How to Choose Your Investors

My mother has been talking about opening her own bakery for many years. But bakeries have startup costs, and she needs investors.

I’ll invest in your bakery, I’ve said. I’ll give you whatever you need to get started.

No, she says. I don’t want your money. I’m trying to get the local housewives to be my investors.

She’s targeting those housewives as investors because they would also be her potential customers. That’s pretty smart. Unfortunately, none of them have wanted to invest, which probably means none of them would have patronized her bakery. So maybe it’s just as well.

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Last night, I learned about raising seed funding from notorious hustler and CEO of Game Closure, Michael Carter.

First of all, your company better be well on its way to becoming a billion-dollar company. Are you not quite at the billion level, but well on your way to becoming a hundred-million-dollar company? Congratulations, go back to 2001 when that was cool.

If you’re not a billion-dollar company, you should just give up on life and go work for Google or something, because no VC or angel is ever going to invest in you.

Now that we’ve established that, choose only the investors who are willing to be the lead investors. Most investors will only invest in a startup if they think other investors are investing. Understandable. You wouldn’t want to buy stock in AAPL if you were the only one doing it either.

But you only want the investors who will invest when no one else does. Investors tend to herd. But if the investor’s actions are contingent on others’, that means that when things get rough and someone backs out, they’ll all back out.

If they jumped in independently, they’ll hang on independently. So even if you have $100k from Sequoia in the bank, don’t tell that to the next guy.

But why would we have $100k from Sequoia in the bank? Shouldn’t we be talking to Sequoia last?

No. Talk to the best investors first. You probably won’t be remotely ready, but the good investors will tell you what you’re lacking (“we don’t believe you can get users” or “your team doesn’t have the technical chops to build X”). The bad investors will tell you what they think you’re lacking, and they’ll be wrong (“pls come back with a projected revenue model and an android app”).

Choose investors wisely. Treat them as teammates, because once they have a stake in the company, that’s what they are. Choose the people you’d want on your team when you really need help.

But what if we’re desperate for money? Then you’re not a billion-dollar company. Apply to work at Barnacle instead.

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