Startups shouldn't raise money

https://ensorial.com/2020/dont-raise-money/

by rheotron • 6 years ago

91 36 6 years ago

jariel• 6 years ago

Step 1 - have some very basic thing that provides some essential value, Step 2 - scale quickly and dominate the market, Step 3 - settle into viability.

Capital deployed effectively is effective that it can be distracting is one of the risks. Also, in growth phase, usually growth and getting to mass-market is more important than sustainability. If you're the new Twitter, you want to get to 500M users or whatever as quickly as you can.

ackbar03• 6 years ago

I feel like it's more important for step 3 to come before step 2 now, although I understand this will not be possible for some business models. But that being said, in most of such cases it's actually questionable whether these business models should exist in the first place and are a good use of capital since so few of them workout

chester_r• 6 years ago

Sure, VC funding can delay the inevitable for businesses that were never meant to be, but what if 10% of the time, it gives the right person the right breathing room to create something truly great? Incessant pressure to survive isn't always the best environment for creative work.

Most startups won't know a priori which of these categories they belong to -- that's the job of VC. So I'm not sure if "don't raise money" is always the right advice.

timavr• 6 years ago

Founders always have skin in the game. It is called their time. Their lifetime is a very finite resource.

In reality, very few founders just raise straight away. 99% of founders spend a significant amount of time working on their business before they see the first dollar from the investor.

Operating business with capital constraints most of the time actually leads to way worse decisions. You start working with people who are less qualified because either they are volunteers or they are the only people you can afford. You start taking worse terms with customers because you need this money to survive the next few months or make the next payroll. You start taking credit card debt just to give you a few months in the hope of closing the client. You put your house as collateral to and pay social/mental costs if things don't work out.

So please please please if you have the opportunity to raise money on standard terms, just do it, unless you have rich uncle/family or wealthy yourself.

Also, people need to stop treating money in a startup financing transaction as a more honorable side of the deal. When you buy tomatoes in a store, you don't go to the store owner and be like "Yo, I gave you money, respect". Startup investors give money for shares in a business. One part of the deal is exactly as valuable as another.

godzillabrennus• 6 years ago

Not all investors are created equal.

Taking their money might mean having to listen to them.

Nothing like fun and games introduced by a bad investor to make an already stressful situation more stressful.

Don’t build a business reliant on investment and you’ll be happier.

If you have to raise then don’t treat it as a good thing, you just sold part of your company and have more bosses now than just clients.

Standard terms hardly exist. Every deal is different.

Venture capital is a business model, Take the time to understand it before you start raising from VC’s.

There is nothing wrong with making a nice lifestyle salary from a small SaaS business without the pain of investors.

There is also nothing wrong with spending other people’s money gambling you can build a big company. Just don't let the terms prevent you from paying yourself if you go that route.

burntoutfire• 6 years ago

Taking their money might mean having to listen to them.

How is that structured legally? I doubt they get a majority's vote, so how else can they influence the decisions? Is not all investment money unlocked upfront?

thathndude• 6 years ago

As with darn near everything, there’s a balance. I’m invested in companies taking a more VC approach, and another company that is incredibly cautious and skeptical of fundraising, growing slowly and cautiously.

This is an case by case kinda thing. And that’s why blanket advice “don’t raise money” is silly.

Also, it’s a software centric mentality. Good luck getting your hardware startup going without funding!

drorco• 6 years ago

As a founder who has an experience with kind of both and raised after more than a year generating revenue, I'd say the things you mentioned as negative are actually often positive. Facing with these problems head-on will burst a founder's "happy-bubble" of their perceived reality, and often early entrepreneurs tend to be over-optimistic. Inexperienced founders who raised funds may easily over-estimate the value of their business, hire prematurely, hire too expensive people who will not be ROI positive. Being forced to work with limited capital can make a talented & ambitious entrepreneur become very creative and efficient with its capital. The opposite of course is the distortion we're seeing in the market with "Softbankish" type of businesses who use their capital to distort the market. The optimal course of action is probably somewhere in the middle but my main point is I'd argue the things you mention as negative are actually positive and will allow for a founder, gradual and healthy growth.

seek3r002• 6 years ago

The problem I see with raising money is that, practically, you’re giving away your business a piece at a time.

Sure, by raising money you’re going to grow your business more easily, but you’ve also compromised your ownership of it.

Obviously, if all you think about is cashing out after the company’s IPO, raising money makes sense. Especially, if you don’t have a sustainable business in the first place, and you’re losing money.

cannaceo• 6 years ago

Businesses need capital for a variety of reasons. CapEx, money to buy growth where CLTV>CAC but CAC is still a big number, or maybe your competitor just raised a 30MM and you don’t want to get crushed when they operate at a loss to drive out smaller players, maybe you need to hire a sales team, etc.

It’s not a personal decision to raise or not. It’s dictated by the competition you’re facing.

TAForObvReasons• 6 years ago

By raising money ... You can now pay your employees a salary

This author possibly lost "contact with the earth". Especially early on, most people will not join and work for free (or on the sole promise of equity down the road). Not all startups are simple CRUD apps, many require significant R&D or marketing investment upfront.

manquer2• 6 years ago

Do not dismiss any product CRUD app or not so lightly .

Building and selling any product ,getting an user base is very difficult. Attracting people to work in your product is even more challenging as it is not cool. Getting all of them working as an organization is no less difficult just because tech does not involve fancy R&D

tmlee• 6 years ago

Not raising or defer raising money can help establish the foundations of a viable long term business.

To start with, it does not feel right to have to raise money or give away equity in order to build the first MVP to look for product market fit.

Founding team should have all the skillsets required to launch the first version of the product (Tech + Marketing minimum). Tech founder who is able to code the product and has the know how to keep it running for as cheap as possible, and another founder who knows how to bring the product to market.

Iterate from there, and if lucky eventually slowly have a sustainable business. Along the journey, not having VC money trains the founders to make difficult choices and learn things the hard way. Ie. Founding team will do as much as they can before hiring someone else, optimize cost of operations rather than throwing money easily at problems, etc.

Founders who are in it for the long game and want to build a sustainable business, will find not raising money most attractive.

manquer2• 6 years ago

This sounds like it is written by someone who has never started up a company or run a small business or a even lemonade stand in their life . This is equivalent to saying banks shouldn’t lend money to small businesses , businesses need money to survive, the guy having the money and one ready to work it are almost always not the same . it could be VC, the bank or your mom giving you the financing to start that lemonade stand.

Even if the assumption that founders put zero money of their own is true (as others have pointed out it is not, in vast majority of the cases) founders have enormous opportunity, emotional cost, lost salary and the financial hardship.

MattGaiser3• 6 years ago

It completely ignores everything from inventory to cash management from invoices being paid late.

hamsterbooster0• 6 years ago

The author seems to forget that not all startup can be sustained by customer revenue in the first few years (i.e. biotech or self driving car industry) Even very successful companies like google or snap wouldn’t be able to thrive without funding at the start.

ralphstodomingo• 6 years ago

Pretty controversial of me to believe so, but what if those sectors aren't really for startups? I'd wager they're more accessible to well-established companies belonging in a horizontal industry beside those.

vulcan01• 6 years ago

Then we wouldn't have Rivian, for example. Competition can be good.

seek3r002• 6 years ago

That’s true. If this is the case, is it enough to do a good job in growing the business, in order to maintain control of it, or you can do something else to ensure that investors won’t pull the carpet from under your feet?

Nextgrid• 6 years ago

snap

As far as I know that one is still on very shaky grounds as their profit comes from pushing really trashy clickbait and I think they've already maxed out the amount of clickbait their users are willing to take so they can't scale that aspect any further. Not to mention that Instagram basically took over their target market, at least in my circles.

npiit• 6 years ago

While I truly understand the point the author makes, I cannot accept that all founders are the wanna get rich type who think that raising money equals a successful company. I think he's biased by the history of the easy money era of the post 2008 recession to pre Coronavirus. I think now things are going to be different and raising money will not be as easy as it was in the 2010s.

MattGaiser3• 6 years ago

The alternative is to forgo raising money and creating a sustainable business from the beginning, growing linearly with the number of people that give you money for your product.

Assuming that it doesn't require money to build, which is dubious in many cases, but alright.

Not only that, but because you don’t have the safety net of a pool of money, you are forced to find the fastest path to sustainable growth.

Sustainable growth? Or just the fastest path to growth at any non-monetary cost so you can make the next payroll? Sure it might be cash sustainable growth but could be unsustainable in other ways such as making ever higher promises to keep customers buying more, allowing all sorts of unscrupulous purchases of user data, or shipping software without any modicum of security.

You now have no choice but to be ruthlessly focused on the things that impact your bottom line (i.e. pay the bills)

Or you end up cutting corners and compromising on the product just to get some cash in the door. A lot of ethical red lines become maybes when the bank account declines. I have a lot of friends in the startup space and they have amazing stories of suddenly cash short companies burning up their reputation just to get the next sale.

Crises don't lead to clearer decision making. A constant threat doesn't lead to clearer decision making. It leads to shorter-term thinking. https://journals.sagepub.com/doi/10.1177/0146167299025001006

Would you do a better job for your company if they kept you one paycheck away from eviction? Or would you play politics, become a sycophant, hide errors you made, and be heavily focused on just making it to the next week no matter the cost?

TrackerFF• 6 years ago

It is absolutely possible to start a business without any serious loans, or at the least with "normal" business loans which do not involve any ownership. Hundreds of thousands of small and medium-sized businesses do this, and have done it for decades.

But the are some severe limitations:

1) You may not scale as fast as you'd want to

2) You may be competing against businesses that ARE funded, and can undercut you

3) The setup period may be very long. If you're gonna fund it all yourself, that may take year and year of saving money. This if obviously a huge problem if you've discovered a niche with lots of potential RIGHT NOW.

The biggest difference between a typical startup business, vs "classic" type of business, is the speed and scale.

(With that said, I don't think the race to bottom by funding/VC arms-race is a good thing.)

carlsborg• 6 years ago

Depends how much capital you have, and how profitable you are early on.

For most, its a harder path without. Growing fast with organic income leaves little room for risks (strategic/operational/extrinsic) and competitors with capital can outspend you.

Delivering a world beating service/product on a shoestring budget while spending on growth is even harder. Kudos to those that did this (Browserstack, Atlassian etc).

DylanBohlender• 6 years ago

Like all things we deal with in our profession, the choice to raise money is a tradeoff to be evaluated, not something inherently good or bad.

The cons of raising VC money? You are forced to answer to someone else to some extent. You become vulnerable to complacency and largesse for the reasons stated in the article. You put some distance between yourself and customers early, which can slow down your quest for product-market fit. You lose a piece of the equity pie.

The pros of raising VC money? A good investor can give you market knowledge you would have to learn the hard way otherwise. A war chest can give you a head start over other early-stage competitors (or establish you as legitimate among existing ones). You can take on problems that require large up-front investments. You can hire people to help you out without having to worry about your ability to pay them.

Personally? I found the tradeoff to be worth it and raised money for my current company. We worked for about 8 months without paying ourselves, and then started paying ourselves half our market rates once we had some supplementary cash in the bank. We hired a few stellar employees who knew how to do the things we needed to do but couldn’t, and now I think we’re in a much better spot than we would have been had we not raised.

But obviously it depends on the situation - just because it’s worked for us doesn’t mean it will for others. Happy to answer further questions about our founder rationale for anyone who’s interested.

mrtksn• 6 years ago

Unless of course, your startup has a higher barrier of entry than the resources you have in hand.

barnabee2• 6 years ago

This post is either written by someone with no skin in the game when it comes to the advice they’re giving (despite appearing to have swallowed a couple of Taleb books but retained little, oh the pointless irony) or who is massively overgeneralising a subset of reality that worked for them.

Please don’t follow their advice.

The alternative is to forgo raising money and creating a sustainable business from the beginning, growing linearly with the number of people that give you money for your product.

This works only for insanely wealthy founders or trivially simple to implement businesses (and even then you’re going to need to be way richer than average). One of the great things about the rise in startups, accelerators, and VCs is that starting companies has become a career option for far more of the population.

The rest of the argument just degenerates from there:

No skin in the game: try telling that to a founder who’s taken a 50–80% pay cut and probably started off working for free to get their company funded, but who owns big chunk of the equity and can pay themselves properly if they get to product market fit and hit a growth curve.

Ruthless execution, faster path to growth etc. Nonsense! I’ve come across plenty of small startups or individual founders that carried on far too long after they should have admitted failure because of the sunk cost fallacy. Team keeps taking sacrifices - cut all costs, less pay, work for equity, etc. But while you’re small enough you can do this nearly indefinitely. Taking funding forces you to aim for something bigger and you’re either going to win, close down, pivot, or get acquired. Sure you can keep raising while there’s a probability of a big enough success at the end but the size of the potential and burden of evidence goes up with every new round and every increased valuation.

_alex_• 6 years ago

I worked at a startup that took waaaay too much money too early. they hired a ton of people that they didn’t need and refused to make some hard decisions because they thought they had all the time they needed to “figure it out”. That company is still around but they’re probably going to collapse. they’re almost out of money and don’t actually have a thing that people want to buy. all they’ve done is spend a lot of vc money.

That said, I don’t think you want to swing the pendulum the other way and everyone should bootstrap everything. Hiring good people takes money. I think you should raise the amount of money you actually need and no more. Scarcity drives the hard decisions.

alexheikel• 6 years ago

We were lucky enough to not be able to raise money every time we wanted.

That made us improve every action and work harder on every situation so we can have a better connection with what we are building.

So, money is something that we always think that could help, but sometimes you can only find secrets without it.

Raise or not to raise. That's the question.

sys_64738• 6 years ago

So many companies see funding as a replacement for actual revenue. These companies are doomed to fail and deserve to. If you look at their founders then this is their existence. They live off of the funding for a few years until the funding runs out then move to the next idea. It’s the modern day snake oil spoon fed to investors.

jl27182• 6 years ago

Except that the big winners are exactly these people. E.g. in the peer-to-peer space, we have companies that have huge revenues from ridiculously simple applications, near-zero marginal operational cost, and still find ways to lose money. Yet this is who we lionize and reward with $100B valuations. Trust me, there were lots of rational technical founders working on exactly the same idea without venture capital funding for years before.

aruanavekar• 6 years ago

Short, concise and immensely thoughtful. ️

jl27182• 6 years ago

The pattern that I see is startups succeeding on money alone. Ideas and execution that would never be sustainable turns into the next big thing because so many people are invested in it, and everybody is pumping hard to find the greater fool.

If a VC sees a good business with great execution that doesn’t need their money, they’ll rush out immediately to find a competitor that does. If an investor is sitting on a good business, they want to keep it quiet and hold their shares privately. If it’s a toxic money pit, push it onto the LPs and then get them to help you pump and raise.

The cost of big-money capital is so cheap now that it inverts the incentive for business discipline. The more you lose, the more you raise, the bigger the valuation.

Startups shouldn't raise money

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