.  No other way to get to the next stage.
  • You can produce $10 in shareholder value for every $1 you raise.  Then, everyone wins and the dilution and obligations are worth it.

The first is mandatory, the second is elective.

What doesn’t work out so well:

  • Raising money because I can.  Yes, but it’s not free.
  • Raising money because VCs want to invest in me.  Do it if you need it, or if you can get $10 in shareholder value (or at least, $5) for every $1 you take.  Otherwise, don’t get seduced by the interest.

What’s on the margin:

  • Rainy-day raise.  I don’t need money now and am not 100% sure of the ROI on the $$$, but I’m worried I may need it later and it’s on offer now.  Might be worth it.  Often a scenario that leads to tears later, though.

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Published on March 20, 2016
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