Does every startup need an investor?

Does every startup need outside funding?

Absolutely not.

We can tend to get the idea from news reports and places like TechCrunch and Y Combinator that every startup has outside investor funding. But that is a misconception.

There are many successful businesses that don’t have investors. In fact, if you can bootstrap and build your company without one it is often better for the following reasons:

  • You can spend your time on the business rather than looking for an investor. Finding funding takes a lot of time which is a distraction from growing the business. Sometimes the business even grinds to a halt.
  • You will learn to manage your finances very well – because you have to. There is no spare cash for non-essentials and you will direct your $ to the growth of the business
  • You retain full ownership of your startup
  • Internal relations are a lot simpler
  • You learn to be self-reliant

Good reasons for having an investor is if they can contribute something more than money to the business:

  • They have relevant skills or experience they can use to give you wise advice
  • They have contacts which can significantly more the business forward

Note that you may be able to find advisors who can do this for you who do not have to be investors.

The only reason you really need an investor is:

  • You really need a large amount of money which is vitally necessary to grow the business. ie. You have large infrastructure or staff costs which are absolutely necessary to the operation of the business. (And I mean ABSOLUTELY necessary – ie. the business cannot operate without them.)

I wouldn’t be a big fan of finding an investor for under $25,000. Most entrepreneurial people should be able to find this amount without giving away equity. (It’s kind of an early test of your entrepreneurial abilities!)

However, one reason you might look for an investor at this early level is if you were going to be part of an incubator (like Y-Combinator or the like) which would give your startup a huge strategic advantage because of the added value the investor brings, such as mentoring, knowledge or networks.

Personally, I prefer an idea that can be bootstrapped or at least grown to a point where it has been proven and has a reasonable income. Then you have better leverage in doing a deal with investors, if you want to take them on to grow the company.

Originally published (in a slightly different form) in answer to this question on answers.startups.com 

Image used under Creative Commons license courtesy of Justin Scott

 

Comments

  1. If your start up needs $25,000 or less a better option than investors would be peer to peer lending, using Lending Club or Prosper. But I agree the best way is to bootstrap, that is how Subway got its start.

    • Susan says:

      Peer lending is an interesting phenomenom – thanks for bringing it up. The advantage for an entrepreneur is you pay back the debt and still own the company. The disadvantage is you usually have to pay either interest to the lenders and/or a fee to the website facilitating the loan.

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  3. Cary Harwin says:

    If you need the funds to take you through the obtaining of “proof of concept” or to prove the market acceptance of your idea, there is a NEW financial vehicle that has been growing in its acceptance and success, to obtain those funds and it’s called Crowd Funding.

    As an example, assume your business is presenting a new technically innovative product or service. Instead of an investor for equity, or a loan you have to pay back, consider Crowd Funding. We are launching our crowd funding site, FundaGeek – Crowd Funding for Technical Innovation, early next month. After you post your project on FundaGeek, you then promote it to your contacts through social networks, directing them to your project, seeking their pledges for rewards you offer. We’ll assist you in the promotion of your project to your social network and beyond. We are accepting project submissions now for our launch, no cost to you unless your successful in raising your needed funds. Check it out here http://goo.gl/7SqRt you can click there on a 90 second Intro Video and read our FAQ that should answer all questions.

    • Susan says:

      Thanks for letting us know about your venture Cary. Good luck with it.

      As a caution to entrepreneurs looking for funding – Make sure you get some strategic advice about what form/s of funding are right for your venture. This decision will have a big impact on the future of your business.

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  5. Dear Susan are Mariapia Vernile, president of a ‘Non-profit Association for Autism. ASSOCIATION CUAMJ ONLUS. WE HAVE A SEAT MATINO (Lecce-ITALY) WE WOULD LIKE TO START OPENING UP FOR THE CREATION OF BUSINESS FOR MANY WORKERS YOUNG GRADUATES IN PSYCHO EDUCATIONAL MATERIALS TOGETHER TO PEOPLE WITH AUTISM AND MENTAL PROBLEMS. WE WOULD LIKE TO BUY A FARM http://www.agrimatsalento.com
    Its cost ‘of 1,200,000.00 euros but we can not FINANCING TO BE RETURNED AT LEAST FOR THE TIME. LOOKING FOR COMPANIES THAT WORK ORDERS commission us. A KIND OF WIN / WIN LAVORARNO WHERE ALL, ALL EARN SOMETHING .. can you help? Thank you. mariapia.vernile @ alice.it, http://www.progettoisha.it, cell +39 334 8648212, +39 0833 503558 fix. If any serious company, and ‘concerned, we can send the project. We must do the BUSINESS PLAN

    • Hi Mariapia,
      It sounds like a very exciting and worthy project you are undertaking.

      I would think that your investors/donors will very likely come from your local community. Therefore the best strategy for you is to find someone nearby who can help you write a business plan in Italian. Unfortunately, I don’t currently know anyone I could recommend.

      Because you are a not for profit organisation, I would be happy to read through your business plan and give you some feedback once it is complete, if you decide to write it in English. (Alas, I don’t speak Italian!)

      Feel free to use the site and ask any other questions you might have. :-)

  6. Gowtham says:

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  7. Patrick says:

    I think it depends on your business, the concept and how much you need to scale. If you have a global concept, then I think it’s inevitable that you have the right infrastructure in place and this generally will involve VC’s at some stage. I agree completely that any Entrepreneur especially in Tech startups, should aim to raise at least 20-40k and build a marketable, launchable product before considering investment as, if you are successful in getting it, it will dilute your company unnecessarily.
    Crowdfunding is the new model for raising funds from the crowd but as Susan quite rightly pointed out, it’s not for everyone. Also, you run the risk of giving your idea away at a very early stage and once it’s up there you can’t take it back. Proceed with caution at all times and be wary of your surroundings. It’s a dog eat dog world.
    Thank you Susan for the fantastic Blog posts as always.

  8. Jen says:

    Great to see a post on this. I think that the mentality is too often that you must get outside investors but I have felt hesitant for the reasons you cover, there are a lot of benefits to bootstrapping. I am hoping I can make that work and it is great to have that desire reinforced, thanks!

  9. I enjoyed reading your post. I have been thinking about whether I should get an outside investor. Although I prefer bootstrapping I have run out of funds and my passion that I have left my 9-5 job to pursue and put focus on seems to be hard without the funds necessary to start up (logo’s, labelling, website and stock etc). I may have to go back to work as am not sure how to start :-(

    • Hi Rina,
      It’s hard to answer your question without knowing specific details about your situation.

      Having a look at your website, I assume you are a beauty practitioner wanting to set up your own practice. If that is the case, I wouldn’t worry about an investor. It will be hard to find one and take some time, unless you already have someone in your family or friends who might invest. The downside there is that some one else own a percentage of your company, which primarily earns its income from the hours you work. Therefore you would be putting yourself in the situation where you are working so many (unleveraged) hours a year to pay back your investor. That’s not a scenario that appeals to me.

      If I was you, I would look for some part time work to pay the bills and use the remainder of the time to build up your own business. That should be achievable in your industry.

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