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Top 10 Ways Investors Hurt Startups, Invention : Page 2

Sure, software entrepreneurs need investment capital, but disadvantages also loom when dealing with dogmatic investors.


5) Company gets directed toward receiving investment rather than becoming a solid company

There is a long-standing trap for entrepreneurs where the goal is to get an alpha product out, get written about in tech publications, and get funded. If I started a company today, I would phrase this differently to something like "pick a direction where the company has a chance to stand financially on its own, has a viral component about it (something people want to link to and recommend to others), and solves some critical need or problem. Of course, I am likely missing something, but the essence of my direction is present.

6) Investors are top of the food chain, but they need to just be a tool for entrepreneurs

One not-talked-about but hugely important job of an investor is PR. Yes, public relations. In public they are all charming, all good brilliant guys who just want to help entrepreneurs. Maybe some do, but most must make themselves known in order to attract the largest number of pitches as they possibly can. Most pitches are bad and an investor needs to see many to find a few of quality which match their own vision of the business landscape moving forward. Therefore while the entrepreneurs are busy making companies, the investors are working hard on PR so that the entrepreneurs come to them, and thus the hierarchy is made: many entrepreneurs come for money to the investors and investors have visibility and control.

But investors would be nowhere without entrepreneurs. The CEOs need to rely less on investors and focus on building solid businesses which make life better for someone out there. Entrepreneurs will only succeed if they focus all their energy on the one goal of making a good company. And if they do, hilariously enough, investors will come to them.

7) Negative energy from rejection, meetings with unpleasant investors

Remember it's a sales pipeline so looking for investment you get rejected quite a bit, and are told that someone else does not see a future in what you are doing. In all honesty, even after pep talks suggesting not to take the rejection personally, wouldn't that kind of rejection dent someone's confidence at least a little bit? This negative energy can really demolish a start-up. Do the investors feel bad? Maybe for 3 minutes, if they ever learn that your startup is dead and why. But you will remember that your labor of love lost momentum or partners because they lost faith after rejection. It is much better to surround yourself with people who are not afraid and have the same convictions as you do, and see the same goal as achievable. There may be some delusion, and some of it is even necessary for entrepreneurs. But in this game, you must have the confidence if you are to succeed.

8) Too many dumb, low-quality investors who detract from the business after funding it

The Internet is a fun space, and many people who have made money elsewhere, want to get in on the game. They don't really know better, and throw 20-100k into some startup which tells them about how hi-tech and cool they will be; and Google better watch out, or buy them soon. The people who make such investments are known as "dumb money." This is not because these people are dumb. Actually they are often quite brilliant because they are already successful in other fields. But they are just not savvy in the Web space. And thus they throw cash, have lots of patience for 2-6 months, and then want results because the start-up blew through all their cash by then.

Worse yet is that these people also have many rich friends who also want to invest in the next Google. After a while there is a bunch of these guys directing things and forcing the CEO to panic and do what is necessary to please them, instead of focusing on building a solid business.

It is sometimes even worse with VC firms which are companies that are really good at calling rich investors and saying "hey, why don't you become a limited partner with our fund, and we'll multiply your money for you." They are just OK at screening for good companies into which they'll put the money they raised. Finally they are not at all prepared to do things like assisting the company or providing advice or connections that makes it run better.

9) Most want control but really have only second-hand, theoretical knowledge

Investors are often people who have been successful at building a company in the past and in a different business landscape, and are now "graduated" into investing in others who have more current view of "the things on the ground" than they do. That is fine, but many investors have big egos, and do not readily admit that they have just a view of things rather than the all-encompassing and correct view, which many of them believe they have. Furthermore, they can be easily if the entrepreneur does not agree with them.

It is good if the investor-entrepreneur relationship is collaborative in nature, but the investors who think they know better than the entrepreneur can damage the startup by forcing it to go in a direction that is maybe not the best for it as a company. In fact, because investors tend to fund many companies, they sometimes have strategic interest in a certain direction for the company whereas that direction may not be in the company's best interest.

Additionally, when the entrepreneur has control, she is less under the gun in regard to making mistakes. All entrepreneurs will make mistakes. Some entrepreneurs will make very many mistakes before they succeed. In the end they might get it right or they may not and their project will die. When an investor comes in, it often puts an automatic ticking clock on the lifetime of the founding team as the acting executive team. This is something many entrepreneurs have signed up for in the past only to regret when they learned about the danger of giving up control from experiencing the bad consequence.

Unfortunately, it is rare that a new person saves the company. Many investors are deluded enough to think that they add value by kicking out the founders and replacing them with MBA's or some "suit" who will just collect a salary from them until he fumbles around and gets kicked out as well.

10) Misleading notions of success

Most people think that raising an investment is a success in and of itself. Surely, the "big" investors put lots of money in you and believe in your ideas, and you have a chance to hire out a team, and are on your way to success. In reality it may even be a small failure. Raising investment is a lottery. Some people get lucky. While having money in a bank account is nice, it is sometimes damaging as it gives a false sense of security and causes the entrepreneur to relax and cause an overall slowing of iteration and productivity.

Alex Genadinik is the founder of San Francisco Hiking Community and a Startup Consultancy. Please say hello and continue the conversation on this topic on Twitter @genadinik
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