Is it a good idea to invest in your own startup?

Benefits of Investing in Your Own Startup

Thinking about investing something more than just your time and energy into your startup? Well you’re not alone, according to a 2024 report by Dynamic Business 33-38% of startups have founders who’ve invested their own capital into their startup & rely on their personal savings as a primary funding source.

Here’s a few things to consider if you’re interested in putting some money into your startup.

Demonstrates Commitment

Putting your own money into your startup shows that you believe in its potential. Investors are often more willing to back founders who have their "skin in the game" because it signals dedication and alignment of interests.

Attracts Other Investors

When external investors see that you’ve invested your own capital, they’re likely to feel more confident about your ability to lead the business effectively. It’s a strong vote of confidence that can help secure additional funding.

Aligns Interests

By investing personally, you ensure that your financial success is directly tied to the performance of the business. This alignment will obviously motivate you to work harder and make strategic decisions that benefit your own company long-term.

Risks of Over-Investing

While investing in your own startup has clear advantages, there are risks involved, especially if you overextend yourself financially. Jason Lemkin, founder of SaaStr, advises against investing too large a percentage of your personal net worth. Doing so can lead to fear-driven decision-making because of the anxiety surrounding potential financial loss. You can read more about what Jason has to say about this here.

Risk Aversion 

If too much of your personal wealth is tied up in the startup, you may hesitate to take necessary risks that could drive growth. An example of this is the experience of Daniel Klang, a former investment professional at SoftBank Vision Fund. In his 2023 Medium article, Kang describes himself as “extremely risk-averse” and details how he spent five years meticulously de-risking his transition to entrepreneurship. This approach does provide a safety net but it also highlights how excessive caution can potentially limit the bold moves often necessary for rapid startup growth.

Financial Stress

Losing significant savings could impact not only your business decisions but also your personal life and well-being. Jeff Proctor, the Co-Founder of VTX Capital, expresses how he handled the stress and ‘preserving your sanity during the early days of your startup is easier said than done’. 

Investor Concerns 

Ironically, investors may view over-investment as a red flag. They prefer founders who are committed but financially stable enough to focus on scaling the business without undue stress.

How Much Should You Invest?

A reasonable benchmark is around 5% of your net worth. This amount is typically sufficient to show commitment without jeopardizing your financial security. By investing a modest percentage, you can balance demonstrating dedication with maintaining the freedom to make bold decisions for growth.

Preparing for External Funding

If you're planning to raise external capital, managing investor communications effectively is crucial. Tools like Orangedox’s virtual data rooms can simplify this process by securely organizing documents and streamlining communication with potential investors. Orangedox provides transparency and confidence during fundraising rounds, helping you present a professional image and build trust with stakeholders.

Start your 14-day free trial of Orangedox Virtual Data Rooms and see what Orangedox can do for your business, or you can book a free 1-1 demo today.