I met recently with an entrepreneur who had a patent on a product that had incredible market potential. She had been able to bootstrap the company and get it off the ground, working with several suppliers but the demands required more capital to satisfy the orders.
Her first inclination was to go and raise some angel capital, and she was successful at pulling in an investor. But it cost her over 50 percent in equity, and because she was no longer the majority shareholder, she was unable to make decisions solely for the benefit of the product and the company.
And even worse, they were now making decisions based on recouping the money that had been poured into the product, as opposed to what made sense to grow their market share.
When I met with this entrepreneur and the investor, I was really taken with the potential that the product had no problem extending more credit.
The problem is that had the entrepreneur come to us first, before raising capital, we probably could have worked out a solution to extend credit based the receivables that were already created to meet the demand of the current suppliers–and we could have done that with no dilution on the part of the entrepreneur.
Unfortunately, this is not an isolated incident, and I think that part of the problem is that we’re taught to automatically search for investors when we need capital. Credit the business schools for that, but I think that entrepreneurs often don’t realize the wealth of alternative capital available to them.
If you’ve got some traction as an entrepreneur, and you need cash to make it work, I invite you investigate some other options, and gain some advice from other entrepreneurs before diluting your share of the company.