Should your startup raise money?

…and if yes, from what source?

Photo by Freddie Collins on Unsplash

by Veronica Reaves-Parks

Start a company. Raise venture capital. Rapidly grow to either IPO or get acquired. Become a millionaire, full stop.

In its simplest form, that’s the playbook, as many aspiring founders see it. But should every company raise money? Should every company raise venture capital? How do you raise at all? With so many steps in between starting a company and growing that company into a successful, sustainable business, how do founders decode and figure out which resources are best for them, when they should employ them, and how to get them?

That’s what the Spero team and I set out to clarify when we launched the Spero Ventures Fundraising Series for Black and LatinX founders a few weeks ago. Our first session in the series sought to answer the first fundamental question: Should you raise, and if yes, from whom?

Watch and read below to learn the key learnings shared on this panel:

Key Learning #1

First, know why you need money. Second, understand what type of business you are and the kind of business you want to build. That way, you can better determine the different forms of capital.

Lolita Taub — Why are you raising in the first place?

When it comes to getting to know founders of color, Lolita Taub has done the legwork. Her advice is to first understand what type of company you’re building. Knowing your business strategy is key in determining what type of funding you should go after. Are you building a small or medium-sized business that you want to grow organically? Are you building a fast-growth business that you want to make into a massive company to win a multibillion-dollar market?

The answers to these questions can lead you down the different funding paths available to founders today:

• Bootstrapping
• Grants
• Debt
• Pitch Competitions
• Equity Crowdfunding
• Angels
• Alternative VC
• VC

For more detail, check out Lolita’s Medium post, which breaks this down even further.

Next, have a clear vision for how you plan to use the funds you are raising. What are the business milestones you want to achieve with this additional funding, and how much will you need to get there? Do you need to hire a technical lead? Do you need to build out the platform or technology? Have answers to these questions before you begin seeking additional funds to run your business.

Key Learning #2

Once you know whose money you want to ask for, understand what will motivate them to say “Yes!”

Lolita Taub — Storytelling is so important!

Lenders want to be repaid, not tomorrow, but a lot sooner than seven years from now — which is the timeframe investors typically have in mind. Grants have their own rules and processes. Pitch competitions can be a good opportunity, and they have their own quirks and special requirements, too. Founders should work to understand potential funders’ return and timeline expectations. Read whatever they’re put out. Get a pulse on them. Then, get to a yes faster by tailoring your storytelling to your chosen audience:

• Bootstrapping: You can build a capital reserve for your business by selling to your customers. What problems are you solving for your customers, or for the organization you’re serving? How can you solve them more efficiently, to keep more money available for growth and business development?
• Grants: Know the requirements for grants. Is this a grant focused on a particular mission? Tell the story around how your company hits that mission.
• Pitch Competitions and VCs: Judges and VCs are looking at patterns. Do you have a billion-dollar market? Do you have the right team to grow the business? If not, who will you hire when you have the funds?
• Angels: Angels are extremely flexible. They can write a check for any reason, even just because they like you. Still, do the homework beforehand to know who you’re talking to and what motivates them.

Key Learning 3

Know the tradeoffs of raising venture capital.

Bryce Roberts, Managing Director, OATV — Do you really want to go the path of raising from VC?

Consider that once you raise venture capital, you will be expected to grow your business as quickly as possible. What does this actually mean? Raising venture capital early on has the potential to change your business’ focus. Companies that aren’t venture-backed have the flexibility to grow and develop their technology according to their own timeline. A venture-backed business has to grow rapidly. Many funds look for month-over-month growth of at least 15% before investing, even at the Seed and Series A stages.

Founders don’t always understand the potential consequences of raising venture capital. For example, your solution today may be a great fit for small and medium-sized businesses, and perhaps that’s your go-to-market strategy. However, after raising venture funding, the pressure to grow faster mounts, and you then have to shift and go after larger enterprise customers. Your technology and/or business operations might not be ready for that. Still, you might shift focus anyway, in order to demonstrate the necessary growth to raise money in the future — and in doing so, you miss out on a multimillion dollar market that’s also profitable, but not as “large” as the VCs want.

Key Learning 4

Don’t write anything off, including bootstrapping.

Lolita Taub — How do you start something when your friends & family don’t have $ either

By no means is it easy to bootstrap your business. In order to even start a business, founders often sacrifice income in the short-term. If you have the ability to quit a full-time paying job to self-fund your own startup, that’s great! But not everyone is in that position. Does that mean you can’t start a company?

Not at all. In fact, some people argue that quitting your day job is the worst thing you can do. Here are some ways to work on your business, even when you don’t have hundreds of thousands of dollars to prove your business hypothesis:

• Work on your startup as a side hustle. Keep your full-time job and build your startup on the side until you can make enough money to quit your job.
• Look for grants and pitch competitions. Grants and pitch competitions are ways to get money for your business without giving any equity away. Look for grants at your local, state, and federal levels, and now that we’re all remote, you can pitch from the comfort of your own home.
• Remember that Twitter can be a tool. You can build real relationships and connections on Twitter. Most people are on Twitter. Some are more active than others, but, there is a real opportunity to get to know folks who may be able to offer advice or point you in the right direction as you bootstrap your business and beyond.