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In our last post, we introduced bootstrap funding as a way to launch a product using only your own resources. While bootstrapping may be a good way to begin building a business, sometimes your business may benefit from investor funding. Often called angel investors, individuals who help fund start-ups provide not only necessary capital but often invaluable insight and infrastructure. “Most entrepreneurs initially finance their firms using their own savings but an investment by an angel investor who puts his or her own money directly into a startup, if done at the right time, makes a critical difference to the success of the firm,” writes Jonathan Ortsman at Kauffman.org.
Investor funding generally enables you to get to market faster because you have the resources to pour into market research, beta-testing, development and marketing. You’re also more likely to keep your competitive advantage because you can stay abreast of market trends and match or exceed competitors’ timelines and budgets.
Investor funding can provide you with the infrastructure and staffing to take on a larger number of customers. Instead of wearing dozens of different hats, you can focus on your area of expertise and hire people to take care of the rest. You’ll also have more cash on hand for investment and other growth as well as to take advantage of time-sensitive offers or deals.
Having investor backing also gives you access to a wider network of potential clients and advisors. As Christina Comben of business.com notes, “Angel investors come from a variety of backgrounds and may invest in startups for personal reasons, or because they’re passionate about a particular sector. Startups can gain a lot more than a simple cash injection from the right angel investor, including industry expertise, inside knowledge of customers and competitors, personal network contacts and potential partnerships.” Because their ROI depends on your success, investors are usually more than willing to connect you with the people you need to succeed. If your investor is well-known within your industry, having him or her on board will also significantly boost your credibility.
Angel investors can be particularly useful for a business in the early stages of a start-up or one that has an inexperienced team. As Ortsman writes, “By serving as mentors and advisors and taking an ‘active’ role in growing a company, angels are life-savers when startups pass through the aptly named ‘Valley of Death,’ the critical point when success or failure hangs in the balance.”
(Based on graphic by Jonathan Ortmans located here)
While obtaining outside investments is beneficial for many reasons, it is not without its drawbacks. One of the largest challenges of investor funding is actually finding an investor willing to work with you. Guy Kawasaki says in his article The Art of Bootstrapping, “Someone once told me that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic.” In order to land an investor, you’ll need to do a lot of legwork upfront, like creating a detailed business plan, identifying obstacles and how to overcome them, and divulging personal financial information.
Another challenge of investor funding is giving up much of the control you have over your product’s development. Your goals for growth may not align with your investor’s goals, which will require adjustment. You’ll also have increased pressure to deliver. You may be happy accepting a smaller ROI than your investor, which will require you to put in additional time and energy.
Aaron Skonnard of inc.com cautions businesses about accepting investor funding which “brings peer validation, industry kudos, and much-needed cash flow to a young business. But taken too early, it can also dilute ownership, reduce autonomy, and weaken focus and resourcefulness, so the timing needs to be right.”
Investor funding also requires extensive legal agreements (and accompanying legal fees) to address governance, the timeline for your investor’s departure, and what happens if business doesn’t develop as anticipated.
And, when all’s said and done, you might pour your heart and soul into your business only to find yourself ousted by the very investors you bought on board in the first place. An article at Entrepreneur.com notes that obtaining angel investors carries with it “the risk that your investors will decide that you are the business' greatest obstacle to success, and you could get fired from the company you created.”
Pharmaceutical Industry Considerations
Our specialty at Pharma Acumen is companies that sell their services to large and small biopharmaceutical companies. If you’re developing a new product for the pharmaceutical industry, your decision to seek investor funding requires some additional consideration.
Perhaps the most important consideration is your advisory team. To succeed in offering services to pharmaceutical companies, it’s essential to have trustworthy advisors who can assist with decision-making, provide a sounding board, and share feedback on important aspects of your business. Investors have an intrinsic desire to see your business succeed and are usually more than willing to perform advisory functions.
Have you ever partnered or considered working with an outside investor? What were the plusses and minuses?