Arnold Kling  

Fundraising vs. Selling

A Fool and His Money... A Taste of Economic Ridicule...

Bryan makes a good point that denying someone a risky investment opportunity probably will not protect that individual, given all of the alternatives out there.

When I wrote,

I think we need fewer fund-raising start-ups and more start-ups where the entrepreneur figures out something to sell that will bring money into the company early on.

I was not thinking in terms of protecting low-net-worth investors.

The main message of these posts is to entrepreneurs. Are there businesses that need upfront capital? Yes, but they are not good role models for the typical entrepreneur.

Amar Bhide has found that most successful entrepreneurs do face-to-face selling. I've met with dozens of entrepreneurs over the past decade, and I never encountered one who I thought should have focused less on selling and more on raising money. Frequently, I see the reverse.

UPDATE: Jeff Cornwall reports on a study showing that over 70 percent of start-ups are self-funded.

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CATEGORIES: Business Economics

COMMENTS (5 to date)
Jarie Bolander writes:

There are several businesses that need a lot of capital to get going. Pretty much anything in high technology needs $10-25M in order to get to positive cash flow. Most individuals don't have that kind of money to put in.

Most self-funded start-ups is doomed to fail. The main reason to get outside money is to validate your idea has merit. If you drink your own Kool-Aid, you will make bad assumptions and not see the downsides until it is too late.

The most valuable thing an entrepreneur can put into any venture is their time. It is never a good idea to have the founders have a lot of cash in their own venture. It influences their rational decision making.

Ivan writes:

I've been taken by Paul Graham's Y-Combinator.

Age doesn't matter. Intelligence does.
Don't need lots of money: give as little as possible. ~$6K/founder. It should last months. After a few months, you should have something working.


Too bad I already have a job I love. I think more Computer Science undergrads should be starting companies. They probably don't realize how easy it is.

David N. Welton writes:

"70 percent of start-ups are self-funded" - I think the study actually refers to any business that people start, which is different, in my mind at least, from a "startup" in the silicon valley sense. It might be easy to set up Bob's Dog Grooming with a bit of your own money, but launching a new search engine, even if you have a demonstrably brilliant idea, is going to take some investment to realize it.

Shawn Mallison writes:

Just because you don't have enough to pay cash for that first home does not necesarrily make you a bad risk. A bank may be willing to help by making an investment but they will surely consider the risk before they do.

Any investor looking for opportunity should first consider the risk. Those not smart enough to do so will eventually loose. Legislation can not protect them.

Abigail writes:

I agree that businesses should be held more responsible for the "start-up" costs associated with beginning businesses. I also understand that it can be a huge burden to come up with large sums of money, so I do agree that money should be given to entreprenuers with well planned out businesses. There are too many businesses being funded that are not well planned. This is raising the number of failing businesses and will make it harder in the future for those who have put in the effort and who have thought the project through completely. Yes, it is very risky to put forth the "start-up" money for a business. What in life isn't a risk? Risks must be taken to move forward. I think that this funding should be phased out over a period of time to make the entreprenuer become more responsible for the future of the business.

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