Whenever I talk to people who are trying to build a start up (be it a
website, an online application or a mobile play) the conversation
invariably gets channeled to “raising money”. That is, they start
talking about why they need to raise money from investors and VCs, how they are going to do it, and what they are going to do with the money afterward.
My reaction is always the same one: “Are you sure you need that money right now, or even that it will help your startup?”
In my opinion, as you can see, raising money from investors and VCs is rarely the solution or even a necessary ingredient to a successful startup. Sometimes it can even be a problem, as you’ll see below.
Sure, you’ll need some money to get started, but for most startups we are talking about numbers between $5,000 and $50,000, and you should be able to raise that kind of money from your personal savings, family, friends and from the bank, all sources that won’t ask for a stake on your project.
On top of that getting venture capital early in the game has potential drawbacks. Here are three of them:
1. If you raise money too soon you’ll need to give up a large share of ownership, as investors will see a higher risk factor there. Should your startup succeed that ownership you gave away will amount to a lot of money.
2. By definition you can only focus on one thing at a time. If you spend time and energy looking for investors you’ll inevitably lose focus from your core product/service, and that is the worst thing you could do to your startup.
3. Sometimes when a company raise a lot of money it becomes lazy, after all you have a big financial cushion. When money is short, on the other hand, people get creative and find new and better ways to do things, to acquire clients and so on.
If you are not convinced here’s empirical evidence: I was just reading an article on ZDNet, and I came across this interesting stat: out of all the startups that were acquired in 2012 (if they were acquired they probably were successful) 76% had not raised venture capital or private equity capital.
As you’ll agree, 76% is quite a high number. In my opinion it confirms that raising money too soon will not help you, and sometimes it will actually hinder your growth.
Bottom line: focus on acquiring clients and improving your product. When the time is right the money will come naturally, and in much better conditions.
My reaction is always the same one: “Are you sure you need that money right now, or even that it will help your startup?”
In my opinion, as you can see, raising money from investors and VCs is rarely the solution or even a necessary ingredient to a successful startup. Sometimes it can even be a problem, as you’ll see below.
Sure, you’ll need some money to get started, but for most startups we are talking about numbers between $5,000 and $50,000, and you should be able to raise that kind of money from your personal savings, family, friends and from the bank, all sources that won’t ask for a stake on your project.
On top of that getting venture capital early in the game has potential drawbacks. Here are three of them:
1. If you raise money too soon you’ll need to give up a large share of ownership, as investors will see a higher risk factor there. Should your startup succeed that ownership you gave away will amount to a lot of money.
2. By definition you can only focus on one thing at a time. If you spend time and energy looking for investors you’ll inevitably lose focus from your core product/service, and that is the worst thing you could do to your startup.
3. Sometimes when a company raise a lot of money it becomes lazy, after all you have a big financial cushion. When money is short, on the other hand, people get creative and find new and better ways to do things, to acquire clients and so on.
If you are not convinced here’s empirical evidence: I was just reading an article on ZDNet, and I came across this interesting stat: out of all the startups that were acquired in 2012 (if they were acquired they probably were successful) 76% had not raised venture capital or private equity capital.
As you’ll agree, 76% is quite a high number. In my opinion it confirms that raising money too soon will not help you, and sometimes it will actually hinder your growth.
Bottom line: focus on acquiring clients and improving your product. When the time is right the money will come naturally, and in much better conditions.
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