Mind the fundraising gap
As a first-time entrepreneur, I’ve thought a lot over the past year about the optimal time for a tech startup to raise money. “Thought” is the operative word, as I don’t have personal experience raising a round of financing.
Despite having shed my clothes and exposed myself as a n00b entrepreneur, I still feel confident saying that there are two viable times for a startup to raise its first round of institutional money: pre-product or post-traction. This might sound obvious, but anyone who has pushed out a skin-crawlingly unpolished beta knows that a long, variable road separates the hyperbole of pre-product expectations and product/market fit.
With Treatings, Paul and I have opted to bootstrap the business, building the beta in the comfort of twin XL bunk beds and library “office space.” It will take time to build our networking platform, which facilitates coffee meetings between professionals, because communities aren’t built overnight.
I believe it would be harder for us to raise money now, six months into our beta, than immediately upon quitting our previous jobs. Despite having a live site, which has been informed by feedback from a growing number of actual users, any fundraising conversation now would quickly turn to a Where’s Waldo for hockey-stick user metrics, revenue and everything else VCs (understandably) care about. Conversely, pre-product the focus is on the founder’s sparkling vision, untarnished by a work-in-progress beta.
It reminds me a bit of the finance interviews I suffered through in college. While every interview was different, they all included accounting and valuation questions. Because I had taken the introductory finance class, I was always held accountable to answer these questions, which quickly moved from the scope of anything taught in the classroom to more nuanced, market-based questions. This was typically the most challenging and probing part of the interviews.
But, not everyone faced the financial statement cross-examination. For people who didn’t take the accounting/finance courses, they could deflect these questions by saying “I actually haven’t studied this in school, but I’m sure I’ll be able to pick up the requisite skills because I’m a [insert canned statement about being an eager learner who seeks out tough problems].”
If I was looking at it purely from a standpoint of improving my chance of getting a job (not at being better in the role), I think I would have been better off not taking these classes.
The parallel to fundraising is that although there is no learning substitute for having a product out in the wild, the second you have a live product, the bloom is off the rose for investors. The same “we’re still experimenting” answers that can be acceptable in pre-product fundraising discussions are no longer satisfactory. The way to get investors out of “wait and see” paralyis mode isn’t just to show what you’ve learned, but to show real signs of traction.
So, is it better to raise some money early to tough out the product/market fit journey?
The bottom line is that there isn’t a one size fits all approach. If you’re building rockets, you might need $100m at the outset. Pre-product fundraising is also crucial for people who don’t have personal savings or envision early revenue. The most important thing to consider is not just how much money and time it will take to launch your product, but also to reach product/market fit.
Reid Hoffman says, “Starting a company is like throwing yourself off the cliff and assembling an airplane on the way down.” We need to remember that the picture of the brand new 747 sitting on the runway that got investors excited pre-product is quickly forgotten once our hang glider is in the air.
