From angel investors urging you to reveal your source code to questionable tactics by VCs in follow-on rounds, not every aspect of seeking funding is in the best interests of a founder. While you attempt to woo backing for your company like a trained monkey in a roadside carnival, the puppet masters who sit before you might have ulterior motives on their mind. As a founder, how do you know which investors to trust and which ones to back slowly away from in an effort to protect your back from the slings and arrows likely to come your way? What changes can you expect when you accept VC money and how can you tell if an investor might potentially ruin your startup?
While the tech press glorifies every round of funding with lurid details on how much was raised and who contributed, rarely is the darker side of startup funding discussed. Today’s startup founders are left with the impression that even the most ludicrous of startup ideas are receiving investment funding (App Raises $1M In Funding For Simply Sending The Message ‘Yo’ Back And Forth).
For founders who choose to bootstrap their venture and maintain control over their destiny, the press mentions tend to be few and far between. Unless you’re pitching at a demo day or launching on Hacker News’ ShowHN, the chances of your startup receiving mainstream media attention are slim to none. To some founders this might seem grossly unfair. Your product might be better. Your path to profits might be more defined. Hell, you might even be cash flow positive with month-over-month sustainable revenues. But if you’re not participating in the tech circus that requires you to pimp out your startup to the highest bidder, tech blogs aren’t going to be rushing to cover your company. Rather than accept this imbalance as a cruel hardship, you might want to peel back the dark curtains and peer into the theater that is VC/angel funding. Not all fundings are as rosy as they seem; you and your startup might actually be the fortunate ones for resisting the temptation to accept investor funding. Just look at some of the indiscretions that have happened in the past:
According to this post by well-known investor Fred Wilson, a potential investor feigned interest in a startup but neglected to invest. Shortly thereafter, a competitive product was launched by the son of the investor who passed on the original startup. Was this a coincidence or an outright rip-off? Would the original startup have been better off never approaching this unscrupulous investor? Not only did they not receive funding, their idea was duplicated in the process. Would this startup team have been better off considering crowdfunding for their product or raising funding from their family and friends?
This post from Upfront Ventures’ Mark Suster details the shady habits of a small investor trying to claim they co-lead a funding round in a startup company, when in fact they were a bit player. Not only were they stretching the truth, they were also sharing the startup’s private financial information with their network. While the startup received funding, they also had their data revealed in the process. What rights do you have to your data when you are seeking funding and what data can potential investors expect you to reveal?
Another occurrence some founders face is backers who only want to invest once your company is successful and other investors have led the way. Once you are already successful and have investments funding your venture, these follow-on backers are just attempting to jump onboard an upwardly mobile company. Are they truly venture capitalists or are they just capitalists? If you allow these late comers to contribute funding to your company in exchange for equity, you’ve given away a piece of your business to someone who didn’t have the chutzpa to back you on their own in the first place.
From investors having undue influence over your business’ hiring decisions to questioning your marketing strategy or insisting you tweak your business model, accepting funding from outside investors can have a huge impact on your company. Depending upon how deeply you grovel at the investment trough, you could be giving up an inordinate amount of control in exchange for funding. Once the term sheets are signed, the press has begun to fade away, and the cold reality of your decision sinks in, you could end up feeling like you’ve been on the receiving end of a hot date gone wrong. Everything seemed rosy at the time, but once the impact of your decision has hit you, the realization that you gave far more than you got can be a bitter pill indeed. Soliciting and/or accepting investor funding can have long-lasting implications for your business. While the tech press is quick to feature the latest funding news, the same jubilance is not evident when deals go sideways or investors become overly aggressive with their ‘vision’ for your company. Before you lament your decision to bootstrap or concern yourself with the impression that everyone is raising funding except for you, take a moment to consider the many ways an investor can ruin a startup. You could end up thanking your lucky stars that you avoided outside funding and depended upon your own hard work and determination instead.