Funding traps that startups should know about

Any money is good money when you're trying to get your startup funded, right? Wrong. Sometimes attracting money from the wrong investors can spell doom.
Written by Michael Lee, Contributor

Finding a venture capitalist (VC) to fund a startup can be a difficult task. But even once a startup has reached that stage, there remain a number of traps that entrepreneurs can fall into — and these could ruin the reason why they began the startup in the first place, or affect the chances of attaining further funding, according to Tapestry founder Andrew Dowling.

Tapestry is a social network with a difference. While most social network clones essentially duplicate the functions of others, and work at re-creating or stealing the user base of rivals, Tapestry attempts to tie them together. Social media aggregators aren't a new concept, but Tapestry again differentiates itself by setting its target market as those who are least likely to understand social media: The aged-care market.

Tapestry's revenue model is propped up by members of the younger generation, who, in order to keep their parents and grandparents in the loop, want to simplify the process of staying on top of multiple social networks.

Dowling's is one of the startups that have hit the particularly tough spot of getting beyond simply having an idea, but not yet being ready to take it to the VC stage. He has a minimum viable product that anyone can sign up for today, thanks to AU$600,000 in seed funding that was raised in part by Sydney Angels. Additionally, ZDNet understands that Tapestry has been selected to participate in the Advance Innovation Program, which will see him mentored and given the opportunity to pitch to US investors while in Silicon Valley.

The news might sound like every aspiring entrepreneur's dream, but Dowling expressed some caution on the hidden dangers of looking for investors.

After making it clear that this is new territory for him, Dowling warned that choosing the wrong investor could inadvertently diminish the reason why entrepreneurs have created their startup.

"VC investment is great, but it has its own characteristics. It's once been described to me that it's like getting married, [but] the moment you're married, your partner's trying to figure out a way to get divorced, because they want to figure out a way how can I make a sale of this company to make my profit, because that's what they want."

Dowling doesn't want a quick sale, however, with his focus being more on doing something for those in the aged-care market, rather than making a quick dollar.

This means that when it comes to finding investors, Dowling needs to find someone who is correctly aligned with his vision. This could include VCs, but might also mean putting more focus into strategic investors, who back a startup because of what it stands for, not for the return.

That does place Dowling in a rather precarious position if his startup is hugely successful, as the probable interested acquirers would include Facebook — the very network that he is aiming to complement, not become a part of.

In that case, Dowling would be forced to consider not only his own motives for starting Tapestry, but also those of the people who have invested in the startup.

"The idea of an acquisition is built in the moment you take on board investment. If you're saying to investors, 'I'm going to give you a return' ... for most non-public companies, the most sure way of getting a decent return is an acquisition."

If the business is hugely profitable or has a Facebook-scale promise of success, it may be simpler to ease off the pressure to sell. However, at the end of the day, Dowling said that if a startup takes on investors, it has obligations to them that it must fulfil — and this is something that entrepreneurs should think about.

"We believe it can be very profitable and a competitive business, and good for investors, but, at the same time, they can go home and sleep at night knowing they're not doing anything bad with their money."

The other option, aside from an acquisition, would be for the company to offer an initial public offering (IPO), and open the sale of shares. However, Dowling said that this, too, may catch entrepreneurs off guard.

"A lot of entrepreneurs don't remember: They go into entrepreneurship because they don't want to have a boss, or they want that autonomy, but their vision is that they're going to go IPO. It's a million bosses, and you don't have a lot of freedom."

Lastly, Dowling said that entrepreneurs should consider their investments strategically for far into the future as they can see, as certain investments could eliminate rival companies from taking an interest. He pointed to Optus' recent Innov8 seed program.

"Telstra has a policy of not investing in any company that Optus is a major shareholder of, so the moment you take Optus seed funding, you're closing the door on future Telstra funding."

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