Most Successful Startups Raise Outside Capital
Chapter Two Excerpt: Startup Muse available from Amazon
When I was just starting out in the startup game I was curious why so many previously successful and presumably wealthy entrepreneurs raised outside capital for their new ventures. The process is overwhelmingly time consuming and stressful. Over the years I’ve done it both ways and I have decided that it almost never makes any sense to forgo the fundraising process unless you’re building a lifestyle business. Here are five reasons why you ought to get someone else to fund your startup:
Raising outside capital requires that an entrepreneur get his ducks-in-a-row ; understanding the market, recruiting the team, finalizing the product or service, building a financial model, and so on. This is important because if you’re using your own money you’re more likely than not spending it too early. Money = Runway for startups. The earlier in the process you begin spending money the shorter your runway will be. I’ve done it both ways and EVERY time I used my own money I started spending it WAY before I should have.
Investors look at hundreds of deals each year. They are keenly aware of what is going on in your market. Entrepreneurs are often so focused on their own project they don’t have time to figure out what everyone else is doing. Meeting with investors to talk about your deal is a great way to understand how you fit into the larger ecosystem. Every single time I’ve started raising capital my business changed — sometimes in big ways — as a result of the feedback I was getting from investors.
Validation and Social Proof
Once you’ve begun meeting with investors it should become very clear whether or not you’re going to be able to raise seed capital for your startup. If you’re not able to convince anyone to give you a few hundred thousand dollars you should seriously consider making a few pivots. If you’ve made a few pivots and you’re still not able to raise any capital it might be smart to walk away and come up with a new idea/ company. Convincing someone to invest capital in your startup is a VERY strong signal. It can help you attract co-founders, employees, customers, and future investors. The social proof that an investment provides cannot be understated. In my own experience once we raised outside money from “smart money” like Eduardo Saverin we were able to attract top talent from companies like Twitter and Facebook. Something we couldn’t do on our own.
There are “ways things are done” in the startup game — you don’t want to be different. Raising capital at ever increasing valuations provides the market important information. It helps past and future investors understand the level of success your company has achieved making additional investments more likely. It helps potential acquirers understand what they should pay for your company. In my own experience we were approached by Yahoo to buy a company we had self-funded with a convertible note. Since the company had never raised outside capital Yahoo’s M& A team had a VERY hard time justifying the valuation we wanted.
I’ll let you in on a little secret — preparing for board meetings is a pain in the ass. Some investors require monthly meetings and sometimes it seems like you’re spending 25% of your time each month preparing for the meeting. BUT, having quarterly board meetings with quality board members can be a huge advantage for your startup. I’ve never gone to a single board meeting for a company I self funded and that lack of accountability was always detrimental to our progress. The funny thing is that you already know what you need to do — sometimes having to admit it to someone else is all you need to do to make it happen.