David Cummings on Startups

Why do Successful Entrepreneurs Raise Money for Subsequent Ventures

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David Cummings

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Two weeks ago I was having lunch with an entrepreneur in town and we were talking about another startup that had just closed a nice sized Series A round of VC funding. The founder of the other startup had been super successful at his previous venture and had plenty of money to fund the new venture. The question then arose: why raise professional money for a new venture if you can easily fund it yourself?

Here are a few of the reasons we came up with:

  • The professional money could have come from previous investors where the team had a solid relationship
  • The founder likely didn’t want to invest a chunk of money in the new venture since he didn’t have to (that comes with being successful — investors are much more likely to back you the next time around)
  • The founder could be employing the Nassim Nicholas Taleb’s Black Swan investor theory where he puts 90%+ of his money in ultra conservative bonds or Treasury bills and then puts the remainder in highly risky investments

What else? What are some other reasons previously successful entrepreneurs with money bring in investors for their next venture?

Comments

3 responses to “Why do Successful Entrepreneurs Raise Money for Subsequent Ventures”

  1. Joe Colopy Avatar
    Joe Colopy

    I’m not surprised. I think first time entrepreneurs need a bit more time to bumble around without the added risk of outside investors. Chances are they are going to use the cash a lot less efficiently and force a lot of dillution unnecessarily.

    Once you’ve done it before and have a lot more experience in what works and what doesn’t, the idea of outside investment seems a lot less daunting because you can better judge how you would use the cash to produce the returns that make it worth it.

    Reply
    1. David Cummings Avatar
      David Cummings

      Thanks Joe for the good comment. I think your points are spot on and that most first time entrepreneurs spend a ton of money learning what does and doesn’t work.

      Reply
  2. Stephen Avatar
    Stephen

    While being able to entirely fund and control a company has its merits, giving up some power and emotional attachment when you have that capability; or even to spread funds across different new companies benefits the community and plays the odds better.

    But I’d be a fan of the diversification factor too. New companies can take years to not be profitable (and more with high multiples) and certainly some other storage for your ’emergency fund’. A clear example of this could be Elon Munsk, living off of lines of credits from his friends the last few months. With his large exits; treasuries or AAA bonds would have provided him with enough for his $200k/month expenditures.

    Reply

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