Entrepreneurs must be willing to swap equity for high-risk capital
By Scott Meacham
Copyright © 2016, The Oklahoma Publishing Company
This is the third column in my series about things that can and do lead entrepreneurs to fail.
Technical founders being unwilling to accept the advice and experience they need to carry their ventures forward was No. 1. Founders who are so enamored with their product that they believe they are a proxy for their customers and ignore the mirror of the marketplace was No. 2.
No. 3 on my short list of things that cause startups to fail is not having enough capital. I don’t mean “not having enough capital” in the way you might expect, at least not in the way that I do when I write about the dearth of seed-stage capital.
With only about 2 percent of all VC funds going to seed-stage deals in the first place, and most of that in Silicon Valley and to a handful of other areas across the country, there is simply not enough seed capital in play. That’s a challenge, but not the whole picture.
In the aggregate, access to capital is sort of out of entrepreneurs’ control; it falls to states and public/private partnerships like i2E to work to expand the continuum. But there is another side to lack of capital, and that’s when companies fail because a founder is not willing to accept capital at the cost of dilution.
Bootstrapping (financing an early stage business through sales and revenue) is a great way to start in some circumstances, to build customer experience, and to position a new business with potential investors. However, that’s not the whole story.
Oftentimes it’s a mistake to put too much weight and time on first sales. Startups waste a lot of time hand-holding first customers. Early adopters tend to be firms with the biggest problems or the companies more willing to take risk on a new solution from an untested vendor. Meanwhile, competitors with capital to scale may be moving in on the broader market.
To try and bootstrap past the window of opportunity for seed or early stage equity investment while competitors are moving or being educated by the bootstrapping company’s nominal progress because founders don’t want to give up a significant percentage of ownership (sometimes as much as 50 percent) is not a recipe for success.
Founders need capital to scale quickly in competitive markets. When investors are interested enough in a startup to put in that much-needed, high-risk capital, they deserve a larger share of equity to compensate them for the risk they are assuming. This is where companies are the most risky to investors. This is the aptly named “valley of death.”
Windows of opportunity close quickly. Competition is swift. I’ve seen founders get their fingers smashed as others reach a market first or expanded to grab share and dominate.
Scott Meacham is president and CEO of i2E Inc., a nonprofit corporation that mentors many of the state’s technology-based startup companies. i2E receives state support from the Oklahoma Center for the Advancement of Science and Technology and is an integral part of Oklahoma’s Innovation Model. Contact Meacham at i2E_Comments@i2E.org.