An entrepreneur can spend every spare minute perfecting his idea for years. Many startups get to a point where they just can’t take their idea further or grow their business fast enough without seeking outside capital. This is usually because the organic growth of retained earnings is not fast enough to outperform the competition.
The classic trade-off when looking for external investors is control versus growth.Bringing in an outside investor can help accelerate the necessary growth, but at the same time weakens the founder’s involvement. Founders often no longer have a majority stake in their company after the Series B financing round has been completed.
Start-up entrepreneurs often make the mistake of believing that their fund has financial value. Investors generally just want to know how much money the founders have deposited. A common question from potential investors is, “How much of your money do you have invested?”This is a critical question for the investor and one that is killing many traders who don’t know how to answer it.
Most start-ups are start-ups, where the founders first invest their personal savings to get started. This is a positive sign for investors who expect a significant investment of time and money from the founders.
Investors assume equity, but do not include it in the valuation. The fact is, investors already assume the entrepreneur has worked hard and sacrificed a lot to bring the company to where it is today.Hard work is therefore not a differentiator and therefore offers no comparative value. It is more important for potential investors to know in advance who wrote the check. Namely, there are three groups of people who want to invest in a “hard money” company:
The founding team
Friends and family
External board members
If no such investment can be found in the three categories above, it can become serious Will prevent or delay implementation investment by an external investor. In this article, the authors discuss three previous investment styles favored by venture capitalists. The authors also present evidence that outside director investment is associated with better business performance, leveraging data from the Pepperdine Private Capital Access study.