Ask HN: Why seek seed funding/Investors?

[cd34]

A brief backgrounder:

I've been self employed since the late 80s and have run multiple companies. None have ever exited/sold. More often I transitioned into a different market -- from PC Sales to PC Repair to Network Installation, building ISPs, arguably the first DSL deployments for a non-Bell entity, wiring buildings with shared Internet before it was popular and over to web hosting.

During the DSL deployment, we did an investment pitch, but, couldn't answer one question - How much money do you need? We had prepared our pitch but didn't expect that question to be asked at the meeting. It was profitable enough at the time that we really didn't need cash - those investors approached us.

I pitched a business plan I wrote for a friend, had lunch at Capitol Grill with the investor and my friend and watched the investor write a check on the spot. After the company was formed, I was ousted. The investor called me at home, offered to fly me to meet him for dinner because he thought I was the driving force behind the company getting where it needed to go and without me, he felt his investment would be lost. The company still hasn't delivered on the business plan I wrote in '98 which would have been like Pandora for Independent Artists.

The question I ask is this:

Why do I need investors?

I see everyone clamoring to get seed funding to build this or that startup, but so few actually have a revenue plan in mind. Since I can self fund, what benefit do I have giving away part of my company? Since I come from a 'doer' background, if it looks like it will work, and will be profitable, I do it. If I can't figure out a revenue model, I don't do it.

An investor won't magically figure out a revenue model for an idea. All they are doing is providing runway/development funds to deploy more quickly to get the next round of funding so that they can exit at some point. It is in an investor's best interest to be able to direct a company they funded to the next level of investment, and, to make sure the chosen team can get there.

Why should I take a cash infusion to give up a piece of my company so that later I can take a larger cash infusion and give up another piece of my company? The odds that the investment will make the company magnitudes richer seem slim.

I have two ideas in mind - one where there is a sole competitor in a space I feel is greatly underserved and extremely profitable based on the current competitor's pricing. There has been recent demand and inquiries for alternatives to that product. With today's technology, I believe I could knock out a working demo in a month and could start selling it. I've got the resources to build it, deploy the product, have a local testbed, etc. With the current expected profit margin, it becomes self-sustaining very quickly. My best salesperson is my competitor. I own the existing product and I have dealt with its assumptions and problems long enough that I know what it would take to fix it. The current product ignores IPv6 and they have stated that it isn't on the drawing board. The product absolutely needs to support IPv6 due to a few issues.

The other idea is a pure acquisition play -- develop the app and have some company purchase it. A year ago when I started working on it, I ran into technical limitations which Google has addressed in recent versions of Android and phone manufacturers are starting to produce the hardware that makes the idea functional. A client spoke with a few Fortune 500 CEOs and is convinced that their company could sell and market the app.

Again though, why do I need investors?

Making another multi-million dollar company won't be substantially affected by a cash infusion. An investor might bring the possibility of an acquisition, but, I believe the product will have four large networking companies interested enough to open dialog.

In short, why are YOU looking for funding rather than just doing it? Every business I've built has had to solve a few needs. It had to be profitable enough for me to be able to afford to live, pay for house, car, family, food, entertainment, etc. That doesn't mean I sat around waiting for someone to open a checkbook before I started working on an idea. Ideas were ranked on a few metrics, and, handled in an order that seemed to make sense. Not every idea of mine has paid off and I've had some really lean years, but, I've never entertained the thought of an investor buying a portion of the company without wondering what he and I would get out of it.

One potential thought was bringing in an investor once I had an idea that scaled. I.e. it takes $x to do Y, with 4x I can do 6Y. However, a cash investment only alters the time to reach 6Y. Even if it was a substantial investment, I don't believe it would shorten the time by an order of magnitude.

As an aside, I was at a startup networking event and had three people approach me with funding offers while a dozen other startups were begging for funding. To my knowledge, none had any idea what the concept was, I had never shown interest in getting investment capital, and only briefly mentioned to a few people that I was working on an idea. Four months later I am reminded by one investor that wanted to discuss my idea that they were still interested in investing and I asked 'Why?'. He didn't have an answer.

Why should I take someone else's money?

As a side note, I was unable to post this as a link on Google+, it instantly responded that the site wasn't available.

[lacker]

For you it sounds like a great deal to take someone else's money. You say that you have run multiple companies that did not exit or sell. So stock in your past companies has always ended up being worth zero dollars. It would always have been a good deal for you, in retrospect, if you had sold some stock in your past companies. You don't have to give up any control for an angel investment nowadays, so what's the downside?

Take some investment, if you can, and use that money to hire people and get going faster.

[cd34 → lacker]

Taking cash from an investor isn't free - investors want some return on their investment. My companies never really exited, I just pivoted into areas that I found more interesting/profitable.

If I had sold stock, I wouldn't have been able to keep 100% of the profits.

Angel investments are not free cash, there is an expectation that the idea will work and provide a return on investment.

[DonWh]

Why? Because this is a seed funding site. It's a similar philosophy to buying into a franchise. The franchisor does a lot of the work for you and tell you exactly what to do. Most people these days tend to not want to think so they prefer that others do their thinking for them. They'll justify their decisions saying it's a solid working model (franchise) or they have access to greater funding/mentoring (seed funding) but it's all the same.

[stonlyb]

The right investor becomes a partner from which you can leverage their knowledge, experience, and network. You may not need them as an investor to access these resources but to propose that you have plenty of cash, knowledge, experience, or network to make your company as successful as possible would be a pretty outrageous statement.

[code4pay]

I have an idea and I would like to work on it full time but I have a family to support. The idea will not make money until it reaches a critical mass of users. If I got funding it would allow me to bridge that gap. That is the reason I would seek funding.

[diolpah]

Being the cofounder of a reasonably successful bootstrapped company, I mostly agree with you, and I believe that in bubble environments such as the current one, funding has become an end unto itself.

However, sometimes there are circumstances in which the business is better served by accelerating growth or product development, and sometimes the best way to accomplish that is to bring in capital, advisers, and networks that you normally don't have access to.

There's also the case, commonly seen outside the web/mobile/social space, in which the capital requirements to produce a working demo are far in excess of what you have in your etrade account. Think nanotech, biotech, solar, telecom.