2 Dangerous Myths About Startups and Investors 0

These two myths just keep on coming up. Consider this, sort of like my don’t break the law post here yesterday, another reminder of what we’re all supposed to know, but is not always understood.

For the record, what I’m calling “investors” or “investment” here is serious business investment from professional investors or sophisticated amateur investors, people who put money into your business with the goal of getting a return on that investment. We’re talking here about venture capital and angel investment. I’m not talking about getting a few thousand dollars together from friends and family or anybody else who doesn’t approach the idea as a business investment.

Myth 1: If you try hard enough you can find investors

Reality: Only a small subset of startups are ever going to get investment.

This should be obvious, but isn’t always: real investment wants a return on investment. That takes luck and hard work and a business that offers real growth prospects and a reasonable chance of getting purchased by a big company or going public in just a few years.

Services are way less likely to attract investment. Although there are exceptions, investor businesses have to be scalable, meaning you can ramp them up to high sales volumes fairly quickly. Usually that means they’re product businesses, or productized services, like some Web applications. Very few service businesses are scalable. If you’re wondering about yours, ask yourself whether doubling sales means doubling head count. If it does, you’re probably not scalable.

New entrepreneurs without startup experience are way less likely to attract investment. That’s really off-putting to new entrepreneurs, I know, but it’s important. Here too, there are exceptions, but the general rule is that you need to have startup experience, or a team that includes people with startup experience. This is a matter of reducing risk to the investors, and the general consensus is that people who’ve been through a startup are a lot more likely to succeed than people who haven’t.

Action point here: if you’re not likely to get investment, don’t waste your time. Revise your plan to make it work with fewer resources. That might mean growing slower, or focusing on only a part of your larger vision. Generate sales. Spend carefully. And the good news, in this case, is that if you do it by yourself, then you own all of it.

Myth 2: Success is getting investors to say yes

Reality: Jumping into business with the wrong investors is a nightmare. It will spoil your life, and of course your business too. You’re way better off with no investment than sharing your business with investors you don’t like working with. Think about shared goals, shared styles of thinking. The entrepreneur-investor relationship is a lot like marriage. And obviously, better no marriage at all than a bad marriage.

So your goal isn’t just to get investors. It’s to get compatible investors, people you can work with, people who will help you succeed, and people who offer skills and contacts and experience that complement what you have.

(Image: istockphoto.com)


About the Author Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

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