Andreas is the founder of No More Startup Myths. He is a 25-year old junior startup development specialist, blogger and aspiring entrepreneur.
Do your own thinking independently. Be the chess player, not the chess piece. —RALPH CHARELL
Raising capital is not for us; here’s why and what to do instead
If you’re thinking it would be a good idea in the development phase of your startup to raise capital…..
Indeed, raising capital can increase dramatically our startup liquidity.
Indeed, this liquidity can enable us to reach the market quicker.
Indeed, the scalability of our startup early stage can be increased significantly.
But, in our today post I will explain why raising capital can proved to be not such a good idea and might have the opposite results.
And most importantly I will point out what many startup experts suggest to do instead.
The Myth of Raising Capital
Unfortunately we live in an era that many believe that there are shortcuts for everything. And these shortcuts don’t arise after a thorough analysis of the existing options and figuring out if there is another way, is simply delusions that are having.
You can’t see it everywhere. Take a moment and observe the various ads that play all day long.
Do you want to learn a language; fluent in English in 3 weeks.
Do you want to lose weight; the secret method that made nutritionists to lose their sleep.
And the reason why these ads exist is because there are many naïve individuals who believe on them.
And you’ll ask what do you suggest, is raising capital for naïve individuals?
Of course not, raising capital is a viable and good option for a certain kind of startups, in a certain business life-cycle (after proof of concept because the leverage dynamics change; you have more than some unproven assumption), nonetheless my point is the following.
Although that these scam ads have nothing to do with educated individuals with common sense, there is a growing trend in the startup community for raising capital.
And you might ask ok is it something wrong with that?
The big risk of losing focus
My answer; Not necessarily, but the big risk with this trend is that make aspiring entrepreneurs lose focus of what is important, or if you wish what is the ultimate goal of any aspiring entrepreneur.
Is perceived as some kind of shortcut, which they think will make them come one step closer to their entrepreneurship objectives.
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Of course, the finance part in the startup development phase is an important element of the whole business model. If you don’t have the necessary capital for building your startup, you’ll not have a startup as simple as that.
Nevertheless, as we stressed in one of our previous post, each aspiring entrepreneur have 2 options, either play it safe (or as I interpret it smart), and select a startup type that doesn’t require any or just a small startup capital, or to take the road of big risks and play the all or nothing game (or as they say it, play it big).
It’s entirely up to us which path we want to follow based on our objectives, ambitions or idiosyncrasy.
But going back to losing focus, our only objective in the development phase is how on earth we can build a “product” that can achieve having a product-market fit (validated that we have a viable business model) and after attaining that objective we can concentrate in the other things.
Nevertheless, there is hype among youngsters about raising capital; how it will transform their startup, how it will pave the way for materializing their startup vision and personal ambitions.
However, they forget that all of these thoughts without fulfilling the #1 goal of any startup; of having a product-market fit is simply aimless, useless and dangerous, the only thing that serve for is to continue building castles in the air.
What Steve Blank has to say about this obsession “Chasing funding versus chasing customers and a repeatable and scalable business model, is one reason startups fail”
An inconvenient truth about raising capital from a Venture Capitalist.
But all the great companies followed that path, raising capital is the way to go for.
Is that true?
Mark Cuban one of our startup experts, an ultra-successful entrepreneur, a VC and by the way billionaire…. belong to the opposite school of thought among many others.
Mark Cuban in his best-selling book (How to win at the sport of business) enumerates a number of outstanding companies that followed a different path in their early stage and they didn’t regret it. Dell, Microsoft, Apple, HP and many others started in dorm rooms or garages.
But it that the exception?
Sadly for many not, this is how the vast-majority of great companies started. However it doesn’t matter what the others did, it could be a coincidence, our objective is to factor in the pros and cons of each option (raising or not capital) and choose what match with our particular case.
In this post I will stick with the cons because I think the pros are fairly understood.
Here what Mark Cuban has to say about raising capital:
“Sweat equity is the best startup capital. The minute you ask for money, you are playing in their game—they aren’t playing in yours, you are at a huge disadvantage. The minute you take money, the leverage completely flips to the investor. They control the destiny of your dreams, not you. Investors don’t care about your dreams and goals. Investors care about how they are going to get their money back and then some”.
Do you think he exaggerate?
But what about the win-win nature of these partnerships?
What about the common purpose towards the mutual benefits?
Both arguments are concrete and are valid, the issue is that no matter how careful you are with the selection of your investor you can’t never know for sure how this relationship will turn out. The only sure thing is that you’ll be stack in this relation with them and you’ll lose some control of your business.
Of course I will reiterate that for certain kind of startups this approach work and can prove very advantageous. It’s our responsibility to take into account all the variables and select which we thing is best for us and nobody else.
But my understanding is that the main reason why we selected the entrepreneurship path wasn’t for the money, wasn’t for the fame, wasn’t for the status (don’t take me wrong these are more than welcome if they come), but for only one reason; autonomy and flexibility.
We can’t stand to be dictated to us what we need to do, how to do it and someone else write our life script. We want to live life on our own terms and we don’t negotiate with it. We are not willing to settle with less than that and we are willing to do whatever it takes to obtain what we relentlessly work about the last year of our lives.
But the question is, if an investor come in the equation is it possible to still attain those non-negotiable goals?
I’ll not answer on your behalf, each one of us has to figure out the answer in this vital question.
I will not dive in too much in the solution part I think I implied the solution in my arguments above. I devote a whole post about what is been recommended as an alternative, and that solution is well-known; is the art of bootstrapping (check out this post if you want to learn more).
The bottom line of this post can be summarized by one comment of Mark Kuban: “The reality is that for most businesses, they don’t need more cash, they need more brains”.
This applies for startups as well.
Never forget that…
What do you need to start a business? Three simple things: know your product better than anyone, know your customer, and have a burning desire to succeed. –Dave Thomas, Founder, Wendy’s