To raise VC money or not? A framework to think it through.
To raise VC money or not? That is the question.
In my opinion, it’s the wrong question to be asking yourself. Lately, my interpretation of what this question is really asking is: Should I go after large world changing “winner take all” ideas or not? In this case, I still think it’s the wrong question to be asking.
Why?
Because the answer is not binary, it’s neither left nor right. I believe the right question to be asking yourself as an entrepreneur is the following: What are you trying to accomplish and what is your situation? As a framework for analyzing the potential routes you could take, I like to categorize
entrepreneurs by the following cohorts (common situations among founders):
- Have access to funds personally and can self fund a team and idea.
- Have an idea but no personal funds and no technical skills.
- Have technical skills and can bootstrap an idea.
- Can freelance to help fund the execution of an idea and team.
Before we dive into the routes, it’s critical that I address that if you do decide to raise money using Venture Capital setting your value and getting your investors right is extremely important.
I’m not going to get into detail, but rather, try to give you a simple outline. If you’re going into the VC arena, you are much like a marathon runner. When competing, a runner must set their running pace properly, with a realistic pace that your body can sustain to get past the finish line with the result you want.
For Example: In order to win the Boston marathon you’re going to have to hit a pace of 5 mins / mile. If you can’t hit that, but convince yourself, family, friends and sponsors on being able to hit that, you’re setting everyone up for failure.
The VC funding trajectory is much like marathon running in that, you can be realistic with what pace you think you can achieve. Every time you take an evaluation you are essentially setting your pace. Here are the rough numbers:
If you raise money at a 1 million dollar evaluation, you are setting your pace at needing to have a minimum ~10 million dollar liquidity event (sale or IPO). 10 million evaluation = ~100 million liquidity event. 100 million evaluation = ~1 billion liquidity event. In theory this could continue to infinity.
There are many ways of approximating if those paces seem possible; total addressable market, comparative IPOs, revenue figures in your sector, liquidity evaluations, etc. I’ll let you figure that part out.
The point I’m trying to make is that you must try your hardest to be real with yourself. Every time you enter the VC arena those are the approximate pace numbers you must keep up with. I’ve seen too many entrepreneurs lie to themselves, and waste a lot of good peoples time and energy, including their own.
Have access to funds personally and can self fund a team and idea.
Having been through a self funded startup, I have thought about this subject, and have seen the pros and cons.
Although it sounds like the obvious choice if possible, there are two caveats.
- Caveat 1: Because there are no real external accountability measures, it can often lead to distressed turnaround times on projects and overly conservative growth goals.
- Caveat 2: Self-funding can lead to a lot of “stealth mode” building and can potentially cause the entrepreneur to miss the reality of real world external validators.
The above applies the most to “moonshot Ideas”. I think that moonshot Ideas require your pulse, the market’s pulse, and the media’s pulse to all be aligned at the same time. You want to get your idea out into the public eye as soon as possible and begin setting the pace for the
above rhythm.
Great Idea → should land great investors → which will land great coverage→ which will help fuel the Great Idea. Your job as the entrepreneur is to assist this wave in forming and if/when it begins you must conduct it like a maestro. E.g. The Jeff Bezos & Elon Musk playbook. On the other hand, if you have an idea that could run on the good economics of cost at $1.00 and selling for $2.00, don’t need fast massive scale, and can slowly re-invest profits to grow
while remaining competitive, then I would almost always argue that self funding is the best way forward early on.
If you are trying to own a market with scale, and willing to forgo net profits to achieve this, I would still argue that you would want to explore tier 1 accelerators or angel investors, the trade off of equity for networks is second to none and the accountability of these great investors will help you focus on your number 1 priority: growing customers/users and adding as much value as you can. There is nothing worse than a self funded founder who focuses on spending money on everything other than customer/user feedback and validation. Bells and whistles are shiny, be cautious.
Have an idea but no personal funds and no technical skills.
I’ve always been enamored with entrepreneurs of this sort because the odds are stacked against them. Although this road is the hardest, there is a silver lining.
In the above case I would argue that you have nothing to lose because the way forward is pretty straight forward. You need to recruit members and/or skills to execute your project. You don’t have funds to acquire a team, therefore you are forced to raise capital or convince members to join your team based on the potential of the idea. Those two feats are validators in and of themselves.
If you can get yourself past the above hurdles, then you are well on your way to becoming a true founder. Keep going.
Have technical skills and can bootstrap an idea.
I have met many technical founders who battle with the idea of fundraising. Although there is no perfect answer, I think the WHY applies most in this situation. Why are you raising money? If the answer is because that seems like the thing you do to get a start-up going, then I’d caution you to take a big pause.
Not every idea is truthfully worthy of venture money, even though you may find certain VCs that convince you otherwise. and especially if your a team
I would advise the following:
1.Create a road map.
2.Get an idea of the total addressable market size.
3.Build it, grow it, build it, grow it.
If and only if you hit a wall during this cycle, it is time to consider the following:
- Have you hit a wall because your product has simply not found product market fit? If so it may be time to reconsider the project as a whole.
- Have you hit a wall because you can’t keep up with the pace of scale, feel short staffed and are just not moving at the speed you want to move?
If your answer yes, this may be indication that it’s time to jump into the VC arena. My advice would be to use it for all it’s worth. It’s go time and you clearly need the help.
If you don’t hit that wall and can contain cash flow levels in which you can still grow, then the world is your oyster. You are in full control of your destiny. You decide what’s next.
Can freelance to help fund the execution of an idea and team.
Freelancing to bootstrap an idea is filled with pros and cons. I’ve seen a lot of talented founders fall prey to this ideology.
It’s a great way to bootstrap early on, but I would caution that you must be very self-disciplined.
The outcome usually end up being the following:
You freelance to fund your grand dream, freelancing starts to produce good revenue, a year goes by and you’ve ended up building what is essentially an agency doing contract work. Content with the revenue you’re making you decide it’s time to give some energy to your grand idea. Another year goes by an you realise your agency has sucked up all your energy and you have made little progress on your grand idea. In the end your grand idea goes nowhere, and another team somewhere in the world beat you to market and is dominating with your exact grand idea.
If your going to go this route, you must give your grand idea center stage and always remember that the side freelancing is just to pay bills until your idea pays the bills and/or you’re ready to scale using the VC arena.
Leaving Thoughts
I think in our societies current state of inbound information, the anxiety to do what we read and see without thought is something that’s beginning to plague our lives. Instead, I want to challenge you to think and do what you believe.
I’d like to leave you with my interpretation of a quote from Leo Rosten:
Life is not about happiness but rather the ability have purpose, to do something meaningful, and to have it matter that you lived at all. Keep adding value to the world big or small, and you’ll never be short of gratitude. Keep pushing, the entrepreneurs of the world are rooting for you. More so, I think the good people of the world, are rooting for you too.
