Stop Thinking About Raising Capital For Your Startup
Start thinking Like A Business Person
I was still in graduate school when I got involved with my first venture capital raise. I had a senior role with a small and growing specialty food retail company.
Five years prior I had started my own business in the same retail category. I started that company with my own capital and was fortunate that it generated cash flow, so I never needed outside investment. After four years, I sold it and used the proceeds to pay for graduate school and invest in this new company.
I thought that raising capital was a great thing. It was like making it into the big time. Investor meetings, projections, CFO and CEO strategy meetings. It was a rush. When the funding offers came in, that is when I realized the pitfalls to raising capital and the real cost of money.
Since then, I have gone on to found five other businesses. Some of these I raised outside capital and some I did not need to. I have helped even more startups with their capital raising efforts along the way. Here is what I learned that would help you.
Ask Yourself Why?
Make certain you know why you need to raise capital. Many startups think they need to raise venture capital as some badge of honor to legitimise their startup. Well, you’re wrong. Yes, it brings money into the company. But that money is costly. In some cases, the investor takes an annual advisory fee. Additionally, in the event of a sale of the company, they can get their initial investment out first and maintain their shares. This essentially doubles their percentage investment.
Many of these early stage deals provide the investors with a lot of control. Even if you get to maintain 51% shareholder control, you may not control the board, and there may be restrictions and approvals on future investments. So be careful and understand what you need the money for and why.
Use Your Time Wisely
When you are starting your business, raising capital can take up most of your time. This is the time you should be spending growing your user base. Whatever your product is, you should be spending most of your time growing users. The more users you have provides proof of concept. This will give you more negotiating leverage when raising capital
Make A Lot Of Noise
If you look at all of the startups that got very good valuations on their capital raises, they made a lot of noise in the press. Get as much as you can. You are better off spending your time growing users and getting stories about your startup with bloggers, business writers, anyone who will listen.
Many investments are driven by fear of loss and greed. So it investors thinks your startup is hot because of all the press you are getting, they are more inclined to move quickly with a better valuation and fewer restrictions.
Bootstrap As Far As You Can
The more users you can get and the more you can prove your economic model, the more negotiating leverage you have. Do what you can do to keep moving the business forward using whatever capital you can get. If you believe in your idea, then it may be worth the risk to tap into your piggy bank, float your credit cards or cash in your savings.
Your startup may need outside capital. But before you go jumping into the venture capital world, think strategically. Is there another business that can benefit from your startup? What about a supplier or a complimentary business?
If I need to raise capital, I always try to find a strategic investor first. There are fewer restrictions on the investment. A strategic investor has knowledge of your business channel and can add more value in addition to money. Most important, the strategic relationship may enable you to scale faster.
Think like a business person and focus on growing your business, not raising capital. An investor wants to see user growth, retention, and an economic model. So focus on building those KPI’s, and you will have plenty of options for capital if you do it correctly.
If you spend your time and effort growing users, you may find that you begin to generate enough cash to continue growing and may not need venture capital.