When Bill Li conceived of the idea for an autonomous security robot company called Knightscope, he faced three common arguments. You may be facing these same three arguments, too. Here is what CEO’s need to know about capital to company fit.
- This will never work.
- This is too complicated, you can’t do software and hardware.
- People will never invest in a physical security startup.
But obviously, those questions weren’t relevant in the case of Bill Li. Knightscope has over 19,000 individual investors, backing from four major corporations, and has done $10 million in lifetime revenue. Why?
“Relentless entrepreneurs like to prove everybody wrong,” Li says. But more than just squashing the naysayers, Li has a better approach for any startup in any industry. According to him, a lot of founders are told, “You must focus on product to market fit… when you get that, come back and see me.”
But what if “capital to company fit” was a better approach? Answering some basic questions—what are you trying to accomplish, what are your obligations, what type of capital do you need?—will determine how much success a startup enjoys and how fast, or whether there’s any success at all.
$130 billion goes into startups every year across every industry, although some areas—like software innovation—easily get the lion’s share. Most of those funds are going to entities whose business model is (simply put) to be wrong.
The people who are in a good stead to help you the most might not be in your field.
If you’re trying to innovate in one field, there’s nothing wrong with VCs who want to have the option to weigh in on key decisions as long as they have expertise in that field. On the other hand, some of the most beneficial relationships will come from VCs who don’t have any expertise in your field and who want to take a more hands-off approach.
Founders have a fiduciary responsibility to all of their shareholders, not just the so-called “big dogs,” to make sure that these working relationships are beneficial to the company, not just to one investor who moves in on the inner workings.
Sadly, in a lot of cases, “VC money is dumb money.” It can backfire if the right relationship isn’t maintained.
So Li’s advice for founders? “Before you start raising capital, really think about who you need on your team.” The deepest pockets might not be as beneficial as they appear if they’re going to insist on some measure of authority within your startup.
“You might just need silent capital — that’s a different type of capital need,” than someone who doesn’t know about the mechanics of actually building a company.
Speaking of his investors, Li adds that sometimes more investors with little expertise or knowledge of your industry can be far more useful than four major backers with a lot of funding but a lot of input that they insist on sharing… and expect to see incorporated into your business workings.
Another value-add that having numerous smaller investors brings to a startup is an instant market for the product once it’s finally available. With only a small handful of major, large-scale investors, the work of finding retailers can chew up a lot of capital through marketing once the product is ready.
In the case of Knightscope and its 19,000 investors, those numerous individuals become an instant source of support and traction when it’s time to take this to market.
But none of this is to disparage VCs in any way. That’s the last thing any founder should do, in fact. But doing the homework of finding the right fit — rather than signing up with the right money the moment it’s available — will mean the difference between success and failure.
How do you find the right fit?
Part of that homework involves understanding what role your VCs expect in the decision-making process, as well as deciding whether a company would be more successful in the long run with a lot of smaller investors instead of a few major players.
Li has one last bit of advice: “If you’re gonna go down this path… please don’t think that you’re gonna turn on a website and then you’re gonna download cash from the cloud. You have to put in the work.”