Most Entrepreneurs Should Not Raise Capital
Chapter One Excerpt: Startup Muse available from Amazon
Raising outside capital is often a mistake for first time entrepreneurs. Starting a company and launching a product or service is an “all consuming” endeavor. Raising capital is similarly “all consuming” and as a result it is all but impossible for first time entrepreneurs to do both successfully. Tragically, many entrepreneurs put their dreams on hold waiting to actually “start” until they’ve secured an investment. Given the realities that fewer than 1% of startups ever raise venture capital I’d recommend that first time entrepreneurs avoid raising capital for as long as possible and focus on building their businesses instead. You might be glad you waited — money isn’t the answer to most problems startups have.
Mo Money Mo Problems: If you’re a fan of Biggie you know that “mo money means mo problems”. The reality is that you’re always going to have problems, but the more money you have the faster the problems will arise. Sometimes it makes sense to grow slower, especially when you’re just getting your start. The problems will still come, but you’ll have the time to find solutions. If you’ve raised outside capital and suddenly get bombarded by problem after problem (and you will) your investors will quickly realize just how unqualified you actually are — and don’t fool yourself — there is always someone else who can do your job better. Sadly your investors will recognize this and hire the one person who is less qualified than you (just kidding, but not really). This has happened to me more than once (not fun). Remember, most startup founders are replaced within a year of accepting outside capital.
Fuck Off Money: Not to be confused with “Fuck You Money”, “Fuck Off Money” is having just enough money in your personal bank account that you feel comfortable saying no — to anything. When you’re first starting your entrepreneurial career having a little money in the bank is perhaps the most important asset you can have. Bootstrapping your first startup and putting a little money in your personal bank account can give you the leverage to make your next deal the home run you’ve dreamed of.
If you depend on your paycheck to make it month-to-month you will likely become an employee instead of an owner. Having a few hundred thousand dollars in the bank can make all of the difference when you’re negotiating your next deal. And let’s be honest, what are the chances your first idea/ startup is going to be your best?
Know Your Enemy: Sun Tzu wrote THE book on warfare and in many ways building a startup is a lot like waging a war. Sun Tzu advised generals to “Know your enemy…” While investors certainly aren’t a traditional “enemy” it doesn’t hurt to try to understand how they tick.
You need to realize that investors spread their risk across multiple startups and as a result their tolerance for risk in any one deal will necessarily be a LOT higher than yours. In most cases (unless your name is Jack Dorsey) you can only run one startup at a time — while an investor will be involved in several at any given time. Over the course of your career you’ll be lucky to have two or three more chances at bat — depending on the investor they may have 100 to 1600 times at bat. Your investors are going to want to push you to the bleeding edge to maximize their chances of an outsized return. Given the economics of venture investing (fee structure, carry, and so on) a 2– 3X return on capital won’t cut it — they need 10X and above to begin to make a return for their limited partners (and themselves).
Given this reality, first time entrepreneurs need to realize that they could very easily work on a startup for 5 years only to walk away from an exit with little or nothing to show for their hard work. Over time your cap stack will get complex and even a $ 100M exit for a company that has raised $ 20– 40M can mean the founders make almost nothing — perhaps as little as a million dollars. Venture backed deals are designed to be zero sum — if the company is a hit everyone gets rich — if the company is anything less no one makes anything.
Contrast this with a bootstrapped startup. The time to exit on successful bootstrapped startups is often half as long as a venture-backed startup — of course the exit values are usually 10x smaller as well. But if you own 100% of a $ 10M company you will make $ 10M when you sell it. Even if you only made $ 1M — making a million dollars in 2.5 years is a lot better than making a million dollars in 5 years. Think long and hard before raising money for your startup. If you’re a first time entrepreneur I can’t stress enough the advantages of bootstrapping your first company. Most successful businesses (and success is a relative term) never raise a dime of venture capital — take a drive through Highland Park, Texas and take a look at the homes — almost none of those are owned by people who raised venture capital.