You know what’s not a wise move for my energy levels? Following a week at TechCrunch Disrupt and then immediately boarding a plane for a startup event in Oslo, Norway. I’ve just managed to overcome my jet lag, and now it’s time to repeat the process all over again. Phew. I must really have a deep passion for startups.
Back in 2016, I spent some time in Oslo and expressed my concerns about the lack of sophistication in the Norwegian startup scene. I was curious to see if they had made progress in the world of startups. The verdict? Well, sort of. The startups themselves have significantly improved compared to seven years ago, and it’s remarkable how much ecosystem development can accomplish in that time. There are now some excellent accelerators, robust support systems, and even a growing number of investors showing interest.
I was quite taken aback, and somewhat dismayed, to discover a contender vying for the title of “Let’s disrupt this fledgling and delicate ecosystem” – the investors. Not all of them, of course, but many of those I spoke to exhibited a concerning penchant for short-term thinking. In particular, I noticed a recurring mistake reminiscent of what I observed in the UK startup scene about 15 years ago: Angels and pre-seed investors were demanding excessively large equity stakes in companies. This is not a wise move, especially in an industry where success hinges on a few standout companies. To put it simply, venture capital thrives even if most startups yield lackluster returns, but only if a handful of startups in the portfolio can deliver exceptional results. It’s a numbers game that falls apart when the deal structure practically ensures that later-stage investors will take one look at the cap table and realize that investing would put the founders at risk of losing interest. Pursuing immediate gains can lead to disappointing long-term returns.
In essence, insisting on a 30% ownership stake in a budding company is shortsighted, and founders shouldn’t accept such terms. Fortunately, this can be resolved by savvy investors who are willing to accept a smaller stake in exchange for the same amount of capital. This achieves two important goals: it’s more founder-friendly, and it makes the investment significantly more competitive against other investors. Founders simply need to understand that it’s perfectly acceptable to push back against unreasonable terms, and hopefully, investors will recognize that they are committed to the long-term success of the venture.
