It's a common belief among startup founders --a significant capital raise will be the saving grace to all of your launch, scaling and marketing woes. Rather than focusing on organically growing the company, the founder's sights are set on seeking investment.
While an injection of capital has helped numerous startups and rapid-growth companies go on to achieve tremendous success, it has also been the death knell for others. That's because there's a lot that goes into the process, and if founders are blinded by dollar signs, they might fall victim to some of the common misconceptions surrounding funding.
Here is what three investors and one founder turned investor had to say on the topic of funding misconceptions.
I work with hundreds of startups every year worldwide through my work with Hubspot and my personal angel investing, and there are several misconceptions I see recur time and time again.
One is "I can't start my business unless I raise $1 million plus." Most companies go through three stages: ideation, proof of concept, business scale. When you are in the idea stage you have to determine things like what kind of company you are going to build, your capital requirements, and how you will find product market fit and your first customers.
The goal should be to go through the proof of concept stage with as little capital as possible for four reasons:
- Bootstrapping usually gives you better sense of urgency
- It shouldn't cost that much unless you need regulatory approval
- You want to save it for achieving scale
- You have fewer ticked off investors if you fail
Particularly if you are a first timer, it is better to run like a hungry man to a free buffet to prove the concept. Once you do that, investors are happy to give you as much money as you need.
The second is "I need a 40-page business plan to raise capital." You need nine slides in a power point and a well-thought-out, 30-minute overview of the problem, your solution, the management team, your "special sauce", your ask and a financial projection.
Finally, "Raising money is the end of my problems." Actually, raising capital helps you end one set of problems, but creates a set of others that are equally challenging. What does it feel like to take $400,000 from 20 investors and then not returning the money?
There are a lot of misconceptions surrounding the venture capital world, however, there are three I commonly see. One is, more meetings must mean we are more likely to get funding.
It's important not to confuse activity with targeting the right kind of investor for your stage. You might be meeting with a lot of potential investors, but are they the right ones?
The second one I see play out often is founders thinking a meeting with an investor is only to get them to invest. Sometimes you can meet with investors just to get their input on the idea and suggestions on who they recommend you talk to. Remember, these folks see the highs and lows of the startup world and can be great resources outside of just funding.
Finally, far too many founders believe the company will sell itself. The truth is, any investor worth their salt is also looking at your team --what you bring to the table in terms of experience, the dynamics of the group, the culture, and how well everyone is aligned on the vision.
We've all heard "more money, more problems," but for some reason that doesn't translate when it comes to business. Many founders believe money will solve all their problems -- and in many regards, it can. But the biggest misconception around funding is that money is the only solution. Throwing more people, marketing and products at problems will only create more issues that will have to be dealt with.
Founders often overlook the level of risk and accountability that comes with venture capital. At the end of the day, an investor's primary goal is realizing a healthy return on their investment. That can be a lot of added pressure and risk for founders.
A good VC firm, however, will also be accountable to the startups in which they invest. They should have a vested interested beyond monetary and provide strategic guidance, expertise and a network to help founders reach that next level of growth.
When we received our first $9 million in series A funding, it felt like those funds would last forever -- we would be able to do whatever we wanted with it. However, I quickly learned how important it was to lean on our investors who were eager to provide strategic support and help guide us through important spending decisions.
To date, we've raised $125M, and at each raise, purposefully sought out investors who would double as mentors and fill in the skill gaps to ensure we were making smart spending decisions. We've been fortunate to find that support in the dedicated investors at Goldman Sachs, Bain Capital Ventures, Mohr Davidow Ventures, and Signal Peak Ventures.
Second, it's not about how much you get, but how you spend it. Don't focus on the size of the funding.
Instead, look at what you want to accomplish and then thoughtfully determine how you will get there on as lean a budget as possible. Stay scrappy and operate like a lean startup, rather than assuming success and spending like there's no tomorrow.
Finally, the investor, not just their money, matters. Do your due diligence--this process is not a one-way street. Look at who they've invested in before, why and how they've helped other ventures, and how the investment turned out.
Also consider how experienced an investor is in general in your industry, and more specifically, in your particular solution. Talk to companies they've invested in to get their side of the story --how did they help them overcome challenges or provide strategic guidance? This will help determine if they are the right fit for your company.