Beware Raising Money When Starting A Start-Up
It's start-up time, so let's talk about raising money for a minute.
Our business is doing well yet again, and by our business I am referring to the Internet industry. As a result, there are numerous great ideas being explored and new companies being created, it seems like every week. But what I find most interesting is how many people are unwilling to bootstrap their ideas, and would rather spend 110% of their time trying to raise money, giving up 90% of their ideas, rather than focusing their attention on building out the core ideas for their business!
Have you noticed how hard people work trying to raise money on a round-the-clock basis to explore their initial concepts and do you, like me, wonder how successful their businesses would be if they focused a portion of that time against the actual business itself? I know many VCs, and I think they'd agree with me that entrepreneurs spend too much time chasing funding and not enough time chasing their own ideas!
Angel money is relatively easy to come by if you need the cash to get jump-started, but there are probably just as many willing and able people to work for prospects and equity as there are people to potentially provide cash.
If you go down the route of a small angel round and developing your network of partnerships to get started, you can probably build a more successful business while retaining the majority control that will be most lucrative in the long term! I have a number of friends who are starting businesses, myself included, and most of these friends have solid, very interesting ideas that will undoubtedly be strong businesses once they get running. But these friends spend so much time trying to woo the venture capitalists that they rarely have enough time to work on their business.
They try to make strategic hires in order to get their business moving forward, but these hires are rarely successful -- because the kind of person you hire into a start-up is the kind of person who wants to get their hands dirty and make things happen! It is difficult for these people to get things moving along at the proper clip when the management team for the idea is out trying to raise capital. That being said, if their time were managed better and their efforts refocused on executing their idea, they might find that they can start to generate revenue on a more modest scale and then fund the growth of their core ideas rather than by splitting their time, with the majority on raising capital.
One lesson I learned over the years is that the business you go into when you start is rarely the business you come out with in the end. Market forces change, and the business reacts. You start with an idea or a concept, you start with a solution to a challenge, and you end up with the evolution of that initial idea. You start small and you work smarter to find a way to generate revenue while building the business you want to explore -- and eventually shift gears to be capable of managing the goal you initially went out to achieve!
If you look at the strongest businesses that were built online, the majority of these were funded by individuals or angels initially, and many of them were bootstrapped using credit cards and family loans. As these businesses grew, they began to generate revenue, and the VCs were used as a stepping stone to create a larger business -- but at that point they were able to retain a larger portion of their business in exchange for a higher valuation.
I know most interactive agencies were created in this way, as most service businesses were, but I believe that some of the largest online companies like Amazon and even Google started out much more modestly and were not infused with cash until they had already gotten their businesses rolling a little bit.
There is a great list of the "18 Mistakes That Kill Start-Ups" published online by Paul Graham. These lessons are spot-on from what I've personally learned -- and many of them have to do with raising money, either too much, too little, too early or too late.
My lesson this week: don't default to raising money first! Try to find a more ingenious way to launch the idea before you go to give away too much. You might find out that you can get a lot further on just a little bit of money while determining the ways to avoid the other pitfalls of starting a new company.