A few weeks ago I opened up the discussion of venture funding. Yes, that black box of enigmatic Pandora proportions that many attempt to open but few are successful.
If you’re reading this article, then you’ve likely decided that raising funding is in your future. That’s right, not just your business’s future, but your future. Because once your business takes venture funding, it changes your future definitely, absolutely, without a doubt.
So if this raising funding keeps you up awake at night and gives your passion and dreams wings as you build your company during the day, then please keep these five things in mind as to what to watch out for:
The Five “Don’ts” of Venture Funding
Don’t Give Up Your Baby
You’ve been stewing the ingredients that make up the secret sauce of your business for likely a very long time. Certainly don’t be too eager to give away 30-50% of your company in your first fund raise. Not only does that leave you with less of the pie down the road, but it also leaves you with less ability to reward employees and to raise additional funding.
Don’t Expect It to Get Easier
As I mentioned in the last blog post, when you raise money, you are now accountable to someone else who has a vested interested in what you’re doing with the money. And money does NOT solve problems. I was in a meeting with the top executive of a public company a few years ago that said, “When I run into a problem, I throw money at it. Money solves problems.” That couldn’t be further from the truth.
Make sure that you’re not spending that money like it’s going to solve your problems. Be wise and judicious and have very specific product and growth goals. Oh, and remember that an expensive sales person doesn’t always equal success either. Prove first that a product can be sold, build out the process, then pay your sales guys well.
Don’t Invite Anti-Dilution to the Party – For Anyone
In case you don’t know what anti-dilution is, it essentially means that as you grow and continue to issue more shares in order to reward star employees and raise more money, that everyone is treated unfairly.
Dilution, while it doesn’t sound like a good thing, is actually a very common and necessary practice. The concept is that if you start with 10 total shares in a company, and then add an investor and give him 3 new shares, then he now owns 3/13, and you own 10/13. So you can see that your absolute number of shares isn’t changing, your relative percentage is getting smaller.
With anti-dilution, one person or party has a fixed percentage relative to everyone else, and continues to be issued new shares each time new shares are created to make their relative amount to be the same. This can be very dangerous, as most serious investors are extremely wary of involving themselves with companies where anti-dilution clauses exist. Be very wary.
Don’t Take the First Suitor Who Says “Yes”
Not only will there be concerns regarding the valuation that a first investor will setting for your company (likely very very low, taking advantage of your inexperience), but the first potential investor may or may not be the right partner to help mentor you and help grow your business.
Taking money from someone very much forms a relationship that can be used to help the company. If you have a compelling business model and product, take your time to interview investors like you would a key employee or business partner.
Don’t Raise Money for Any Vain Reason—Growth Reigns
To raise money just because you can, or pay yourself higher salaries, or to make some popularity list, or any other vain reason is a dumb reason to raise money. Decide on very specific objectives and purposes for the money that you’ll be raising, and if your business model is far enough along, set very specific goals to use that money for growth!
Raising venture funding can be a wonderfully helpful thing. Keep these “Don’ts” in mind and you’ll be better of in the process!