Q&A: Which Money Comes First — The Founder’s or the Investors'?

Should I invest my personal savings in a startup before I approach investors? I’ve heard investors require founders to have cash investments in their companies. But if I can’t raise extra funds from investors, I’ll lose all my savings. What’s your advice?

Sometimes the problems that cause startup entrepreneurs the most angst have the easiest answers. Fortunately, your question is one of them.

The primary reason why investors ultimately will or will not invest in your company has nothing to do with how much money you personally invest. Other factors are far more influential.

Angel and venture capital investors will first focus on the viability of your business plan, the anticipated speed of revenue and earning growth, projected profit margins, customer demand for your company’s products or services, your management team, and the strength of your competitors.

Of course, investors will evaluate how they will likely earn a profit on their invested funds. Will other corporations or competitors want to buy your business? Will they pay a premium to own your technology, cash flow generation, customer relationships or brand? Or will your company’s operations be so financially successful that other investors will step forward to buy out the company at a premium price?

After you meet investors’ criteria for business viability and investment viability, then it might be useful to offer to invest “alongside” new investors on the same negotiated deal terms. Then your equity stake would include your founder’s shares, which are allocated to you at the time of legal business formation, plus shares received as part of the proposed private placement funding.

My strong recommendation is for you to first present your business plan to investors. Listen closely to their feedback and demonstrate a willingness to reduce the perceived risks of your startup through partnerships and other strategic alliances. Like you, investors won’t want to write checks until they are convinced they can get their money back with a profit.