Entrepreneurs: Stop raising, please.

tl;dr – too many worry about funding, when they should be validating their business first.

I’m constantly talking to fellow or aspiring founders. The very first questions I try to ask are: 1) How can I help? and 2) What is your biggest challenge today. The top response (by far) to both these questions is “I need help raising capital.” I cringe a bit*, but wait and probe deeper: “Why? What do you need the capital for?”

Usually, the response is something about needing to build the product / hire the people or pay current ‘partners/co-founder’ so they can come on full-time / pay an outsourced developer or designer… Although not all terrible reasons, I view this general question and subsequent common responses as potentially missing the point.

I am really asking the entrepreneur about their underlying business and I don’t consider fundraising to be a step in validating the business. It might be required (usually optional, taken to accelerate progress), but is clearly a means to an end, not a destination. Further, an overwhelming percentage of those that ask me about fundraising are both not ready for financing and should probably not accept financing yet (if offered).

Why? The vast majority of startups have no solid indication of product-market fit. There are a lot of great resources online about this, but said simply: do you have something that people want (and hopefully are proving it to you by paying or enabling you to monetize through another channel). If you haven’t released anything, haven’t put up a landing page to test interest, haven’t even tried to sell to customers to get their reaction, it will be incredibly hard to raise capital from anyone savvy. Good investors know that it is so easy to glean early signal from the market on almost anything (yes, even big/hard stuff like healthcare, education, energy, etc.). The time, cost & effort to create a horrible prototype or a concept video, or try selling is approaching zero. The closer you can get to validating some product-market fit, the easier it will be to raise.

Look hard at your company/idea and ask what fundamental assumptions must be true for this business to exist. Make testable hypotheses that would validate (or invalidate) these assumptions as objectively & quickly as possible. This is essentially the Lean movement.

If that means living without a paycheck for another 3 months or not paying your partner or digging into your savings or throwing together a quick and small friends and family convertible note round – do it. If you can’t be scrappy about this stage, if you can’t convince people to take a risk on your venture with you, why is an investor going to believe you will be resourceful and resilient when the emotional and financial rollercoaster really gets cookin’.

[Here’s one of those cliché statements that no matter how many times you are told you don’t fully understand until it happens:] Fundraising is a full-time job. It is all consuming and during that time, at least one member of your team is not making any progress on the business. In such a vital stage, where growth percentages and traction metrics are kings, this can drastically reduce the attractiveness of your company if it is not moving in a clearly positive direction.

Also, the time it takes to close a round is highly correlated to the amount of validation you’ve achieved. Take the following hypothetical situation seriously, as I believe it is common: starting to raise money in your current state might take 3 months, where as spending 2 months to land your first 10 paying customers, might change the investment discussion so significantly that it takes 1 month to close. In the end, you have the same amount of money, but have a very different business. Further, that assumes you can even raise at all without that validation AND if it doesn’t work, you found out 5 months earlier (3 months of raising + the 2 months of business development).

*despite the fact that this is a topic I feel well equipped to discuss, I am anticipating their rationale.


UPDATE: At this point, I feel the need to address another common retort: “Shouldn’t I start to build relationships with investors so that when I want to start raising I can do it quickly?” This is an easy (yet potentially controversial answer): No. Don’t waste your time. Here’s why: you’re smart, your business sounds reasonable -> it is easy to get meetings (or have people reach out to you). You go meet with a potential investor, they give you some good tips, you feel like you are being productive and helping your business, they tell you they are interested and appear excited (remember that’s their job). They want to stay in touch. You decide to take a couple more similar meetings. A month later you look back and you’ve taken 10-15 meetings, spent a couple hours prepping – you’ve wasted a decent chunk of time that you could have used working on the business. Further, your business will likely change in the next few months – anchoring an investor with your (probably bad) initial ideas and lack of understanding puts a first impression in their mind that may be hard to shake later if you pivot. As a bonus, if you say “not yet, I’ll get back to you in a month when I am ready,” you seem both in control and like the sexy girl pushing her suitors off a bit so they.

Posted on July 15, 2014, in Venture & Start-ups. Bookmark the permalink. Leave a comment.

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