We’ve been through several top-tier accelerators – Techstars, 500 Startups, MassChallenge – and the takeaway from each was the same. If we do everything exactly right then eventually some venture capitalist will take an interest in us and provide the funding we need. That is the story we’ve been told and it is a story that’s been born out a thousand times in Silicon Valley:
If we do everything right, stick to the script, pitch the right pitch, meet the right people and impress them in exactly the right way…we’ll get funding.
In the meantime, our company is expected to run on fumes and if the company runs out of funding then it wasn’t meant to be. I don’t know how many startups die while waiting for their white knight investor to show up, but I suspect it is a majority. A majority of startups fail because they play by the “rules”.
We’re supposed to be super secret with our technology, instead we publish the source code. We’re supposed to develop our product behind closed doors then launch it to public fanfare. Instead we do bi-weekly releases and incrementally improve the product. We were supposed to avoid equity crowdfunding, instead we raised a $350,000 Angel Round and a $2,000,000 Series Seed with the help of Crowdfunder.com.
One of the other rules we’ve been told to play by is “keep the number of investors on to a minimum, otherwise you’ll spook ‘real’ investors”.
Setting aside the fact that small investors are real investors. This argument is baseless.
First off, an investor who gets excited about the company’s product and traction won’t care at all about the number of investors on the cap table. Venture capital investors who get excited are willing to overlook much bigger problems. They overlook things like the toxic culture of misogyny and abuse at Uber or the prolonged “stealth modes” of companies like Magic Leap. A pesky little thing like a longer than normal cap table won’t cause an excited investor to bat an eyelash.
In fairness, some venture investors may use it as an excuse not to invest, but if they didn’t have that excuse they’d think of another. Investors have a thousand excuses not to invest. They say things like “we don’t focus on your region”, or “we can’t get our minds around the value proposition”, or “we are concerned about < insert competitor here >”. All of these statements mean the same thing “we don’t like your company” or “we don’t like you” or “I don’t understand your business and don’t care to.”
So if there is no legitimate downside to having 1,000 investors on the cap table, what is the upside?
First off, each investor is an ambassador for the company. Early investors in your company are your cheerleaders. If you’re a business to consumer (B2C) company they are probably customers. They tell their friends about your company, preach the gospel of your products and keep a sharp eye out for competitors and relevant media. I can’t tell you how many times I’ve had an investor send me an article about my industry that I’d otherwise have missed.
These investors are also likely to become follow-on investors in the future. If you do what you say you’re going to do and your market predictions turn out to be true, existing investors will double down and bring in their friends and family.
Finally, they broaden your network. Each investor has a network of friends, family, and colleagues who they can provide introductions to. By increasing the number of investors in your network you make it that much more likely that when you need an introduction to a potential customer or supplier, someone with a stake in our company will be able to provide it.
So if you’re a company that has a great product, an excellent strategic position, and a community, who communicates well and can succeed at crowdfunding, I encourage you to give it a shot. Don’t be scared by the number of investors on your cap table or the perception that small investors aren’t ‘real’ investors. Real investors write checks. If they are offering to invest in your company and participate in your journey, accept them with open arms.
You’ll be glad you did.