No Shortcuts - Financial Risk
Starting your own company is tough. One of the toughest things, in my opinion, is getting the money you need to get it up and going. EVERY option has major pros and cons. Depending on your risk tolerance and your comfort level with family, friends and investors.....each option looks different.
Friends & Family: This is how Jeff Bezos raised his initial seed to start Amazon. He had a lot of great connections from his previous work in finance and his parents could actually chip in a nice chunk. He was honest with people and said that he thinks the venture had a 20% chance of success. They believed in him and that investment paid off nicely for them. That is the absolute best case scenario....maybe ever. If the 80% happened, then there could be hurt feelings, disappointment and even anger from the investors. Thanksgiving just got a lot more awkward!
Angel Investors: These are likely professional investors that are aware of the risks. There won't be awkward Thanksgiving if things go south with their money, but they will want to know what's going on with the company. That means regular (often monthly or quarterly) connects with them to report out how the company is going. If things aren't going well, then they will let you know about it and give ideas on how to turn things around. Those ideas might be different than what you think, but you have lost leverage since what you initially told them is not transpiring in the market. Given the ups and downs of entrepreneurship you are most likely going to hit some rough patches.
Personal Investment: This gives you the most autonomy. You answer to yourself. This also has the most personal hit since you are pulling from your own bank account. Are you taking away from your retirement? Your kids education account? From a potential down payment on a house? Is your partner supportive of this? Are you not able to go on vacation this year because the company needed some more money? The autonomy is balanced out here with personal financial sacrifice....and the even whether you have the personal finances to support the needs of the business.
Bank Loans: This is a nice option, but the bank usually needs to see a track record of success to even loan you any money. That means you will likely have needed to get money from somewhere else to get the business to the point where it is revenue producing and profitable. Banks are wanting to bet on more secure businesses versus taking flyers on entrepreneurs.
Professional VC Investment: This route is highly publicized but is a tiny fraction of total investments in businesses. To get into the offices of someone like Andreeson Horowitz means you are in some rarified air already. You have connections. You might have a track record already. VC investments range from something as small as $50K at the very beginning to tens of millions of dollars. The VCs are for profit companies, so will want equity with their investments and don't play around. They are shrewd and are looking for 10X (or more) return on their investments. Patience is not their game. If you are not going on the trajectory they are seeing they will push you. And push you. They likely have connections for you since they are professional investors, but the expectations are very high on you making the business big.
Sloane has done a mix of personal investment and bank loans. I am personally uncomfortable taking money from family and friends. The likelihood that the investment will be lost in this game is high and I just don't want to be on the hook for it. I did take a $50K loan from a good friend to help with inventory and took 2X to 3X longer than expected to pay that off when the inventory didn't sell through like I thought it would.
My friend was really cool about it, but I personally felt awful. I didn't have the money to pay him off and it kept me up at night. I do not want to go through that again.
Since our personal investments and a nice boost from Kickstarter helped us get on our feet we were able to approach banks for a traditional loan. This has been great for us and for what we want the company to be in the near term. If we were trying to grow at 10X, then the bank loan would not be enough. We would need to get money from somewhere willing to take a risk on us.
Every company and individual is different. Think through the ramifications of the choice long and hard before making it. Money is a very serious thing. The euphoria of starting your own thing and the confidence (potentially overconfidence) you feel at the beginning will be tested in the months and years ahead.Read More