Lessons from my own experience
I recall being told by VCs not to invest in my own companies. Investing should be left to professionals (e.g. venture capitalists), founders should focus on building their companies. I’m sure that there is some self-serving in this advice as VCs want to buy the biggest slice of a company they believe will be successful. If founders self-finance they may have less need for VC funds. On the other hand, the advice from angels was just the opposite. They want to see founders’ skin in the game. They are suspicious if you don’t invest in your own company. “Why should we invest in something you won’t invest in?”
I managed to get through my first four startups with only VC funding, no self-funding, no angels. But once I dropped out of the major leagues, which I did after leaving
Mobile-Mind and went into the minors to work on a mobile shopping app that was funded mainly by my partner. He did inveigle me into putting a small amount into the venture, which I ended up losing, as the world wasn’t ready for a mobile shopping app in 2002, duh!
Unfortunately, I did not learn my lesson with SmartWorlds and cajoled a friend and former successful VC into us self-funding a startup based on his idea. This was a great idea, it became Stories for Instagram. But we didn’t have the Instagram platform to launch this early version of Stories, so like the mobile shopping app, we belly flopped. But my biploarity had its switch flipped still in manic mode, so once again I tried to start a company with my own idea, as I did with Throughline. While we had a modicum of success with Throughline, our investors lost confidence in us and were afraid of our entrenched competitor, so we shut down the company.
I should have learned that my role in the ecosystem of startups was to help visionary founders build their companies – I have no sense for what’s commercial, so the visions I had for Throughline and PopSleuth never gained traction. But fool that I was I put my own money into PopSleuth, which was created to help solve my own personal problem: how could I keep up with the latest releases and appearances by my favorite creatives -writers, directors, actors, authors, and musicians? I believed in the idea that successful entrepreneurs built products to solve their own problems, like Dan Bricklin who invented VisiCalc to save himself the labor of trying to revise financial models using just a calculator in his Harvard Business School classes. It is true that many successful startups were founded to solve the founder’s problem, that doesn’t mean you will be successful just because you are creating a product to solve your own problem.
So after being burned twice by investing in my own startup ideas, I’ve gone to the sidelines to coach other entrepreneurs. And often the subject of self-funding or funding via friends and family come up.
I advise them founders that:
1. self-funding should be a last resort and a bridge to either shipping your product or bringing in outside investment.
2. You should not invest more than you or your friends and family can afford to lose.
3. Only if you plan to raise angel capital will self-investment be a plus, otherwise it won’t help you gain institutional investment.
4. If you do bring in substantial outside investment odds are you will get very diluted by the time you exit the venture, so what good did that self-investment do? (see number one).
The best capital is not your own capital, it is not investor capital, it is customer capital. Bootstrapping to build your product is the best way to go. Even if customer revenues are slow to take off your venture will be far more investable with a complete product and some customer revenue.
So basically there are only two pros to investing in your own startup: it acts as bridge to outside capital or customer revenue or it helps persuade an angel or angel group to invest. Unless you have made substantial money from a previous startup or have inherited wealth, your investment probably won’t represent meaningful equity after a several rounds of investment. You would have to continue to invest your own money in these rounds to maintain your equity share. I don’t know anyone who has done that.
Blood, yes. Sweat, yes. Tears, yes. Your own money, in most cases, no. Bringing in outside money is real validation you have a viable venture; investing your own money validates nothing.
Lessons from Jean-Louis Gassée, former VP of Software Development at Apple, and founder of Be Computing
For another tale of investing your own money, read Jean-Louis Gassée’s Monday Note: 50 Years In Tech. Part 16: Be Fundraising Misadventures. JLG paints a very accurate picture of the difference between professional investors and amateurs, i.e. founders like himself. You have to be a fan of the history of computing like me to read all 16+ parts of JLG’s history. But I do highly recommend part 16 for anyone contemplating investing their own capital in their venture. Here’s a few tidbits:
I wanted to keep Be out of the vulture capitalists’ talons, so to fund the company in its early years, I put my own money into the venture. That was the first of a series of fundraising mistakes.
…I thought I was doing the right thing, but, as I found out, professional investors in the US are suspicious of self-funding. They prefer a clean division of labor: The entrepreneur provides the idea, the psychic energy, the leadership; the pros supply the financial fuel.
When my personal coffers began to run low, I accepted investment money from friends and business acquaintances.
JLG’s note does a good job of listing what he calls the Laws of Professional Venture Investing. If you don’t know them, I’d advise you learn them before you start your venture.