With all the frenzy around angel and venture investing, sometimes rationality and reason get tossed out the window. I mean, if you CAN raise angel or venture capital why wouldn’t you take it, right? It’s flattering. It can help take the pressure off my immediate cash needs. And hey now, YOU’VE BEEN BACKED. Yes, but to what end? Backed against the wall? Backed into a corner? Or perhaps backed in a promising large-scale venture? Before ever taking someone else’s money, the first question an entrepreneur should ask themselves is: DO I REALLY NEED THE MONEY GIVEN THE SCOPE OF MY MISSION, BUSINESS OBJECTIVES AND PERSONAL GOALS? Because many a business has been backed that didn’t warrant getting backed, not because the business wasn’t sound but because the motives of the entrepreneur and the investors weren’t properly aligned. Please don’t let this happen to you.
These are businesses that don’t warrant taking external funds from anyone. You aren’t going into it looking for a liquidity event (which is what most angel and venture investors seek), but for regular cash flow that enables you to work less and do more other stuff. These are often characterised by web businesses that largely run on their own and monetise via ads, lead generation or e-commerce. Lifestyle businesses are awesome and can often help their owners achieve freedom one thought unimaginable. However, these are most assuredly NOT businesses for which external financing should be sought, because of the fundamental misalignment of motives between the business owner and investors.
An angel-backed business comes in two flavours, one which leads to future venture financing and one which does not. The former case will be dealt with below. The latter case is one where the business opportunity is attractive from a financial standpoint for external investors, and where the founder has the goal of selling the business in the future. However, the size of market opportunity might not raise to the level necessary to attract (or warrant) venture financing, but with the right amount of angel capital and support the business can yield an attractive outcome for all constituencies. Exits in this realm are frequently in the $20-$30 million range, but can sometimes top the $50 million mark. These businesses tend to be very capital efficient and leverage the networks and expertise of the angels involved, offering a great opportunity for a smaller idea to get funded while avoiding the brain damage and time suck of a VC roadshow that is bound to yield poor results.
These opportunities often have an angel round as a precursor, with a small group of individuals providing seed capital as runway to hit the proof points sufficient to raise a venture round. For a business to be venture-backable, it generally needs to be targeting billion-dollar+ markets with exit opportunities measured in the hundreds of millions of dollars – or more. Almost all businesses that execute successfully against opportunities of this scale require lots of capital, which makes them perfect for venture financing. This approach also requires founders who want to “go for it” to build the massive company, and won’t be satisfied with an exit in the tens of millions that might yield an attractive result for the founders but a pretty uninteresting outcome for the venture investors. In today’s market, venture investors can keep founders in their seats by providing partial liquidity in conjunction with a growth capital round, but the point remains: the DNA of the founders needs to be LETS BUILD A GIANT COMPANY, DISRUPT MARKETS AND NAVIGATE A HUGE EXIT. Yes, money is a big motivator, but being in it to win it goes far beyond the coin. It is an obsession.
Being honest with yourself at the inception of your business is absolutely critical for achieving the desired outcome. Don’t be seduced by people throwing money at you if you know what you really want is a lifestyle business, or if you really believe taking too much capital too early creates risks to disciplined decision-making or sets the exit bar too high. You are in control of your own destiny: don’t let others take it away from you. Making the right decision upfront has life-impacting implications. Be deliberate, thoughtful and smart about it.
This post originally appeared at Information Arbitrage.