Should you raise capital for your startup?

It can be an amazing way to accelerate growth, bring on valuable partners, and increase your chances of building a transformational business.

It can also be easily misunderstood or an ego trap.

Founders think they need to fundraise because “everyone else is” or “that’s how it’s done in tech.”

But if you fundraise for the wrong reason, the raise itself will be time-consuming and frustrating, and it will rarely generate the long term positive outcome you were hoping!

Here are a few phrases or reasons to watch out for!

If you hear yourself (or a founder friend) saying these, take time to reflect on your motivations and goals.

And of course, the O’Daily is nothing if not practical and action-oriented. We’ve included some alternate strategies or ways to think it through instead!

1. “Because my competitors are.”

If all your competitors jumped off a cliff, would you do it??

Seriously though, when the news cycle is reporting that a company similar to yours raised big bucks, it’s hard not to feel like you’ve missed the memo or are falling behind.

Two reminders:
1) Tech news rarely reports the full story.

2) High tide lifts all boats. Aka that competitor is going to invest heavily in marketing for your industry and that will help you also! (Remember: in big markets, there are multiple winners!)

And a story:
This happened to one of our studio companies. Two competitors raised BIG rounds. The studio company raised a much smaller round and stayed focus on serving customers. Fast forward 3 years, those two competitors are shut down or in turmoil. Studio company is winning big deals with hockey stick growth.

It can be hard to take the ego out of it but do what is right for your company!

What To Do Instead:
Analyze your company, product, financial position, and goals. What, if any, is the right amount to raise? Do what’s right for you, regardless of what the other bozos companies in your industry are doing. In a big market with lots of winners, you need to be around long enough to win!

2. “Because it will help us close deals.”

If the founder can’t sell the product, no one can.

And if you can’t close a deal on a shoestring budget, more money won’t help you.

Funding can help fuel sales and marketing.

Adding fuel to the fire is a great reason to raise.

But you need to have something that is already working.

Note: if a customer says that your lack of funding is why they won’t buy your product, they probably weren’t going to buy anyway! As a startup, you can move faster, give better service, and grow with your customers.

What To Do Instead:
Re-read The Mom Test to make sure you’re building something people want. Analyze your sales process. Improve your sales skills. Look at your pipeline — where are people falling out?

3. “Because I need to pay employees…or myself.”

It’s important to pay people. It’s important for you to make money.

But this is like nails on a chalkboard for an investor.

Investors want to fuel growth, not pay salaries.

I recognize that scaling companies involves lots of hiring which involves paying salaries — but paying salaries is not the reason for raising.

Also, some of this is an optics and messaging thing. Remember what investors care about!

It’s reasonable to raise a little bit of money so you can go full time on a business with strong early signs. Something you’ve been working on, have a few paying customers, strong authentic demand, and it could grow into a big ass business.

(FYI — $60-100k salary is a normal range for a founder’s salary of an early stage company, depending on their life stage and number of dependents.)

What To Do Instead:
If your business doesn’t have very compelling early signals (yet) or a path to a venture scale outcome, focus on paid customer discovery options, including bringing on paying clients to fund the business!

4. “Because I want my company to be more valuable”

Raising money can make your company more valuable.

When you can turn $1 of capital into $2 (or more) of growth, raising and investing money into the business adds a ton of value!

Technically, raising money often increases your company’s valuation and you will have more money in the bank (for a while).

But a higher valuation or more money spent does not always translate into a better financial outcome for you or your team.

The valuations change as the economy and stock market fluctuates. The underlying business may have major issues. Or the high capital investment may hurt your chance of getting acquired.

I know companies that are underwater (raised more money than they are worth) or that quietly went to zero, after making headlines as a “success” for many years.

I’m sure you can think of examples too (scroll for tech documentaries on your fave streaming service 😉).

What To Do Instead:
Seek out the “real” stories of founder exits to understand the pros and cons of different paths. Find the quiet successes. People who make a crap ton of money don’t always talk about it 😉

5. “Because I want to be successful”

Raising money is a tool, not the goal.

It’s seductive to think that when you raise, you have made it. All those successful founders raised money and now you will raise and be successful too!

Raising money can definitely accelerate growth and solve certain challenges.

But it also creates new ones: bigger growth targets, key hires to make, better and faster product delivery, more cooks in the kitchen.

Yes, these are “good,” high-class problems that founders are hoping to have one day!

But raising money is not the finish line, it’s just the beginning.

See it and understand it for what it is!

What To Do Instead:
Focus on success metrics other than amount of money raised…

• Value created for customers

• Meaningful work and financial impact for employees

• Meaningful work and financial impact for yourself

• Meaning and impact created for your community

• Enjoyment and pride in the journey

It’s easy to make “amount of money raised” the benchmark.

It’s public. It’s in the news. It’s easy to compare against.

It’s like looking at the price of someone’s house.

It gives you a number but doesn’t tell you the full story.

Maybe they are wildly in debt, getting a divorce, and have a casual meth lab in the basement.

Do you want that house? 🙅‍♀️

Stay true to yourself.

Acknowledge social pressure and ego temptation.

Then strategically think about your business and what’s right given where you are — regardless of what anyone else is doing!

Part of being a founder is blazing your own path…even among founders!

What advice do you have for founders considering a raise? What’s a “good” reason and a “bad” reason to raise? Any other ego traps to watch out for??