When you are first building your platform or product, you need to focus on a couple of things: The technology, putting together a great team, user acquisition and gaining traction, and hopefully earning revenue as well.
Once you have all four of these things, you will be in a much better negotiating position when it’s time to talk to investors about raising a round of funding. Many entrepreneurs make the mistake of seeking funding too early. Sometimes they take a really bad deal before even building a product. This is one mistake that you will regret in the future. If you take money too early (and give away a lot of equity), it turns off future investors, and also puts you in the position where you could be fired from the company one day.
Some entrepreneurs get frustrated and stressed out with the process of building a startup. This is normal, because building a startup is very difficult, and it’s not meant for everybody. But the last thing you want to do is give up at the last second or take a really bad deal because you are tired of struggling. Just when things are most difficult is usually when you can finally start to see the silver lining. You just have to stick with it and persevere through to Version 1.
For example, I was recently part of a video streaming startup where my cofounder was getting increasingly frustrated and stressed out about the company. We were approached by some investors who are not typically from the startup space. They offered us a very bad deal, with a small sum of money in exchange for a large piece of equity. I told my cofounder that this was a big mistake and that we should not take the money.
Ultimately we counter offered and the investors did not accept the counter offer, so needless to say we walked away without a deal. Then I found a better deal with more money and less equity from other investors. The problem was that my cofounder was already frustrated and stressed out to the point where he didn’t even want to run the company anymore. So we shut down the company even though I was against closing the company down. The deal I had found would have taken us to the finish line. In the least, it would have proven whether or not we could reach the finish line.
When you spend one or two years building a company, the time that you put in brings value to your company. So when someone tries to offer you a small amount of money, you have to tell them that the time you spent in the company should be accounted for. If you don’t value your time then you should not be in business. Time is money. Don’t sell yourself short, and don’t take the first deal you get out of desperation. You should never act desperate, and you should always have the upper hand.
You should always focus on building your platform and proving that you can get customers before taking in any money. This way, when you do raise money, you’ll be using it to scale your company, not build it. This is why I always say that you should build your platform or product before pitching to investors. Always have a product in hand or a website or mobile app built, before you take in a penny. If you do this, not only will you have all the negotiating power, but you will also get a good deal for your equity. So build first, prove your platform/product second, and seek funding last.