When Self-Funding Works
A lot of people argue that if you're fortunate enough to have the cash to invest in your own start-up, you shouldn't hesitate. The best way to preserve your equity, that theory goes, is to keep investors out of the picture until you absolutely need them -- and can sell them stock at a much higher price. What's wrong with that strategy? Ask Dave Nelson.
Nelson had been a founder of Apollo Computer; in 1989, when he left to start Fluent Machines, in Framingham, Mass., he put up the first $1 million or so of equity himself. He figured he'd get cracking on the product and, in a year or so, seek some new funding. Why let the venture capitalists into a deal before you needed them? In the back of his mind, Nelson thought he'd be able to double, maybe triple, the valuation.
Unfortunately, the seed investment didn't take the company nearly as far as Nelson had hoped. "We were still about a year away from having a product," he says. So when he approached investors, looking for $3.7 million, they balked at paying a steep premium. In fact, the furthest they were willing to go was exactly what Nelson had originally put in.
The lesson in all this, Nelson says, is that unless you're able to fund a business all the way through a particular phase (to product completion, for example), you may not see much appreciation on your investment. And if you know you can fund it only part way, you may be just as well off bringing in outside money sooner rather than later. "It was an eye-opener," says Nelson, "to discover that the early money I put in was hardly any better than the money investors put in 18 months later." -- Bruce G. Posner* * *