Can a startup with little expenses really benefit from investors?


11

My Royalty Free Music business model is designed to have zero expenses other than keeping my domain name up every year. The 'fuel' to my company is musicians' old recordings which I create new music out of and license on my Royalty Free site. Every time a track with their samples are licensed, they earn some residual income. And I've already acquired enough material to last a lifetime already.

Question: Are there any reasons I haven't thought of where I should still consider seeking investors?

Cheers

Funding Investors Music

asked Jun 7 '11 at 11:40
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Gregarious
88 points
  • Just wondering... did I get voted down because of the link I had earlier or is the answer viewed as a 'no brainer' in this forum? thx – Gregarious 9 years ago
  • @Gregarious: My guess is that it might have been a combination of both. But the link was probably the biggest contributor. Even if the link was well intentioned, it may appear spammy when a new user posts a link to their site. Especially when the link doesn't help answer the question, and several similar links are posted. I removed the links to give your questions a fighting chance. Thanks for caring enough to ask! – Zuly Gonzalez 9 years ago
  • @Zuly: Makes sense. Btw, thx for adding the tags. I'll get the swing of things eventually :) – Gregarious 9 years ago
  • and now i need the link lol :P because the service offered seems useful :P will check the edit page... and the link is actually a dropbox link, not a link to the actual site. hm... – B0x0rz 9 years ago
  • @Gregarious: Yes, you'll eventually get the hang of it. Watch and learn from the community. If you are ever unsure about something, the best thing you can do, is what you did in this case - ask. The downvoter didn't answer, but a lot of us can make educated guesses most times. If you have general questions about how the site works, ask on our meta: http://meta.answers.onstartups.com/. And if you haven't already please review our faq http://answers.onstartups.com/faq. I hope you stick around. – Zuly Gonzalez 9 years ago
  • @b0x0rz: Yes, the link was to a dropbox, and not a site. However, it still wasn't appropriate. A lot of our startups offer useful services, but in the interest of the community, we can't allow random links to be posted. If we let one person do it, everyone will do it. It is fine to post a link to your site if it is in some way helpful, but if it doesn't add anything, it shouldn't be there. For more on that, see this: http://meta.answers.onstartups.com/questions/3/are-users-allowed-to-suggest-their-own-services. The user profile is the place to post your links. – Zuly Gonzalez 9 years ago

5 Answers


3

From my other answer on this topic :

The other thing investors being to the table besides money is

  • Contacts. The right investor will be able to open doors with a phone call that you could spend a year or more trying to contact.
  • Experience. If they are Angel investors normally they have been there and done it before. This can be critical for the first timer as there is so much to running a business that is beyond the technical or marketing skillset you both have unless your both 50 and been working for a range of companies in CxO positions for the last 20 years.
  • Objective view point. They will bring a useful alternative view ... most startups are excited, out to kill it in the market and have a very focused view on what they are doing which is exactly what is needed ... but often people get drawn into the fiddly detail optimising something and aren't looking ahead to see if its stil the right direction ... an investor will say "hey, is this really the right direction it feels like X could work far better for us".
  • Ability to scale. You don't need it today but if you start growing and are successful you may need to grow in the future ... having someone onside who can tackle this to get the next round of funding is a big asset or knowing who they are so that when you get there you can knock on the door and say "hey we are ready" can cut out months of time when you really need the money today.

The downsides are:

  • Pick the wrong one and your constantly battling with someone who doesn't understand you or your goals.
  • You have diluted the shareholding ... but 50% of $1Billion is still more than 100% of $100,000.
  • Finding them takes away from your focus of getting the job done today ... short term this is a problem ... longer term when you look back it will most likely look like a sensible investment.

So, I think it is worth some of your time to attend events and say hello, practice you pitch, see if there is interest both on the spot and more importantly on the followup ... You don't have to commit till you sign on the dotted line.

answered Jun 8 '11 at 11:47
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Robin Vessey
8,394 points
  • Thx @Robin. So am I interviewing investors first by asking "So what can you do for my company?" and then negotiating how much their connections, experience and financial means are worth to me? – Gregarious 9 years ago
  • Well I would be a little more diplomatic than that but yes, your in the driving seat, its your company that you need to make work ... are they going to help you make it work or not? Jason Calacnais on This week in startups had a great rant about it mid december last year (sorry can't remember the episode). – Robin Vessey 9 years ago

1

your situation is actually excellent for investors, because:

their money will not go towards paying your infrastructure bills or developing your service (perhaps only to expand it if demand increases)

BUT can be used towards pure customer acquisition (marketing, hiring sales and support personnel, etc...)

WHILE at the same time they have a very good case for your profitability, since with such small expenses, it is almost guaranteed (or at least the fail margin is considerably lower than usual) that you won't fail on expenses alone.

so the benefit FOR YOU is rapid expansion (marketing, sales, social media) with the money you get from investors (as in - getting more views from your target groups, therefore getting more business, therefore > profit).

--

basically, here you are thinking like the McDonald's brothers who opened up one restaurant it was a success and then they opened another. that was it.

then they sold out and the new buyer expanded the franchise to what it is today.

http://franchises.about.com/od/mostpopularfranchises/a/ray-kroc-story.htm the brothers were happy with their two-restaurant expansion. with investors the (eventual) corporation could go global and acquire such a huge market it has today.

same for you, you may be happy with your current situation, but more money from investors means a bigger market share possibility.

--

other than that, using the money to BUY out or MERGE with other similar services is also a money well spent (especially if your investors can help with advice or actual takeovers/mergers). you may think your inventory is big, but it can always be bigger (example: amazon.com - watch http://www.infoq.com/presentations/vogels-amazon-platform ).

--

also, if you can make use of adwords and similar programs (by hiring an expert to set it up) you are just exchanging money for more money. suppose the experts sets (and keeps optimizing) your campaigns so that each campaign spends (even) slightly less money than you get profit from the business it generates. in the case you have such a campaign, it makes sense to keep increasing the money to run the campaign (as long as it remains profitable) and you keep getting more and more profit from it.

if $10 campaign can bring $1 profit ($11 dollars total), then $1 million can bring $100,000 profit. this is usually called leverage, and can only be made if you have investors or bank assistance (in your case - investors are realistically more available than the bank).

answered Jun 7 '11 at 19:24
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B0x0rz
316 points
  • WOW!! This TRULY puts it all in perspective for me. But how much control of the company will they really want in a situation like mine where I really can actually **survive** without them? – Gregarious 9 years ago
  • usually investors already have a number in mind if they have done such things previously, AND here it is not a problem that they will demand a high percentage - because you are not looking for startup investors (you know - make it big, profitable and sell is), but rather long term. and they know if they get GUARANTEED return they have no need to behave like a startup investors. they can simply invest, reap benefits, and the more they invest the higher the benefits. if your profitability is NOT REALLY as guaranteed as you claim, then you will have to contend with the usual percentages. – B0x0rz 9 years ago

1

Investors, particularly early stage ones, will be rather heavily involved with your company and give you valuable advice and bring substantial real-world experience with startups.

But it's incredibly unlikely you actually have "zero expenses". In addition to the domain name, you clearly need hosting, and if you're serving audio files you're going to need relatively significant bandwidth.

This is in addition to the incredible time investment required. Frankly, working very hard greatly increases your living costs (no time to cook; looking for deals takes time you won't have; etc.).

You'll inevitably need to market, which can easily start costing thousands of dollars.

Etc.

answered Jun 7 '11 at 15:13
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Wmacura
139 points
  • Thx for the response. Fortunately, the service I use to receive payments offers free hosting, unlimited bandwidth, SSL, backups etc. and they only get paid when I get paid. But you're totally right that the "time investment expenses" are not cheap! Besides marketing, what else can an investor do for my business? – Gregarious 9 years ago

0

I cannot answer from experience, but I have a similar problem. My startup does only need the money I need for living. At the moment I need no money, I live from my savings.

As an investor has some rights to decide, I thought I would leave investors out as long as I can. I calculated servers costs, the time I work for it, a bit risk and of course all the costs I need for insurances etc. Can I handle it without investor, I will not ask one.

Investors are usually good with distribution and such. At the moment I am more interested in getting a distribution partner who is willing to work for his own bill and gets a % of the income he sells.

About marketing strategies, there is Google AdWords and some viral stuff like Twitter. I don't know if it is enough but I hope so.

Just in case I suddenly feel I would like to get a 10k$ marketing, I have a presentation ready for an investor.

I heard of several companies who managed it without investors.

answered Jun 7 '11 at 16:13
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Christian
3,590 points

0

I say no - if you can get away without investors, take your business as far as you possibly can without them. You will be building equity and will be in a better negotiating position if you need investors in the future.

answered Jun 8 '11 at 10:12
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Rob Gordon
441 points
  • thx. I think I'll wait before approaching investors. I like the idea of doing all I can with my own two hands then approaching an investor to perhaps fly me around to demo the "dancing frog." ^^ – Gregarious 9 years ago

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