Venture capital for startups often comes with strings attached. Some investors want more than an equity stake; they also want executive power. Such intrusion warrants consideration of the unthinkable: rejecting VC funding. A few anecdotes from the startup world illustrate the need to be careful in who you select for investors. The goal is to ensure a stable source of funding that avoids undue intrusion and threatens your future equity stake.
The first lesson: Avoid the bandwagon investor. These are investors who create the bubbles that inevitably lead to corrections like those we’ve just observed. The problem with the bandwagon crowd is their short-term perspective. They come along for the ride, only to bail out when they feel the first bump in the road.
One of my friends had a company that was generating revenue at a nice clip. He attracted a host of investors who wanted to get in on the next new thing. My friend knew that he had some big expenditures that would soon eat into revenues. Rather than give up a chunk of equity to investors who might never return for a second round, my…
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