THE MONEY AIN’T FOR NOTHIN…
Relatives and friends will often give you money for your new business — whether a loan, investment, or even a gift — for a variety of motivations from belief, to support, to responsibility, to guilt, and more. You hope to eventually give them their money back, plus a return, but both sides generally know that money may never come home.
Banks will loan you money as a means of making a set return or interest rate. There’s little to no emotion involved and there are ramifications if the bank doesn’t get their money back. Again, it’s not personal, just business.
Early-stage venture is a blend of the two. For almost all VCs it is personal, they want to support great entrepreneurs and big visions. And, it’s also business. While they accept that individual bad outcomes are inevitable, the fund exists to make money. They want rapid growth/ scale, additional capitalization to sustain said growth, and an exit within 5–10 years. The entrepreneur and VCs interests are directionally aligned, but those paths can diverge if the entrepreneur becomes the impediment, significant additional capital/dilution is required, things are taking many years longer than anticipated, and many other scenarios.
Accordingly, founders ask all the time regarding what type/class of investor they should raise from. Here’s a visualization to help you to begin to think through it. You may not have all the answers yet. But, it’s important to be aware of the relevant questions and to be honest with yourself about the answers. The acceptable risk tolerance, work-life balance, degree of responsibility, notoriety, loss of privacy, etc. is solely yours to define…
Questions to ask yourself:
- How much $ do you need to achieve planned company milestones for the next 12–18 months?
- Do you have a network of friends and family from which you could raise this much capital?
- Are you prepared to assume the risk of taking money from friends / family and never providing a return?
- Will a bank loan to you / your business right now?
- Do you want to keep your business for decades, and maybe hand it off to a relative someday?
- Will you likely need to raise additional capital or just this one time?
- If you can make the business profitable, do you want to distribute profits annually, or reinvest in growth until an exit?
- Do you want to be able to run a lot of life expenses — car, meals, clothing, travel — through the business?
- Are you comfortable with being diligent about metric and financial reporting — monthly, quarterly, etc.?
- How do you feel about regular oversight and mentorship?
- Do you want to hire friends and family or keep it strictly a meritocracy?
- How important is it to you that you remain CEO for the life of the business?
- If a successful outcome is a sale or liquidity event?
Be careful what you wish for, because you just might get it!
*of course there are exceptions*
TIA Ventures | Randy Brandoff