Discover more from Prod MBA
Why We Won’t Take Investment
We at Scribe had never spoken about investment as a team, despite working on Scribe, our fledgling business, for 3 months.
Despite still working part-time jobs or taking the odd freelance contracts to fund the business, we never brought up the subject of investment.
I don’t think it had ever crossed our minds to even consider it.
We were so aligned on our vision for our company & for its trajectory that it felt somewhat like a dirty word: ‘investment’.
Last week, however, we, the three founders of our nascent company, Scribe, sat down to discuss our options for financing the business.
Those options consisted of:
Raising venture capital to fund the living costs of the founding team & a few software expenses
Raising <€50k from family & friends to fund us to work full-time on the project for a year or so
Fund ourselves through part-time or temporary work
We very quickly settled on the third option — potentially the harder option — because of our shared vision for our company.
Why Investment Isn’t Part of That Vision
To give you some context:
Scribe is a journaling tool, one to help you write in a distraction-free environment, as well as to gain insights from your writing, on your mood or recurrent themes, for example, through textual analysis.
We have only been going for four months, but already have a very active community online of journalers, as well as a regular group of testers for our app.
Our purpose is to help you become the best version of yourself through journaling, specifically through the greater clarity of thought & therapeutic benefits journaling has consistently been proven to bring.
It’s used by people into self-improvement & -optimisation, as well as those struggling with mental health issues.
And taking on investment would only lead us away from that goal, for reasons I will outline below.
If we took on investment, we would not be fulfilling our purpose, our very reason for starting out. Then what would the point be in any of it?
How Investment, Specifically Venture Capital, Works
Most investors are willing to invest in your company because they see the opportunity of a far greater return on that investment (ten times or more) than a traditional investment, such as investing in a specific stock or on a specific market, for example through an S&P 500 index fund.
They do not invest to gain a 20% or 50% gain on that investment. They invest for a 1000+% gain on that investment.
If they looked for small gains, their economic model would not make sense. That is because startup investment is risky: you are dealing with, in most cases, untested teams, unvalidated problems, unproven solutions in a highly competitive business environment.
They therefore expect most of their investments to fail, leaving one — or maybe two — to cover the return of the entire fund.
Say, for example, I invest €100 in 10 startups. If 9 fail, that’s fine, as long as that last company’s value increases by over 1000%, leaving me a greater return than my initial €1000 investment.
Therefore, when you take on investment to scale your business or your fledgling idea, there is an implicit expectation* that your business will grow, and grow dramatically.
unless explicitly stated otherwise, as you may find an individual investor investing out of philanthropic motives or a selfless desire to help you develop.
And in the early stages of the investment cycle, that pressure will not be too strong. Say you give away around 20% of your equity in exchange for your first round of funding, then the founders still own 80%, a large controlling stake in the company.
What happens, however, after three or four rounds of funding, when you find yourselves with 20% of the company & the investors with 80%?
How does that power dynamic change?
Well, it changes dramatically. Your agenda will no longer be one of value, of providing value to your end customer. It will be an agenda of growth, of market dominance, of short-term profit at the expense of everything else.
Because despite investors having belief in you as founders, and in your team, they still need to pay the bills that year, and they still have a boss, looking for a high return on his fund that year to placate his investors, as well as to attract new investors next year.
The relentless pursuit of short-term profit that tends to come with venture capital investment will cause one of two outcomes:
the bankruptcy or drastic scaling down of your company, due to the high costs of scaling the business without matching it with sufficient growth & profit to secure your next round of funding
the successful exit (sale) of your company after four or five rounds of funding, either as a private sale to a larger company, or through the public sale of shares in your company
And in both cases, the company you end up with will be far from the vision you initially had for it. And if you sell, you will see it gradually worn down by the pressures of the corporate parent that buys it or by the pressures of pleasing public shareholders (e.g. Snap).
Why Does Everyone Take Investment Then?
It may sound like I paint a very alarming, or overly negative picture of the world of venture capital investment.
In some cases, founders take on investment understanding the consequences, but aware that a large tranche of funding is necessary for their specific business & their specific market.
Tesla, for example, initially required a huge amount of funding to build their own cars, as well as to develop their autonomous driving platform, years before it would ever make it’s first dollar.
Yet, I fear that in many cases, founders take on investment for the simple fact that it is the norm in the startup world.
That investment equates business success. That taking on investment is perceived as the only way to acheive business success.
That, in some way, by taking on external investment, it is a way of legitimising the idea behind your business & your business success.
Yet, by focusing on the investor (on pitching to them, on making your business appeal to them), you forget who the core of your business is: your customer.
And by not focusing on your customer, you invetiably end up not serving that customer.
You instead serve the very different interests of that tiny group of investors, who have a very specific, distinct agenda from your customers.
And, at some point, that sets you up to fail.