Premature fund raising syndrome
Lately as I mentor more and more zero stage companies, I’ve become concerned about what I’m calling “premature fund raising syndrome.” Startups that lack not only customers and revenue, but don’t have a product, or an MVP, a prototype or even a demo, are out trying to raise money from venture capitalists. What’s wrong with this?
Well first of all raising capital is not one of the two jobs in a startup: creating a product and creating customers. Anything else is a distraction. I’ve even seen companies bring on a founder whose primary task was raising money in their zero stage venture! Unfortunately what young entrepreneurs don’t seem to understand — especially those from “name schools” like Harvard, Stanford, and MIT — is that any graduate or even student from one of those schools who can walk and chew gum at the same time can get a meeting with a VC. Especially these days when VCs swarm like flies around honey at startup networking events and demo days. And after taking a meeting virtually every VC will follow up with a “great meeting you, keep me posted” email. VCs suffer from FOMO — fear of missing out. So, of course, they want to keep tabs on young entrepreneurs from breeding grounds like these schools and others. Why wouldn’t they?
Unfortunately, startups confuse this knee jerk, lightweight interest as real, tangible progress on the path towards raising capital. Well it’s step zero! Until the check clears the bank you haven’t successfully raised money. That’s not to say there aren’t leading indicators you will, the strongest being the offer of a term sheet. Steps leading up to a term sheet include having a senior partner — NOT an associate — advocating for your startup within the VC firm, a meeting with the partners, and due diligence. But many a term sheet has failed to translate into a check.
So confusing polite interest with actual traction is just one problem. The biggest problem with premature fund raising syndrome is that it distracts the team from what it needs to do, build a product people want and cultivate those people assiduously. More insidiously it can set up internal conflict within the team as the person charged with fund raising blames the tech team for not delivering some type of validation they can use as a lever to pry open the VC’s treasure chest and the tech team gets more than annoyed at someone who is neither creating product nor customers bugging them about their progress or lack thereof.
There is one reason to raise venture capital: to scale the business. VC funding is rocket fuel — it’s very expensive and can either send you into orbit or blow you up on the launch pad. As the book Nail it then Scale it: The Entrepreneur’s Guide to Creating and Managing Breakthrough Innovation says, entrepreneurs can often do the right thing in the wrong order. Yes, you may well need to raise VC money, but only after you have nailed it.
Obviously founders need to eat and there are legitimate startup expenses, so it may well be necessary to raise capital. But that raise should come first from friends and family. Second from angels and as convertible notes, not sales of equity. Only when the company has nailed the product/market fit and is ready to scale is it time to start knocking on VCs’ doors. And if you’ve done a good job of nailing it I assure you there will be one or more VCs who will do more than follow up your meeting with a polite email.
Bill Parcells, Hall of Fame football coach, used to say he woke up every morning with one thought in his head, “How can I make my team better?” The question that should arise in the heads of all founders upon awakening is “How am I creating value in my company?” Tangible value falls into three buckets: product development, customer development, and distribution. Set operational milestones in each of those areas and measure your progress by attaining those goals — not by the number of meet and greets with VCs.