Author: Todd Belveal
You always have to think ahead when running a startup.
I know it’s fueled by ideas and passion and all that. But ultimately, your job is to structure the company, deliver a product, and attract capital.
That requires quite a bit of foresight.
Especially when it comes to attracting capital, which is what you’re going to be doing most of the time.
Most successful founders spend at least half their time securing funding. Once they finish one round, they’re already looking ahead to the next one.
And any failures or weaknesses in your last deal will affect your future rounds.
I see some of the same mistakes being made by founders who are eager to get their startups off the ground.
Let’s address a few of them:
1. Taking On Too Many Investors
The fewer investors, the better.
A lot of entrepreneurs know this principle, but some have trouble following it. They find a number of investors who pay more than they should for a small stake in the business, and they jump to bring on those investors.
But they’re not thinking ahead.
Remember, the SEC limits an LLC to 99 investors. And even if you stay under 100, that doesn’t mean your structure is appealing to the investors you’ll need later on.
I know a startup in Tampa that’s highly regarded right now — but the guy is stuck. He’s completely stuck, because he’s raised about $3 million but has 75 investors. No VC will touch him. No private equity will touch him.
He’d have to recapitalize the whole thing and basically buy out a bunch of the smaller investors at this point. No VC is going to do that many individual closings. It’s just not going to happen.
Investors don’t see any value in negotiating a complicated transaction with that many counterparties.
You can’t get out of this situation easily. It’s very rare to find an investor who will buy everyone out.
2. Having Unattractive Investors
It’s not just the quantity of investors you have to keep an eye on, it’s also the quality.
Think carefully about the investors you take on, and choose resumes that add to the quality of your venture.
Whatever you do, don’t take dumb money.
That money doesn’t do anything for you later. It’s strictly capital. Not to be disrespectful, but an investment from your aunt doesn’t set the right tone.
At Washlava, I have three large investors who’ve invested $3.2 million of the $4 million we’ve gotten so far — and I brag about them in every pitch.
These are my people. This is who’s backing us. These people don’t make stupid investments. They don’t screw around, and neither do we.
It’s incredibly reinforcing for you as an entrepreneur, and it’s also very attractive to later investors.
When you start to negotiate with a VC, you need people on your side who are capable of participating in that negotiation.
They have real weight with investment bankers and peers in the investment community. I love my aunt to death, but they’re not going to take her seriously in that setting. It’s all about attractiveness — the attractiveness of your capital structure and your investors.
A lot of startups just don’t think ahead. They take on investors who aren’t attractive to the more important sources of capital they’ll need later on.
3. Not Paying Yourself
When I started my first startup, I figured I wouldn’t pay myself.
I thought, “If anyone ever has to forego income, it’s going to be me.”
But my partner at Silvercar, Bill, taught me a lesson that more startup founders should hear.
He pointed out the investors have to pay for the results, and the investment they make in people is their most important investment in the early days.
Smart investors will tell you — pay yourself. Not anything exorbitant but enough to make a living and actually focus on what you’re doing.
Not paying yourself is a mistake you can’t unwind from. Because once you start doing that, investors expect to not pay you.
When I see an early startup with low compensation, I wonder if they’re hiding something — or if they’re multitasking on something else. And that comes back around to being attractive to investors. It speaks to your structure and your organization when you aren’t paying yourself.
It all boils down to organizational structure and capitalization.
If you lay a good foundation and anticipate what’s going to happen as you move forward, you have a shot at success. If you don’t, you’re going down the road that many failed startups have walked before you.