Why I turned down investor money for my startup

By Alexander Torrenegra , written on April 24, 2013

From The News Desk

I’m often asked, “Who are your investors?” and “How much have you raised?”

The answers are: no one and $0. Eyebrows, and perhaps red flags, rise. I’ve actually talked to VCs and had a few offers, but for now have decided not to raise capital. Yes, there is a sense of pride that comes with being an immigrant entrepreneur and being able to say I’ve come this far on my own (with the support of an amazing team, of course). But it’s not just pride or the mythical “American Dream” that keeps me bootstrapping. I’ve got five solid reasons why it’s is not only possible but a logical decision.

We are cash positive. My wife and I founded the first online voice over casting site in  2003. Thanks to a combination of timing, luck, our combined skills and willingness to do whatever it took to make our dreams of owning a business come true, the site was making a profit in six months. A steady stream of income allows us execute our plans without sacrificing speed or quality. I understand that many don’t have this luxury. If, for instance, you or your co-founders can’t code, hiring developers is going to eat a significant amount of your budget (even if you’re not a tech startup, you’re going to need web development).

Still, it’s not impossible to make it on your own. Companies like Valve and GitHub were able to succeed by bootstrapping. If you are in a competitive arena, you may think you need venture capital to beat others to the punch, and that may very well be the case, but remember, lots of money doesn’t always mean faster product development. Money can actually have the opposite effect, affording a feeling of safety that numbs the sense of urgency that comes with having your livelihood on the line each day.

VCs provide good advice, but a well-built board of advisors can provide better advice. Many startups use VCs as way to get expert advice and connections to major players in their target industries. In my case I chose to build an experienced, well-connected board of advisors. I started by identifying my own personal and company’s weak spots and sought experts in areas where we lacked experience or skill.

For example, we didn’t have anyone with a strong sales background. So I brought on someone who did. With a board of advisors, I get their wisdom and connections without losing any control or giving up too much equity in my company. Plus, I get to name drop a little, giving my new company a little more credibility. The trick is to not give too much away and not to expect too much. Good advisors are busy, and while they may initially be very excited about your company, you need to continuously ensure they budget a few hours a month for you.

Besides, venture capital is not the only way to get money. Try funding your company with sales. Oh, I know, I’m a throwback to another era. But get a few customers and treat them like kings, you’d be surprised how far word of mouth from your initial clients can spread. Once you have some cash flow, you can get a business line of credit. This gives you capital to work with without sacrificing any equity. If you don’t qualify for traditional loans, there’s venture debt, which is basically a loan from a venture capitalist with the right to purchase equity or stock as collateral.

Then there’s crowdfunding sites like Kickstarter and Indiegogo. If you get a website like Reddit or Hacker News supporting your project, raising the money could come more easily than you think. You can also raise friends and family money money, but that could come with some consequences -- and tears, especially on holidays. Even though you may be close, it’s best to put everything in writing and be a little formal about the process so everyone knows exactly what’s expected and when. Even if the money is intended as a “gift,” get it in writing.

Need cash just to get started? Start saving. You could personally finance initially and raise capital later, if needed. This will show potential investors you believe in your idea willing to put your finances on the line. You could also take on a business partner who puts up his or her finances, but just make sure you iron out all the details ahead of time in case the relationship dissolves.

Time invested in raising capital is time not invested on improving the product. I’m a product CEO, so I believe the time I invest on product development has the potential for much higher returns than my going to dinners, events, and pitching every VC I can get my face in front of.  “If you build it, they will come” -- hopefully. In my case, I had enough financing to get a minimally viable product out there and knew if I got it right, it would generate sales right away. I did the research. I knew there was interest in the service and had potential clients lined up at the beginning. Not to mention, if you do decide to raise a round later, having an actual working product is more impressive than a Power Point.

Also, keep in mind that there’s no going back after you raise capital. You can divorce your spouse, but you can’t really divorce your investors. You are in a long-term relationship and there’s nothing you can do about it if the relationship sours. If you need to raise money, invest time researching VC firms and finding one that is a good fit for your company. I’ve seen so many new, enthusiastic entrepreneurs give away a ton of equity and control, not realizing until it’s too late that their investors don’t share the same vision for the company.

Now that I’ve said all this, it doesn’t mean that I will not raise capital. The point is that the option will always be there and there’s no reason for me to rush.