Naomi Kokubo
Question: Entrepreneurs having their own “skin in the game” is a recurring requirement when discussing the necessary steps to acquire investor funding. Just how much of your own money, and therefore risk, is enough to satisfy an investor?
Answer by Naomi Kokubo, Editor of Founders Space
Zero. You don’t need skin in the game. If the opportunity is good enough, investors will invest even if you haven’t put a dime into your company.
When investors start asking for “skin in the game,” what they’re really saying is that you haven’t convinced them that this is the next big thing. Or else, they’re worried that you’re not 100% committed and might just be after a nice paycheck instead of building the business.
One way to get around this problem is to talk about all the “sweat equity” you’ve invested. Add up all the hours you’ve spent on the business and put a dollar figure on them. I bet you’ll be surprised at how much you could have earned if you’d taken a job instead of building your company.
The bottom line is that when investors get nervous, they start looking at all sorts of things, like valuation, the amount you’ve invested, revenue, etc.
Don’t worry about putting money into a business just to please investors. Put in exactly what you need to grow the business to a point where it becomes viable. That should be your goal.
I hope this helps!
Having “skin in the game” is important if you are to remain the majority owner. The buyer is typically responsible for the costs of due diligence and these costs can be significant. Sometimes, you can attract “seed” money, but it is expensive and may require an equity offering and a generous interest balloon at closing. Most investors will not take the risk, unless they are experienced in the industry and familiar with the company, even on a customer or vendor level. Of course, I am referring to an entrepreneur who is acquiring a company and building a startup, or just acquiring a company. Important in combination debt and equity deals is to insist on non-recourse for debt at the onset. My experience, if it helps.
Steve-
Very on point. I have been asked for retainers of $5k/month for costs of an investment intermediary’s services. They wanted to know how much “skin in the game” we had invested and I told them over $40k for legal, accounting, travel and professional services fees. Also, over 3 years of sweat equity which was valued at over $500k. They insisted that the only “skin in the game” they considered was money invested during their watch. They also wanted an exclusive for representation. I rejected their services based on the absence of a guarantee of funding and an open-ended installment retainer. I also rejected an exclusive as we are working with 6-10 other potaential funders willing to work without an exclusive and requiring no fees.
That's interesting, thanks Steve. Your comments are the first I've heard or read that didn't overly push the significance of having skin in the game. I'm one of the founders of a very high tech venture that will take a significant amount of capital to pursue. The root of my question was based off the fact that the amount of money I, and my fellow founders, could introduce into the venture would be very small in comparison to what we'll need. Thank you for the insight and I look forward to learning more from Founders Space.
-JR