Conscious Fundraising. Should you be raising funds for your startup? — 1/3
The short answer: probably not. While fundraising may seem like an obligatory step in the life of every start-up, it is often an imaginary need and can be the beginning of the end.
Countless founders I met and interviewed in the process of building GlassDollar and writing this article, myself included, are so occupied with raising funds that the realisation of their vision seemingly becomes secondary. In the effort to secure money to build a company, we lose track of the problem we set out to solve in the first place. Energy that should be dedicated to solving the problem our companies set-out to address ends up being sucked by fundraising activities. The result? Crippled founders and crippled companies.
Ask yourself these two questions as you read over this piece:
- Do I really need capital at this point?
- Do people love my product?
Fundraising has an opportunity cost
Ultimately you are trying to reach a state in which you have many happy customers. To reach such a state you need to build a product that people want. Once you have such a product, your company will grow.
Raising capital is a means to that end.
Typically only short funding rounds are good funding rounds. The more investors are interested, the shorter the funding round. If it takes you longer to raise than talk to your customer and develop your product step by step. Stop fundraising.
Why you probably should not be fundraising right now
For us founders, fundraising usually starts from one core belief: “Once I get funding, my startup will grow.” This belief is a dangerous one and, above all, it is false. Here’s why:
Firstly, it assumes that large amounts of money are the key to building products people love.
In early stages of your company, your perceived lack of financial resources is likely a simple lack of resourcefulness and focus. User testing and prototyping do not require enormous resources. The first prototype for nestpick (apartment rental platform) was an email address that I used to upload listings from my landlord on different housing platforms. The first prototype of our website was a Facebook page.
When we set out to build GlassDollar earlier this year, our early prototypes where Google Sheets we shared with founders in our network. Through these product drafts and by keeping things small, we were able to provide handcrafted experiences to users and potential customers, who therefore became interested in what we were going to build next. We learned about the problems they faced and how we could become more useful to them. None of these cost much and certainly didn’t require a funding round!
Secondly, it assumes that investors easily provide capital to enable you to build a product people love.
While that may be true in some cases, most investors are not looking for startups that need them to grow. They are looking for startups that are already growing and will do even better with them. In other words, they are looking for companies whose success is already tangible. That is their best bet of maximising their return and that of their investors (LPs).
For this reason, investors will always ask for tangible evidence that you are building something people want. They’ll want to see traffic, engagement and/or revenue growth.
Therefore, if you decide to fundraise when you don’t yet have tangible evidence that yours is a product people want, chances are you’ll enter a death spiral. After all, the process of convincing investors takes between 3 and 6 months and requires 50% of a founder’s time on average. Your strategies and priorities will shift around securing funding. With most of your energy mobilised in this direction, the little energy left will not be sufficient to find the patterns needed to create a product people love. Lacking focus to make significant progress, your vision will fade into the background. And while you’re sending that 4th email to that VC you met at a conference last year, your company will deteriorate making investors even less likely to invest.
Make no mistake: in most cases, the money you are after will not solve the problems you are facing. In essence, the belief that you need investors and their money to reach your goal effectively paralyzes your ability to reach said goal.
Creating a product people love is the best fundraising strategy
Case Study: Building a DVD unicorn
Suppose we are building a marketplace for used DVDs. While our first reflex might be to begin by searching for an investor so we can start building a platform with an integrated shipping software for €40k, this time we’ll consider a different strategy. We’ll start instead by asking our friends if we can sell their DVDs for them. We’ll negotiate a friendly margin and list the DVDs on eBay.
From the very first day, we’ll be focusing on the KPI that really matters: DVDs sold. We will focus on the stakeholders, sellers and buyers, and the value we create for them. Most likely, we will also gain a much clearer idea of the areas we could improve upon to sell even more DVDs. We will receive customer emails about shipping, which will lead us to the understanding that fast shipping is very important to them; we will be asked questions about the movie synopsis or the state of the DVDs, which will push us to write more detailed descriptions; we will notice that some of our target demographics are not buying from us because they don’t shop on eBay, which will lead us to start selling on Amazon.
As we progress and sell more DVDs, we learn more about how the €40k platform should actually look like and what it should do. We can project the database we’d like to rely on to store our information. We understand the features that are relevant to our customers. We come up with ingenious systems that will solve problems we didn’t know existed when we first embarked on this journey.
We have acquired the customers that will be using the platform once it is built. We have effectively created the evidence investors will ask us for when we decide to fundraise. We’ve got what they’re looking for. On top of that, we have begun to generate revenue. We’ve got what we’re looking for — funds — and are now in a position to decide whether we’d like to take money from investors.
Empowerment of the Founder
Matthias Ockenfels pointed out some time ago that you just won’t be perceived as the hottest founder in town if you try your luck with any investor. You won’t be perceived as the hottest founder in town if it is clear to everyone that you need money to move forward.
You will be perceived as hot when it is investors who have to convince you to take their money. You will be perceived as hot when you have the option to say No or, even better, if your round is oversubscribed.
Developing a default strategy that allows you to advance your startup without an investment is the solution to be in that position. Sure, it may require you to do more work right now, work that may not always be as fancy as you’d like, but it is worth it in the long run. It will make you the resourceful and independent founder investors want to give their capital to.
As founders, our core belief about fundraising must therefore change. Instead of needing money to move forward, we should see funding as a bonus.
We must shift from “Once I get funding, my startup will grow” to “We’ll succeed no matter what, raising money will help us do it faster.” Only then is the funding round really worth taking on.