“Why struggle to get by when we can simply burn other people’s money – aka venture capital financing?” If you’re a startup founder or aspiring entrepreneur, and you’re thinking like this, then you are doing it wrong.
I have always been pretty much convinced that you don’t need venture capital financing on day one of any business venture. But if ever I needed a timely reminder, I got it from our recent participation at the recent Thessaloniki Demo Day at OK! Thess. What’s OK! Thess? For those who aren’t in the know, they provides space and technical support to teams of people with innovative ideas helping them to validate a business model fast, and to meet, mix and connect with like-minded peers.
So, back to the issue of VC funding. Firstly, I understand. It is so tempting (and so much more convenient) to try and raise venture capital financing. After all, using it removes the risk of you putting in any of your own money or getting loans. Not only that, it’s also an attractive alternative to bootstrapping your way in the early stages. Hello! Instant marketing funds.
But, there are so many reasons why this is not the way to go. Especially if you are in the early stages. And sometimes, even when you are even at an advanced stage. So what are those reasons?
Venture capital financing as doping
Startup founders must always question seriously and firmly the need to go for venture capital financing. You should only go down this route only if further, organic growth isn’t possible anymore. And, all resources from those 3Fs and angel investors are exhausted. Think capital efficiency first – and in turn financial health – before anything else.
Why? Because this is the essence of lean. But more than that:
VC for startups and fledgling businesses is very similar to doping for sports. In general a very appealing idea to be more certain of success, but an extremely risky and dangerous idea. And one which works only under very specific circumstances and constraints.
And at OK! Thess I decided to pitch a simple question to the aspiring entrepreneurs an startuppers who were there. Among an audience of investors from Greece and South East Europe, as well as startups from Thessaloniki, I asked: “Why are you here today; and what do you want to achieve?”
I was stunned by some of the answers. By and large everyone said that funding was the reason. And actually the best case scenario. Wow. This blew my mind a little. I quickly realized that the majority of those young entrepreneurs actually have a misconception around fundraising. Which actually is a general thing among entrepreneurs in general.
Most of them believed that they must look for funding in any case in order to succeed. They were even expressing their approach in a quite naive way. Comments such as “Why not get funding if we can?” The thing is that while okay this may be true in some way, it’s actually misleading.
So, let me share with you some of my thoughts on that particular topic that is crucial for any young business’ future. Oh yes, and which is actually based on our experience here at Starttech.
You don’t need funding to succeed
First of all, let’s set the foundation concept behind funding. You are not obliged to get funding in order to be successful. Yes, that’s right. It’s actually quite the opposite. From what I’ve seen so far, the majority of successful companies, the healthiest ones, i.e. those who create economical value, are mostly companies which developed in a more organic way. They based their advancement on their own strengths. And, without investors’ support, they gradually managed to achieve profitability and grow.
From my understanding and my experience so far, which has to do with early stage B2B SaaS startup companies targeting North America, a successful business is one that is able to grow mainly based on the founders’ financial strength.
Let’s examine other funding resources. Whenever a business receives funding from third parties it actually hands over a certain amount of shares of its company. Now, let me share some thoughts that might be useful, especially to people that are about to start a new business. Whenever they get an amount of money they actually give shares. We need to be careful with this. Why?
Because shares are part of your business flesh.
Whenever investors ask to receive shares of our company we must be reluctant. Investors will gives us a particular amount of money, but the truth is that we’re definitely going to spend or even burn (as it is often called) this amount in a short period of time.
So what next? You have already given a certain % of shares and you won’t be able to get them back unless you buy them back. So, let me repeat myself one more time: Be reluctant to receive any money, especially from venture capital funds.
Why, why why
Whenever you are about receive any amount of money from investors, challenge yourself to think for a while the reason why you need that funding. Ask yourself why three times. Or even more. Or try these:
- What will I do with this funding that I am not able to do now based on my own strengths?
- Will it give more value to my company?
Asking these kinds of questions means you’ll be able to determine that the reasons for which you think you need to go for funding don’t actually contribute to our business value. You might have already heard stories about investors who funded businesses and then pushed them to do things, such as open an office in the USA. Or hire an expensive sales manager, or to participate in expensive conferences or marketing exploits (press releases, photographs, videos, etc – i.e. wasted money without value).
A few other tips as alternatives to venture capital financing that I have are the following:
Be the skin in the game
Entrepreneurs should be the skin in the game. To put it in another way: founders should be core funders of their own businesses. They should give their best in order to finance their business on their own. And even if they are not able to this completely based on their own financial resources, they should at least try to make it clear they do take the risk that corresponds to their “financial power”.
Go for the 3Fs
Once you’ve done everything you can to make the best of all your own available financial resources then you should turn to your personal environment – the 3Fs, AKA friends, families and “fools”. You need to make these people trust you (with their money), and convince them that you can deliver. This will also force you to be more reliable in order stay true to your beliefs and to your word.
Look for angel investors
Angels are a really important financial resource for young startups. They won’t just give you a specific amount of money, they will also offer you advice, networking (connections), as well as experience. Angels are particularly useful when you plan to internationalize your business. It’s crucial for your success to have on your side people that will offer all the above, right from the beginning.
Venture capital financing as a last resort
When you have exhausted the above two, then – and only then – you should go for third party funding. In this case, accept funding only if you are really sure about the way you’re going to leverage the amount they plan to provide. When you have a specific plan for this venture capital financing to clearly help you accelerate your business’ development – and increase your business value in the international market – then go for it.
In our valuable participation at OK!Thess what I really wanted to achieve was to separate the myth from the truth. Or destroy a common myth if you like. The one that says “Your business will succeed only if you manage to get venture capital financing”.
From what I’ve seen till now, there are many companies out there that managed to become successful. And these successes were based on founders’ initial resources, mostly on money they took from a close family environment, or even from angel investors. And there’s nothing wrong with this. So, try to make everything you can before you go for venture capital financing.
Because, at the end of the day, when you do finally scale up enough to receive venture capital financing, you should spend that amount only on specific activities which add real value to your business. Then, and only then, is venture capital financing of great importance.