Why You Need Not Raise Funds For Your Startup!
Being a tech enthusiast with a fair bit of experience on the startup scene, I am naturally quite a regular on sites like TechCrunch, looking for my daily fix of industry updates. While I do thoroughly enjoy most of what I read on these platforms, I have only recently begun to notice a long-standing trend that dominates much of tech and business reporting today.
Many of these platforms are often peppered with headlines hailing the massive funds raised by a few famous startups. Uber, Slack, Dropbox and Square have all found mention in these publications at some point or the other, for having brought in astronomical sums from investors. While such fundraising may have been consistent with their business models and even laudable, our repeated exposure to these headlines often makes us forget one very important fact.
It is that an overwhelming majority of startups are nothing like these firms and can in no way seek to emulate their funding strategies without digging themselves into a hole.
Even though the example set by these "unicorns" have swayed the hearts of many existing and prospective founders, I seek to strike a note of caution. As I see it, most startups should really try to move as far from fundraising as they possibly can, unless they are the capital-intensive sort that simply cannot take off without funding. Why, you ask? There are just too many reasons to ignore the perils of fundraising!
Friends & Family
We see startups raising funds from diverse sources, with 38% of them (in the United States) reporting, according to Fundable, that they have taken money from friends and family members. At first glance, this may seem to be a rather innocuous funding strategy. After all, it remains in your close social circle, right? Well, that is exactly a part of the problem. Typically friends and family rounds do not offer much in the way of technical expertise or operational guidance, and only spout a sense of obligation that you must take back into your personal life.
Moreover, since they typically contribute an average of $23,000, it does not even have the greatest impact in transforming the economics of the business. If anything, the advance ends up being treated as a loan of sorts, which is something you can definitely do without so early on in your venture.
Another source of funding that founders often get very excited about is angel investing. Angel investors, typically high net-worth individuals with a drive to build sustainable businesses, often contribute money and a fair bit of mentorship in return for equity. On paper, this does sound like a lot of fun, as angel investors come bearing the best of both worlds: money and guidance. However, a word to the wise, it is terribly time consuming to get hold of an angel investor who will actually get on board. There are only a limited number of angel investors around, and even they must pick and choose to see what fits their vision the best.
Preparing to pitch them takes up way too much time, often for no reward at the end. At the outset of your startup journey, time is just as precious as money, and do you really want to jeopardize one for the other?
The next possible option for founders is knocking on the doors of venture capitalists. When one skims through the tech and business publications and their alluring headlines, this seems to be the most promising of the lot. After all, they are said to be investing an average of $2.6M in startups, in a year. The lure of these high amounts can be incredibly thrilling, with startups setting out to woo venture capitalists with everything they've got. However, this too is often an exercise in squandering time. Some bloggers estimate that a mere 0.5% of startups actually get their hands on VC money, and in the case of the ones that don't, there is simply no justification for the kind of time they need to waste on pitching to VCs.
The process of pitching for funds is just as gruelling as planning and executing sales, and it takes away valuable time from the organization. Moreover, since startups often have only a few people juggling multiple roles, it also becomes an unnecessary preoccupation that just takes away from the vision of the enterprise. More crucially, in the investment scene post-Uber and post-WeWork, venture capitalists are increasingly beginning to opt out of a growth-only strategy. Looking to get back decent multiples on their investments quickly, they are now reportedly tightening purse strings, with a Forrester report predicting a slow year on year growth in VC investment in Indian startups come 2020.
In any case, taking on a VC so early straddles a founder with the responsibility of fulfilling profit obligations to the backer, and gives away too large a slice of the equity. Wasting time, some money and a lot of effort for essentially bringing home some very expensive funding makes little sense in today's startup landscape.
Bootstrapping is frequently posited as a decent solution to the funding problem, and I think that is an option that many founders can definitely consider.
Having said that, however, it is imperative to remember that even bootstrapping must come with a certain degree of prudence. There is no justification for spending your hard-earned money on something that may not yield the best possible returns. Instead, what can work is the traditional route of building a business first, and a firm second. Fundable lists customers as a crucial source of funding, and in a way, they are right. If a product or service sells well, with profits growing sustainably, that in itself can propel it forward, without having to depend on massive sums of money from the outside.
Of course, this strategy would not work for those startup ideas that are capital intensive right from the get go, but for most new enterprises, this old school approach should work just fine. Not getting a boatload of expensive cash at the outset can help in generating stable growth devoid of reckless spending, and can preserve a much larger (and in the ideal case, the entire) share of the equity pie. One can argue that investors can often act as mentors and guide founders through the frankly arduous journey towards startup success. To that, I will just point out that the number of startups that can boast of having received such personal attention from industry majors, is far too low to be considerable.
In any case, chasing after funds can often distort the founding team's long term vision for the enterprise. As many founders have noted in their personal anecdotes, they have often fallen prey to the idea that they must be "fundable" to succeed. Now, since being "fundable" and being sustainably successful are occasionally overlapping but almost always very different things, this approach has often led them astray. Therefore, my suggestion for most new and aspiring startup owners would be to refrain from pandering to the fund-lust that seems to have taken over many industries. If they focus on building a smart and efficient business instead, that will reap far more benefits for them in the long run. As long as they have a clear vision and great product that fits the market, they should be fine, even if they don't make headlines for all the funds they've raised!