For me, not a day goes by without an entrepreneur telling me they have an idea for a startup and want to raise money for it. What I want to tell them is that not only are ideas borderline worthless without execution, but that even if you are able to raise the money on your own, chances are, down the road, you will regret doing so.
Here are five reasons to be patient and conservative with your fundraising strategy:
1. You want to define the terms, not let the investor define them.
It is really very simple. The earlier you raise capital, the less say you have on the terms at which you raise said capital.
Every investor has one thing in mind, one goal, which is returning their money to their limited partners. You are focused on raising a few million for your startup, but don't forget that the investor you are pitching also has investors who gave them significantly more money in order to invest and yield maximum returns.
It is your job to convince that investor you are a future success story and your product will help them return their money. If you come to the investor super early, with no validation or traction, the risk for that investor is significantly higher. That means that if you do convince them to take out their check book despite the high risk, they have the leverage to write the check on their terms. In other words, you need that investor more than he needs you.
That is not a good place to be when negotiating financial terms, and the result will be terms that are aggressively in the investor's favor.
2. A down round is the enemy of progress. Avoid it at all costs.
Now that we addressed when to raise, let's talk about how much to raise. I realize that reading all those articles about monster financing rounds glorifies the concept of raising more than you need, but be careful, because raising too much might leave you in a predicament.
A "down round," in case you are not familiar, is when you raise a round of financing at a lower company valuation than the previous round. This is not a good look for your company, as it means that instead of growing since your last investment, the company is now worth less.
Why does this happen? Well, either because you didn't do your job and the company really is worth less, or because in your previous round, you raised at a valuation that was unjustified and then spent a year trying unsuccessfully to justify it. Now you are raising at a lower valuation based on real revenue and not just some random number you chose.
Raise conservatively, then grow. Don't overpromise.
3. If you fail before raising money, you will sleep better at night.
Simply stated, most startups fail, and as an entrepreneur, surely you know the statistics. When you fail with your own money at stake, well, it stinks. But when you fail and lose your investor's money? That is a whole different level.
Most startups fail early, because they are unable to gain traction, so you want to try to gain traction without someone else's money. If you succeed, then go raise. If you fail, well, no harm done to someone else.
I know you're probably wondering how you can gain traction without money. To that I say, welcome to entrepreneurship. No one said it would be easy.
4. The more you have to show, the less time you will waste looking for money.
Let's not forget that time is your most valuable asset as an entrepreneur. The last thing you want to do is spend six months looking for money. You simply cannot afford to. Instead, spend that time building your product, gaining some initial critical mass, then go raise capital, and things will move significantly faster.
5. Bootstrapping is a skill that will serve you well as your company grows.
Everything else aside, the ability to bootstrap, to build your company without external funding, will train you as an entrepreneur. It will give you the ability to remain lean, to become productive with minimal resources, and in turn, it will give you the appreciation of every single dollar once you do raise capital.
In summary, part of your job as a founder of an early stage startup is to fight the temptation to raise too quickly and too much. Do it at the right time, and at the relevant company valuation, then work your way up.