How do you get someone to invest into your company and how does it work
So this is purely out of curiosity but I have a bit of questions regarding investors and VCs and the sort.
First off, how do you even get a VC or a fund to invest into your company? Do you just setup a meeting and throw your pitch and if they like it, it goes from there?
Also, do you get funding when you actually have customers and is actually profitable or can you get funding if you've done 0 sales and just go to them with an idea and a MVP which they end up liking. Like I see these companies with like "Series A $5m" and such, I mean surely they throw this kind of money if you're actually doing well in sales and see a future. But if that's the case, why take the money at all? You're doing well in sales, you can only keep going up and you get to keep all % of your company.
This brings me to my next question. I understand that for the money they give they take a percent of your company. I read somewhere that it's usually around 30% and just for this example we'll say it's 30%. What does this do? Does this mean that if you made 100k for the first year, you'd have to give them 30k of it, or does this just mean that when you go public, they own 30% of the shares of the company.
And lastly, is there ever a reason NOT to try to get investors? I'm trying to build something myself and I'm long away, but I always thought of just going at it alone, but then I realized that I knew barely anything on the business/marketing side of the world and if an investor invests in the company to help market and offers their connections, things would be so much easier.
Thanks everyone!
Here is my take on your questions:
Q. How do you even get a VC or a fund to invest into your company? Do you just setup a meeting and throw your pitch and if they like it, it goes from there?
A. It takes some effort to even get a meeting to give your pitch. There is a lot that goes into getting someones attention in the 1st place. So, unless you have a good brand, a great reputation, or just happen to know someone, you might find it a bit of a challenge to get your name/product in front of an investor for any consideration.
Q. Do you get funding when you actually have customers and is actually profitable or can you get funding if you've done 0 sales and just go to them with an idea and a MVP which they end up liking?
A. Depends on the relationship, there are a lot of different outcomes. Some investors invest in the people, some in the product, but solid financials go a long way in getting the proper attention ;)
Q. Why take the money at all?
A. Depends on where you want to go with your vision. Some don't take the money and bootstrap all the way to the finish line. Others take the money for a number of reasons. Could be to scale, could be to hire, could be to develop, there are a LOT of reasons to take the money, and many NOT to take the money. It really depends on where you want to take it.
Q. Does this mean that if you made 100k for the first year, you'd have to give them 30k of it, or does this just mean that when you go public, they own 30% of the shares of the company.
A. This depends on the way the deal is written. Could be as you described, could be a % ROI on their investment, could be so many different things that this is a tough question to answer with any certainly unless you are reading the legal mumbo jumbo.
Q. Is there ever a reason NOT to try to get investors?
A. This again depends on where you want to go. How much control you want to have over goals/benchmarks/roadmap? If you take someones money, you owe them something. Sometimes that is money, sometimes that control/input.
In the end, if you can bootstrap you don't owe anyone anything. You will put limits on available resources, (access to cash for growth), could stifle your product development efforts, might limit your access to talented investors that have been there before, etc... On the other hand, you are in control (to a certain degree), you can grow at your own pace, you aren't being forced by an investor to explore a path you disagree with, etc. etc. There are pro's and con's with Investors and going solo. I've seen, and been on teams where both models worked well and had a fair amount of friction. Just my take for what it is worth. I chose to bootstrap my current project https://5starrocket.com/ even though I was offered several investments. Why? I am a bit of a control freak, when you take money you "owe" someone, we weren't willing to go that route.
Unless you have a major track record, nobody will invest in just an idea.
For an alternative view on taking funding, have a look at indie.vc and some posts from 37 Signals such as
https://signalvnoise.com/posts/3972-reconsider
https://signalvnoise.com/posts/1686-the-lifestyle-business-bullshit
In general, the further you can get with your own funding ("bootstrapping") the better your negotiating position if you do find yourself seeking capital. You have demonstrated commitment as well as viability of your idea.
Getting funded, if successful, usually takes months.
When they take 30% it is a percentage of the company shares at that point in time. VC funding usually means they get paid out on acquisition or when the company goes public. That 30% may be further diluted in future if there is more investment - it's a complex topic.
https://www.feld.com/archives/2016/10/venture-deals-third-edition.html will teach you about this (and Brad Feld's writing is usually good value)
I have speak to VCs before.
They will only give u money if u have sales next to nothing only if you are Mark Zuckerberg, Jeff Bezos etc. You must be some famous personality to have history in selling off successful startups in order for them to give u loads of cash with very little share ownership.
If you are a nobody, they will definitely take more than 50% of the company as they want to cover for their risk in covering a nobody. Whether u pay them 30% of revenue based on the share ownership is up for discussion but usually u don't do that at the start, whatever is earn should go back to company for sustainability and growth. Returns are usually on the 3rd year onwards.
Do u want a boss above u screaming for numbers every 3 months? If u r ok, then get a VC. If you want total control in terms of finance and creativity etc., don't get a VC. VCs are known to be vultures and u can be damn sure they be hovering above u if they know your company is going to die.
"Do u want a boss above u screaming for numbers every 3 months? If u r ok, then get a VC."
Exactly.
See also: "90% of investors add no value. My assessment: 70% of investors add negative value to a company." (03:40) https://www.youtube.com/watch?v=TYt5yuiGk9E