When Is Raising Funds A Bad Idea

For lots of first-time founders, raising money is the first hurdle they need to cross. This is like a rite of passage and they feel that unless they are able to raise oodles of cash, they’re not going to be able to run their startup successfully. This is partly because of all the media buzz around funding and since it’s only the startups who raise money which gets written about, it’s completely natural for all entrepreneurs to believe that this is the only path to success.

This is extremely short-sighted. While it’s true that there is a right time to raise money, it’s also true that there is a wrong time – and, especially, for a young startup, raising funds too early can actually be harmful. This is true for multiple reasons.

Raising funds is a long, complicated, time-consuming process, which distracts you from running your company, so that instead of focussing on your consumer and creating a product which delights him, you start focussing on investors.

Funders can be hard to deal with. They waste your time, lead you up the garden path, say contradictory things, and make all kinds of promises which they never live up to. The experience can leave you embittered and disillusioned.

Investors Are Not Validators

The truth is that getting a buy-in from investors and raising money is hardly a validation that your startup will be successful – you should aim for getting paying customers instead! Ironically, once you start getting customers, the investors will follow – I can promise you that.

Unfortunately, the reverse does not work, and just because you’ve raised money from investors doesn’t mean that your product will be accepted in the market. Just because investors have money doesn’t mean they have all the answers. If they were really so smart then they would all be rolling in money by starting their own companies!

The danger is that once you have money you start becoming sloppy. You are happy to burn the money because that’s what your investor wants. No longer are you frugal, and you don’t think about being creative within your constraints. Because money can cover up a lot of errors, you may end up going down the wrong path – often instigated by “insights” from your investor who has a great 30,000-foot view of the market, but may be completely out of touch with reality.

By the time you realise that you’re up a creek without a paddle, you’ve burned all your money and you can’t recover. You’re then saddled with not only a damaged reputation, but a lot of blame and recrimination as well which can be hard to live with.

Why Being Bootstrapped Matters

On the other hand, if you are spending personal funds, you’re likely to be much more conservative and careful. This helps you take advantage of the major benefit of being a startup – you can be nimble and since you can afford to experiment inexpensively, you can fail fast. Also, because you are not answerable to anyone else other than your customers, you don’t have to worry about trying to keep your investors happy.

While having a certain amount of money can be a useful cushion, raising it too early can be toxic. This is something which founders often don’t realise because it’s so exciting to be able to get a boatload of money from someone simply by making a presentation. The trouble is that this encourages shortcuts, which will come back to haunt you afterwards. It will be very difficult to recover from these errors, simply because you ended up spending so much money on pursuing a red herring.

If you fail to raise money, don’t get disheartened or disappointed – this could actually be a blessing in disguise. Just because your investors have said no now, doesn’t mean they will continue to say no. Get some paying customers and they will be singing a different tune!

[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.