TL;DR: if you are called to participate in the business, figure out what the catch is? Why you are the one they want to share profits with?
The entrepreneur has only two options for raising capital for business development: credit and investment. The first is sought by banks and other financial institutions that make money from usury. The second is sought by special funds, most often venture capital.
Let’s analyze and compare both options:
| Loan | Investments | |
| Fundraising difficulties | +/- | + |
| Cost | % per annum | % of business |
| Interactions | — | regular reporting |
| Disturbance | — | pop-up calls |
| Unsolicited advices | — | continuously |
| Additional (non-financial) benefits | credit score | ?? |
| Total: | 5 | -4.5 |
If an entrepreneur sincerely believes his business is profitable (or potentially profitable), he has no rational reason to share it with anyone and raise investment capital. With one exception: there are angels and funds that are able to open doors to the entrepreneur that no amount of money will do.
There are only a few reasons to raise investment capital for a potentially successful business:
- we’re talking about a Tier-1 fund that, through its connections and reputation, will open up new horizons for the entrepreneur;
- the task is to transfer the financial risks of failure on the investor’s shoulders;
- the entrepreneur does not have enough competence/expertise to implement the idea;
- no one other believes in the future potential of the enterprise;
- you are looking at a serial start-up enterpreneur.
If you are not a Tier-1 fund and you are offered a stake in a business in exchange for an investment, you should look very carefully at the last three points, understand their reasons and weight all the potential risks.
The same is true of any investment advice from banks, brokers and other financial advisors. The simple question, “Why are you revealing your alpha to me instead of leveraging it yourself?” puts everything in its place.
On the other hand, if you are an entrepreneur in search of investment, let us remind you of an unobvious fact: Young or inexperienced entrepreneurs very often overestimate the mental and cultural abilities of people with money. Financial obligations to a fool or unqualified investor result in very unpleasant consequences. For both parties. Try to avoid non-smart money.
This is precisely why Schnellreich never takes funding from those who are unable to noticeably strengthen the expertise of a project or in other non-monetary ways to bring an enterprise closer to its goal.