If there’s an absolute truth in the world of startups, it’s this: entrepreneurs have an infatuation with raising capital. Regardless of how noble your reason, you should build your company on cash flow (or friends, family and what you find under the sofa cushions) before you ever approach the market.
“But, what’s wrong with chasing a big check? you say. “Once I have cash, I can dedicate all my focus on the company.”
And this is where entrepreneurs get it wrong.
Here are the 4 truths that no one ever tells you about raising capital:
1. Money is a band-aid
Securing a million dollars does not give you a solid marketing plan, product validation, or loyal customers. When we are forced to build company by customer generated revenues or bootstrapping we build habits that lead to success. We focus on critical success metrics, we learn to hire effectively and we become acutely aware of where every cent goes. Having cash – especially early on – can make us soft. Bootstrapping invites the rigor required to build a sustainable company. (Of course, in the local capital-starved environment the only way to survive for most is bootstrapping.)
2. You think you’re worth more than they do
Investors are hyper aware of the personalities, maturity and financial sense of a startup founder or management team. If your perspective is “money will solve all my company’s challenges” or you fundraise before you have revenue traction and a firm understanding of your product’s potential in a market, you will probably overestimate your company’s value. The problem is that you immediately generate skepticism in savvy investors and burn potentially profitable relationships before they take off. Even if you do convince investors at an outlandish valuation, you’re in trouble if you need to raise another dollar and haven’t experienced meteoric growth. Current investors will want to see substantially larger valuation and prospective ones will balk at what you’re asking. If you’re at a critical time in your business where capital can tip the odds of success, tough luck.
3. Work like a CEO, get paid like an intern
The pursuit of success keeps us hungry. Once you have a flush bank account, the temptation to pay yourself too well creeps in. While running lean, you avoid this temptation and the softness it breeds. Investors are making a sacrifice to fund you. Sure, you need to eat and live. But remember, you chose the startup entrepreneur life. It’s a risk, but comes with the potential of a substantial reward. Someday you may hit a homerun, but for now, reinvest every extra dollar in building your company. Your investors, partners, customers and community will respect what you’re doing. Don’t underestimate this; the glory is in the grind.
4. Not all money is created equal
Investors are partners. When you take their money, you’re inviting their perspective, vision, expertise, relationships and influence into your company. For better or worse, your investors bring more than just cash. Don’t be blinded by the zeroes on the check. Look at the full value of investors – do they have the technical expertise they promise, how involved can they be given their investor portfolio size? Do they have a positive reputation (will other investors down the line want to be associated with your earlier investors?).
Consider your business challenges – do investors have the resources to help you navigate what’s ahead? Whether you’re staring down regulatory, customer, distribution, partner or headcount related challenges, there should be obvious and essential value-add from your investors in addition to their cash.
There’s a saying, “If you make money your god, it will plague you like the devil.”
Overemphasizing fundraising and obsessing over capital stunts your growth. You won’t learn to lead and execute efficiently, you won’t have the requisite, obsessive focus on profitability, you will impact the value of your ownership and invite a host of outside opinions into your business.
For 99% of enterpreneurs, the tradeoff isn’t worth it; for the rest I’d love to explore how Singularity could fit into your firm’s success story.