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Either have startup capital or sacrifice equity?

Discussion in 'Business Models, Niches, Industries' started by Galaxy16, Jun 29, 2018.

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  1. Galaxy16
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    Galaxy16 Bronze Contributor Read Millionaire Fastlane

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    Have I misunderstood a part of this?

    Investors drain equity, but they can be excellent long-term business partners and even mentors.

    Do people with high startup capital still need investments?
     
  2. Scot
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    Scot Ductus Exemplo Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    This question is completely relative to what your business is.

    If you have $100k in personal money to start a business...
    • That’s more than enough to start an amazon import business
    • Not even close to start a bio-tech company.
    Investors aren’t just for money. For example, investors can be get partners for networking and strategy. For example, if you’re starting a social media platform and Reid Hastings, founder of LinkedIn and VC invests, his money is secondary to the knowledge he brings to the table.

    Lastly, if the majority of your thoughts about investment, equity, and capital come from Shark Tank, throw it all out now. That’s not the real world.
     
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    Supercar Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    If someone can help you double the size of your company, it is worth giving them up to 49% of the equity, theoretically speaking.
     
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  5. JScott
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    Huh? If the value of your company doubles after you do this, you've essentially given up half your equity for pretty much no increase in value.

    For example, if you owned a company valued at $100K and gave away 49% of it to get the valuation to $200K, you've given away nearly half the company, and have only gotten $2000 in value in return. And now, for every dollar the company increases in value in the future, you get 51 cents of it, instead of the full $1.

    You should rethink your assessment of the value of equity...
     
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  6. minivanman
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    minivanman Platinum Contributor Speedway Pass

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    So just by doubling the size of the company do you think that doubles your profit? That varies 999 ways. Not to mention what JScott said. Let me give you 49% so I can make the same amount.... which might not be true anyway. Don't pull a Marcus :)
     
  7. LittleWolfie
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    LittleWolfie Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    No they don't look up, mailchimp, Atlassian,37 Signals,Automattic etc.
    Mailchimp took no investors and is making revenue of 400,000,000. Just pay cash for employees with the skills you need instead. There are Venture Capatalists who are more than happy to consult for cash, if you think they add value but don't want equity, then offer to pay them to be your advisors.

    Investors are for those who don't have enough capital (or who want to grow faster than with the capital they have) Mailchimp took nearly two decades. But no investors, no silicon valley presence,

    Note most of these do give employees equity as part of their compensation, because it is startup culture and that conserves cash. Employees are the investors instead, but even if you give 1/4 to them, your still better off than you would be after Series A.

    Of course the idea is you give up equity for faster cash, so you get there quicker.

    Also depends on your exit, plan. Are you going to build it and sell for under 30 million(earlyexit), not wanting to be tied to round after round or you shooting for the moon, risking leaving smoking holes from a burnt out unicorn?

    It's if you want control (I own 100%) (yes, I know employees, but an employee in a stock ownership scheme is a totally different arrangement, to an investor, they are your jr partners) investors can come with pref stock, lots of term. Your lawyer will set it and common stock for employees.

    Most successful fast owners, shouldn't need investors unless it is something like biotech or renewables or other expensive area.

    They can just build It. More than likely their skill is in getting capital, in which case others are perhaps building it in the early days, they can go sell to customers (or even carry on what they were doing to raise money and just provide the exec oversight and training to the team or both)

    Also look up rocket internet, Germans fastlaners that do exactly this. They go bankroll their own start-ups, hire the people they need, then sell them or collect dividends.
     
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  8. LittleWolfie
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    The vast majority of these startup posts, assume that $40,000 is a lot of money for first time founders to put in, and they don't have a spare $100,000 (first round now I think)let alone a million lying round.

    If I was investing say 10 million into my own start up, I'd break it down inro roind size chunks and have a lawyer cut the start up company cheques based on typical round sizes and performance gleaned from the investors. (Lawyers are pretty good at holding money and rigidly sticking to well defined plans. That puts a buffer between you and the start up, gives it the hungry mentality, and the investor vibe, and avoids too much money (yup that's killed startups), though a fastlaner probably has a lot of the skills to compensate for that. Hope it adds value.
     
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  9. Andy Black
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    I worked for company that apparently had €40 million in funding (so I heard but never dig deeper). I don’t think they had a single profitable day.

    The founders in another company I worked for both invested €5k each into their venture, and were profitable from day one.


    What struck me was how the first company didn’t care or think for a second about the people using their platform. They called those folks “users” even though no value was offered and no-one ever “used” the platform. They should have called them signups.

    Their real customers were the investors, and their end goal was to sell their business to one of the big tech companies.


    The other company made money shuffling electrons about and not adding any real value either. I learned a lot there, especially about direct response and “daily trading” as we called it.


    One of my biggest takeaways from that experience was that phrase “profitable from day one”.

    I personally would like to grow businesses where I can get money from clients and be profitable from day one.

    If I ever get funding it will be after I’ve proved I can turn $1 into $3, and it won’t be “startup” funding. It would be to grow faster.

    Sure, it will restrict the type of businesses I can start, but I also like the idea of product-founder fit:

    Start businesses that make sense for YOU to start at this moment in time.

    Maybe even consider only starting something where you can make a sale in the next 7 days?

    E.g. If you need €100k to start that business and don’t have it, then start something else and generate that €100k?


    Anyway, just my two cents.
     
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  10. LittleWolfie
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    that was my point behind the lawyer don't invest millions, drip feed it so the startup is hungry even if the founders is not.

    That's a viable strategy, if both founders on the same page. Atlassian CEO could find the company but couldn't do the tech and didn't have a tech cofounder, so he paid a ramen salary plus 10% equity to employ someone. That works too, cofounders don't have to invest equal amounts, bit equity should reflect that, cofounders can be paid too. That gives you a much wider range of options of whom to.work with .

    Yup I agree with all that. Profitable from day 1 means your runway is essentially infinite,.Though I doubt you are. You should be including salaries in that calc too, because otherwise your action faking. Business don't rely on free labour. Sure you can reinvest for later but that's not the same thing.

    €100k is a common early stage number so seems sensible target number initally.

    Though probably better to define in months of runway than anything else.

    If you do something else to generate the €100k, then invest that, the start up makes €100, day one it is not profitable it has €100k of liabiltes still..your the investor now.
     
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  11. Andy Black
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    I have no target investment amount. Getting investment isn’t even on my radar.

    It would not only be a complete distraction for me to be courting potential investors instead of courting potential customers, but it would likely get me to build the wrong product (because my customers are now investors).

    My current focus is 100% on acquiring and serving paying customers of my products/services, and growing using the revenue.

    Maybe on a third or fourth rodeo I’ll do things differently, but anything other than customer focus is a distraction for me now.


    I don’t if others agree, but if you’re just starting out then I’d suggest picking businesses that don’t need a lot of capital to get started, and pick businesses where it’s quick to make a sale. Then grow from there.
     
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  12. LittleWolfie
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    LittleWolfie Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    Investors start coming in because people don't have the little capital. It takes money to make money. Though investors can be them form income through their job or their parents providing a roof over their heads and so on.
     
  13. Andy Black
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    I don’t subscribe to “it takes money to make money.”

    I prefer “Add value. Get paid.”
     
  14. LittleWolfie
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    Okay, if you add value to 0, the end result is still 0. Add value, only works to the valueless thing. Money can be one cent in this case.

    I'm being rather mathematical about it, when people say no money they don't literally mean They have none,you need some to buy a phone to post here. If you have one cent then you have some Money.

    You can also be asset rich and cash poor, so you don't have the money, but you have assets.


    Those African farmers on a dollar a day still have well a dollar.

    Anybody with literally No money (inc assets) is probably dead.

    Your truth doesn't change mine. I'm betting you didn't count money you spent on gas,rent,that your parents spent on teaching you to talk (that was an investment in your future) what about all the shots you had? Would you have added value if you had died of TB at 6 because your family couldn't afford the shots?

    It is standing on top of giants
    If you got the book, that changed your mind set. Well did you get it from the library or did you buy it.

    I bet I can find a place where you spent money in every opportunity in which you added value and extracted money, because if I couldn't then everyone would do that.
     
  15. Scot
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    The problem is, everyone starting the journey into entrepreneurship thinks giving up equity for capital is a bad idea.

    Until you realize that you could really use an investor...

    6 months ago if you asked me about investors, I’d have told you I would never need them. But now, I’m actively courting several. It all depends on what the business needs, not what you want.
     
  16. Vigilante
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    Would you rather have 51% of $20,000,000

    or 100%

    of $1,000,000?
     
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  17. LittleWolfie
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    Those all pretty smart guys, I wonder if they chose niches that they thought they could bankroll and didn't need investors for on purpose. Perhaps they pivoted away from a model when they saw the need for investors looming.

    Either answer is fine, though. Do you want control or do you want to be rich.
     
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  18. Vigilante
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    You have control in both scenarios.
     
  19. jpn
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    Why not both? Presenting it as an "Or" statement implies that you cannot have both.

    Perfect control is an illusion, you will always have clients, employees, partners that influence and limit the decisions you can make. If interests are aligned, the limitations that clients and partners place on your "control" will be irrelevant.
     
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    Just playing devil's advocate -- while you're most likely right that the $20M business is more attractive, I can certainly imagine situations where the 100% of $1M is better positioned.

    The questions I would ask are:

    - How much cash is each business throwing off?
    - Besides cash, what is the 49% partner providing to the company?
    - How liquid is the business (can you easily sell it for the current valuation)?
    - What is the earnings multiple that generated the valuation?
    - What are similar businesses in the industry worth (closer to $1M or closer to $20M)?
    - Could you easily grow the business to the point that you could get the same $20M at a higher valuation (lower equity offering) in the near term?

    The most important factor is lifestyle. Would you be much happier having full control of a smaller business or would you be much happier having a larger business where you share control?

    Again, you're mostly likely right...but it's always worth considering everything...
     
  21. LittleWolfie
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    I butchered the original quote , it was would you rather be rich or be king.

    You can give equity to employees and retain kingship in a way you can't with investors.

    Sure you might have both, but this was I think I'm venture hacks bible. Your opinion might change form venture to venture or month to month.

    It's a lot easier to fire clients and employees than investors,cofounders and maybe partners depending on how it's structure than to fire investors. Just Google partners on the forum here.
     
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  22. Scot
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    And that’s the big distinction. As @LittleWolfie has mentioned in his intro thread, he doesn’t want a big exit or $10m in the bank. For him, 100% control of a $1m business is ideal.

    However, I plan on a 5-7 exit. I plan on following the MJ model of, build it big and profitable and sell it off to the highest bidder, invest wisely and retire. For me, 51% of $10m is the ideal.

    So, it all comes down onto what your endgame is.
     
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