Influenced by the unbelievable journeys of the biggest technology companies with hundreds of millions of dollars in funding, many first-time entrepreneurs sometimes believe that the job of the entrepreneur is to find an opportunity and focus on execution while the investor is responsible for providing the capital to realize the vision. While this may be true, it is rarely the case at the start of a new venture.
On average, out of 6 million new businesses starting up in the U.S. each year, banks issue only 100 thousand SBA loans, around 70 thousand startups get an angel investment, and fewer than 5 thousand startups get venture capital funding. This makes it a very safe assumption that more than 90% of all new businesses are funded by the founders, at least in the early stages.
In general, startup investors are looking for ventures with potential – interesting ideas based on reality led by competent teams. You, as the founder, are the one person who understands the idea the best, who knows the capabilities of the team the best, and ideally who understands the market and the target customer the best.
Bearing in mind this access to the highest-quality information about the startup, if you as the founder are not willing to invest your own resources in your venture, why should outside investors do so?
The majority of startup investors nowadays are simply not interested in purely theoretical ideas. Most of the time, if you are building a true high-risk startup product, you need to provide some form of proof indicating product-market fit before you can attract experienced startup investors.
Today, even startup incubators supporting starting founders with interesting ideas and visions are looking for some form of validation. You’ll most likely have to develop your first product version by yourself (your early prototype or MVP), and you’ll have to attract your first customers by yourself.
Those facts simply entail that in the beginning, you won’t be able to just manage the project. You’ll also have to be the first investor in your own venture.
In many cases in the very early startup stages, your new business wouldn’t require as much capital as it would in the later growth stages. Partially thanks to the development of no-code technologies and new marketing solutions, developing the first useful version of your product and reaching your first customers could be done for cheaper than ever before. This means that you’ll be able to invest in your own business without breaking the bank.
Moreover, the risks of failure for a startup project are highest in the early stages. Targeting a non-existent consumer need is the biggest startup killer – around 34% of failed startup projects point at lack of market need as the main reason for their failure. If you are willing to bear this risk and to bet on your own ideas and effort, this sends a great message for future investors.
The fact that the founder’s early investment in the form of capital, time, and effort aiming to validate the idea is the one that is exposed to the highest risk means that this investment is also entitled to the highest returns. Consequently, if you treat your startup as an investment, you’ll have a good basis to negotiate better terms in your future fundraising rounds by demanding a higher valuation, i.e. to give up a smaller stake in your company.
Even if the nominal value of the investment that the founder has made in the company is lower, the overall stakes for the founder are higher, which justifies higher returns.
Last but not least, investing your own resources in your startup idea has other intangible benefits. It forces you to treat your project as an investment. It’s a common saying that you need to work ON your business, and not only IN your business, and putting your own money in the project is a great motivator to do so.
You’ll be enticed to make sure you’re not wasting your time and money and you’ll actively think about deploying available resources most optimally in order to maximize your expected return on investment in the long run.
Adopting this mindset would let you shape a project which is much more likely to attract investors in the future. If you require the involvement of an investor in order to build your startup, you may never start. Think about your startup as an investment in which you need to efficiently allocate resources to maximize future returns.
Forbes – Entrepreneurs