Why Raising Money Isn’t Cool
The Dirty Little Secret of the Startup Community
by Ben Lee
I’m 28 years old. I’ve worked with incredible people to build businesses spread across multiple continents that generate millions of dollars in revenue every year. Instead of a traditional corporate headquarters, the office and creative studio for Neon Roots’ LA team is a beautiful, 4,500 square foot house in the heart of LA with art adorning just about every square inch of the walls. I don’t own a car — instead, I “Uber Everywhere,” just like the rap song. And, most importantly: I don’t have investors. There’s no catch. My partners and I have absolute freedom with these businesses, letting us take them in any direction we feel is best.
I think that’s pretty cool.
Raising Money is a Drag
Have you ever had to raise money before for a digital business or brick and mortar storefront? It’s not that fun — in fact, it’s actually pretty hard. You have to take near endless meetings with people who love to talk about throwing around big money just to make themselves feel important. Unfortunately, most of these end up being a waste of your time.
Over 250 startups in Silicon Valley took outside capital last year. A quick look at Crunchbase tells us that for most of these companies, the Series A round consisted of several or a collective of investors/angels and finance firms (i.e. VCs or hedge funds). That translates to lots of dinners and lots of potentially massive gambles.
Investors have boards, questionable taste in clothes, and high expectations, but they offer little strategic value or creativity other than capital. Even worse, they’re your permanent Sugar Daddy. Yes, there are circumstances where there’s strategic fit — but if you’re looking to take on investment purely because that’s what the cool kids are doing, you need to rethink your long-term business strategy.
For some, it’s a dream, and I respect that. But for me, it’s a nightmare. The thought of having someone above my head that only cares about my business decisions for how they affect their immediate ROI makes me queasy.
To me, my businesses are the realization of a dream: years of hard work, late nights, long hours, all to actualize something I’ve wanted for my entire life. I’m not interested in working with someone who sees my businesses purely as a cash cow and me as a loyal farmer. I only want to be involved with people that are willing to invest more than their pocket change, and investors will never play that role.
Money Shouldn’t Be a Milestone
The problem is that raising money has become a milestone, a major achievement of sorts in a startup’s roadmap. Instead of a sometimes-necessary step to take once the product and model are solidified and it’s time to scale, taking on funding is now seen as a first-step badge of honor. Bootstrapping — the timeless tradition of building a thriving business out of almost nothing — has become a thing of the past. And to me, that’s terribly sad.
Quite honestly, cash flow projections and all the other financial models are educated guesses at best. The added complication of private investors breeds meaningless projections and an absurd amount of paperwork. Even Mark Cuban recognizes the lack of importance that early investment holds:
You should do everything possible not to raise funds. Sweat equity is the best equity.
There is No Free Lunch
This is really the main problem with the startup and investment community today: up and coming businesses have seemingly forgotten about sweat equity. Early investors offer promises of security and massive growth — two things that are really only controlled by you, your business, and your work ethic. While investors may make things easier in the short run, they severely complicate every aspect of your life later on down the road. Investors are a quick way to lose fundamental control of your business.
Trust me: it may seem like free money, but everything has a catch.
Investors are the first to throw you under the bus and protect themselves when a startup fails. Theranos and the misadventures of Elizabeth Holmes is the perfect example of the mask that investors make startups put on. Vanity Fair states that it’s the creation of this “origin story” that startups use to win over “investors, the press, and if it ever gets to that point, customers too.” The world of investors is filled with old white men who want to make a quick buck on a startup they really know nothing about — and sadly, now that mentality is infecting the startups themselves. Startups are coming up with massive fronts and backstories to win over investors.
Investors are not innovators. They’re hustling cowboys making bets all over the place in hopes of turning a profit. The extent of the innovation they have to offer is directly related to how many 0s they include in their investment. The startup world has developed this false mentality that investors breed innovation. They don’t.
You and your business create the innovation, not the person giving you a check. Investors lack the fundamental passion for your business that made you start it in the first place — the extent of their passion is determined by whether or not they are turning a profit. That means the minute things start to look sour for your business, they’re trying to figure out how to cover their ass — even if that means sacrificing you on the altar.
We get the CB insights emails or Crunchbase notifications about all the unicorns, but what about the startups that fail? I’d probably peg that number to be closer to 90%+ of them. More importantly, what about all the shitty bets those old rich white men have placed?
Take Theranos for example, or Magic Leap. Every big investor is throwing the others under the bus and saying how it was part of a larger fund, blah blah blah, but the reality is they’re taking selfies with the newest unicorn as soon as the fundraising round closes. They’re popping Dom Perignon before a business turns a profit. A celebration of financing and funding is apparently the “cool thing” in the Valley and other parts of the world.
It’s insane. Belonging to the club shouldn’t mean you know how to fundraise well. I know a ton of people who know how to fundraise but operate shitty businesses. 2017 is poised for a humungous uptick in tech companies going for an IPO — almost 50 compared to 2016 which was less than 19. This will make all investors more bullish in the tech sector and also twice as many Theranos’s or Magic Leaps. Crazy visionaries that know how to sell the kool-aid and lots of smoke.
It’s not that this industry needs a course correction, but rather a message correction. We need to be communicating to our future founders and CEOs what making a buck really means. Operating in the black as opposed to the red, not being dependent on investors or outside capital, and operating efficiently.
It’s innovation and execution — not investment — that keep a business alive. Know that, and the world is wide open to you. Forget that, and you’re doomed.