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The Shocking Truth about Startup Investing Costs (Founders, Watch This!)
Hey founders! Ever wonder why most pitches get a polite "no"? It's not always about your idea. Investors face hidden costs beyond just the money they invest, and some startups have no clue!
Today, we're unveiling the truth about investment costs and how they impact your fundraising journey. Buckle up!
(Main Points)
1. Investor Expenses: It's not just a money game!
Imagine you pitch for $250K, but investors spend $15-$40K just on lawyers for agreements, due diligence, and more! (Visualize costs with animation)
Don't forget accountants, administrative work, and their precious time! ⏳ Every meeting is an investment for them too.
An investment not only costs the investor the principal investment, but there are auxiliary costs that founding teams are generally unaware of. These include;
Legal costs related to draft agreements, shareholder agreements, operating agreements, investment terms, Cap tables, articles of association, financial review and any extraneous legal documents unique to your project. If there are tokens involved, this may add another layer
Due diligence costs related to paying associates, operating and administrative staffers when reviewing your company
Accountants to review financials, investment terms, tax implications, timelines etc
Time! - Yes, time is indeed money. Every meeting or team exercise the investor and their team spend with you has a monetary value.
2. Founders, Be Aware! Don't be caught off guard.
These costs shrink your actual investment. Your $250K could become $190K in a blink!
I will give you an example for a team seeking $250K in seed funding:
As an investor, I know it will cost between $15 and $40 thousand to make the investment after legal administrative costs. Additionally, it’s customary for the Startup to foot all legal bills.
Astute investors know this means your $250K just got reduced by $40K on day One
Additionally, most startups have accrued expenses prior to raising money. This means your $210K will be reduced by whatever immediate payables are on your books. Let's assume $30K. This means your $210K is now reduced by another $30K, bringing your net investment to $190K.
If your expense projections were based on a $250K raise, you’re dead on arrival, and that makes it a bad investment. This is why most early stage companies have a difficult time raising funds.
Be transparent in your pitch and account for these hidden costs. Transparency builds trust.
3. It's not all doom and gloom! Let's be balanced.
Yes, costs are real, but remember investors bring value too! They offer funding, expertise, and connections.
Focus on effective communication and showcase how you minimize their costs (prepared documents, clear financials).
The key is awareness, not fear!
(Outro)
Knowledge is power, founders! Research investment costs, be transparent, and present a strong case. Remember, investors are partners, not just money bags.
If you don’t get to a term sheet by the 3rd meeting with an investor, they are likely not making an investment, and the more meetings after the third meeting often signals a disinterested, or worse and unserious investor.
Want to learn more? Check out the resources below and leave your questions in the comments! Let's build a strong startup community together!
Subscribe to the Thanos Node Podcast on Spotify, Apple Podcasts, Google, and iHeartRadio:
You can find me on social media on the following links:
Twitter: / alanikuye
LinkedIn: / alanikuye
Website: https://thanosnode.com
BEWARE OF SCAMMERS AND/OR IMPOSTERS!
➡️ I will never DM you or ask you to join an investment group or give financial advice.
➡️ I have no WhatsApp group or paid service.
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