- Vinay Nair
Funding is not the Turning Point of your Startup
Fundraising has been the startup scene's favourite buzzword for years now, with everyone trying to figure out how to get it just right. Journalists and experts can't stop writing about it, and founders can't stop chasing after it. As for SoftBank, it just cannot stop fanning the fire of reckless fundraising, even as the flames close in on its wobbly business model.
Clearly, fundraising has been the flavour of the moment for far too long now, giving the undue impression to startup founders and their teams that this is the turning point for their startups. Few can blame them for this belief and obsession. After all, listicles and expert columns describing the pitfalls of fundraising are in woefully short supply compared to the pieces that dispense advice on how to raise funds, as if that is the be-all and end-all of startup activities.
While there are several advantages of fundraising as well, particularly for resource-intensive firms that need a lot of money for delivering on a minimum viable product, a worldview focused on funding alone is misleadingly myopic.
Fundraising isn't the turning point for your startup and let me help you understand, why?
Role of Fundraising in a Startup's Growth
The role of fundraising in paving the path for a startup's growth is largely dependent on the nature of the startup and its basic value proposition. While I am not the greatest fan of raising funds in the early stages of growing a startup, it is undeniable that some startup ideas require a tonne of money upfront, and that amount of money often cannot be bootstrapped by the founders alone. However, such resource intensive businesses that need a lot of real estate, or expensive prototypes to set the wheels in motion; are few and far between. Most startups that we see in Silicon Valley or the ecosystems around the globe, are trying to create value by innovating with something simple. Often, it is just a mobile application that delivers a certain kind of value to its users. Other times, it can work with small quantities and limited volumes initially, in order to build a solid foundation for a sustainable business. For startups like these, chasing after venture capitalists for fat cheques makes no sense. It is way too much effort for something they might not even get, and if they do end up getting it, it is nothing but a pile of expensive cash in the bank they had to give up a large slice of equity for. If the founders of such businesses are absolutely incapable of bootstrapping their businesses, which is honestly one of my favourite approaches, they can always opt for a small friends and family round of funding. While bootstrapping is the most convenient, a friends and family round can be more flexible and limited than trying to grab a share of all the VC money we keep reading about in industry news sites. In any case, anything beyond the bare minimum funding tends to create a significant number of problems, which these fledgling new businesses are quite ill equipped to deal with.
Pitfalls of Raising Too Much, Too Soon
For anyone who is familiar with my point of view on fundraising, it might seem repetitive to once again read why raising too much funding for an early stage startup can potentially ring its death knell. But this is an appeal that will continue to fall on deaf ears till the industry publications stop glorifying exorbitant startup valuations, so I am guessing I will have to cry myself hoarse till they do. What really happens if you raise too much money too soon? Much more often than not, unless you are a wunderkind with a revolutionary startup idea up your sleeves, raising funds at an early stage means giving away a large chunk of equity. After all, why else would an investor bet his or her money on a business that has little to no track record to boast of? All investors want some skin in the game, and when the risk factor is so high, which it usually is for most startups, even mid-stage ones, they are bound to ask for more. While it may initially seem like a good idea to give up some equity for getting your hands on an some money and an investor's backing, it sets you up with less equity to sell in the subsequent funding rounds, further diluting your stake in the business that you have built with your blood, sweat, and tears.