Traction is here. Raise funds or keep growing organically? That's the question...
Stephane Ibos
9 replies
Hello all,
Throughout the years, I've been privileged with creating startups that worked and exited and also to support fellow entrepreneurs through various circumstances.
One of the big question that arises systematically at some point is: "My startup is starting to get traction (users and/or revenue) - should I raise investors money to accelerate?".
Because it's a fair question, and because I've had it asked so many times, I thought I would share some personal views on the topic.
1 - Ask yourself: "What for?"
What I mean here is that it's obvious that money can bring speed of execution. This is not the meaning of the question.
The meaning is: would raising funds help me achieve my own objectives?
Raising funds means shareholders involved. It brings a whole new level of expectations, views, and to some degree pressure on results in a given timeframe.
Whilst most of the time, things happen well (in the sense where shareholders understand your progress, your goals and agree with them), it can at times create frictions that just add to the overall ride.
If your business is a steady-growing, cool-pace one and you are happy/fulfilled with that, then nobody says you have to raise funds. Just keep doing what you enjoy doing as well as you are doing it, and you'll be just fine. The "hype" of raising funds is ... exactly that - a "hype".
On the other hand, if you consider you are bootstrapping and you really want more (faster, bigger), then you should consider raising money. Just be prepared for a new game.
2 - "Which money?"
We all read around that "not all money is good money". But what does it mean?
Well it means that money comes with strings attached. It's provided by people or institutions. And these stakeholders (becoming your shareholders) can have 3 types of effect on your business on a daily basis:
None: it's called "passive money". You have the cash, you are supposed to execute a plan, and these shareholders will simply look in the end at whether or not you met your promise.
Benefits: peace and quiet for you to execute.
Downsides: do not expect any help, support (intro to new clients for instance) or actions from them. Also - if in the end you did not achieve your goals, you might be faced with anger.
Positive: These shareholders understand the risks you are taking, your views, strategy and objectives. They will support you and be active.
Benefits: More horsepower.
Downsides: Could potentially lead to a "collegial" management of the strategy and actions. You do not want to become "employee" of your shareholders.
Negative: A know-it-all shareholder that completely interfere with your business and not in a good way: 3 questions per day, micro-reporting demanded, challenging everything that is being done.
Benefits: None. None whatsoever.
Downsides: They can ruin your business.
So - not all money is "good money". How can you tell which is which?
Well - unfortunately, you cannot always. There are signs before signing the agreement. Discuss their views on how they see the relationship with you, their expectations, objectives in regards with their investment.
In the end it's a judgement call on your part. It's not rare - especially the first time - to get a bit of bad money in the mix. No drama though - if it's a minority, it is perfectly manageable.
3 - Do you have a plan?
Raising money to go bigger faster is one thing. Executing a properly planned strategy to do so is another.
The metrics you have showing traction are evidence of the market appetite for your product and your achievements so far. But they are not a guarantee in terms of how you will perform with a bunch of cash on your account.
If you do not have a proper plan (strategy, converted into objectives, broken down into milestones and activities, supported by a solid - and realistic - profit&loss model), then chances are you should not go for a raise just yet.
Why?
1 - Because you will not succeed. Investors expect to see and challenge the above, and expect to be convinced of your capacity of execution.
2 - Because you will waste time and maybe - which is far worse - loose credibility with potential investors.
SO:
Raising or not raising money. That is the question.
I'd be curious to know if some of you are questioning this at the moment. What's your take on it?
Cheers,
Replies
Dan Rockwell@floozyspeak
To me it depends on what the product is and how fast it can move to meet the customer and win adoption, continued interest and how communicable the product is to other groups solely from the initial person that got into it. Ya kinda need to do both in a way, play the part of needing and wanting money for acceleration assuming you are correct in what the customers are telling ya. It really depends on the product and that interaction cycle is it a constant need, a sorta need, a total maybe, etc. How many competitors, how are you different and then ultimately what you want to do. You want a base hit, make some $ and exit, or grow with a good partner etc. Time and time again I meet a startup that missed its window, ie not getting enough cash to matter in time. But then again startups with strong relationship products do better at their own pace. I think it just depends on the founders and then the product really and its evolving customer etc
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In my experience, (For B2B) its always better to not raise until you have a product market fit with early customers. But (For B2C) an MVP product also works for a pre-seed or seed stage round because you require initial capital to market and get validation.
keypup.io
@bilal_chaglani Not an expert in B2C, but seems to make sense. Totally agree with your views for B2B.
Hi @Stephane Ibos, I absolutely agree that everyone needs to make a choice based on their plans, current financial situation and ambitions. Also, you've mentioned that investors can cause problems in a startup, but I wouldn't say it's unavoidable. If you go for investors, just make sure you choose the right person.
keypup.io
@aleksandra_vovchenko Absolutely and having problems with investors is thankfully rare and totally avoidable!
I have seen situations where they have caused problems. Personally in my ventures, it was never the case.
It's all down to setting mutual expectations and for the founders to be clear, clean and transparent.
It is always the matter of meeting the right people at the right time :) But generally, if you know what to expect you can always prepare the right conditions for you.
For example, a person wants to receive a daily reports every day? Do not agree to that right away - set a meeting with that person and try to understand why they need so many reports? Do they realise that this slows the actual development process and delays their potential exit time? Are they reading those reports or they just want to keep you fit? And so on. At the end of that meeting, with the right questions that person will be willing to reduce the number of reports by themselves :)
Or, let's say there is a risk of being trapped into as you said 'collegial management' - here you need to be prepared not to step to that in the first place. Keep the proper amount of shares at your side, and ask yourself, why you are actually giving such a big part of your shares to so many people? Is the project too big? Is there incorrect valuation? Please note though, that this is usually, but not always, a bad thing - management can actually help your product grow or at least making directions changing towards the corporate attitude.
The organic grow is good as well, but just treat it as a strawberry plant (or any other, pick one :) ). You can grow that strawberry at your yard and you will be getting 20 berries a season, or you can hire a farmer, a manager, a land and make it a strawberry farm - all of that will require money (investment per se). And yes, with your yard, you can achieve the same volumes as the farm, but it will take ages, where the investment actually provides you the possibility to make that happen quicker and with (potentially) more effect.
I would suggest to just to not stop doing what you do and if there is any investment seems to be happening, just do a homework - most likely you can find a lot of information about that person/fund/etc. and read/watch/listen as much information as possible about making the right deal before signing any document.