Trending

Why Taking Funding Too Early Can Hurt You – Brett Fox

“Equity is like jet fuel for a startup,” Gill, one of our investors, said to me one day.

 

In our case, not only was early stage funding jet fuel, early stage funding was absolutely necessary.

 

Why? Well, unless you have $20M-$30M lying around, it’s pretty difficult to build an analog semiconductor company. The numbers go to over $100M to build a microprocessor company.

That’s part of the reason we got funding at all. Building an analog IC company is cheap compared to building a microprocessor company.

Analog companies use trailing edge technology because analog doesn’t scale like digital does. Therefore our mask costs (the information that’s provided to the fabrication facility to make the chip) are orders of magnitude less than digital ICs.

So we’ve answered how funding makes it easier, in some cases essential, to build your company.

 

What about how funding makes it harder for you to build your company?

 

The downside of taking funding is pretty obvious. You now are beholden to an outside investor.

It doesn’t matter if you own the majority of stock, you have to execute or you will no longer run your company. So what are the keys to making this relationship work?

 

You need to be in alignment with your investor(s):

 

A. You need to be in financial alignment with your investors:

 

Let’s say you take $1M seed stage investment, and you give up 20% of your company in return. Your investors are probably hoping to make 30X on their money or $30M.

See also  Kunle Awobodu In, As Builders Tasked On Pragmatic Solution In Building Industry

For your investors to make $30M, your company needs to be worth $30M/20% = $150M. Welcome to the big leagues.

Was getting to a valuation of $150M your goal when you started the company, or would you have been happy selling the company for $40M a few years down the road?

It’s pretty easy to see how you can fall out of financial alignment with your investors if you don’t want the same thing. And…

 

B. Your vision for the company needs to be the same as your investor(s) vision.

 

You have a vision to develop products for Market A using Technology B. Your investors believe you should develop products for Market B using Technology A.

Your investors will likely support you going after Market A with Technology B, but they will not like it. And you may lose your investor support quickly if you are not successful quickly.

 

Don’t just take money from any investor.

 

Investor relationships are long term, seven to ten year relationships. You need to be in alignment with your investors to make it work.

For more read: What Is The Best Way To Keep Your Equity As You Raise Funding?

 

Do You Want To Grow Your Business?  Maybe I Can Help.  Click Here.

Leave a Reply

Send in Your Business News to BusinessTrumpet News!