This useless company just raised $50 million, and you’re telling me that I won’t raise $1 million for my climate-change startup?!
- “Non-Important” just raised $300 million in the pre-seed round.
- Your friend’s company just raised $50 million.
Then you tell me that I won’t be able to raise $1 million for my climate-change-focused startup?
Yes. I am telling you that exactly, and here’s an interesting read about why I am right.
Before I read this, are you demotivating me? Should I not read this if I am super pumped?
On the contrary, It wouldn’t make a difference to me if you raise a billion or your startup goes bankrupt. But, as a business consultant who’s been working on the investment side for more than ten years, I would like to argue with you why you are probably not going to get an investment.
However, that does not mean your startup will not be a game changer.
I would’ve loved to start this argument by telling you how many companies fail to raise investment. Unfortunately, however, this statistic does not exist. So here’s my sad, probably far from accurate, attempt:
Seed funding grew 56 percent year over year and totaled $29.4 billion in 2021, per Crunchbase data, with more than 17,000 startups around the world raising funding at seed.
Alright, but how many startups were there in the US in 2021?
Nearly 5.4 million applications were filed to form new businesses in 2021 — the most of any year on record, based on the latest data from Census Bureau’s Business Formation Statistics.
I will not create a percentage as there is insufficient data, as you can see. However, the above does not include funding from friends and family, companies who do not report on CrunchBase, or those who skipped the seed round of investment.
The initial conclusion is that it is extremely challenging. Yet, do not let that stop you. Imagine if everyone thought it was challenging that no one applied, and you take an investment easily.
So, pinpointing the first point, you probably do not need investment. A fair percentage of people who come to me for funding have this in their mind:
- I have a great business opportunity.
- I need money to build the product and market it.
- This will make me very rich, but it might as well fail.
- I will never risk my savings on such a risky project.
- If I make it, then great. If not, then it’s only my time wasted.
For these above five points, I am in dire need of investment.
Let’s play a small game and shift this from an investor’s perspective.
- This person is possibly too excited and unbiased about their business.
- They need my money to test whether this product will work out. I am not sure if they know how to market it.
- They have not shown me that they are deeply invested in this project on a financial level. They are not taking the same financial risk as I am.
- They might be right, but the risk is too high. I’d better put my money in the stock of Apple and safely earn a 10% this year or so.
This “entrepreneur” needs more risk-taking and a proof of concept or a product market fit. They need to sell their product and get hype for it to reassure that investor that it is a fantastic business and that they only need this investment for fast growth.
What? What are you suggesting? You are not asking me to invest in this project from my savings, are you?!
Yes, I am. If you do not, you do not believe in your company as much as you want your investor to believe in it. You are not breathing it.
But that investor has money to spare. I do not.
If an investor wants to donate, they won’t think of you. Instead, they would look at you as something that would grow their finances. If you fail to identify as that person, interest is far gone.
Imagine sharing your toothbrush with someone. It sounds revolting to the majority.
Some founders I know with highly successful startups would rather share a toothbrush with someone than give up equity in their startup.
You become very attached to the startup on all levels. It gives you joy, anger, sadness, and excitement. It gave your work life a purpose. Then you come and tell me you want me to share this? I am already making $100k per year with no investment. I have bootstrapped this whole time. So why would I share it with someone and give them voting power?
- What if, like Uber, my board kicks me out of the company?
- What if, like Tesla, I get a big investor to bad mouth me and fire me?
- All of this for what? Increasing my revenue from $100k to $300k? The risk is too high, and I do not need it.
Me: “Oh, so you are saying that you are sure this money will return with a good ROI?”
Entrepreneur: “Yes! I have been selling this product for a year now.”
Me: “Alright, and you need $100k to survive? You are also willing to give out a part of your company for it?”
Entrepreneur: “Yes, I have to, unfortunately.”
Me: “I know this sounds crazy and unexpected. But how about I give you this money, and you just return it to me without giving me a part of your company?”
Entrepreneur: “Why would you do that?”
Me: “I will take a small fixed profit, that’s all.”
Entrepreneur: “Sounds unbelievably amazing!”
Me: “Okay, perfect. How about you go to a bank and ask for a bank loan?”
Entrepreneur: “What? No! Banks are evil. I do not trust them.”
“Did you hear about this person in deep debt because of the bank loan she took? Now she can not pay it back, and they will take her house!”
Loans are sometimes the best option to go for. You could ask any of the big startups whether they would prefer taking a loan vs. an investment. It’s quite simple maths.
- You are 100% sure that this year you will make a 100% profit over the initial funding amount you need.
- The bank will take a 15% interest.
Why would you choose to get an investor who takes a piece of your company rather than just giving up a small 15% profit this year? What if you make a 500% profit instead? The bank will still take the 15%, while the investor has the right to take a lot more.
Evil or not, an agreement is an agreement. Most successful entrepreneurs have a business mindset. They understand that five donuts could be worth $25. Not that 20% of a donut consists of sugar.
- There is no bank loan for this amount.
- Your industry is too risky.
- You need this amount to grow quickly to compete and dominate.
- You need external experience to make your startup more successful.
Amongst other reasons…
There are moments when investment is the best possible option. However, this depends on the entrepreneur’s goal. Not all startups are created to become unicorns. Some are just side hustles that turned out to cause a founder to retire early. Some are specifically created to be sold in a few years. It all depends on the goal.
Whether you get a loan, an investment, or bootstrap, you must constantly look at the end of the road to keep your focus on the game.
I’m Al, a business consultant in Zurich, Switzerland. I believe in the power of delivering value to you, the reader. Follow me on various social media platforms if you’re interested in the value of my content.