Over the last year I’ve had the opportunity to meet a few entrepreneurs that have raised modest amounts of money from local investors in their region and built the basis of a meaningful, valuable business. When talking to the entrepreneurs, it’s clear that they value optionality — they don’t want to raise too much money so that they maintain control and they don’t want to get on the venture-backed train of go big or go bust.
Yet, there are major challenges going the local investor route: lack of true domain expertise and recent been-there-done-that experience. Occasionally the local investors in the deal have it but the vast majority of the time they don’t. And, typically, when doing these local rounds, the money comes from non-professional investors that have a day job, usually in a different industry (e.g. successful business people, lawyers, doctors, etc.). The other major component is that many of the monied folks that do have domain expertise are many years removed from their last success. Basics like leadership and values are timeless, but many other facets of building a successful startup are different from 20 years ago.
My default position is to not raise money unless it’s clear the machine is working, defined by a 5x increase in value for every dollar invested. Too many entrepreneurs blindly chase investor money believing it is the only path forward. For entrepreneurs that have already raised some local money, the key is getting people around them that know what they don’t know.
For entrepreneurs that go this route, there are several solutions. First, get involved with an organization like EO or YPO, join a forum, and then reach out to the greater network and look for regional or national special interest groups that have current domain expertise. Second, apply to a non-profit like Endeavor which explicitly focuses on helping scalable, high impact entrepreneurship make the most impact. Third, recruit board members and advisors that truly care and will debate what’s best for the business (too many entrepreneurs surround themselves with people that won’t push back).
Raising money from local investors is fine, but it requires more time and effort to get the expertise around the table to really help the entrepreneur realize his or her potential.
Get the help needed.
Build an amazing business.