4 Reasons Why You Should Avoid Investor Money

Written by Tom Fairey

8 March, 2022

Techstars’ Max Kelly On Why You Might Make More Money From Customers Than From VC

Max Kelly is an intelligent entrepreneur with a long list of successes and a broad background.

Kelly went to Oxford, where got an honours degree in chemistry, then went on to get a master’s in management from the Northwestern Kellogg School of Management and the ESSEC Business School.

Professionally, he started as a group brand manager at L’Oreal then moved on to be director of consumer innovation at Boo.com and senior strategist at Razorfish. He served 12 years at Virgin in two roles and was on the board of directors for Last Second Tickets. Most recently, he was the vice president of innovation and senior vice president of strategy at Techstars, which is arguably the world’s best seed accelerator. Based in Colorado, USA, but now with locations all around the world, Techstars has taken more than 1,600 companies into its program and fewer than 1% of applicants are accepted.

How do you cut 99% of companies from such a program?

“It’s tiring,” he told me on a recent edition of my podcast, Back Yourself.

Even though companies apply to Techstars, Kelly and his team would already be tracking leading companies before they applied. He also invited companies that seemed particularly promising. Personal interviews helped winnow the field further, and group discussions and face-to-face interviews resulted in the selection of the final applicants. By the time a company was selected, it had likely been through more than a dozen interviews, while those that did not make the cut got personalised feedback on how they could improve.

The most successful companies have some common traits:

  • They were full time and showed commitment
  • They have a strong team in place already
  • They fully embrace technology and have a CTO or technology lead in place
  • They already have some pre-seed funding

While raising money from investors can be the push a company needs for success, it’s not always a good thing, and sometimes it can be a poor decision.

Raise Your Chances Of Success By Avoiding Investors

“If you can avoid it, avoid raising money from investors and get the cash you need from clients,” Kelly said.

Doing that is beneficial in several ways:

  1. It gives you cash from day one: By raising money from clients, perhaps in the form of consulting, you hit the ground running and with cash in the bank — or at least in the system
  2. It is your market validation: By avoiding fundraising and simply selling, you have proof that your product has value in the market. If you can’t make money on your idea independent of VC, then that is a strong indication there is no market for what you have to sell. If you have to, do your work part-time, and when your idea is market-proven, then you can go full-time or bring in additional support.
  3. You avoid the VC treadmill: VC will invest in your idea in stages, with demanding benchmarks for each stage. The problem is that the finish of each stage is simply the beginning of another stage.
  4. You own more of your company: You already know that VC will take partial ownership of your company. But do you know just how much that will be? Here’s a scary statistic —  According to one recent estimate, if you get $100 million in funding, you may only walk away with $15 million to $21 million. And if you have two or three co-founders, that may drop to as little as 5%.

All that said, Kelly notes, VCs can be valuable, particularly in the understanding they have of the difficulty of entrepreneurship and the support they will lend budding entrepreneurs.

“They can be supportive and help you grow your business well,” Kelly said. “Just make sure you go in with your eyes open.”

Thinking of going it alone? Sole entrepreneurship can definitely lead to successful outcomes, but having a partner has multiple benefits. A co-founder can help with ideas, assist you through difficult times, and bring a different set of skills to your project.

Should your friend be your co-founder? Friends are generally lousy partners, said Kelly, and the startup process will frequently shred relationships. If you have worked with a person before and happen to be friends, on the other hand, the outcome may well be different.

How do you find a partner? It’s hard, but be sure to be humble and understand your strengths and weaknesses.

“Be honest with yourself as to where you need that support,” he said.

Meanwhile, take a cue from Amazon: Hire up. Always hire so that you are increasing the capabilities of the team, not decreasing them.

The Takeaway

Getting funded from client money may lead you on a very different journey than if you secured your funding from venture capital or angel investors. While going with outside funding has its benefits, you may end up happier and richer by raising the money from clients through sales and services.

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