Should I take $5m as an early-stage investment?

This article was written by Evan Larbi, who runs the strategy practice Studio Junction. His focus is on creating compelling brands for startups. He works with companies on their brand voice, business vision, and products. If you're a founder and are looking for brand strategy advice, we highly recommend dropping Evan a line at hello@studiojunction.io.

Decisions

Building a company comes with a pipeline of decisions and choices. That of taking a sizeable investment would seem to be a simple one. Why wouldn’t you? Especially in times of uncertainty. Or even, why would you invent reasons not to take several million that could accelerate your business?

In working with founders on business and brand strategy, these apparently simple decisions often have huge consequences. Taking investment, knowing how much, when, and from whom, will direct the course of your company – and can determine its success – as much as whom you hire, and how you gain customers. Over a couple of posts we’re going to look at, first, whether to take the money, and second, what to do with it.  

Should you take $5m? The short answer is: probably but it depends. The question touches on several business challenges.

The problem with money

The first tricky issue is the size of investment. For that $5m, read any large sum of investment. It could be $2m; it could be $50m. It brings with it massive presumptions of success: from the investors, the internal team, partners, and yes, customers too. Investors in particular, will most likely want to see results – often in the form of growth – quickly.

The broader ‘community’ of companies and competitors in your sector will take notice; as will their own investors who won’t want to sit on their hands as your company gears up to advance.

Grabbing your attention

The other problem with money is that it can distort your focus. You can become blinkered to drive up user numbers without paying enough attention to the product; you can hire intensely without thinking enough about the customers or product; you can throw yourself into a features arms race; or you can get onto the treadmill of raising more money than the previous round; and so on. There are so many possible avenues that won’t necessarily lead to the company succeeding.

The point here is that investment is a catalyst: it forces you to take action. Setting out the time to find your focus in this is crucial.

Where the money comes from

People often talk about smart vs dumb money, a phrase I’ve never been comfortable with for a host of reasons, including the suggestion that these are binary choices. Investment can come in several forms. Angel, VC, debt, friends and family – and there are many different kinds within these categories. (As an aside, if you’re able to raise $5m from friends and family, you’re far from having problems finding investment.)

The fact is there are always expectations within these different forms of investment. What level of control or influence does the investor get with that money? Will the money bring you investors who can help you grow your business? What non-financial benefits (or drawbacks) are you getting alongside that money? It could be operational help, credibility with customers, strategic advice, a kick that you need. Or maybe it’s micromanaging and even a reporting structure you’re not capable of handling.

A question to ask is whether the investors lining up to offer you that cash align with your goals. Do they say that they believe in your goals or do they show it?

Can you do without it?

Many companies are able to succeed without taking investment. Can you grow the business organically, that is by driving up revenue to the point that it can sustain itself? The challenge here is often that your competitors might well have had a massive cash injection, which is propelling them forward. (This is an excellent example of a self-funded company getting crushed by a better-funded competitor.) Ask yourself whether you can grow the business and compete.

It’s also important to know what you want from the business in the long term. This can mean setting yourself up so you’re in a stronger position with investors. The question ‘Should I take $5m?’ can be better reformulated as ‘When should I take $5m?’, the answer to which is knowing for the most what you’re going to do with it. Plans can change over time but you must have a plan at the outset.

But wait… $5m is a lot of cash.

$5m is a lot of money in any terms. It’s an eye-watering amount. Yet a start-up can easily burn through that. I’ve seen companies go through multiples of that sum in an astonishingly short time. $5m is a lot of money but can be little investment. Creating a thriving tech company, for example, usually demands a lot more than that. You have to figure out how much investment you need to achieve your goals given how your company is growing, what you’re building, how you’re winning customers, the turns in the market.

The people around you

Can you put together a talented team that is capable of delivering a service or product that meets that amount of investment? Think about all levels of the organisation. When people know that you’ve attracted a large level of investment they come running: these might be consultants, they might be other investors. Some will give you invaluable support that will help you progress and build a strong team; others will give you advice that gets you nowhere. Knowing how to spot the difference is essential.

What outcome do you want?

An investment – whether it’s $5m or $50k – is an accelerant, and should be seen as such. It’s about getting your company to a later stage more quickly. Sometimes that accelerant is well timed and of the right value, other times it burns you out rather than propelling you forwards. In deciding whether to take it, consider your goals, your ways of working, what you want from the business. How does an investment sit within that, and where do you want it to take you?

This article was written by Evan Larbi, who runs the strategy practice Studio Junction. His focus is on creating compelling brands for startups. He works with companies on their brand voice, business vision, and products. If you're a founder and are looking for brand strategy advice, we highly recommend dropping Evan a line at hello@studiojunction.io.

Image credits

– Money image by Sally Jermain.
– Arguing image by Mohamed Hassan.
– Graph by PublicDomainPictures.
– Fork in the road photo by Pixabay.