STARTUP

Investors Will Never Fund Your Startup If You Haven’t Done This 1 Thing

If you want to raise money from investors, put some skin in the game first.

Share on
BY Sean Wise - 17 Mar 2019

startup funding

PHOTO CREDIT: Getty Images

There is one thing all investors require you to do before they invest their money into your venture: invest your own money into your venture. This is often called "skin in the game," and it's a key signal for all investors. Skin in the game refers to what the founders have personally committed to the company--what they have at risk if everything goes to zero. This often means financial contributions, but can include things like opportunity costs, foregone salaries, and intellectual property.

One of the best examples of this is Jeff Lawson, who founded San Francisco-based technology company Twilio in March 2008. Venture capital had fallen through as a result of the financial crisis, so he took a leap and put his money, and the money of his friends and family, at risk. Later, Lawson (with his wife's blessing) even sold his wedding presents to continue the evolution of Twilio when funds ran short.

Fast forward to today, and Twilio is worth more than $12 billion and has raised more than $250 million in venture capital from funds including Bessemer Venture Partners, Salesforce Ventures, Amazon, and Lowercase Capital.

Contrast Lawson's story with that of a trust fund baby who pitches investors asking for millions for his pre-market startup, but hasn't put any of his (or his billionaire tech entrepreneur father's) money at risk. It's obvious which of the two founders is truly dedicated to making their vision a reality.

Like most investors, when I look at a startup as an investment opportunity, I look closely at the founders, individually and as a team. If they have no skin in the game, I have no time for them. In my experience, these are the three main reasons investors want founders to have skin in the game:

1. It shows commitment.

If you won't commit, why should I? No skin in the game is historically a very strong negative signal to investors. When a founder asks me to invest before the founding team has, my spider sense starts tingling.

2. It builds the dream.

Today, because the cost to launch a startup has dropped so low (below $5,000 in some cases), investors expect founders to have a minimum viable product and early traction (sales, pre-orders, signups, etc.) by the time they are pitched for investment.

Gust, a service that helps entrepreneurs launch startups, collected data from over 6,000 startups and found that 95 percent of startups that raised money beyond the friends and family round had a product or prototype. In 2019, founders can longer wait to raise external investment to start their venture. Simply walking around with a dream and no internal capability to execute on that dream is a non-starter. If you aren't willing to invest the time, effort, and small amount of capital needed to get there, then I don't believe you will have the internal resilience needed to bring a product to market fit.

3. It mitigates flight risk.

Assurance is the opposite of risk. Investors want to know that you won't bolt when the going gets tough. A founder without skin in the game will be more likely to give up, but a founder who has their money (and their friends' and family's) money invested in the venture is more likely to demonstrate resilience.

In my experience, founders seem to feel less obligation to professional investors when they have a large number of friends and family committed financially. This tends to give me comfort as an investor.

Having no skin in the game is a red flag for many investors, so if you plan on raising money from outside investors and want to improve your chances of fundraising success, invest in your startup beforehand.

 

inc-logo Join Our Newsletter!
The news all entrepreneurs need to know now.

READ MORE

Want To Know How To Handle A Hostile Audience? Watch This Motivational Speaker Do It

Read Next

5 Lessons Entrepreneurs Can Learn from Bruce Lee

Read Next