Seed Investment Choices Impact Your Company

The other day I read an informative article classifying different ways to fund a new company. The article, Angel, Venture Capital, or Bootstrap? by Ananda Rajamaran provides an excellent explanation of what different funders are searching for. I thought I would augment this article with my experience on how these different investor types impact the company based on actual experience.

For reference, I have been an executive or individual contributor at several VC funded startups, one of which went public. I was at another startup that was entirely angel funded. And finally, both Open Mountain and our development partner Avantica are bootstrapped efforts. We have clients in all 3 categories as well.

Here are my observations:

Venture funded

• Venture funded companies have more knowledgeable and powerful people associated with the company. The board tends to be loaded with people who have deep knowledge and/or wide connections in the industry. The knowledge helps to guide the company while the connections help the company become known.
• Venture funded companies do more faster and spend more faster over time. Even the young companies feel more mature since job offers may be more competitive thanks to the larger bank account. The venture dollars provide for bigger salaries and the name behind the company gives the impression the stock is already more valuable.
• The one down side is that venture funded companies have more pressure to have better success faster (not always, but for the most part). The investors are definitely looking for the big hockey stick to show up sooner.
• For clients who have big ideas and a strong possibility for the home run, this is definitely the way to go!

Angel funded

• Angel funded companies can have knowledgeable advisers and boards but some times do not have the big names found in venture companies. This means you get good advice, but you may have to add advisers with connections or have to work harder to become known.
• Your investors may be very good or may just be someone who joined the right startup at the right time. You generally need to be a bit more careful when selecting from your angels who will have active participation within the company.
• Angles often invest for interest along with profit. This takes some of the short term pressure away. If you are self-motivated, which you most certainly are if you are starting a company, this is probably a good thing for you.
• The pressure comes back in terms of cash management. You will most likely have less to start when using angel funding. If you start to run out of cash, you’ll probably need to find new investors. VC’s tend to work harder to preserve their initial investment than angels do.
• In the end, leadership teams from angel funded companies feel more empowered and more in control of their destiny. That’s because they are! But if the company starts to fail, you don’t have the larger institution behind you.

Bootstrap

• The plus side is easy here. You own it all and have complete control. You can make all the decisions because you have not taken any money from anyone.
• Many bootstrap efforts fail because they run out of cash. Sometimes, it is worth it to give a little ownership in the company away for security and help. Plus, with cash, you can hire more people and produce results faster. This means you just might not miss your window of opportunity.

So back to Open Mountain, we’re bootstrapped because services businesses take a long time to grow and require a great deal of effort to carve out their niche’. We wanted to take the time to do it right and without the influence of external investment. That’s not to say we don’t speak with advisers and industry experts. It’s just that, after 20 years in the business, the mission of what we are trying to do is crystallized in our heads and we like marching to that drum beat.

The good news is that we’re over the hump and have healthy and profitable growth. We have found that we can provide better service to our customers because our mission remains controlled by us as defined when we started the company. That may change some day. But for now, I can say bootstrapping the company feels like it was the right choice for us.

That said, if I were starting a product company, I would create a prototype, project some revenues and then definitely start calling every VC I know with knowledge and interest in the market. My experience is that product companies require money and backing to succeed. I recommend the backing of a venture company with strong expertise, funding and passion for the industry where your product will thrive. A key data point is how many portfolio companies they have within the same or similar industries, or with the same or similar business models.

All of these models can work. It’s a matter of defining what you want to do and putting together a plan to get their business. Then, crank up Excel and a budget and that should tell you what type of investment you will need.