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Why startups should be careful with high investments: 5 reasons pro and contra

Five reasons against rash, high investments

As a lawyer and consultant, I would first like to point out to young startups the potential risks associated with rashly raising large investments. In my opinion, there are five main reasons against such a decision.

  1. First, a low valuation of the company can lead to you having to give up more company shares than you would later like. This can weaken your control over the company and affect decision-making ability, which can have a negative long-term impact on the company’s development.
  2. Second, the lack of legal structures and regulations may lead to complications once the investment is raised. Such complications can not only be time-consuming and costly, but also undermine investor confidence in the management team and the company.
  3. Third, as a founder, you should have enough knowledge and experience to use the investment wisely and turn it into growth. Without a solid strategy, there is a risk that the investment will be used inefficiently and that the company’s growth potential will not unfold as hoped.
  4. Fourth, raising large investments too early can limit the creativity and flexibility of the young company, as investors may want to contribute their own ideas and strategies. This can lead to the startup’s original concept being watered down or the company developing in a direction that does not suit the founders.
  5. Fifth, if you need another round of financing later on, it may cause difficulties because the company may already be heavily diluted. In such a case, potential investors may be deterred, fearing that their investment will not have the desired impact on the company and that their capital will not be used optimally.

 

Five reasons for a high investment

Now, however, I would also like to present you with five counter-arguments that speak for attracting high investment in order to offer you a balanced perspective.

  1. Firstly, a high level of investment can make perfect sense during growth phases or when expanding into new markets in order to secure a competitive advantage. The additional financial resources allow you to expand your product or service offering and invest specifically in the development of new markets. This can help you position yourself against the competition and secure market share in the long term.
  2. Secondly, a high level of investment can help to strengthen the company’s capital base and bridge financial bottlenecks. This enables you to remain capable of acting and making strategic decisions even in difficult economic times. A solid financial base can also help to better cushion uncertainties and risks.
  3. Third, a high investment allows you to hire qualified employees and purchase necessary technology or machinery that can drive your business forward. Attracting talented professionals and access to advanced technology can help you increase your competitiveness and drive innovation that ultimately contributes to your company’s success.
  4. Fourth, in some cases it may be important to react quickly to changes in the market, and a high investment will allow you to take advantage of these opportunities. For example, you can respond to emerging trends or changing customer needs and adapt your offering accordingly. This can help your company keep its finger on the pulse and continuously evolve.
  5. Fifth, a high level of investment can help build the confidence of potential customers and partners in your company by demonstrating that you have sufficient financial resources to succeed in the long term. A solid financial background can also attract the interest of additional investors and give you access to a wider network of business partners and resources. This, in turn, can help you expand your business relationships and strengthen your market position.

Alternative financing options for startups: opportunities and challenges

In addition to high investments, there are also alternative financing options that could be interesting for startups.

  1. First, business angels can be experienced entrepreneurs who can bring not only capital but also valuable expertise and networks. They are often willing to work closely with founders and help them set the strategic direction of the company. This personal assistance can be critical to making the right decisions and becoming successful faster.
  2. Second, seed investors provide an opportunity to execute early rounds of financing with manageable sums that lay the foundation for further growth. These investors often specialize in early-stage startups and have the necessary expertise to assess risks and identify potential. This allows them to give important advice to founders and support them in the successful implementation of their ideas.
  3. Third, blockchain investments, such as Initial Coin Offerings (ICOs) or Security Token Offerings (STOs), are opening up new ways of raising capital that are particularly suitable for technology-oriented startups. These forms of financing can provide global access to investors and reduce transaction costs. However, startups should be aware of the legal framework and potential risks associated with such financing instruments.
  4. Fourth, pre-sales or Kickstarter campaigns offer the opportunity to approach the market directly and validate customer needs early on, while raising capital at the same time. This can be especially beneficial for products with a strong community, such as computer game development. Through direct contact with customers and supporters, startups can receive valuable feedback and adapt their products or services accordingly to increase their chances of success.
  5. Fifth, government funding programs, including those from the EU in particular, should be considered, as they often offer low-interest loans or grants that can reduce the financing burden. Such programs can also provide industry-specific support and access to valuable resources, such as research facilities or networks. Startups should learn about available funding opportunities early on to maximize their chances of successful funding.

However, when choosing the appropriate funding option, it is important to make sure that soliciting funding does not consume more resources and time than can ultimately be raised. Finding the right financing should be carefully planned and weighed to ensure that the chosen financing model meets the needs and goals of the business and adds real value.

 

Conclusion

In conclusion, I would recommend that you carefully weigh the pros and cons before deciding whether or not to make a high investment. It is important to consider your individual situation and the specific needs of your business. As I have outlined, there are both good reasons for and against early investments. It is crucial that these are well thought out and planned to fully realize the potential of your startup. Another important aspect is legal cleanliness in the planning and execution of investments. As an attorney, I can only urge you to seek legal counsel early on to avoid potential pitfalls and ensure that all contracts and agreements comply with legal requirements. Professional legal advice can help you minimize risks and set the course for successful cooperation with investors. A solid legal foundation is essential to keep your business on track for success and ensure long-term stability and profitability.

Overall, as a founder, you should always be aware that high investments bring both opportunities and challenges. However, with careful consideration and legally sound planning and execution, you can achieve the greatest possible benefit for your company.

Marian Härtel

Marian Härtel

Marian Härtel is a lawyer and entrepreneur specializing in copyright law, competition law and IT/IP law, with a focus on games, esports, media and blockchain.

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