Confused about Startup Investments?

You are not alone! Read on and let’s get some clarity. This article was inspired by a fiery debate on Romanian Startups around an investor’s thesis.

[1] There are 2 ways to finance the development of your startup:

Bootstrapping: founders take an idea — and using talent and professionalism — build a worthwhile business without the backing from investors and having little or no starting capital. It takes great dedication, sound work ethics, and pure single-mindedness to achieve success this way. Apple, Mailchimp, and Atlassian are companies that fit this definition.

Raising risk capital: founders take on external capital to finance operations and growth. Yearly you have around 16,000 startups raising a seed round globally (crunchbase), 7,000 an early stage round, and 2,000 a late stage round. In US only, there are around 800,000 new businesses founded (statista) making it obvious that raising institutional funds is the exception, not the rule.

Of course, reality is messy so you have between the 2 avenues a lot of other paths for startup financing, from founders’ credit cards and savings to the famous triple Fs (family, friends, fools), and the ever present angel investor.

[2] Each path has its rules:

Bootstrapping requires certain strategies meant to keep the team alive until they can support themselves — ramen profitable — while institutional funds require a completely different logic.

A bit of theory — startup funding is mainly focused on SaaS business models. Because Customer Acquisition Costs are paid in advance (because you have to pay today for advertising and your copywriter) while the Life Time Value of a customer means that the revenue is delayed 2–3 years at least (because customers pay monthly), the more money you have in the beginning the more market velocity and volume you can have.

Additionally, initial funding lets the team focus on building the best possible product (and achieve Product-Market Fit) before having to figure out or optimise revenue structure.

[3] The world is messy, remember a few rules:

The world is filled with amateur investors Theranos raised $724m while nobody seemed to be capable or even willing to do a modicum of due diligence (YFinance)

Amateur investors will micromanage you, will try to get involved as much as possible in daily decisions and operations, will try to dominate founders and dictate (advise, huh); they are scared and this is compensatory behaviour.

Professional investors, as well as professional founders understand the deal. One puts their time, effort, and expertise, the other puts the funds (and ideally some network and knowhow), and together these ingredients lead to a venture that has a good chance to succeed.

There is the issue of hygiene: it is abhorrent for an investor to ask the founders to put in their savings, mortgage their houses or do other skin-in-the-game stuff like this. There is skin-in-the-game because time you can never get back, while the venture capital is defined as risk capital and it is absolutely normal and expected for 90% of investments to go under.

Emerging markets have this strange behaviour where investors are seen as more powerful than founders. I don’t really understand where this comes from. Money by definition is worthless by itself, the capacity to execute is incredibly valuable. For every single founder/business there are multiple potential sources of financing. Therefore, I really hope to see more self-assured founders driving better negotiations with their potential investors.

Other more mature markets are the exact other way around — investors, especially in the VC domain, are people that ended up in those positions and are most of the time reminded that they don’t really need an education to have an opinion and spend other people’s money.

As far as I am concerned, I believe that a balanced, cooperant position is the best. Nobody is better, nobody is doing the others a favour. We come together as partners and bring to the table our resources to build something bigger than we could have done on our own.

Do you have anything to add? Let me know what you think.