- 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.
In any case, the process of fundraising, especially from a venture capitalist, or even an angel investor, is often a long shot. It requires a tremendous amount of time and energy to formulate the perfect pitch, and run after all potential investors you can set sights on. This is valuable time that you can spend on perfecting your product, acquiring customers, or establishing a clear business model that works. Now, let us assume that you manage to get funding, and even get featured in a TechCrunch headline for bagging massive sums in equity investment. What happens after that? You have money in the bank, and you think you can take on a few more expenses, so you do. Your expenses soon balloon to match the amount of money your investor wired to you, but your revenue refuses to climb as high. No point blaming your luck then, because you ran after an investor before you could figure out a business model that could generate the necessary revenues. In any case, early stage revenue scalability can often be quite slow, even if you manage to get your business model down pat. At this point, you are likely left with a loss making business that you keep pouring more money into, because you think it's almost there, and the bets are too close to success for you to give up now! If this sounds unrealistic to you, or you think it won't happen to your startup, you just need to take a look at SoftBank's portfolio of companies. It will save my breath in trying to explain why more money doesn't equal more success, and it will be far more compelling in terms of discouraging evidence.
The Oxford English dictionary defines "turning point" as "the time when an important change takes place, usually with the result that a situation improves". Since this definition does not really sound appropriate for being saddled with a loss making business, low equity stake, and a bunch of investors who all have their own agendas to fulfill, I'd say that fundraising is not the turning point for your startup!
The Lean Startup Model and Why it Works
Eric Ries wrote "The Lean Startup" all the way back in 2011, and if more startup founders had paid attention to what it said, they would have more success in building sustainable businesses. I have explained why fundraising cannot be the turning point for your startup, especially if you are in the early to mid-stage range. What can be a true turning point then? For me, it is developing a business model that takes into account all the current and future needs of stakeholders (including founders, customers, employees), the organisational mission and vision, and a clearly demarcated calculation of projected revenues, expenses, break even point, and profitability. Developing a SMART business model, one that specific, measurable, achievable, realistic and timely, is half the battle won when looking for your turning point. Having an intrinsic knowledge of the business, and harnessing its full potential are the key elements in building a great startup, and not one that takes a tumble the moment it has to go public, if you know what I mean. A lean model works particularly well while developing your basic business structure, particularly in the early days. Inspired by Toyota's practices, Ries explained how startups can cut costs, eliminate wastes, minimise feedback time, and boost productivity. The idea is to basically streamline all expenses and activities of the startup, in favour of a model that deems all frivolous expenses as unnecessary. If you can get something done at half the price, forget the frills and go for it! This is why I feel bootstrapping is a better option anyway, because it forces founders to put each and every penny to good use, unlike funds they got from an investor against some equity that seems intangible at the time. I have already explained how expenses can automatically skyrocket and cause financial haemorrhage the moment a startup takes in investor funds. This is precisely what the lean model seeks to combat. The turning point of your business should come from minimising costs and optimising resource utilisation, and not from flamboyant spending habits. The lean approach allows startups to scale slowly, accumulating less debt and holding onto more equity, to build a business that has earned its worth and can justify a hefty valuation. These are the businesses that last, and thrive in the public market later on, instead of barely surviving like Uber is right now.
Startups That Found Success w/o Funding
Some of the most successful startups in the world have found their turning point without having to knock on VCs' doors. A principal example of this is Dropbox. Its turning point was devising the plan to use a 3 minute long screencast to test if there was a demand for this value proposition. It checked if people were really interested in a file sharing service like this, and also created a buzz among potential users that a service like this was on its way. What's more, the firm also got an idea what features their prospective customers wanted, through quick feedback generation. When the response was favourable, the startup team set out to create a product that would satisfy the needs of their customers, and the rest is history. Zappos is yet another example of an old startup that leveraged the concept of e-commerce all the way back in 1999 to build a business. Instead of investing in inventory, storage facilities, and a full fledged distribution channel, the founder just created a website, using it to sell shoes at his cost price from a local store to figure out if people were interested in this model of purchase. It worked, and that is when he moved to expand his operations, and put in more money to sell shoes at a profit. Zappos later went on to become a billion dollar enterprise.
If these examples tell us anything, it is that you don't always need a heavy investment to grow your startup and pave the path for stupendous success. The turning point comes at a different stage for every business, depending on its unique vision, value proposition, and business model. Figuring that out correctly is what makes good founders, great. The turning point of a business can be devising a great customer acquisition plan, or finalising a great distribution deal. It can even be a new innovation that updates your product features, and sets it apart from competitors. Whatever this turning point is, it has to be based on an intimate knowledge of the core business, and not just a heedless lust for high valuations. You may make headlines with an illustrious funding round, but to build a business, you have to realise that funds can only take you so far and a well-defined business model in touch with reality will always be the way to go!
