Every new parent loves when they bring their new baby home. It is such an exiting time because you are a family now and your whole life has changed. You do not know how you ever lived your life before you had your little one in your arms and you would do anything for this tiny human. You would give your left arm for them, give up your life savings, go through literal hell just to keep them safe. While I am not a parent (yet), a startup is a lot like a having a baby. You nurture it and give it whatever it needs to grow up healthy and strong. You lose sleep because of it and you spend countless hours trying to make it happy. Most importantly, you worry about providing for it in any way possible and what you startup baby needs is funding.
Let’s examine some ways the you can establish funding for your startup and making sure you chose the right path. We will briefly look at self-funding and then look at the benefits and drawbacks of family and friends, angel investors, and venture capitalists (VC’s).
Self Funding is when the the founder raises their own money and invests their own funds into the startup. Startups who self-fund and have a small cash cushion, are more vulnerable to liquidity problems and are more likely to disband. You will normally see “king driven” founders self-fund because they will want to retain control and not ahve to manage investors.
Financing Options and some of the benefits and draw backs of each:
- Family and Friends- This is what makes the startup possible in the first place
- Limitations when compared to more professional investors like angel investors and VC’s
- Usually invest much less in the startup than other types of investors
- Usually have little human or social capital to contribute to the startup and the investments do not boost the startup’s credibility.
- Most of them are not looking to make a lot of money back on their investment
- Playing with fire gap (link)
- Angel investors- a wide range of individual investors who want to invest their own money and usually do not know the founder on a personal level. They will also invest in an early stage of the startup.
- Much harder to reach than family or friends so there is less initial trust and comfort which results in weaker tires to angel investors
- have more business experience and some may act as counselors and some will ever sit on the board
- Startup may gain a lot more credibility which can play a direct role in bringing in VC’s in the future
- Angel investors can fill the gap between family and friends and VC’s
- Can lack a level of accountability and “constructive discipline” that VC’s usually have.
- Venture Capitalists-professional investors who focus all of their time on investing in high-potential startups.
- can provide more financial capital, social capital, and human capital.
- investments are not only larger than family and friends and angel investors but are also longer because they invest with the intention to continue to invest through multiple rounds of financing.
- Accountability is highly dependent on the market conditions
- Can give startups the legitimacy that it lacks and the startup can receive higher public valuations.
Lets think about the future now. Your little startup baby is growing, thriving, and successful. You are so proud of what it has grown in to, you think back on all the sleepless nights with a smile on your face and tear in your eye because it was all worth it. However, it is time for you to let it go, your little one has grown up and is off to college to live on their own. They do not need you anymore and you must say goodbye to everything you have worked for. This same thought process can be used when talking about walking away from your startup after you have worked so hard to build it into what it is. Noam Wasserman talks about this in Chapter 10 of The Founders Dilemmas and how a founder can prepare for their own departure from their company and how to make it the smoothest transition possible.
Lets take a look at some of the benefits of voluntary succession that Wasserman talks about in Chapter 10. The day will come when a founder must walk away from their livelihood or as some founders may call it “their only child.” A founder who prepares early can ensure that the following things have the potential to happen.
Voluntary succession– when the CEO or founder decided to step aside for a new CEO who frequently come from outside the startup. This is the least stressful transition, but it is rare for this to happen because founders are so attached to their startups and have high confidence in themselves.
When founders opt for a voluntary succession, the following things can happen:
- The founder is less likely to leave the startup immediately. They will most likely stay around and do their best to help out and make for a smooth exit.
- Founders are more likely to play a central role in the search for and choice of the successor. They will choose to serve on the board or committee that is selecting a candiate.
- The founder will be more likely to remain in a senior executive role because they have not been forced out. The investors will also appreciate the transition period from former CEO to new CEO and encourage collaboration.
- The founder is also more likely to remain on the board of directors because will help the founder to still feel involved and important. The founder can maintain a title that makes them feel like they are still a part of the startup before completely transitioning out.
While no one likes to think about the end when they are just starting out, it is very important to plan ahead, especially in the business world. I mentioned to someone that thinking about an exit plan when starting a business is a lot like writing a prenuptial agreement before your wedding, it is not something you want to think about but it can save you a lot of stress down the road. Thinking about your exit plan is very important when you are looking at the potential for investors and should be done sooner rather than later.
In terms of my business, I will certainly think about an exit plan for my business. While, I like to think that I will be making soaps when I am old, grey, and arthritic, that is not the smartest decision. I want my business to continue on after I decide to hang up my apron and retire to a beach somewhere, I want my name and company to live on long after I am gone. Having an exit plan in place will ensure that happens and that it happens on my terms. I also plan to self-fund for as long as I can and then I want to look into angel investors as opposed to VC’s. I want to maintain some control in my business because I am a “queen” no matter how much I try to tell myself otherwise.
As always, I found these chapters interesting and I learned a lot about investors and developing an exit strategy. I hope you learned something from reading my post. Leave me a comment below telling me which type of investors you will pick: self-funding, friends and family, angel investors, or venture capitalists.
Thank you for stopping by.
Until next time,