Co-Founder Ai

# “Not Raising Investments Doesn’t Make You a Startup Founder” or What You Need to Know Before Seeking Investors

Investments aren’t just about money and the opportunity to showcase your startup on social media; they also entail risks for both parties involved. Whether you have a startup or plan to launch one in the future, this article comes highly recommended. Even if you’re not currently running a startup, it’s worth reading—not to mention that I’ve delved deep into the world of venture capital investments. 😅

# You Might Not Need Investments

Investments are expensive, especially when sought at the early stages of a company’s development. However, securing funds isn’t the only path to growth. There are alternatives such as bootstrapping, obtaining grants, or even taking out a loan, which can sometimes be more advantageous than selling a portion of your business.

Investments aren’t a cure-all and aren’t necessary for everyone. You can consider taking out a loan, borrowing from friends, tightening your budget, and growing organically. If any of these options are applicable to your business, utilize them instead of selling equity. At the start, equity is inexpensive, so you’re unlikely to receive substantial funds from investors to fuel your growth.

# Investments Are More Than Just Money

While theoretically, you could find a private investor and secure a million-dollar investment without much else, true growth often requires more. Smart investments provide not only capital but also valuable connections, expertise, and strategic support from investors.

Essentially, bringing on an investor means gaining a partner who can assist with various strategic tasks—be it preparing for an exit, negotiating contracts with major clients, or resolving management issues. Simply taking money is possible, but such investments might be “unwise” during the early stages.

# Being a Good Person Isn’t Enough

Every seasoned investor, whether from a venture capital firm or a private business angel, evaluates startups meticulously before investing. Here’s what investors typically assess:

• Team Size and Role Distribution: At the startup phase, a small team can cover all essential roles. As the business grows, so does the need for more specialized staff. Certain roles are indispensable for progress and cannot be overlooked, even with investment.

• Founder’s Personality: Traits like emotional intelligence, realistic expectations, and effective team interaction are crucial. These factors help investors predict future collaboration dynamics.

• Market and Competitors: Market size, accessibility, competition, and their development stages significantly impact a startup’s prospects. Consider whether the market can be expanded or if there are opportunities to enter new regions, such as Southeast Asia.

• Business Model Viability: Investors like MalinaVC focus on the potential for a startup to become profitable within 2-3 years, rather than just technological innovation.

• Financial Metrics: Metrics like LTV, CAC, and burn rate help assess risks and estimate the return on investment timeframe. A higher LTV to CAC ratio is generally favorable, indicating profitability speed.

# Investors Look for Red Flags

Just as investors evaluate startups based on specific criteria, they also look out for red flags that may deter them from investing:

• Too Many Investors: Having multiple private investors can complicate decision-making and reduce overall investor interest.

• Equal Equity Distribution Among Founders: If all founders hold equal shares, resolving disagreements becomes challenging.

• Aggressive Founders: Even experienced entrepreneurs can be too aggressive or uncooperative, making them risky investments.

• Information Concealment or Deception: Any dishonesty during the investment process can lead to losing investors, as trust is paramount in partnerships.

# And Green Flags

Green flags are attributes that signal to investors that a startup is a worthy investment:

• Adequacy: Founders must set realistic and achievable goals, maintaining objectivity about their product’s potential.

• Maturity: Even first-time entrepreneurs should demonstrate experience, whether in management or other relevant fields, and show readiness to take responsibility.

• Ethical Practices: Maintaining professionalism towards work, employees, and stakeholders is crucial. Additionally, effectively presenting the product by highlighting strengths and providing concrete data enhances investor confidence.

# Investors Choose Startups, and Vice Versa

While we’ve discussed the criteria startups must meet to attract investments, it’s equally important to recognize that investors also evaluate startups to ensure mutual benefit. Both parties are interested in a profitable partnership, so entrepreneurs should scrutinize potential investors by considering:

• Beyond Money: Does the investor bring additional value such as experience, connections, or expertise? Some startups may only require financial support, but many benefit from the strategic advantages that investors offer.

• Key Focus Areas and Success Stories: Review the investor’s previous investments and their outcomes. Are there companies that have secured subsequent funding rounds? What is the average investment size?

• Investment Terms: Understand the conditions, such as whether the investor will take a seat on the board, their decision-making authority, and their level of involvement in the company’s operations.

These considerations are especially pertinent for venture capital firms. The criteria might differ slightly for private equity firms or strategic companies.

# It’s Important to Protect Your Reputation, Even If the Startup Fails

While this point might never come into play, it’s wise to be prepared. In the event of a startup’s failure, the company’s liquidation rules will dictate the distribution of any remaining assets—investors and founders alike.

Often, especially in tech startups, there may be little to sell, leaving investors to write off “debts.” Although founders may not owe anything legally, handling a failed startup responsibly is crucial to maintaining a good reputation. This ensures that future projects aren’t tarnished by past failures and that attracting new investments remains feasible.

The way founders conduct themselves during a failure is pivotal. Proactively communicating challenges and attempting to salvage the company demonstrates adequacy and reliability. Remember, investors also bear responsibility, as they might contribute to saving the company, highlighting that both parties play a role in the startup’s fate.