Questions

How important is a co-founder when it comes to raising capital?

My company has a great working product, 2.5 yrs of revenue and traction, however I don't have a co-founder, or any employees. In fact, I have set it up so most of my business is outsourced: product fulfillment, customer service, etc. I am currently going through the Founder Institute program in San Diego, and I am looking to raise funding in order to bring on some actual in house employees, and increase my marketing spend. I am at the point where I am looking to begin meeting with investors, however I am just wondering if it would be in my best interest to find a co-founder before I begin these meetings, or just assemble a good team of advisers and then hire key employees after funding? Look forward to hearing back.

9answers

I'm a single founder who was raised angel and venture capital. If your business is compelling enough, you could raise angel funding. But there is little chance you can raise venture funding without a team in-place. It's a negative signal to institutional investors that you haven't been able to lock down a committed team.

That said, depending on the nature of your product and traction, it sounds like you might be past the stage of recruiting a cofounder and more into hiring a great team of employees. The differentiation being less title and more the amount of equity.

It sounds like you are selling a physical product so the question is whether you have built the capacity to scale. If not, the importance of having someone on your team who has done that at scale, even at the angel level of funding, could be helpful if not required.

Happy to do a quick call and give you more contextual advice.


Answered 7 years ago

I've coached a few startups through the strategic planning and fundraising process including both solo founders and co-founders. I also spent some time producing a livestream Internet TV show that interviewed startup founders and investors. This question exemplifies the situation where the answer an entrepreneur gives (or thinks she should give) is misaligned to the question the investor is asking.

Some investors are vocal that multiple founders mitigate risks:

http://blogs.wsj.com/accelerators/2013/07/25/ed-zimmerman-why-i-prefer-to-invest-in-startups-with-multiple-founders/

http://arshadchowdhury.com/1587-how-many-founders-a-startup-should-have/

According to these two authors, some reasons why investors consider solo founders risky include:

-burnout
-model exists for investing in more than one founder and investors like following existing models
-multiple founders might offer complementary skills while solo founders might bring specialized expertise while struggling with other areas of the business

Paul Graham is well-known for famously listing the solo founder as one of the biggest mistakes a startup can make.

http://www.paulgraham.com/startupmistakes.html

Jeff Miller refuted this idea in 2010.

http://talkfast.org/2010/07/06/solo-founders/

Other risks to solo founders include:

-the business will fail if the founder becomes incapacitated
-startups with co-founders may experience more successful exits
-lead investors may find it easier to attract partners if you have a co-founder

These risks are all considerations that are outside your control that investors don't always share with you.

Startups with co-founders face their own set of risks and plenty of examples of failed startups exist to prove that these risks are real:

-visions for the company may not be aligned
-decisions may take longer
-overlapping areas of responsibility may confuse customers, staff, and members of the board of directors

In any event, you need to keep these risks in the back of your mind. Investors certainly have them in the back of theirs.

My advice, all of which is immediately actionable:

1. Spend some time preparing an investor scorecard. Identify what you need in an investor to make your scaling process successful.

2. Research several investors and assign them a score based on your criteria.

3. Look at the portfolios of investors who scored within the 90th percentile of your evaluation process. Is their portfolio of companies comprised mostly of solo or co-founded entrepreneurs?

4. Set up a meeting with these investors right now and be completely transparent where you are.

If you're meeting with an investor who primarily invests in solo founders, let them bring up the topic of a co-founder.

If you're meeting with an investor who primarily invests in companies with co-founders, explain that you're weighing the pros and cons and that you'd like their advice. It's important, though, to make it clear that you don't want to bring on a co-founder for the sake of having one. Rather, you want one that meets the needs of your business.

5. Evaluate the needs of your business. Why is a co-founder critical to the success of your business post-funding? Consultants selling their services on here (including me) can help you out at this stage. You will end up with a needs assessment for your company's management strategy. You might want to move this task up in the process if you're not confident on your ability to be a solo founder post-funding.

6. Ask your target investors if they know anybody who fits the bill. This ask has three main benefits.

First, the best way investors can mitigate risk is by gaining control over key aspects of the operation: allowing them to recommend a co-founder or somebody to help you manage the business gives them more control over the company's destiny.

Second, if you take your prospective investor's recommendations, they label you as "coachable" and you gain their trust. "Coachable" is high on the entrepreneur scorecard for many investors and their trust is invaluable.

Third, they will often recommend somebody in the same space who has successfully managed a venture in the past and can immediately have a positive impact on your business. Research shows that past experience and talent go hand in hand with success.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=909615

In any event, listen to all of the ideas you get from answers to your question here. There are plenty of other viewpoints that fall outside the scope of my answer.

Let me know if you'd like to discuss in more detail. I'm happy to take a call via Clarity.fm and I offer complimentary reviews of business plans for startups in your situation. Feel free to reach out if you'd like some help.

Best of luck,
Sean


Answered 7 years ago

The only reason why a co-founder makes sense is if you are looking to give away sweat equity in lieu of salary.

The business proposition and founder track record matter more than the size of the team. Even worse, a large team has the risk to be perceived as window dressing if not much has been accomplished thus far.

You will inevitably need to find sweat equity partners as it is increasingly difficult to get financing at interesting valuations if you don't have a working product or some indications from the market that your business model works.

If you have an interesting proposition, you should not have issues in finding people that are willing to work for free in exchange for a piece of the action (or funding without having a large team).

https://twitter.com/sergesalager


Answered 6 years ago

After two and a half years, it is a bit of stretch to bring someone in and call them a co-founder! You already have a successful business, so you may claim full credit for that.

What you are really asking is how much should you build out your management team. On that score, you must. If you are pretty much the sole person running the show, then the first thing an investor will ask is: What will happen to my investment if you get run over by a truck? Crap happens, and if you are no longer running the show, who will take over?

If you don't have a person, no one will want to invest. So you should develop a management team that will be able to seamlessly take over should you not be able to continue. It doesn't matter what title you give these people, just make sure you have them.

The second aspect you need to address is growth and scalability. Sure you are doing fine now, but what will it take to increase revenues by 5X or 10X? If you don't have a team in place that can achieve that, then you need to get them.

No one wants to invest in a company unless it is scalable. That is how they achieve a high ROI within a few years. You need a plan to show that you can scale, and that you have the team in place that can do it. Again, it doesn't matter if they are advisors, or VPs, or whatever. The point is that you have to have these people committed to working to achieve that scalability.

If you can't afford to bring them on now, then that's a good reason to raise funds. But at least have those people identified and ready to join.


Answered 4 years ago

Believe or not, a solo founder is never taken positively by the investors. For a good startup you need at least two Co-Founders. And for a great startup, you need a hacker, hipster and hustler. You may read more in my book. Search "Startup Easy" at Amazon.


Answered 2 years ago

co founder will be important in raising capital if his or her financial power or the network he/she becomes equal or exceeding what you have in terms of those things aforementioned otherwise he/she cannot be of great important


Answered a year ago

Your answer lies in an incident that took place on February 18, 2020. This incident will give you an idea as how co-founders can help in raising funds.
Atomico, the venture capital firm set up by Skype ‘s co-founder Niklas Zennstrom, has raised an additional €757 million ($820 million) to back “mission-driven” European tech startups, targetting Series A and beyond. The firm raised the funds from several institutional investors, including pension funds, sovereign wealth funds, banks, family offices, insurance companies, and government-backed entities from all over the world. It also drew support from several founders and early team members from some of Europe’s most well-known tech companies including Adyen, Transferwise, Klarna, Spotify, and Zoopla. The new raise brings Atomico’s total assets under management to a staggering €2.4 billion ($2.7 billion).
Thus, we learn the following methods to raise funds from this above incident:
Prepare Yourself: Fundraising is a mind game as much as anything else. Setting expectations appropriately can mean the difference between success and failure. Expect rejection as part of the territory but try to see it as a learning opportunity rather than a failing. At first, pitching feels like really putting yourself out there, but the right investors will see your company’s potential. Envision yourself receiving those checks.
Focus on Traction: Substantial gains in marketplace popularity impress investors more than any other metric. Focus on building your user base from day one. These first users became evangelists, providing feedback that helped me test and shape the product. The early traction we gained demonstrated to potential investors a genuine marketplace needs and interest in our platform. After all, if people will use the bare-bones version of your product, investors can envision what you can do with development and marketing budgets.
Seek Good Advisors: The best mentors are those who believe in you and your business. They will be your sounding board in lieu of a co-founder. Reach out to them through any means available: Twitter, Facebook, LinkedIn, or personal connections, when possible. Great mentors provide excellent business advice, such as insights into approaching investors and negotiating equity distribution. They will help you validate your idea, figure out how to differentiate your product, and expand your network. Investors are generally too busy for cold calls, but they may entertain a referral because of your advisor’s credibility.
Perfect Your Funding Platform Profile: Funding platforms, such as AngelList and Circle Up, give investors access to support ventures based on the quality of the idea. People invest as much in the person as the idea, so whichever platform you use, ensure that your profile is excellent. Do not be afraid to include your other business ventures, even if they have folded. Investors will appreciate your experience founders and co-founders who fail with their first venture are more likely to succeed with their second.
Build Your [Lean] Team: Having a great team alleviates a major investor fear—that you have some deep personality flaw. But more than that, when you begin raising funds, your attention will be diverted from the day-to-day of the business for months. Planning for it with strategic hiring will ensure that the company (and traction) do not suffer.
Start Pitching: You cannot divide and conquer as a solo co-founder. Build relationships with as many people as possible both for the practice and to save you time with investors who string you along. Prepare components of the pitch before asking for the meeting and support all claims with metrics that demonstrate your company’s potential for producing great returns. Practice your pitch with your mentors and team, and then get out there for real.
Even if the investor does not offer you money, they may invest later. Stay positive and maintain good relationships along the way, periodically updating those you have pitched. I was rejected by more than 60 angels and VCs before landing my first check — from someone who had already said no 25 times.
Spend for the Future: Before you accept a deal, ensure you are comfortable with it. Get excellent legal advice before signing. It may seem like a huge expense, but it could prove invaluable in the long run. Managing resources wisely will help you raise a good round next time. Common mistakes include raising too much money with a valuation and goals that are impossible to achieve or raising too little money to achieve significant results and having to ask again too soon. It is best to be raising money while you still have money so that you are not inclined to accept a bad deal. Lastly, leading a company intermittently on the financial brink is taxing, so while funding may feel like a relief, prepare for the oversight and obligation that accompanies accepting a huge debt. You have responsibilities to your employees, investors, and users. Slowing your burn rate can mean the difference between shutting the doors early or trying one more test.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered 12 days ago

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