On Fundraising & Bullshit

It’s become an essential part of the Bay Area morning routine: curl up with your Soylent, fire up TechCrunch, and see who is announcing that they raised a round of funding today. There are several major funding announcements each day — from companies you know, companies you don’t, companies you thought died months ago, and companies that you’ll never hear of again.

When you come west, you learn that this is all part of the dance.

It goes something like this: a group of hustlers get together to hack together a minimum viable product and convince someone to cut a check for $100k-$1.5m. They ramp operations up — exciting times — which sounds promising but usually just means increasing headcount.

People leave their comfortable corporate jobs to work at this exciting new startup. They jam on the problem. They realize that the problem they set out to solve isn’t quite the opportunity they thought it was. The company jams anyway — they raised the money to solve the problem, after all — and does so until they’ve got 60 days of cash left in the bank. They start shopping for more money. The new money doesn’t materialize. The company winds down.

If this sounds like a gross generalization, that’s because it is. But it’s not so much of a stretch: some version of this (within 10–15% accuracy) happens every single day.

Let’s stop the madness.

First things first: you don’t need to raise all of that money.

We all have bills to pay and some startups, especially those in hardware or in data science, do have real capital expenditures. If you’re like most, working on a web or mobile software product, you don’t need to raise a ton of money to get something to market and seek out market validation.

Let’s drop the mentality that you need $500k+ to get something compelling out there. You (generally) don’t need more than $100k to do it well.

Plus: you want to keep your options open. If you raise $1.5 million for your movie-based social network and then identify an opportunity and find your passion for eBay for dogs, you’ve got an investor to sell on the idea. It’s hard to turn a cruise ship on a dime — much easier to spin a kayak around. Keep those options open and stay lean.

Second things second: stop announcing your rounds.

It’s important to ask yourself why you’re doing everything that you’re doing. In most situations, a non-technical founder should be singularly focused on sales, marketing, fundraising, and recruiting. If an activity contributes to one of these items, that’s great. If not, stop.

Announcing a round can feed one of the aforementioned monsters of non-technical founder responsibility but I see far too many instances where these announcements are for a pre-release product or companies that are so far along their lifecycle that the announcement can’t possibly provide that much of a bump. (When Uber raised its most recent round at a $60+b valuation, did it influence your decision of which ride-sharing app to use later that day?)

Recruiting is a good defense for the funding announcement but you don’t want to hire the person who is only coming to you after announcing your fundraise. When you’re building a loyal, talented group of employees, you want individuals who believe in the mission and feel the pain that your product addresses. You want a group that e-mailed you when there weren’t any job postings and there was no apparent money in the bank. You want people who are motivated by more than the fact that you just had a splashy headline on VentureBeat.

Third things third: stop talking about headcount.

Stop bragging that your team is rolling 20-deep now. You (usually) shouldn’t be proud of that — all it means is that your overhead is through the roof and you’ll probably have an expensive holiday party to host. Good luck surviving lean times when you’re spending $200k/month on payroll and you’re bringing in $10k/month in revenue.

Another thing: stop asking founders what their headcount is up to — it sends the message that headcount = success. Talk about sales, revenue, or even House of Cards. Anything but headcount.

In general, startup founders are intelligent people. Let’s calm down.